The Canadian hired to save the world

By John Geddes - Monday, November 14, 2011 at 9:40 AM - 0 Comments

Sean Kilpatrick/CP

Upbeat stories to spin were in short supply at last week’s G20 summit at Cannes. The host, French President Nicolas Sarkozy, narrowly avoided disaster on his home turf when the destabilizing prospect of a Greek referendum on the country’s debt crisis faded. U.S. President Barack Obama remarked on how European decision-making in the face of economic calamity struck him as “laborious” and “time-consuming,” before heading back to Washington, where laborious, time-consuming efforts to cope with America’s deficit continue. Prime Minister Stephen Harper, though, claimed bragging rights on the Riviera thanks to the naming of Mark Carney, the governor of the Bank of Canada, to head an increasingly powerful body called the Financial Stability Board. “His appointment,” Harper said, “is both a tribute to his personal qualities and a reflection on Canada’s superior performance in monetary, fiscal and financial-sector policy areas.”

Carney’s emergence as the international poster boy for everything admirable about the Canadian economy is among the more improbable stories of the Harper era in Ottawa. It’s not that he’s Ottawa’s first appointed public servant to outshine the elected politicians. Former auditor general Sheila Fraser, after her 2004 report on the sponsorship affair that rocked the then-ruling Liberals, became the face of honesty in government. Retired general Rick Hillier’s outspoken pride in Canadian troops made him, as chief of defence staff, the voice of patriotism. But Carney offers nothing like Fraser’s down-to-earth quality or Hillier’s entertaining populism. He’s a Ph.D. economist and former investment banker, and seems like one. His star quality counts for more in elite circles than among Canadians in general. Still, during this prolonged stretch of anxiety over when the next recession might hit, a figure who embodies sophisticated economic leadership is an invaluable political commodity.

As Harper’s comments in Cannes confirmed, Carney’s skills and Canada’s strengths are now being sold as a combo pack. And Carney is highly marketable. At just 46, he’s unusually young for a central banker, and cuts an athletic figure. (He ran the Ottawa marathon in three hours and 48 minutes last spring.) His bio comes complete with a Canadiana prologue any political mythmaker might envy. Born in the Northwest Territories, where his father was school principal in remote Fort Smith, he’s said one of his earliest childhood memories is the smell of the furs his mother bought for making parkas.

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Mark Carney: A central banker for a volatile age

By Andrew Coyne - Monday, November 14, 2011 at 9:40 AM - 0 Comments

Chris Wattie/Reuters

At 46, Mark Carney manages to look both younger and older than his years. This is fitting, as his approach to the economy combines a commitment to old-fashioned central bankerly verities—sound money, prudent risks—with a modish flexibility as to how these are to be secured.

That has been an unavoidable necessity in what we should perhaps now refer to as his day job, as governor of the Bank of Canada. Gone are the days when central bankers could simply focus on keeping the so-called monetary aggregates—M1, M2, all the gang—to a fixed annual growth rate, as monetarists had advised. While this approach had succeeded in reining in the Great Inflation of the 1970s and ’80s, it eventually fell victim to Goodhart’s law, named for a former adviser to the Bank of England: namely, that the moment you target any particular measure of the money supply it loses its usefulness—because people in financial markets find ways to innovate around the constraint. Central bankers have since had to steer by a variety of other measures, even as the overall objective—stable prices—has remained unchanged.

The lesson of that experience, that policy does not consist in simply issuing a set of rules, but rather exists as a continuing process of interaction between the regulators and the regulated, appears to inform Carney’s views on the causes of the financial crisis, and how to prevent another—a subject that will be his focus in his new, part-time job as chairman of the Financial Stability Board, the international body tasked with coordinating and overseeing the reform of global banking regulations. In speeches and interviews the governor has given, a number of related themes and concerns emerge. Among them:

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Carney rules

By Erica Alini - Friday, November 4, 2011 at 6:03 PM - 0 Comments

Bank of Canada governor Mark Carney was named chairman of the Financial Stability Board on Friday, a global banking watchdog in charge of preventing the repeat of another 2008-style financial meltdown. He’s now one the highest-profile voices on global finance. The world will stop to listen when he speaks. How did he get there?

Mark Carney.

Profile: Carney has it all. With a doctorate in economics from Oxford, 13 years spent working as an investment banker for Goldman Sachs, and a brilliant record in government—not just at the Bank of Canada but at the Department of Finance as well—Carney brings to the table a mix of academic credentials, Wall Street credibility and public sector expertise few central bankers can match.

It’s at the helm of the Bank of Canada that Carney started turning heads among policy makers the world over. In March 2008, only a month into his new job as the bank’s governor and well before the collapse of Lehman Brothers, he slashed interest rates, demonstrating an early grasp of the true depth of the turmoil brewing in the financial markets. In 2009 he raised eyebrows again by taking the unprecedented step of promising to keep rates low for 15 months in order to see the weak Canadian economy through rough times. Two years later, Fed chairman Ben Bernanke borrowed a page from Carney’s book by promising near-zero interest rates in the U.S. through 2013.

Carney is also a true believer. The Financial Stability Board “needs a person who really believes in the need for the Financial Stability Board,” says Chris Ragan, a professor of economics at McGill University and a former special advisor at the Bank of Canada. Our central banker is known as a staunch supporter of new and tougher rules for the financial markets. “If some institutions feel pressure today,” he said little over a month ago in Washington, “it is because they have done too little for too long, rather than because they are being asked to do too much, too soon.”

According to Thomas Bernes, executive director at the Centre for International Governance Innovation, the top three items on Carney’s agenda as he takes the reins of the world’s banking watchdog are likely to be:

1.    New regulations on the $60 trillion so-called shadow banking system, which includes non-bank financial entities such as insurance companies and money market funds. Though these institutions perform many bank-like activities, they are not properly “banks,” and are not–for now–subject to the same strict requirements and oversight as banks.

2.    More supervision of the opaque global derivatives market. Financial instruments called over-the-counter derivatives are widely blamed for spreading risk throughout the markets in ways that are difficult to track and predict. A breakdown in the derivatives market dragged down the entire financial system when Lehman Brothers collapsed 2008.

3.    Tighter rules and scrutiny of institutions judged “too big to fail,”—those whose demise poses a significant threat to the entire financial system. Among them are U.S. banks such as Carney’s former employer Goldman Sachs, and JPMorgan Chase.

Good to Know: Don’t mess with Mark. A former Wall Streeter himself, Carney has no problems locking horns with the titans of global finance. When JPMorgan chief Jamie Dimon attacked Carney during a private meeting in Washington two months ago, Canada’s central banker retorted with a vibrant public speech in defence of tougher capital requirements for institutions like JPMorgan. Dimon later called Carney to apologize.

Fun Fact: He was a hockey goalie at Harvard in the 1980s.

Bank of Canada holds interest rates steady

By macleans.ca - Tuesday, October 25, 2011 at 12:29 PM - 1 Comment

The Bank of Canada held its target overnight interest rate steady at 1.0 per cent on Tuesday, hinting it won’t tighten monetary policy for an extended period. The bank cited concerns about slowing global growth in a statement, noting that Canada’s export-driven economy is vulnerable to Europe’s debt woes, as well as weak demand from the U.S. and emerging markets. The Canadian dollar fell steeply on the news from above-par levels with the U.S. dollar before the bank’s announcement.

CBC

What’s the use of saving money?

By Jason Kirby and Chris Sorensen - Tuesday, September 27, 2011 at 9:30 AM - 38 Comments

Getty Images; Photo Illustration by Taylor Shute

Steven Patterson and his family moved to Vancouver from Cambridge, Ont., in mid-2008, just as the financial crisis hit. After years of scrimping and saving to pay off their first mortgage, they had earned a tidy profit when they sold the Cambridge house and put the proceeds into GICs, where the money would be safe and easily accessible should they decide to buy another home in B.C. Three years later, Patterson, a 42-year-old IT manager, is still sitting on the sidelines, renting, while real estate prices march ever upward in a city where a three-bedroom bungalow covered in warped siding can fetch $1 million.

That might seem like a prudent move in an uncertain economy, but Patterson says his cautious approach has come at a steep price: all his money is steadily being eaten away by inflation, which the meagre interest income from his GICs can’t cover—particularly after the taxman takes a cut. Meanwhile, several of Patterson’s friends have taken advantage of those same low interest rates, loaded up on debt, and bought into Vancouver’s frothy housing market in recent years. And they have enjoyed a windfall—at least on paper—as the value of their homes continues to climb. As for Patterson, “I’m only a few thousand dollars ahead—minus inflation,” he says, clearly frustrated. “So actually, I’m way behind, and I don’t have a house.”

Welcome to the world of ultra-low interest rates, where profligacy is richly rewarded and saving is, well, for suckers. Those who’ve opted to be austere with their personal finances have found themselves on the losing end as governments and central bankers have worked to get people to borrow and spend in the wake of the global recession. While emergency interest rate cuts were to be expected after the financial crisis seized up lending markets, it’s been nearly four years since central banks started slashing rates to the lowest levels in history. For that matter, over the last 10-year period, following the 9/11 terrorist attacks, the Bank of Canada’s benchmark interest rate stayed above four per cent for just six quarters (in 2006 and 2007), while the average headline rate of inflation over that time was 2.1 per cent.

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‘I think it’s better that we stick to the facts’

By Aaron Wherry - Tuesday, August 16, 2011 at 4:42 PM - 19 Comments

Conservative MPs on the finance committee move to ensure you are not frightened by this week’s hearings.

At a planning meeting Monday evening, NDP finance critic Peggy Nash put forward a motion requesting that a panel of economists be included as witnesses Friday, but the Conservatives used their majority to limit the invite list to Mr. Flaherty and Bank of Canada officials.

“It’s imperative, in my opinion, that we not do anything that might worry Canadians. And I think that hearing from the Minister of Finance and the Bank of Canada will help to reassure them, as they should be, that there is concern, but that we are proceeding, as parliamentarians, in their interests,” explained Conservative MP Shelly Glover, who is Mr. Flaherty’s parliamentary secretary.

If you dare look, here are some of those economists now.

Bank of Canada cautions Canadian households on loans

By macleans.ca - Wednesday, June 22, 2011 at 2:40 PM - 0 Comments

Although Canada’s banking sector is still relatively safe, Bank of Canada policymakers say risks to the economy and financial system have increased over the past six months. The central bank said the European debt crisis, unbalanced recovery of the global economy and debt-ridden consumers are to blame for the increase. Bank of Canada officials worry that if interest rates rise or there’s another fall in the jobs market, Canadian households won’t be able to control their debt. Governor Mark Carney and his rate-setting panel warned borrowers and banks to be careful about taking on or giving out loans.

The Globe and Mail

Econowatch: June 2011

By Jason Kirby - Friday, June 3, 2011 at 9:30 AM - 3 Comments

When the U.S. economy crashed in 2008, taking the world with it, central bankers grabbed their defibrillators and headed for the emergency room. To shock their economies back to life, interest rates were slashed nearly to zero. Then when it was clear the American patient would survive, but remained dangerously weak, the U.S. Federal Reserve administered a bold new treatment: quantitative easing, by which it created trillions in new money to stimulate growth.

Well, in just under a month, the latest round of quantitative easing, more commonly known as QE2, will end. Meanwhile, here at home, the Bank of Canada faces pressure to raise rates. Last week, the Organisation for Economic Co-operation and Development said the B of C should put an end to its “highly stimulative” monetary policy to keep inflation in check. Opinions are divided over what comes next. Optimists argue the U.S. economy can stand on its own. Companies are profitable and the job market is improving. Besides, interest rates in the U.S. will still be near record lows. On the other hand, the easy money that’s helped drive up stock markets could be bad. Albert Edwards, a strategist at French bank Société Générale, shares this view in the extreme. He warns the end of QE2 will cause a “deflationary bust” and send the S&P 500 stock index down 70 per cent.

As for Canada, the recession was never that bad to begin with. The key reason B of C governor Mark Carney kept rates low is to prevent the loonie from strengthening further and hurting exporters. An end to QE2 might even help in that effort, since the greenback is expected to rise after the program ends.

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Why you shouldn’t be loyal to your bank

By Erica Alini - Wednesday, May 11, 2011 at 2:03 PM - 18 Comments

When it comes to your relationship with your bank, you should be flirtatious. That’s the takeaway from a recent report by the Bank of Canada, which concludes that “loyal consumers pay more” when negotiating a mortgage rate with their bank. If you have three or more products with the same bank (such as a bank account, credit card and insurance), the bank “interprets your loyalty as reason to believe you are less likely to shop around, making you less price sensitive,” writes RateHub, a Toronto real estate startup that noticed the report.

The Bank of Canada’s study found that new clients receive a rate discount of 0.1 per cent more than existing clients. Based on the average value of Canadian homes on the market, which is currently around $370,000, that translates into savings of about $6,000 on a 25-year mortgage at a 4 per cent rate. It’s a substantial price to pay for loyalty.

High-price problems

By Chris Sorensen - Friday, April 29, 2011 at 7:50 AM - 1 Comment

Richard Buchan/CP

The Oklahoma chapter of the American Automobile Association has been forced to respond to hundreds of extra calls from stranded motorists who decided to postpone their next fill-up after the price of gas soared over 19 per cent in the past three months. Meanwhile, in Florida, a gang of thieves reportedly stole six tractor-trailers full of tomatoes in an apparent bid to cash in on soaring prices of fresh produce.

There’s no shortage of examples these days as to how rising prices cause people to do odd things, and cause real instability. And it’s the reason why central bankers around the world, including in Canada, are suddenly waking up to a growing inflationary threat. In fact, it would appear the Bank of Canada (along with most economists) was caught off guard by recent data from Statistics Canada that showed the Consumer Price Index— which measures the price of everything from food to mortgage insurance—rising 1.1 percentage points in March, to an annual rate of 3.3 per cent. It was the largest monthly jump since Canada introduced the GST in January 1991, according to BMO Financial Group.

“We now have an inflation rate at 3.3 per cent and the Bank of Canada’s overnight rate at one per cent, which is the largest gap since the 1970s,” says Douglas Porter, BMO’s deputy chief economist. “Inflation is also now above the prime lending rates, which is three per cent. And that is highly unusual—we’re now in a situation where it almost pays to borrow.”

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This week: Good news, bad news

By macleans.ca - Friday, April 15, 2011 at 10:40 AM - 0 Comments

Good news

Andy Clark/Reuters

Vive la France!

France played a crucial role this week in the surrender and arrest of the Ivory Coast’s defeated president Laurent Gbagbo and his militiamen. With its troops on the ground, France has publicly pledged to help the troubled nation in its reconstruction. Along with its recent calls for greater NATO involvement in Libya, France has suddenly become a robust player on the international stage, flexing its muscle in the name of democracy and global stability. It’s just too bad that same spirit isn’t on display back home, where French police arrested two women under the ban on wearing face-concealing veils in public.

In the classroom

The organization that regulates Ontario’s 230,000 teachers issued a new rule this week: no more connecting with students on social media. Teachers have been warned not to “friend” their pupils on Facebook, subscribe to their Twitter accounts, or use Flickr, LinkedIn or MySpace to interact online. Give the College of Teachers an A+ on this. The student-teacher relationship belongs in a classroom, not a chat room.

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Easy money men

By Chris Sorensen - Wednesday, January 12, 2011 at 10:00 AM - 43 Comments

Carney (below) slashed interest rates and kept Canadians spending—but helped fuel debt—while Flaherty tightened mortgage rules | Chung Sung-Jun/Getty Images

When Mark Carney took over as governor of the Bank of Canada in early 2008, he had relatively little central banking experience under his belt. As fate would have it, the former Goldman Sachs managing director got plenty of opportunity to test his mettle later that year when the U.S. financial crisis erupted. He responded, perhaps predictably, by slashing already low interest rates until, by April 2009, they stood near zero. But he also took the unusual step of telling Canadians that rates would likely stay there until mid-2010.

It was a departure from the style of central banking popularized by former U.S. Federal Reserve chairman Alan Greenspan, who was once dubbed “maestro” for his seeming ability to orchestrate economic growth (critics would say “bubbles”) through the 1990s and early 2000s. Greenspan’s speeches and statements were often masterworks of ambiguity, forcing investors to parse their true meaning and lending the man behind them an Oz-like aura.

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Recovery? You bet.

By Jason Kirby - Thursday, December 23, 2010 at 12:40 PM - 32 Comments

Over the Thanksgiving weekend in the United States, retailers experienced their best sales gains in four years, surprising many analysts | Adam Hunger/Reuters

With the flood of facts and figures that rush by every day, it’s easy to lose sight of the bigger picture when it comes to the American economic machine. For every batch of positive news confirming a recovery, it takes just one bad jobs report or trigger-happy dictator in North Korea to plunge us back into doom and gloom. But Lakshman Achuthan, managing director of the Economic Cycle Research Institute, and someone who studied recessions and recoveries for two decades, has a message for anyone with an interest in seeing the U.S. economy get back on its feet. “The revival is right in front of us,” he says. “Overall economic growth is about to accelerate.”

Signs of America’s resurgence abound. Shoppers surprised analysts during the Thanksgiving weekend—they helped drive retailers to their best sales gains in four years. They’ve also begun to indulge again, driving strong revenues at companies like Starbucks and cosmetics giant Estée Lauder. At the same time, manufacturers have enjoyed a resurgence of late. Sales and exports are both up. It’s all helped boost America’s top line. In November, third-quarter GDP was revised up to 2.5 per cent from two per cent—the fastest growth rate the U.S. has seen since the end of 2006.

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A monetary mandarin speaks, but not about everything

By John Geddes - Tuesday, October 5, 2010 at 3:50 PM - 0 Comments

A sturdy speech for the monetary policy aficionado in all of us was delivered today by Tiff Macklem, the veteran mandarin who recently rejoined the Bank of Canada, where he’s worked before, after a spell at the finance department. And yet I’m left mulling over what he didn’t tell us.

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Another elite special interest

By Aaron Wherry - Friday, September 17, 2010 at 10:31 AM - 0 Comments

The Governor of the Bank of Canada explains to the Globe how changes to the long form census will impact the bank’s work.

Mr. Carney told The Globe and Mail editorial board on Thursday that those changes could have an impact on the quality of research in those important areas and force the bank to supplement the information with its own research. “There is a non-trivial range of data that could be affected,” Mr. Carney said…

When asked which data could be affected, Mr. Carney said, “that’s part of what we’re going to have to work through. Obviously a series of surveys on the household side, and the potential implications for the labour force survey … there could be issues around the productivity data, some of the other national accounts, and then you get into more granular data … some of our longer-term research could be affected.”

The Commons: In search of loose change

By Aaron Wherry - Tuesday, June 1, 2010 at 6:17 PM - 49 Comments

The Scene. Michael Ignatieff began with an attempt to weave together various disparate strands to form a basket. A basket within which he could carry his message from one middle-class suburban door to the next.

Or something like that.

The Bank of Canada, he reported, had today hiked—the only word one can use when describing this action—interest rates. Canadian families are already more indebted than households anywhere else in the G20. The government is spending a billion to secure three days of meetings of G20 world leaders later this month. How, he wondered, could the government explain putting so much into the latter in light of the former?

Here, though, the Prime Minister stood with his own basket to weave. The interest rate hike, he said, was due to Canada’s sound economy. The G20 meetings, meanwhile, would bring as many delegates as the Olympics had athletes with even greater security risks. Ipso facto, the money simply has to be spent. Continue…

Seven Days: A week in a life of Stephen Harper

By macleans.ca - Thursday, April 22, 2010 at 11:20 AM - 2 Comments

Adrian Wyld/ CP

A week in the life of Stephen Harper
Within four heady days the Prime Minister had accepted embattled junior minister Helena Guergis’s resignation; welcomed Nickelback singer Chad Kroeger to 24 Sussex Dr.; caught the band’s Ottawa concert with son Ben; then jetted down to Washington for a nuclear summit with Obama. Such is politics—being, to quote Nickelback, a Leader of Men. By week’s end, will the PM be a political Rockstar, or will he have Something unsavoury—a foot, an apology?—in [his] Mouth?

Good news

A new chapter
The online book juggernaut Amazon was granted approval this week to open a distribution centre in Canada. Canadian booksellers decried the move, arguing that allowing the foreign-owned retailer threatens to undercut Canada’s cultural industry. But Amazon says it will invest $20 million in Canada, including $1.5 million on cultural events and awards, and promote more Canadian books internationally. More importantly, the move stands to benefit both Canadian publishers and Canadian consumers with better prices and more options. A little competition is nothing to fear.

Northern tiger
In the Bank of Canada’s latest quarterly business survey there was plenty of cause for optimism. Canadian executives say they plan to hire more workers, boost investment and raise prices to meet growing demand for their goods in the next year. Meanwhile, the Office of the Superintendent of Bankruptcies reports that bankruptcies fell in January for the fourth straight month, while the country’s trade surplus widened in February to its highest level since the beginning of the recession. This all comes on top of solid GDP growth. No doubt about it—Canada’s roaring recovery is here to stay.

Bottoms up
Workers at a Carlsberg brewery in Copenhagen went back to work this week after a five-day strike over company plans to cut back their free beer rations from three bottles a day to one, which must be consumed at lunch in the company cafeteria. Workers agreed to sit down with management and come up with a temporary solution to the dispute. No matter how this brouhaha is resolved, the new drinking policy  may not be such a bad idea. A recent study from the Harvard School of Public Health found that having one or two drinks a day can reduce the risk of heart disease in young adults.

The family guy
What started as a golf tournament—all but consumed by the prodigal return of the adulterous Tiger Woods—ended with the triumph of devoted family man Phil Mickelson, who won his third green jacket at the Masters. While Woods had been away from golf dealing with a sex scandal fallout, Mickelson faced his share of distractions too. Both his wife and mother were diagnosed with breast cancer a year ago, and he dedicated his victory to them and his family. Mickelson’s win provided a welcome narrative shift and a nice break from talk about Tiger, who was back to his old habits on the course, yelling and flipping clubs in anger, even pouting over his fourth place finish. Sometimes, nice guys do finish first.

The Bad news

Alberta grit?
Dave Taylor, the former Alberta Liberal leadership contender, has quit the party to sit as an independent, saying he’s “lost confidence” in his one-time rival David Swann’s “abilities as a leader” and calling the party “invisible” and “irrelevant.” If the Alberta Liberals ever had a chance to grow the party, now would be it: Danielle Smith’s Wildrose Alliance seems poised to cut the Progressive Conservative vote under Ed Stelmach’s moribund premiership, leaving an in for the Grits. Well, don’t count on it. Long encumbered by backbiting, this is yet another instance of bad Alberta Liberal party politics. That’s bad for democracy in a province that, with 40 years of Tory rule, has become a one-party state.

All news fit to bleep
Since the New York Times began broadcasting video of its morning news meeting across the Internet, some of its highest-ranking editors have been seen to utter inaccuracies. On just the feed’s second day, executive editor Bill Keller said that Britain had thrown “the head of Mossad,” Israel’s intelligence service, out of the country “in retribution for the Israelis having assassinated a Hamas militant in Dubai.” But the Brits hadn’t accused Israel of the hit, and the Times hadn’t confirmed whether the diplomat they’d ejected was the Israeli London spy chief. “This is why I went into print rather than TV,” Keller wrote to his paper’s ombudsman, explaining today’s accelerated news delivery: “The deadline is always.”

Simmering down
Protests against Thailand’s coalition government turned violent last weekend, killing 21 and threatening to send the country spiralling into crisis. In Kyrgyzstan, meanwhile, 83 people were killed during an anti-government uprising that saw the president flee the capital. The incidents leave dark stains on two countries with histories of political instability. But there are signs the worst may be over. In Thailand, the head of the army ruled out using further force to stop protesters. Kyrgyzstan’s president said he would resign if his safety and his family’s safety could be guaranteed. Cooler heads must prevail.

Fat food
This week, KFC introduced the Double Down sandwich, a savoury creation consisting of two deep-fried chicken fillets rather than a bun, and with bacon, cheese and sauce as filling. All told, it contains an alarming 1,380 mg of salt (more than half the recommended daily allowance). Then again, if you’re the type who’d eat this beast, you probably don’t care too much about your health anyway.

How to stop the next financial meltdown

By Andrew Coyne - Tuesday, April 6, 2010 at 9:23 AM - 40 Comments

Blair Gable/Reuters

Born of the Great Depression, the Bank of Canada has found new relevance, 75 years later, in averting another. As Canada emerges, surprisingly strong, from what many had feared would be at least a Great Recession, the governor of the bank, Mark Carney, credits its interventions in large part for sparing us the worst of the financial crisis.

In an interview to celebrate the bank’s 75th birthday, Carney said one of the lessons of the near-collapse of global finance was the crucial part that central banks play in the smooth running of financial markets, especially in a panic. “The need for a lender of last resort, and not just a lender but a liquidity supplier of last resort, was made absolutely clear by the crisis.”

The corollary lesson: markets are not always self-correcting. Having worked in capital markets for many years at Goldman Sachs, Carney says he acquired “both a respect for [markets] and a skepticism of them. You know, I’m not a market fundamentalist. There are periods of excess in both directions in financial markets and it’s important to recognize that.”

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An economy under the weather

By Chris Sorensen - Thursday, March 18, 2010 at 3:00 PM - 1 Comment

Photograph by Kevin Lamarque/ Reuters

During the first week of the 2010 Games, Vancouver’s winter weather—or more precisely, lack of it—was a hot topic. In the end, though, the spring-like conditions proved no match for a determined army of snow-shovelling workers. But while Olympic organizers were able to temporarily wrestle Mother Nature into submission, the bright minds charged with running the giant U.S. economy weren’t nearly so lucky.

In the United States, harsh winter storms pounded the densely populated eastern seaboard in February, and are blamed for taking the steam out of the country’s economic recovery. Washington, for example, was buried under more than half a metre of snow during a blizzard dubbed “Snowmageddon,” which disrupted the entire region and was followed by an encore performance less than a week later. The storms disrupted government and air travel and caused many Americans to stay home instead of going to work or to the mall, putting a dent in everything from consumer spending to employment. “This February marked the first time in recorded history that each of the 50 states had measurable snowfall in the same day,” according to UBS, a Swiss bank. “It is therefore likely that this unusual weather played at least some role in the recent string of weaker-than-expected [U.S.] economic data”

It has been a different story north of the border—and not just in Vancouver. In Toronto, the country’s financial centre, bankers and lawyers have gone nearly the entire winter with nothing but bare concrete under their leather-soled dress shoes. Meanwhile, GDP numbers shot through the roof in the fourth quarter and talk has suddenly turned to taming the recovery, instead of stoking it. Bank of Canada governor Mark Carney will likely hike interest rates to cool any overheating, but praying for a few more snowflakes couldn’t hurt.

The runaway economy

By Chris Sorensen - Thursday, March 4, 2010 at 3:00 PM - 9 Comments

When Thomas Hoenig took over as president of the Federal Reserve Bank of Kansas City nearly two decades ago, his 85-year-old neighbour gave him a 500,000-mark German banknote to remind him of Germany’s experience with runaway inflation following the First World War. “He told me that in 1921, the note would have bought a house,” Hoenig said during a recent speech to a U.S. budget commission. “In 1923, it would not even buy a loaf of bread. That note is framed and hanging in my office.”

Hoenig openly admits that invoking historical reminders of hyperinflation might seem overly alarmist in an era when inflation—a rise in the cost of living caused by heightened demand for products or the rising cost of producing them—has ceased to be a major concern for most North Americans. Central bankers have made fighting excess inflation, usually anything more than two per cent to three per cent, among their chief priorities in recent decades (some inflation is generally viewed as a good thing because it signals economic growth). But as the economy comes back to life after an extraordinary period that saw governments—particularly in the United States—resort to unprecedented fiscal and monetary measures to keep the world’s economies from imploding, suddenly there’s renewed concern about inflationary pressures. (Already, Canada saw a surprise jump in its inflation rate in January.) With all that extra money sloshing around in the system—inflation is sometimes thought to be caused by too many dollars chasing too few products—some are worried that the cure prescribed for the downturn could quickly become the recovery’s disease.

While unwanted inflation can be reined in by hiking interest rates, central bankers seem intent on keeping interest rates low to help speed economic recovery. People like Hoenig, meanwhile, say they are worried that a massive buildup of U.S. government debt could also lead to calls for the central bank to print more money to help pay it down sooner, which could also have long-term inflationary effects.

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Are taxes the only way out of the deficit?

By Andrew Coyne - Tuesday, January 26, 2010 at 10:51 AM - 48 Comments

The Great and the Good have come down from on high, and delivered their decree: there shall be tax hikes. The deficit that was once our friend is now our enemy, no longer “stimulative” but “structural.” The spending spree that gave us that deficit cannot be reversed, or not altogether. If the deficit is to be slain, it must therefore be by raising taxes. Thus sayeth the elders, including former Bank of Canada governor David Dodge, two former deputy ministers of finance, and Jeffrey Simpson.

Well, maybe. What is certainly true is that the fiscal forecast, once an unbroken line of surpluses as far as the eye could see, has darkened considerably. Not only is the deficit headed for $56 billion this fiscal year, but it will still exceed $11 billion even four years from now. And that’s on the government’s cheery numbers. The parliamentary budget officer forecasts the 2014 deficit at $19 billion—after four years of (assumed) steady economic growth. Just in time for the next recession to blow it sky-high again.

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Econowatch

By Jason Kirby - Friday, October 30, 2009 at 8:30 AM - 4 Comments

Forget what economists have told you about how stimulus programs are supposed to function during a recession. You can learn a lot more from watching a master illusionist at work.

Take America’s US$8,000 tax credit for first-time homebuyers. Like any stimulus measure meant to jolt the economy out of recession, the tax credit was always more about smoke and mirrors than economic theory. When Washington created the program eight months ago, its aim was to conjure the illusion of stability in the housing market. Until the free fall in house prices could be halted, a broader economic recovery could never take hold. Continue…

Econowatch

By Jason Kirby - Friday, October 23, 2009 at 8:30 AM - 3 Comments

As tongue-lashings go, it was rather sedate. When the Bank of Canada left its overnight interest rate at 0.25 per cent on Tuesday, it took the opportunity to send a message to currency markets. If the loonie continues to approach parity with the American greenback, it will “more than fully offset” the recent signs of recovery.

Those would hardly be fighting words—normally. Except this isn’t the normal world. It’s the rarefied realm of central banking, where economists hang on every intonation for hints of future policy changes. In that context, the warning came like a blow to the solar plexus. It worked, too, for now. After climbing nearly 18 per cent this year, the Canadian dollar fell two cents immediately following the central bank’s statement, to US95.3 cents. Continue…

Inside the meeting that saved the world

By Andrew Coyne - Tuesday, October 13, 2009 at 1:45 PM - 30 Comments

The meeting was not going well.

On Friday, Oct. 10, 2008, finance ministers and central bankers from the Group of Seven leading industrial economies had gathered in Washington for their regular fall meeting. The circumstances, of course, were anything but routine. Four weeks after the collapse of Lehman Brothers, the 158-year-old Wall Street institution, the financial world was in a state of escalating panic. With banks toppling one after the other, stock markets in a death spiral, credit markets all but disabled, the meeting had taken on crucial significance.

Around the world, investors were looking to governments for salvation—only they could provide the kind of rock-solid assurances that might put a floor under the markets. A strong, united statement from the G7, and there was some hope of restoring sanity to the situation. A weak statement, or worse, a failure to agree, and the entire world financial system might well tip over the edge. Continue…