It was on these planks that Carney rested his oddly sunny predictions for a robust recovery. In late January, he released a forecast that acknowledged the depth of the recession but predicted 3.8 percent gdp growth for 2010. This ray of official sunshine didn’t jive with mass layoffs in the manufacturing heartland, falling resource prices in the West, and a corporate landscape full of misery. Some critics wondered what the 27 governor was smoking, but University of Toronto economist Peter Dungan didn’t find Carney’s number to be too far off the mark. “Everything is in place for a fairly fast rebound in 2010,” he told me.
Drummond, for his part, was less taken by the specifics of Carney’s prediction than with the public’s reaction to it. He told me that earlier governors, like John Crow, couldn’t communicate clearly with voters, but Carney, for whatever reason, commands attention: “People in the subway were stopping me and asking about the Bank of Canada forecast. It’s amazing — they’re really engaged. What a sea change for this organization.”
With the forecast controversy swirling, Carney and other Bank officials continued to focus on their G-20 plans. In mid-March, two weeks before the London summit, he and Flaherty travelled to the G-20 summit for finance ministers and central bankers, convened at Horsham, a pretty town in West Sussex. The health of the international banking sector — and, in particular, the problem of all those so-called “toxic assets” on the banks’ balance sheets — was at the top of the agenda. Emboldened by the growing reputation of Canada’s financial institutions, Flaherty and Carney had come with the goal of pushing for a more Canadian approach to banking — expanding “the perimeter of regulation,” as Carney likes to say.
The Horsham summit’s final communiqué echoed many of the ideas Carney had been touting all winter, including the need for internationally coordinated oversight and tougher scrutiny for unregulated financial institutions. Describing some of the proposals as “fairly radical,” he told reporters afterwards that he was pleased with the outcome. “One of the things that’s likely to be applied is a belt-and-suspenders approach, or a version of the Canadian leverage test on top of any other capital regime [for] global banks.”
Shortly before 3 p.m. on the afternoon of the London summit, reporters began lining up outside the 800-seat briefing studio in the ExCeL centre, where Gordon Brown would be unveiling the final communiqué. The stage was lined with the flags of the twenty nations, and the graphic behind the lectern showed the summit’s fanciful logo: a graphic of Earth from space, with the sun peeking hopefully over the horizon, directly above Great Britain.
When Brown stepped up to the podium, he boldly declared that the “old Washington Consensus” — which had evolved into a pejorative label for America’s long-standing goal of promoting globalization in trade and investment — “is over.” He then itemized the six pledges agreed to by the leaders. Laying out principles for global banking reform was at the top of his list. The leaders, he continued, had also vowed to establish a “Financial Stability Board” that clearly reflected the Bank of Canada’s vision of macroprudential oversight. (As it happens, David Dodge had already agreed to co-chair a similar organization set up by the global banking industry.) “For the first time, we have a common approach around the world to cleaning up banks’ balance sheets,” Brown said. “I think a new world order is emerging.”
The sexier aspects of the accord garnered the most attention: the vow to crack down on tax havens, something French president Nicolas Sarkozy had been after; the $1.1 trillion (US) in new loan guarantees through the imf, much of which will go toward preventing Eastern European economies from collapsing; and vague promises to bring executive salaries back to earth, a throw to US voters outraged about aig bonuses. But many of the twenty-five recommendations from the Canada-India working group could be found peppered throughout the final communiqué. Canada “co-authored” the report that led to the deal, Harper later boasted.
Some commentators griped about the fact that the Europeans had balked at more stimulus spending. And regarding those regulatory promises, much remained to be worked out. As the New York Times noted, the leaders stopped well short of creating an international enforcement mechanism to rein in rogue lenders or countries that tolerate them. In other words, if the G-20’s newly established Financial Stability Board detects signals of impending disaster, it can do little more than sound an alarm. At least one leader seemed to get that point. “The steps in the communiqué were necessary,” President Obama warned. “Whether they’re sufficient, we’ve got to wait and see.”
The next morning dawned cool and misty, with London’s East End, where I was staying, shrouded in fog. My friend wondered whether the push to establish stricter oversight of the global banking sector meant the end of greed. Of course, the answer was no. Still, there was a sense that an era of turbo-charged financial speculation had limped to a close, paving the way for a safer and duller brand of capitalism — not unlike the sort of thing that passes for a day’s work on Bay Street. As a Guardian column declared, “The masters of the universe have been brought down to earth with a bump.”
As I headed toward the cathedral-like Canary Wharf tube stop in the heart of London’s new financial district, office workers streamed out of the station, their ranks thinned by mass layoffs in the UK banking sector. At the edge of the square outside the station sat the Thomson Reuters tower. An electronic ticker, that flickering symbol of investor frenzy, wrapped around the building’s stone facade. The board showed that most stocks had jumped at news from the summit. It seemed the global market was relieved to have been stripped of some of its freedom.
Bankers’ reputations aren’t built on negotiating super-technical international regulatory accords, of course, and so Carney’s fate for much of this spring has entailed living down that cheerful recovery projection while juggling calls for a more activist approach. Some prominent economists have pressed him to unleash more stimulus. David Dodge, currently the chancellor of Queen’s, even emerged to wag a disapproving finger in his successor’s direction. In an interview with the Globe and Mail, he said that anyone who expected a recovery by fall 2009 “was dreaming in technicolour.”
In late April, after scaling back his earlier growth forecast, Carney unveiled the Bank of Canada’s long-awaited report on its own approach to “quantitative and credit easing,” sending a signal to Canadian markets that the Bank was pre-pared to get its hands dirty buying up distressed assets.
“It’s the sort of thing that’s been discussed theoretically,” says Nick Rowe, a Carleton University economist and a member of the C. D. Howe Institute Monetary Policy Council. “We don’t have a lot of practical experience.” In the past half-year, Ben Bernanke — a former university professor, remember — has effectively become the largest investor in the history of man-kind, approving as much as $7.5 trillion in bailouts, loans, and asset purchases, according to a tabulation by The Atlantic. The Bank of England’s governor, Mervyn King, has also embarked on an easing strategy, with £75 billion in asset purchases. On paper, Carney’s experience in investment banking should prove useful for the easing era in Canada, simply because he presumably understands what kinds of investments aren’t selling on the open market, and why.
He remains patient, for now, in the face of mounting pressure. Well aware of what Bernanke and King are doing with their easing policies, Carney has been content to drop repeated hints (easing if necessary, but not necessarily easing, one might say), the idea being that the Bank might spur economic activity merely by showing an interest in asset purchases. To supplement this strategy, he has promised that interest rates will remain at their historically low level until at least June of 2010, assuming stable inflation. As the spring flowers began to bud, there were scattered signs — stabilizing unemployment and housing sales, stock markets rising, etc. — that the global economy had bottomed out.
Since then, Bank representatives have been hunkered down with other senior government officials, quietly working on implementing many of the reform recommendations approved by the G-20. It’s a sensitive negotiation, and one that could lead to significant changes in the way Canada oversees major financial institutions, non-bank lenders, investment banks, hedge funds, private equity funds, and the provincially regulated securities industry. Government and Bank officials are keenly aware that they shouldn’t be trying to fix what’s not broken. Yet as two of the architects of the G-20 reforms, the Bank and the Department of Finance are also eager to show their stuff to the rest of the world.
