By Tamsin McMahon - Thursday, May 2, 2013 - 0 Comments
Finance Minister Jim Flaherty has named Stephen Poloz the next governor of the Bank of Canada. The announcement shocked analysts who had thought that long-serving senior deputy governor Tiff Macklem was a front-runner. Poloz, head of the federal trade agency Export Development Canada, has a low profile in financial circles.
Here’s a primer on who he is and what he might bring to the job:
1. He is 57 and married to Valerie Poloz. The couple has two children.
2. He spent 14 years at the Bank of Canada, rising to chief researcher, before being appointed chief economist at Export Development Canada in 1999. He is currently the agency’s CEO.
3. During the 1990s, he was managing editor of the Montreal-based International Bank Credit Analyst, an influential financial publication that long warned against jumping into frothy, dot-com fuelled stock-market bubble before it burst.
4. He has also been a visiting scholar at the International Monetary Fund and the Economic Planning Agency in Tokyo.
5. He was previously rumoured to be on the short-list of candidates to replace David Dodge as Bank of Canada governor in 2008.
6. He warned early on of a potential for a major financial crash:
In 1998, after Long-Term Capital Management went bust, requiring a $3.6-billion U.S. government bailout, some analysts shrugged off the episode as the workings of a rogue hedge fund. Poloz was among those who predicted the fund’s failure was more likely a sign of a financial system that was working itself into a bubble built on complex and opaque derivatives, which would eventually require more bailouts. “I think there will be lots more” fund failures, he predicted in 1998.
7. … and then got it wrong after it happened.
In 2007, Poloz predicted the financial crisis would be short-lived. “A key source of comfort during the financial turmoil of recent weeks has been the consensus that the world economy remains strong,” he wrote in an analysis. “This is important, for it means that even if the financial contagion continues to spread, the world economy will prove resilient to the shock.”
8. He helped set the framework for Bank of Canada policies largely seen as successful in helping Canada stave off the worst of the global recession.
In 1994, while still at the Bank of Canada he co-authored a paper describing in detail the central bank’s approach to its medium-term forecasting. It may sound dull, but the paper was a critical step in the bank’s sweeping shift away from clandestine operations and toward more transparency in how it sets monetary policy.
It’s an approach strongly supported by outgoing governor Mark Carney and one that he has signaled he’s bringing to the Bank of England. Carney is a vocal a proponent of more communication and forward guidance from central bankers — signaling to investors where interest rates will likely be headed in the future —arguing that it can be calming on the markets and perhaps induce consumers to adjust their spending.
9. He disagrees with Carney on a few key issues.
Unlike Carney, who has criticized Canadian corporations for sitting on “dead money” instead of investing, Poloz warned in a 2011 speech that the stockpiles of cash were a “necessary insurance against the next black swan” in an era of deep uncertainty about the future of both the Canadians and the global economy.
Carney has also openly dismissed the “Dutch Disease” argument that Canada’s high “petrodollar” is harming the manufacturing economy. Poloz, on the other hand, has publicly warned that the rising Canadian dollar was harming the economy, mainly because it exacerbated the widening gulf between Eastern manufacturing-based economies and Western commodity-based ones.
He has cautioned that such economic divergence would become a long-standing problem in Canada and that similar conditions in the 1970s had led to “stagflation” when inflation rises rapidly but economic growth stalls.
“This two-speed economy thing is enormous,” he told a 2008 conference on how energy industry affects the economy, arguing that the Bank of Canada should pay more attention to the dollar’s exchange rate when setting interest rates.
10. Perhaps he’s so vocal because he initially got it so wrong when it came to the dollar:
In spring 2007, Poloz proclaimed that the Canadian dollar, then sitting at 94 cents, would fall to 84 cents U.S. by the end of the year because the weak U.S. and global economy would hurt demand for Canadian exports. “There is a global slowdown that is grinding through the system, and oil prices are probably going to drift lower rather than higher, and in that context you get the Canadian dollar going down not up.”
Instead, the dollar hit a high of $1.08 in November. It took roughly two years for his prediction to come true — the dollar dropped in 2009 — though the loonie has been stubbornly sitting around par since 2010, thanks largely to strong oil prices.
Some analysts rushed to describe Poloz as an “outsider” whose appointment signals a morale crisis at the Bank of Canada and a push by the Harper Conservatives for more control over monetary policy. Indeed, the Canadian dollar fell on news of his appointment. But Poloz could also be viewed as one of Harvard Business School professor Joseph L. Bower’s “inside outsiders” — the kind of leader who has both deep institutional experience and knowledge, but not so much that he’s become part of the establishment.
A good example of such a leader, according to the Harvard Business Review? Mark Carney.
By Stephen Gordon - Monday, January 7, 2013 at 11:22 AM - 0 Comments
The original goal of this post was to answer the following questions:
- What was Mark Carney talking about in his December speech entitled “Guidance“?
- What is NGDP targeting and why are people talking about it?
It turns out that that before I could figure out what to say about those two questions, I had to talk about two other things first: inflation targeting and price-level targeting.
There’s really no great mystery about what the Bank of Canada does and why: it has an explicit mandate from the government to conduct monetary policy in such a way as to ensure that inflation rates stay between one and three per cent per year, with two per cent being the de facto target. It’s been doing this for more than twenty years, and successfully, too:
By Tamsin McMahon - Tuesday, December 11, 2012 at 5:57 PM - 0 Comments
In his first public speech after being named head of the Bank of England, Mark Carney, governor of the Bank of Canada, deftly dodged the question of what lesson he might take with him to Europe from his experience shielding Canada from the depths of the global recession. He did, however, give some hints about his approach and touched on a range of other issues, from what the debate over the U.S. fiscal cliff means for Canada, to how we’re not yet out of the woods when it comes to the country’s housing bubble.
Here are a few excerpts from the Q&A that followed Carney’s speech at the CFA Society in Toronto this morning:
On what lessons he plans to take from Canada to the Bank of England:
I think my comments about the Bank of England are best first delivered to the Treasury select committee given their role and we’re working right now with the committee to find a date in the new year that works for both of us.
[That said] there are experiences of crisis management that we had here in Canada. Much is made in Canada that we didn’t have bank failures and we didn’t have other issues. In part, we didn’t have those because we made tough decisions in a timely fashion…The first thing is transparency. You have to level with people on the scale of problems. It does no good to try to spin your way out of a crisis.
…I would say on monetary policy and financial stability policy writ large, I think one the strengths of the Bank of Canada is the breadth and dept of talent in the institution and, as the governor, the importance of listening to diverse points of view and synthesizing within that institutional structure either a path for monetary policy or a path financial reform for other things. Those are some of the aspects that worked here in Canada.
The last thing I would reinforce is basically the power of the flexible inflation targeting framework, which we and many others practices…In order to get the most benefit from that framework, transparency and communications is absolutely crucial. There’s a way to use communication to potential amplify that power in extraordinary circumstances, which may be appropriate in some jurisdictions, not appropriate in other jurisdictions.
Those are general lesson, which are not necessarily directly applicable to the Bank of England.
By Colby Cosh - Tuesday, December 11, 2012 at 6:53 AM - 0 Comments
Just about my favourite thing in the world is when someone comes up with an idea for a policy move that (a) seems completely ludicrous but (b) is completely legal and (c) would probably work. With the U.S. headed for the so-called “fiscal cliff,” there is renewed discussion of a weird jiujitsu move that President Obama could conceivably use to elude the congressional debt ceiling.
The executive branch is, as a general rule, not allowed to incur debt in defiance of Congress, and the U.S. Mint’s printing of money is strongly circumscribed by statute. But last year a blogger named Carlos “Beowulf” Mucha noticed an oddity in the U.S. Code: the Treasury does have an explicit unrestricted right to order the mint to create collectible platinum coins of arbitrary face value. They can’t be gold or copper or aluminum; they have to be platinum. Under this theory, the President could tell the mint to strike a couple of platinum coins with denominations of $1 trillion each. He would then deposit them with the Federal Reserve, in what is actually the ordinary fashion, and the Fed would in turn issue the Treasury a credit of $2 trillion; since the physical specie is there at the bank, no “debt” is technically created at all.
This would be an executive branch intrusion on the Fed’s acknowledged privilege of controlling the money supply. It’s probably the kind of loophole Americans probably do not want to establish a precedent for exploiting. (Insert “Pretty soon you’re talking real money” joke here.) But amidst controversy over the Fed’s management of monetary aggregates, the platinum fantasy is finding enthusiasts in surprising places: not only in the left blogosphere where it originated, but amongst “market monetarist” critics of the Fed (who believe that the central bank should be targeting nominal GDP growth instead of inflation).
Among leading econopundits, Felix Salmon charged that magic platinum coins would represent “the utter failure of the U.S. political system and civil society.” Matt Yglesias questioned whether it was really possible but admitted that the idea “highlights a very accurate point”—that the U.S. controls the unit of account in which its debts are denominated, and so has (finite) room to manoeuvre in ways other countries don’t. Market monetarist Scott Sumner asked whether it was a “brilliant masterstroke” or a “loony idea” and decided “I can confidently answer ‘both’.” A man after my own heart.
By Stephen Gordon - Thursday, December 6, 2012 at 12:41 PM - 0 Comments
The Bank of Canada’s most recent interest rate decision offers the same guidance for interest rates as its previous decisions: interest rates will go up eventually, but not just yet. There is no hint that the Bank is contemplating a relaxation of monetary policy in the near or medium term.
This stance puzzles some observers: inflation rates have been below the two per cent target for six months and the Bank of Canada’s estimate of the output gap (the difference between how much the economy is actually producing and how much it could produce operating at full capacity) widened after weak GDP growth in the third quarter of 2012. This state of affairs would generally suggest that a relaxation of monetary policy was in order. So why is the Bank holding firm?
One answer is that the BoC believes that the current weakness in the economy is transitory. As Milton Friedman once noted, there are “long and variable lags” between a change monetary policy and its effects on the economy—a reduction in interest rates now may only take effect some time in 2014.
Another answer is that the Bank is worried about the possibility that holding interest rates too low for too long will fuel an asset price bubble—either in stocks, houses or both—a concern it expressed today in its Financial System Review. It may feel that a temporary deviation of inflation below target may be an acceptable price to pay to avoid a financial crisis.
But yet another answer may be what’s happening in labour markets:
By John Geddes - Sunday, October 14, 2012 at 7:26 PM - 0 Comments
Late last year I sat in when Andrew Coyne—still with Maclean’s then before his return to writing his newspaper column for Postmedia— interviewed Bank of Canada governor Mark Carney.
While the LSE-trained journalist quizzed the Oxford-educated central banker on the finer points of monetary policy, I found plenty of time to take in the portraits of past governors that grace the boardroom of the bank’s rather imposing, neoclassical headquarters in Ottawa.
I was mainly interested in the gaze of Andrew’s father, James Coyne, the bank governor from 1955 to 1961, who died at 102 last Friday. Just before the interview began, Andrew had mentioned how well he thought the official portrait caught his father’s natural expression—a rarity, I imagine, for that sort of formal sitting.
By Andrew Hepburn - Monday, July 23, 2012 at 4:59 PM - 0 Comments
I wrote about the private-sector side of the LIBOR scandal in my previous article for Maclean’s. Now let’s turn to the more intriguing part of the whole affair: How the Bank of England itself at one point supposedly started to encourage Barclays to fiddle with the numbers.
Even if the allegations proved to be true, you’d be excused for scratching your head in puzzlement. What’s the big deal with a central bank engaging in manipulation for the sake, supposedly, of the health of the financial system?
With governments trying to contain the effect of the financial crisis first and now the eurozone mess, we hear of central banks tampering with the markets almost every day. And, really, governments have always intervened in the economy to influence–manipulate if you will–outcomes. When a central bank adjusts short term interest rates, it is using its longstanding, legitimate power to artificially tip the market one way or the other. And, in a closer-to-home example, rent control is another form of market manipulation at the hands of the government.
We generally accept various forms of manipulations because we think the government can and ought try to influence certain markets in ways that produce beneficial outcomes for society. Take the case of monetary policy: The widespread consensus is that central banks can cushion recessions by lowering interest rates and help calm roaring inflation by raising them.
And because monetary policy is largely viewed as a reasonable area of government intrusion, interest rate changes are announced publicly. Market watchers and the general public may disagree about the need for rate cuts or hikes at any moment, but, for the most part, the government’s right to make the decision goes unquestioned.
Now, that’s not what happened with LIBOR. In this case, if the Bank of England did indeed instruct Barclays to submit artificially low rates, it had no choice but to convey such directions surreptitiously. According to the allegations, the very goal of Barclays providing false submissions during the financial crisis was to deceive the market into believing the bank was healthier than it truly was. Had the Bank of England publicly told Barclays to submit lower LIBOR figures, the charade would have been self-defeating. Everyone would know that LIBOR didn’t represent the true rate of borrowing.
By macleans.ca - Tuesday, July 17, 2012 at 3:03 PM - 0 Comments
Today the Bank of Canada decided to hold interest rates at 1%, surprising no…
Today the Bank of Canada decided to hold interest rates at 1%, surprising no one. It did hint, once again, that it would raise them eventually.
The bank lowered its growth estimates for the coming years, to 2.1 percent in 2012, 2.3 percent in 2013 and 2.5 percent in 2014. The bank said housing activity is likely to slow, but consumption and business investment would drive growth.
In typically arcane language, the bank said: “To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”
In other words, the BOC will be leaving things as they are for now, but it may take its foot off the gas soon.
By Erica Alini - Wednesday, April 11, 2012 at 3:03 PM - 0 Comments
It’s been years since Bank of Canada governor Mark Carney first started warning about Canadians piling on too much personal debt. Rising household debt, after all, has been the most dangerous byproduct of his low interest rate policy, which was initially designed to help Canada sprint out of the Great Recession––and, later on, partly dictated by the need to help sputtering Canuck exports. Right from the get-go, though, Canadians haven’t been listening. As the situation became more dire, so did the Bank’s warnings. Today Canada’s ratio of household debt compared to disposable income is inching toward 160 per cent, the peak seen in the U.S. and the U.K. just before their respective housing busts. (In the last three months of 2011, the debt-to-income ratio declined somewhat–not because Canadians stopped taking on debt, but because income levels also rose during the same period.) Carney is still at it. Last week, he finally raised the prospect of raising interest rates, cutting people off from all that cheap money, even as the Fed down south sticks to near-zero rates.
In the graph below, we’ve charted debt-to-income ratios, alongside some increasingly alarmed quotes from BOC governor Mark Carney or other Bank officials.
Click on the chart to open a full-size version of the graph in a new window.
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.