Why can’t Mark Carney convince corporate Canada to spend its cash?

Mark Carney has never been more powerful. Canada’s Mensa central banker seems to gain influence every month; last year, he became head of the G20’s Financial Stability Board, and if you believed the British press this summer, he may have been a candidate to run the Bank of England. The financial world oozes respect for him. In Global Finance magazine’s latest report card, Carney was one of only six central bankers to merit an “A.” Take that, Ben Bernanke—yes, you, the one with the “B.”

Yet Carney has never seemed more powerless. Sure, he gets the plaudits. So what? A central banker’s real power lies in his ability to control the cost of money, to nudge short-term interest rates higher to discourage borrowing or knock them lower to encourage it. Carney can do neither, boxed in by an ugly global economy. The Bank of Canada’s key interest rate has been stuck at 1% for two years, and isn’t going to change soon. So he has been forced to try to influence our behaviour in another way: by becoming a financial psychologist of sorts, dispensing money advice to the nation, which mostly ignores it.

To consumers, he delivers one message: Don’t borrow so much! To business managers, it’s another: Don’t save so much! Invest! Yet consumers keep on borrowing and companies keep saving. At last count, corporate executives and business owners had stashed more than $500 billion in company vaults, prompting Carney to light a match under their posteriors, with his now-famous “dead money” comment. “Their job is to put money to work, and if they can’t think of what to do with it, they should give it back to their shareholders,” he said, and it was fun to hear him say it.

But put yourself in a CEO’s shoes for a moment.

You are just four years removed from the worst financial crisis in memory. You remember how difficult and expensive it became to borrow money—for many companies, impossible. In the Bank of Canada’s own survey of firms in the fall of 2008, nearly half (44%) said it was becoming harder to get financing. Credit markets eventually thawed, but for that brief, scary period, cash was the only thing that mattered.

You also know—because you’ve been reading the newspapers—that the risks of another such crisis are higher than they ought to be. Political incompetence is the primary reason, led by the squabbling flock of politicians running the euro zone, who can scarcely agree on where to find Spain on a map, never mind what to do about its debts. You can see that one big risk to the Canadian economy is that the euro crisis morphs into another financial disaster, with big European banks imploding. The United States, to which Canada exports about one-fifth of its economic output, seems in modestly better shape, if one ignores its $1.1-trillion (U.S.) deficit, which politicians do.

And if you’ve been paying attention, you also have an understanding of what it takes to keep your own job. Since the crisis, the most common cause of CEO career death has been overreaching. What destroyed the Asper family’s media empire? Too many deals. What killed Yellow Media? Same. The common denominator in the latest round of C-suite sackings and resignations is a failure to deliver on ambitious plans. Kinross Gold’s Tye Burt banged his head on an expensive African acquisition. Barrick Gold’s Aaron Regent got burned by soaring costs in Africa and South America. Both men are now on the unemployment line.

How many CEOs have been fired this year for being too cautious? If anything, the rewards are going to those who’ve pared back their sprawling corporate empires. When Hal Kvisle took the top job at Talisman Energy in early September, the first thing he promised to do is cull the company’s sprawling collection of oil and gas fields—i.e., raise more cash. Talisman’s share price went up

The Mensa central banker understands this. He surely also knows that corporations have actually done a lot of the heavy lifting for the recovery. Business investment is back near its pre-recession highs, notes TD Bank chief economist Craig Alexander, and the private sector is responsible for 80% of the more than 700,000 new jobs since the recession ended.

So why take on executives and their “dead money”? Because there was no downside to doing so. Governments are cutting spending, the housing market is slowing, and consumers need to stop gorging on cheap credit. If business gets caught in its own cycle of retrenchment, we’re in trouble. Carney’s likely objective was to stoke the debate in the country’s boardrooms about what to do with those billions—to turn the conversation from “What could go wrong if we spend some of this money?” to “What could go wrong if we don’t?”

There’s not much he can actually do to make companies spend. It’s all talk. But that’s the only tool Financial-Psychologist-in-Chief has at the moment.

Original Article
Source: the globe and mail
Author: Derek DeCloet