I — and presumably most people familiar with the recent history of monetary policy — read this article in Saturday’s Globe and Mail with mounting horror:
Mark Carney was cast as the perfect alternative to Justin Trudeau by a tight network of Liberals who pulled out all the stops last summer to attract the Bank of Canada governor into the Liberal leadership race.
Mr. Carney was responsive to the efforts, and his actions over the summer – taking phone calls, asking questions about the race, staying over at a senior Liberal MP’s house during a week-long family holiday in Nova Scotia – fueled speculation about his candidacy.
By September, Liberal officials were trying to put together a team of organizers and supporters, and mapping out Mr. Carney’s road to victory at next year’s Liberal convention.
This isn’t just a bombshell; it’s a bunker-buster. As Mark Carney noted in his most recent speech, modern monetary policy depends crucially on making sure that people understand what is going on:
[R]esearch and experience demonstrate that clear and open communications also enhance the effectiveness of monetary policy. In particular, successful monetary policy requires transparency around two aspects of the policy approach – what we are trying to achieve and how we go about achieving it.
This sort of transparency is almost impossible to achieve when monetary policy is set by politicians. This goes beyond the usual concern that since raising interest rates in never popular, monetary policy will always be too loose. There’s also the risk that even if the government does announce a shift to monetary tightening, people won’t believe that it will be carried out. And actually carrying out the monetary tightening doesn’t make the problem go away: an unexpected increase in interest rates is more disruptive than an expected increase.
It took 20 years and two recessions — both of which were more severe than the one we just had — before we were able to come up with a monetary policy framework that works well. The current practice in Canada is that the government provides the Bank of Canada an inflation target, and the Bank of Canada is free to exercise its discretion in how it meets its mandate. This is not full independence — the Minister of Finance has the legal authority to override the Bank in extreme circumstances — but it’s been enough so that when the Governor of the Bank of Canada speaks, people know that there are no unspoken partisan political considerations through which his message should be filtered. Explanations of how monetary policy is being conducted can be taken at face value, even if they are couched in cautious and nuanced language.
Or at least, that was the case before the Globe story broke. The second paragraph puts this hard-earned reputation for non-partisan professionalism into question. Unless Mark Carney can swiftly and convincingly demonstrate that he responded to those Liberals’ overtures with a quick and unequivocal refusal, we shouldn’t be surprised if non-Liberals start looking through his recent speeches through the corrosive, distorted lens of partisan politics. Was his speech to the Canadian Auto Workers simply a play for union support? Was his dismantlement of the Dutch Disease talking point simply a tactic to put the NDP off-balance? For me, these are rhetorical questions written with a sense of sickening dread; others will doubtlessly repeat them in earnest and with angry, partisan vigour.
But even in the best-case scenario in which Mark Carney’s conduct is blameless, we are still left with the prospect that not-insignificant elements in the Liberal Party of Canada were willing to risk one of the most crucial elements of our governance for partisan gain. If we are extremely lucky, this episode will be quickly forgotten. But if by taking a run at Mark Carney, these Liberals have initiated a never-ending cycle of speculation about the possible political ambitions of future Governors of the Bank of Canada, they will have weakened — perhaps fatally — the foundations of Canadian monetary policy.