In Ottawa, where he served for five years as Bank of Canada governor, he is routinely praised as the man who prevented the country from falling into the abyss.
At one point, he was a rumoured Liberal leadership candidate. In spite of his denials this week to a British parliamentary committee, there are still rumblings that he will eventually enter the Canadian political arena.
But what exactly did Carney do during his tenure at the helm of Canada’s central bank? And how much credit does he deserve for the relative stability of this country’s financial system?
The answers to these questions are complicated. As Canadian autoworkers economist Jim Stanford pointed out last fall in a trenchant analysis for the Financial Times of London, Carney exercises little direct statutory authority over the country’s banks.
The fact that Canadian banks maintain robust financial cushions to protect against bad loans stems from a long history of federal government regulation, not from the diktats of any particular central bank governor.
Indeed, it could be argued that the real hero behind Canada’s sound banking system is Julie Dickson, the federal superintendent of financial institutions, whose job is to monitor and regulate the commercial banks.
Nor was it Carney who prevented Canadian banks from loading up their balance sheets with dodgy mortgage-backed securities prior to the 2008 meltdown. Stanford notes (correctly, in my view) that the uncompetitive nature of the Canadian banking system discouraged it from participating in this madness.
To put it another way, Canada’s clubby bankers were making enough money without taking on the extra risks posed by opaque investment instruments — instruments that ultimately torpedoed financial institutions elsewhere.
This is not to say Carney’s role was minor. He dramatically reduced the Bank of Canada’s benchmark interest rate and he printed more money. He also made clear his long-term intentions in these areas.
All were wise choices that alleviated the recession.
But even here, he had little room to manoeuvre. When U.S. Federal Reserve chief Ben Bernanke lowered his benchmark interest rate to near zero, Carney had little choice but to follow along.
Keeping Canadian rates significantly above those in the U.S. would have encouraged investors to park speculative money in the Canadian dollar. That in turn would have sent the loonie even higher than it is now — with disastrous consequences for Canadian exporters and jobs.
But Carney’s most important contribution may have had to do with whatever informal advice he gave Finance Minister Jim Flaherty.
Finance ministers and Bank of Canada governors tend to talk. We don’t know what Flaherty and Carney discussed in their chats. We do know that they appear to respect one another and that, after an initial stumble in late 2008, Flaherty made some shrewd decisions.
The finance minister moved quickly to have the government’s Canada Mortgage and Housing Corp. buy sound mortgages from commercial banks in order to give them more leeway for business lending.
Later, he tightened mortgage rules to head off a threatened housing bubble.
Most important, and unlike his Conservative cousins in Britain, Flaherty did not pursue a strategy of scorched-earth fiscal austerity.
All of these were matters technically outside of Carney’s remit. But if he played any role in convincing the hard-line Conservative government to act sensibly, he more than earned his salary which, according to the Bank of Canada, is in the $431,800 to $507,900 range — or about a third of what he’ll get in England.
Original Article
Source: thestar.com
Author: Thomas Walkom
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