Jim Flaherty has to stop talking about monetary policy

The more he says, the more he undermines the Bank of Canada governor

by Stephen Gordon

Jason Franson/CP

There’s a French expression: Manquer une occasion de se taire. It means “To miss an opportunity to stay silent,” and it comes to mind every time I read reports in which Finance Minister Jim Flaherty opines on the conduct of monetary policy. Even if his comments were well-informed—which they’re not—he shouldn’t be speaking publicly about his views on how monetary policy should be conducted.

Here is how Canadian monetary policy has functioned over the past two decades:

  • The Minister of Finance provides a mandate to the Bank of Canada.
  • The Bank of Canada uses whatever instruments it sees fit to carry out it mandate.

This setup has worked well. The mandate is the mechanism for keeping the Bank accountable to its political masters, while the day-to-day management of monetary policy is conducted at arm’s-length from the political sphere. The Bank does not have complete discretion, though: in the case of a serious disagreement, the Minister of Finance can overrule the Bank. (The Governor would then be expected to resign.)

Much of the effectiveness of Canadian monetary policy depends on the Bank of Canada’s credibility: managing expectations for the future is at least as important as setting short-term interest rates. It’s hard to imagine a better way to erode a Governor’s credibility than for a Minister of Finance to develop the habit of second-guessing the Bank of Canada in public.

Jim Flaherty’s comments a couple of months ago on Quantitative Easing (QE) were a good example of What A Finance Minister Should Not Say In Public:

As you know, we in Canada have not been fans of quantitative easing unlike the United States and elsewhere.

In point of fact, QE is a tool that the Bank of Canada views as a legitimate instrument of monetary policy if the need should arise. So far, the Bank hasn’t thought it necessary to implement QE, but what if circumstances change? How would markets react to a Canadian QE exercise with those sorts of comments on the part of the Minister of Finance on the record? Especially when those comments are so ill-conceived?

More recently, we have this:

“I think the pressure [to increase interest rates] will be there, because the Fed in the U.S. should stop printing money, and taper off as they say,” Mr. Flaherty, referring to the dialling back of U.S. bond-buying, told CTV in an interview aired Sunday. “The OECD and the IMF have both said to Canada we ought to let our interest rates go up a bit. So there’ll be some pressure there for that to happen.”

This raises many questions, such as “Is Jim Flaherty mentioning these views because he too agrees that interest rates should go up?”, “Is this some sort of veiled rebuke of the Bank’s current policy stance?” and “Why is he even talking about this in public?”

Mr. Flaherty stopped short, however, of saying what he thinks Mr. Poloz should do, with the minister’s spokeswoman saying Sunday that’s the “domain of the Bank of Canada.”

Phew! While that clarification is welcome, the minister’s spokeswoman isn’t the one who has the authority to demand the resignation of the Governor of the Bank of Canada.

Jim Flaherty will have many opportunities to stay silent about monetary policy in the future. He should take advantage of them.




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Jim Flaherty has to stop talking about monetary policy

  1. “As you know, we in Canada have not been fans of quantitative easing unlike the United States and elsewhere.”

    Key part of that quote is “have not been”. Sounds pretty factual to me. If circumstances change, then the comments by the Finance Minister can change. I don’t see a problem there.

    Same goes for the next quote. He was merely repeating what the OECD and the IMF have said. And pretty much everyone, including the Fed itself, acknowledges that the US at some point reasonably soon, has to stop printing money.

    • You might want to go back to the bit where SG points out how damaging political gossip can be to a hands off institution. A nation’s FM ought to be able to avoid gossiping with the media, no?

    • We do the same thing, Flaherty just lies about it. QE is in effect electronic creation of inflationary money to devalue currency and buy government debt that savvy lenders are not buying.

      Canada does it, you bet we do. Sort of like bank bailouts, we called it something different but banks got a $125+ billion buyout of bad debt by CHMC….. but it is all materially the same.

      Also factor in Canada does not report shortfalls in CMHC and CPP like the USA does, well, if you did you would see Canada is in the same debt spiral as is USA.

      But hey, politics is about deception.

  2. The need to sound important will override every other consideration.

    • You’re speaking of yourself, right?

      • Again with your redneck swagger…..

    • Actually, Emily, the need is to prevent inflation from eating up the savings of pensioners and others who have invested for years.
      All that “Quantitative Easing” creates is cheap money. What folks don’t realize of course, is that this process is in effect….a tax that takes from all of us with investments. Governments use this when they need more money, but stiff us with the bill.
      Little insidious.

      • QE fraud kicked off the depression in 2006, causing unemployment and credit crisis in 2007 and then the market crash of 2008.

        http://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y

        Canada too, as USD and CAD are being devalued for QE/government debt fraud:

        http://www.xe.com/currencycharts/?from=CAD&to=CNY&view=2Y

        Pensions with returns below inflation but big future promises are all in shortfalls. Real inflation is much higher than 1.2%, its more like 6%.

        But hey, Flaherty and Ottawa politicians are about deception. As inflation is really a debt tax on all money including pensions and incomes, a compounding tax.

  3. The ambulance chaser/housing arsonist strikes again….what modern nation would put a personal injury lawyer in charge of its finances?

    • Er…um…this nation.[ is there a prize?]

  4. Jim Flaherty has posted 7 consecutive deficit budgets, while under-spending on programs funded by Parliament. (Dead money on top of borrowed money.)
    He oversaw the transfer of billions in high-risk mortgages away from the banks’ books and onto the public’s books (CMHC).
    His government is projected to have added $176 billion to our national debt by the end of next year.
    He should not be employed in either the public or financial sectors.

    • Totally agree.

    • You fail to point out that much of the policy was created after pressure from the Oppostion parties. That being said, it was a bad move. We should have let companies sink or swim on their own merits.
      We can thank the US for that little drop in the economy. My peeve, is that the Bankers and finance folks from Wall Street who are responsible for it…didn’t spend any time in jail.

      • The only spending forced on Harper was the initial stimulus spending for one fiscal year — 70% of which remained in Ottawa during the worst of the crisis, missing two construction seasons. The rest was normal Tory policy: convert private sector risk into public liabilities.

      • There is truth on that. When NDP/Lib/Bloc tried the coupe d’etat it was about getting Government Motors bailouts, and the deal was bailout banks too. They all ended up shafting the taxpayers and putting more debt on the kids and grand kids.

        And we pay in hidden ways too, as in devaluing money, a inflation tax. And people with less value money get less goods and services and that means ultimately less jobs. But we have statism bloat from the three corrupt parties of Canada.

        The real people who need jail is our crooked politicians that let all this corruption happen and they are the onces really shafting us. Sure, Wall Street has criminals, and behind every one is a government bailout.

        • The problem in the US, however, is that many of those very wealthy companies that were “bailed out” just happen to provide very substantial sums to both the Republican and Democratic Parties.
          Sad really…..

  5. I look forward to the day when we once again have a Finance Minister who understands what the job entails. Could be scary when the next party to lead the country finally gets to see the real books (as opposed to the publicly presented “cooked” ones). In Ontario, we discovered to our chagrin that Flaherty doesn’t understand the significance of the minus sign.

  6. Jim Flaherty: Ontario’s legacy to the nation. Sorry, fellow Canadians.

  7. The CPC have more or less undermined[ attempted to anyway] just about every institution in the country – why stop now.

  8. Thomas Mulcair calling for a weaker Canadian dollar (forcing Mark Carney to respond to his wrongheaded nonsense) was far more egregious than Jim Flaherty commenting on aspects of monetary policy being implemented by unelected bureaucrats around the world (central bank heads). Flaherty was not advocating or disadvocating anything.

    The quadrupling of the Fed’s balance sheet by QE (or money printing) has only helped the 1% get richer and bailed out the banksters. It hasn’t helped real people or the real economy.

    It is a strange world where now political decisions by central bankers, picking winners and losers, cannot be commented upon or criticized. In the economic crisis, the US Fed backstopped the banksters to the tune of over $10 trillion dollars in actual implied guarentees. It prevent GE from going bankrupt, by opening a commercial paper lending facility. While it was impossible to get hardly any funding for Main Street in Congress.

    To say elected politicians cannot comment on these actions after the fact is ludicrous.

    The monetary system is designed so that banks don’t have to go to elected officials for their money like real people have to go to their elected officials for.

    Banks have an unelected central bank which can conjure up money to benefit them and their 1% friends at will.

    It is time ordinary people began to understand this asymmetry in access to “money”, and how this asymmetry is being gamed by the banks and the 1%, creating greater and greater inequality, particularly in the United States and Europe.

    Contrast financialized Toronto, and the trickle down in the cultural and service industries, with the gutted industrial heartland surrounding it. A server in a trendy restaurant in downtown Toronto is a really good job.

    But the truth is financialization is a Ponzi scheme. It cannot last. Ultimately, the real economy matters, and central bank funny money filtered through the banks and the 1% into the economy is fool’s gold.

    • How could Tom Mulcair “force” Mark Carney to respond?
      Sure Mulcair said something dumb, but so what? Markets were going to respond to what someone who might win an election in 4 years thinks? I don’t think so.

      Mark Carney did respond, but then Mark Carney liked to respond. He showed up in the papers quite a bit.

      Jim Flaherty hired Poloz and could fire Poloz tomorrow and everyone knows it. It does make a difference.

    • Funny, as soon as the dollar dropped, Heinz is closing up. As a low value NDP dollar means higher prices for sugar and tomatoes, and the plant could not pass ont he higher prices to its customers. So without customers, a low value currency in decline with union rant….they closed an now lno jobs.

      So how is that low value inflationary currency working? Me, I chose to invest it offshore so instead of taking a 6 cent on the dollar bath, I made 6.38% on the exchange.

      But then I don’t think like a greedy socialist looking to con people for a vote.

      Fact is Canada already is a negative value economy of debt fraud. Only a matter of time before we fizzle. People better get used to a poor job market, this is the new economy of debt and devaluing money. As people with less value money, declining pensions, negative value returns, have less to spend on other peoples jobs. No NDP socialist whine is going to change it.

      SK has been rid of NDP socialism for years now and is in increasingly better shape…as SK is now a happening place and not a tax run down NDP mess.

      • …of course booming oil revenues have nothing to do with SK’s fiscal health, eh?

  9. I get a kick out of Flaherty and his bold faced lies. JBoC is lock step with the US Fed, hook line an QE fraud and all.

    You bet BoC creates electronic counterfeit money to buy federal and provincial debt no savvy lends buy. Its how they keep interest rates below real inflation, they flood the markets with money. It works the same in Canada as it does in the USA, yet Flaherty criticisms of USA? I agree, USA (and Canada) deserve the criticism but in fact Flahery does exactly the same debt/currency fraud.

    Its why USD/CAD is now at record lows to Asia’s Yuan, and in fact more wealth is now in Yuan than USD as the USD/CAD are at record lows:

    http://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y

    Note, in above it clearly shows devaluation of money for debt policy slightly predated and caused the credit credit crises, unemployment and lead to the 2008 crash.

    But Flaherty and others are about deceit and not real economics. Governments can’t solve the economic problems as they are the problems.

    • Harper’s bunch have always been more about semantics than reality.

  10. He ‘undermines the Governor’?… DUH!!!!…. Of course he does!.. THAT’S the whole
    point!!!!!…. Now, it’s not all just him… Think for a moment and try to imagine how absolutely and completely galling it must be to Stephen Harper that HE AND HE ALONE is not pulling all the economic levers… He still imagines himself an economist, though one only has to cast your mind over the last decade or so to realize that his degree was either honorary or extorted!…lol!…

  11. Seriously, calm down, Jim. It’s not like the Fed stole your lucky charms.

  12. “The Bank does not have complete discretion, though: in the case of a serious disagreement, the Minister of Finance can overrule the Bank. (The Governor would then be expected to resign.”

    “The Minister of Finance provides a mandate to the Bank of Canada.

    The Bank of Canada uses whatever instruments it sees fit to carry out it mandate”

    Substitute Monarch for “MinFin” and P.M./ Minister-of-the-Crown for “(Bank)Governor” …. and you’ve got an example of “Classical Ministerial Responsibility”

  13. I think it is very telling to hear the media say that a federal finance minister (an elected official who is at least in theory supposed to to have the best interest of the people in mind) should not be talking about monetary policy. WTF? Who owns the media? Who owns the bank of Canada? Food for thought.

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