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

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.