Canada’s Merchant Banker

The G-20 summit began early on April 2, at the cavernous ExCeL convention centre in east London. I rode the Docklands Light Railway past the towers of Canary Wharf to a station near the London City Airport. In a forlorn parking lot, hundreds of journalists were being siphoned through two sets of security checks and cordons, then bused to the venue. After a long night of negotiations and banquets, the American and British delegations were still debating the French and the Germans over the need for more stimulus, as well as the extent of new regulation for the global banking system.

The Brits had prepared a seventy-three-page summary of the crisis. On page thirty-five, in large blue letters, was former Fed chairman Alan Greenspan’s confession that his nearly mystical faith in the free market — exemplified by his decision in the late ’90s not to regulate privately traded derivates — had been misguided. By last year, global speculation in these lucrative, ultra-complex investments had topped $500 trillion (yes, trillion). The implosion of a staggeringly large market that had flooded the world with cheap credit was the defining feature of the economic crisis. As Greenspan conceded to a congressional committee in October, “The whole intellectual edifice…collapsed in the summer [of 2007].”

For years, Greenspan was the embodiment of the all-knowing central banker — a superstar economist noted for his owlish appearance, cryptic public pronouncements, and long friendship with literary libertarian Ayn Rand. His successor, Ben Bernanke, is a bushy academic who came to the job with noted, and evidently fortuitous, expertise in the causes of the Great Depression.

Since the onset of the sub-prime meltdown in the summer of 2007, Bernanke and other central bankers have been under a microscope. When Iceland’s banks disintegrated last fall, the country’s central banker, David Oddsson, became a widely ridiculed figure. Bank heads in the UK and the euro-zone, meanwhile, have faced criticism for failing to check the reckless behaviour of financial institutions, and for responding slowly to calls for interest rate cuts to prevent a recession.

By contrast, the Bank of Canada — which oversees monetary policy, banknote circulation, and Canada’s financial system (though it does not directly regulate the banks) — has sailed through this crisis with its international reputation al-most unscathed. More so than in most developed countries, our chartered banks have been diligent about keeping plenty of capital on hand, meaning they could absorb a deluge of defaulting loans without becoming insolvent. Ottawa, meanwhile, owes less money per capita than any other G8 country. Consequently, the Harper government could afford the $40-billion stimulus package introduced in January without subjecting Canadians to a future of lingering deficits. And the Bank of Canada, for its part, hasn’t had to perform financial cpr on the country’s banks.

With 1,400 employees, $79 billion in assets, and a licence to print money, the seventy-five-year-old institution enjoys a reputation for professionalism, conducts extensive economic research, and maintains a wide network of international contacts among other central banking authorities. It is also a bureaucratic Fort Knox in Ottawa, where it occupies an imposing granite and glass complex on Wellington Street. When Carney — whose conservatively groomed good looks and charming manner give him the air of a character out of Mad Men — took over as its eighth governor in February 2008, he arrived as an outsider.

Born in the Northwest Territories, he moved with his family to Edmonton when he was six. He played competitive hockey at Harvard as an undergrad, then did his master’s and doctor-ate in economics at Oxford. After graduation, he spent thirteen years at the Wall Street investment bank Goldman Sachs, working in several of its global offices, including Tokyo and Toronto. Eventually, he and his young family grew weary of the peripatetic world of investment banking, and he accepted an appointment as a Bank of Canada deputy governor in 2003. A year later, he left his lucrative job for a senior post with the Department of Finance, settling in Ottawa’s upscale Rockcliffe Park neighbourhood.

Carney’s most notable initiative at Finance was to convince his political masters to close a tax loophole that allowed huge companies to boost their profits by converting themselves into tax-free income trusts — a practice that was draining billions from government coffers. Paul Martin’s Liberals, with their extensive Bay Street connections, waffled on the proposal, and Stephen Harper, too, opposed the change. But Carney managed to persuade Conservative finance minister Jim Flaherty of its merits, and when the Tories made their surprise reversal in 2006, senior citizens, a core Tory constitu-ency, were furious about the hit on their portfolios. Coming off the income trust battle, Carney put out the word that he had broader ambitions. In late 2007, the government executed a trade with the Bank of Canada. Long-time Bank insider Tiff Macklem moved to the Department of Finance to become Ottawa’s emissary to the G7 and G-20, while Carney headed to the Bank to succeed David Dodge as governor.

Carney took the job at a time when the political debate over the Bank’s role in the Canadian economy — and its relationship to the government of the day — had been largely settled. But it was not always thus. In the late 1950s, then-governor James Coyne insisted on jacking up interest rates to battle inflation — a controversial move that put him on a collision course with the Diefenbaker government. He re-signed in 1961. To preclude future fights, Coyne’s successor, Louis Rasminsky, moved to codify the Bank’s operational in-dependence, laying out a set of rules to mediate major disagreements with Ottawa. During the early 1990s, John Crow, a caustic former International Monetary Fund official, started pushing to rein in inflation. Crow and Paul Martin didn’t get along, and the Liberals, irritated by Crow’s harping, let him walk at the end of his first term, in 1993, and brought in Gordon Thiessen, a Bank insider.

Since that time, the Bank and successive governments have been negotiating “inflation target” agreements (typically in a band around 2 percent) that are periodically renewed. These deals effectively allow the Bank to do whatever it takes to contain inflation, even if that means pushing interest rates to a level that makes it expensive for the government to borrow. The US Fed, by contrast, lacks such institutionalized monetary policy discipline.