Carney is just the man for the Bank of Canada
[e-mail this page to a friend]
by L. IAN MacDONALD
The Gazette, Wednesday, April 22, 2009
Just when you thought Mark Carney was done, he did it again yesterday, lowering the Bank of Canada's overnight lending rate another 25 basis points, to 0.25 per cent. Not only that, the governor of the Bank promised he wouldn't raise rates again until the middle of next year, unless inflation kicks in.
Kind of like a sale at Leon's or the Brick - no money down, and more than a year to pay. Or, in the famous lyric of Dire Straits in Money for Nothing: "We gotta move these refrigerators, we gotta move these colour TVs."
That's certainly Carney's message to the commercial banks, move the money out the door, pump liquidity back into the system, get people spending again.
The banks all got the message. Carney's rate cut was announced ahead of the market opening at mid-morning, and by lunch time all the banks had lowered their prime rate by 25 basis points to an unheard of 2.25 per cent.
Of course, no one has ever heard of getting the prime rate, which banks reserve for their hypothetical best customers, of which you undoubtedly consider yourself one. But even at prime plus two, you can finance those fridges and flat screens at 4.25 per cent.
Psst! Wanna buy a house, cheap? A five-year variable mortgage rate was moving south yesterday, to about 3 per cent. Not to mention the home reno money in Jim Flaherty's budget.
Money has never been this cheap. In the year since he took over the central bank, Carney has aggressively lowered the bank rate from 4.5 to 0.25 per cent. And he still needn't worry about a run on the loonie, because in the U.S., the Fed rate is somewhere between .25 per cent and zero.
Carney's predecessor, David Dodge, set monetary policy through the best of times, through a virtuous cycle of low inflation, surpluses, debt reduction, and a dollar that became a petrocurrency, rising with the price of oil, to better than par with the greenback last year. It has since settled down around 80 cents U.S., which is much better, in this trading economy of ours, for exporters in managing their trade to the U.S.
Carney is governing through the worst, or at least the most challenging, of times. And we are very lucky to have him there. Just 44, he is very much a man for this moment in time.
It isn't his academic resumé (Harvard and Oxford) that's striking, so much as the 13 years he spent in London as a rising star at Goldman Sachs. Like all the investment banks, Goldman has taken a huge reputational hit in the last year. I mean, have you noticed how no one says their daughter is dating an investment banker any more? He's in the City, eh? I'll bet you haven't heard that in at least six months.
Carney knows all about the problem, and how all these toxic assets must be moved through the international financial services system. This is what happens when money begets only money, and math majors rather than MBAs are running investment banks.
Carney knows all about the commodification and collateralization of products in financial services, in which money was the only product of money, legalized Ponzi schemes which brought the world's financial system to the brink of ruin.
Since he knows all about the problem, Carney can be a serious part of the solution. And not just in Canada, but at the continuous banquet of G7 finance ministers and central bank meetings, where Canada may be the smallest player at the table, but where we also have the best story to tell.
For one thing, after a decade-long virtuous cycle, our fiscal framework is the best in the G7, with the lowest debt-to-GDP ratio in the club. For another, our commercial banks might be boring, but that also means they haven't been living dangerously.
Though Flaherty made $200 billion of standby credit available to the banks in the budget, they haven't asked for a nickel of it. And while U.S. banks are still making markets nervous about insufficient loan loss provisions, the Canadian banks have apparently set aside quite enough.
And here's the thing. There has never been a more important time to have a guy with Carney's investment banking credentials at the head of the central bank. And it's almost an accident that he's there.
When he came home to join the public service as associate deputy at Finance in 2005, he quickly became a favourite of Flaherty's when the Conservatives took office in 2006. It was no secret that Flaherty wanted to make him deputy minister, but Carney's path was blocked by Kevin Lynch, the clerk of the Privy Council, himself a former deputy at Finance, who preferred to keep Rob Wright in that role. As deputy ministers are appointed by the prime minister, through his own department, the PCO, that was considered Lynch's call.
As a result, Carney ended up at the Bank of Canada instead. It's not clear whether this is fate, destiny, or dumb luck, but as it turned out, it's very much for the best.