Mark Carney's legacy, and what it means for his successor -

Mark Carney’s legacy, and what it means for his successor

Whoever takes the reins will have to live up to a rock star image that has little to do with monetary policy, writes Stephen Gordon


(Fred Chartrand/CP)

Going into the economic and financial crisis of 2008-09, Mark Carney had several advantages that most other central bankers did not:

  • The Bank of Canada had accumulated a not-inconsiderable amount of institutional credibility after almost twenty successful years of inflation targeting.
  • Canada’s banking system was highly regulated and more than solid enough to withstand the crisis.
  • The housing sector was still in a position to respond to lower interest rates.
  • Commodity prices bounced back rapidly a few months after the financial crisis hit.

This is not to say that Canada’s relatively rapid recovery was a foregone conclusion: there was ample room for the Bank of Canada – and the federal government – to make mistakes. But they didn’t. So Mark Carney can fairly claim not to have botched the task that was given him, with the caveat that the task he was given was easier than those facing his counterparts in Washington, Frankfurt and London.

Even so, Carney’s departure shouldn’t be accompanied with triumphant fanfare and “Mission Accomplished” banners. Inflation has been running below target, recent economic growth has been sluggish, and the housing sector has been tapped out as a source of growth. The current strategy – counting on a renewed surge in business investment and a stronger recovery in the U.S. and elsewhere – may be enough to get us through this rough patch. Or maybe not. Either way, the new Governor will be facing some interesting challenges in the near term.

But that’s as it should be: a prudent central banker will always have something to be worried about. There are a couple of other areas where Carney’s legacy is somewhat mixed:

  • The central banker as rock star: To be fair, the image as “The best central banker in the world” isn’t something Carney cultivated, and he has taken great pains to point out that his public statements reflect the broad consensus of the Bank of Canada’s analysts. But for whatever reason – communications and marketing specialists are better placed than I to explain why – the Governor will leave his successor with an image to live up to that has little to do with monetary policy.
  • The central banker as potential politician: Before Carney, the idea that someone could make the leap from the Bank of Canada to electoral politics was unthinkable. Now it’s not. There are any number of ways to apportion responsibility for the Governor’s Affair with the Liberal Party of Canada, but available evidence suggests that the head of the Bank of Canada did not strenuously object to seeing his name bandied about as a possible leadership candidate. I don’t know what the Conservative government thinks about the episode, but it’s not hard to imagine that partisan considerations could play a more prominent role in the selection of the next Governor(s).

As for who will succeed Carney, there are many good reasons for thinking that Tiff Macklem, the senior deputy governor, is a prohibitive favourite: he established a strong reputation as he rose through the ranks at the Bank, and he played a crucial role during his short stint at the the Department of Finance during the financial crisis. But there’s another reason why Macklem’s odds look very good: the last time a senior deputy governor was appointed Governor was in 1994, when Gordon Thiessen succeeded John Crow. Since then, the post has been filled by two outsiders: David Dodge in 2001 and Mark Carney in 2008. These were arguably good choices – probably the best choices. But there comes a point where you have to worry about the signal that the repeated recruitment of external candidates sends to the next generation of potential central bankers. We don’t want smart, ambitious economists to start thinking that taking a job at the Bank of Canada is a dead end. As Mark Carney once said, monetary policy is a team sport: the new governor will want the A team working inside the Bank, not waiting in the stands for their shot at the top job.


Mark Carney’s legacy, and what it means for his successor

  1. There is such little difference between most political parties in Canada these days that Who cares? The Diefenbunker was a relic of the Coyne era.

  2. Tiff Macklem? That sounds made up.

    • I’m sure he gets that a lot.

  3. I think that both Mark Carney and Stephen Harper were given a lot of credit where little was due regarding our (partial) economic recovery from the 2009 recession (which has clearly stalled.)

    Harper said during the 2011 leaders debate, “Canada has the strongest recovery on the planet.” Yet a week before the campaign started, the Globe and Mail ran an article titled “We’re No. 10!” citing an economic report from the Conference Board of Canada. (In 2011, our economic growth actually ranked #132 world; #147 for 2012.)

    Harper also ran campaign ads implying he made Canada an “economic star.” But The Economist article he quoted actually said the opposite: “Much of the country’s resilience stems from policies—such as bank regulation and sound public finances—which predate Mr Harper.” These policies also predate Mr. Carney.

    I think both of these economic rock stars are in for a rough ride ahead. As good fortune turns to bad, praise will turn to blame.

  4. He is Canada’s Alan Greenspan, take interest rates down to nothing to blow up a housing a bubble and jet out before it bursts. Despite Carney himself warning against the household debt problem, he never had the slightest courage to do the one thing that would stop it – raise rates. His vain attempt at political cover won’t save his leacy in the future.

    • Had interest rates not been taken down to nothing investment in pretty much everything would have stopped almost dead. That means no money for businesses to pay people, which means people not buying things, which means other people not getting paid, and around and around the drain we spiral. And that’s without considering the effects on our export economy that would have occurred with the appreciation of our dollar because of higher rates — so even more people out of work and not buying things and that drain is getting closer.

      In addition to that, we already had a housing bubble going, prompted by Flaherty’s 40 year 0 down mortgages that he allowed the banks to offer for a short period of time.

      Raising rates would have popped that bubble, sure.. but would have done it violently, causing a lot of harm to people who’ve been allowed to get in over their heads, their bankruptcies would have taken them out of the economic cycle which gives us even fewer people buying things and we’re pretty much in the pipes at this point.

      Raising rates solely to fix a housing bubble is like using a sledgehammer to tap a puzzle piece into place. Sure, it might work, but it might also destroy the coffee-table underneath and send the whole puzzle flying.

      So long as this government is in an austerity mode, they’re not going to be able to support demand strengthening policies, which means that the Bank of Canada basically has its hands tied as to what it can do without causing major damage to the economy as a whole.

      • Of course raising rates will cause pain in an overly indebted economy. That is why the earlier it is done the better. Think of what the mess will look like the longer this goes on. Low rates also have the side effect of robbin retirees of income on their savings and contributing to larger and larger unfunded pension liabilites. There are no easy solutions. If we swallowed armagaeddon in 2008 and balanced the budget like they wanted to at the time we would have had 3 years of solid economic growth behind us. Not sugar high, debt financed consumption and phony home equity growth.

        • Most economists disagree with you. Balancing the budget in 2008 would have put a good chunk of government employees out of work and on the dole, and would have happened *way* too fast for the private economy to pick up the slack, which would have put us into the exact same situation outlined above. We wouldn’t have had 3 years of solid economic growth, we wouldn’t have even had the economic growth we’re having now.

          We would have had worse unemployment, the government would miss it’s debt reduction targets because of the collapse of private industry (and therefore tax revenues) and wouldn’t be in a position to attempt to fix it.

          • Well we only had 2 years of moderate economic growth. (2010: 3.2%; 2011: 2.5%; 2012 had 1.8%, well below forecast.) But you are right. The UK is now facing a triple-dip recession because of Cameron’s “contractionary stimulus.” Clearly Harper wanted to take this route in 2008. It was the Liberals and NDP that demanded a stimulus package (which Harper capitulated to: $40B over 2 years.) If Harper had his way, we’d be facing the same mess the UK is in.

      • Agree 100%. I think Mark Carney did a good job managing the housing bubble with regulations: tightening the mortgage rules Harper loosened (which caused the bubble.)

        If a central bank raises interest rates when an economy has not fully recovered (such as ours) that will cause recession. Then the bank will have to lower interest rates right back down. So it would be a destructive exercise in futility.

        An economy functions best when all tools for managing demand/controlling inflation are in line: monetary, fiscal and regulatory. That was how things worked in the Keynesian era. Over the past 30 years, central banks tried managing the economy through monetary policy alone, with fiscal policy often at odds (like “Reagonomics” tax cuts stimulating growth while Volcker was reeling it in with 22% interest rates.) This has been less efficient.

        Today the US is implementing de facto austerity measures while the central bank tries stimulating the economy with ultra-low interest rates and QE. Again, the left hand doesn’t know what the right hand is doing.