Central bankers aren’t often looked to for a steady supply of lively quotes. They’re usually so worried about spooking financial markets that they couch every phrase in monetary mumbo-jumbo and economic escape clauses. But Mark Carney, who took over as governor of the Bank of Canada early last year, has a punchier way of expressing himself.
About those reckless lenders who got the world into its current economic mess, he has observed that they were too easily distracted by “opera or the ski slopes of Davos.” Concerning the naysayers who doubt that stimulus policies will restore growth, he’s lectured that “the laws of economics have not been suspended.” And to those who say he’s too much of an optimist, Carney recently rebutted, “We don’t do optimism, we don’t do pessimism. We do realism at the Bank of Canada.”
It’s pithy material, a touch disdainful perhaps, and more than a touch self-assured. And it all comes, not from a typical central bank boss, seasoned and grey, but from a 43-year-old former financial markets wunderkind, whose experience in government stretches back only to 2003. Carney flew fast to one of Ottawa’s loftiest economic perches, only to find himself looking out over the bleakest economic landscape in at least a generation. Yet his style so far has been defined by what passes, these days, for a distinctly positive outlook.
Carney’s willingness to see light at the end of the tunnel might eventually make him appear prescient. Or it might make him seem Pollyannaish. What’s clear already is that, right or wrong, he has emerged as the most distinctive voice on the federal scene on by far the most pressing challenge of the moment. “He’s just that bit more direct,” says David Laidler, a veteran Bank of Canada watcher and University of Western Ontario emeritus economics professor. “If a few more off-the-cuff [quotes] get more attention than he wants, it might make him think twice before he makes the next.”
For now, though, an often staid capital is glad to get to know Carney. It’s not just his knack for a memorable phrase. He’s a notable presence at Ottawa social events, particularly in younger crowds that extend outside the establishment mandarinate circles in which previous bank governors tended to move. Immaculately attired, invariably poised, he is the picture of the elite, globe-trotting player. He grew up in Edmonton, where his father was a professor of education history at the University of Alberta, before earning economics degrees from Harvard and Oxford. Riding the updraft of a 13-year private sector career at Goldman Sachs, he worked in London, Tokyo and New York, before returning to Canada as the global financial firm’s managing director of investment banking in Toronto.
It was there that then-Bank of Canada governor David Dodge recruited him six years ago. Friends say public service was the lure. Ottawa’s manageable scale and pace might also have mattered: Carney and his wife, Diana, an economist he met at Oxford, have four young daughters. After a brief initial stint at the bank, he shifted quickly to the federal Finance Department, where he made an impression, overseeing the multi-billion-dollar sale of Ottawa’s stake in Petro-Canada, and proving he was no yes-man by successfully pressing the Conservatives to break a prominent campaign vow by taxing income trusts.
When Dodge was ready to retire, Carney’s name popped up on the short list of possible successors. Inside the bank, Paul Jenkins, the rock-solid deputy governor, was viewed as the obvious man for the job. But outside the bureaucracy, among some investment bankers, Carney was rumoured to be the more likely choice. In this case, the outsiders proved to have more insight. The appointment made Carney an obvious star, but also a conspicuous target for critics. He soon rattled Bay Street, following up two cuts in interest rates in early 2008 with a surprise decision last June, at a point when another reduction was widely expected, to hold pat. Among analysts who make their livings anticipating interest rate fluctuations, the unexpected is always unwelcome. One bank economist grumbled that Carney “had some explaining to do.”
But adjusting rates in the first half of 2008 turned out to have been a breeze, compared with the market tsunami that hit a few months later. Like other central bankers, Carney was hopeful early on that the collapse in the U.S. subprime real estate market—and other signs of spreading market trouble—wouldn’t spark a full-blown recession. “What we’re trying to do,” he said in January last year, “is make sure that current issues in the financial system do not impact the broader economy.”
That would have been nice. By last fall, the meltdown was so catastrophic that a recession became inevitable. The question was whether the Bank of Canada, like other major central banks, could sufficiently shore up consumer and business spending with aggressive interest rate cuts.
Carney projected more confidence than most. At the Davos World Economic Forum, Switzerland’s annual jamboree of business and government movers and shakers, he was invited to participate in the closely watched economic outlook panel. His forecast for the economy to begin rebounding late this year, sufficiently for Canada to post solid growth in 2010, was markedly more sunny than, say, the panellist from the International Monetary Fund. Carney said markets weren’t paying enough attention to, among other factors, the pledge from G7 governments not to let any other “systemically important institution” collapse. “The power of that and the degree of commitment to that,” Carney told the Davos crowd, “has been underestimated.”
Back in Canada, Carney took much the same tone, cautioning market players not to sell short the ability of finance ministers and central bankers to manage economic turmoil. He did not, of course, dismiss the seriousness of the slump. “What began last autumn as a relatively controlled slowdown,” he said, “has become a sudden, synchronized, and deep global recession.” Jobs would be lost, and Canada’s gross domestic product would fall 1.2 per cent this year, according to his forecast. But GDP would rebound 3.8 per cent in 2010. The main stimulus tool behind that bounce, he suggested, would not be direct government spending so much as lower interest rates. “Don’t underestimate the impact of what we have done,” he told reporters in Ottawa.
In fact, he appears to have overestimated the power of rate cuts to buoy up confidence. Early this month, he cut the bank’s key interest rate on overnight loans between commercial banks to a bottom-scraping 0.5 per cent from one per cent. That leaves virtually no room for him to make it any cheaper to borrow money by traditional means. What’s left for Carney to do? He said his next step would be “credit and quantitative easing,” a phrase that’s unlikely to make it into any compendium of his memorable quotes. Yet these might be the most historic words he has spoken. Quantitative easing might be jargon, but, as one commercial bank economist observed, it amounts to a central banker’s “nuclear option.”
The bank has never before engaged in quantitative easing. The precise moves Carney has in mind likely won’t be revealed until the bank’s quarterly monetary report next month. But private sector economists say what’s coming is that the bank will print money to buy up government of Canada bonds or even corporate bonds. That unprecedented intervention should raise the price of the bonds and lower the interest paid on them. The aim is to reduce the stubbornly high longer-term rates in the corporate bond market, making it easier for companies to borrow money.
Other central banks are embarking on a similar course. But for Carney, taking the quantitative easing plunge amounts to a test of personal credibility. Resorting to such an extraordinary measure implies a rebuke to his previously optimistic outlook. Don Drummond, TD Finance Group’s influential chief economist, credits Carney with having directed consistent policies and appropriate rate reductions. But Drummond sees Carney’s forecasting record as weak. “All of us have been humbled by the need to constantly revise down growth forecasts,” he told Maclean’s. “But the bank has consistently been more optimistic than us, and has had to make some very large downward revisions.”
Drummond wonders if Carney would have intervened somewhat more swiftly if he had been more alert to this economy’s downside. David Laidler, from the University of Western Ontario, also suspects Carney should have moved “a bit faster.” But Laidler also sees this as the moment when the young governor’s Goldman Sachs background might give him an edge, as he prepares to head down the uncharted path of directly buying up bonds. “It gives him a lot more experience where he needs it,” Laidler says. “The problems come from inside the finance sector.” For Carney, the test now might be to find a way, at a moment of high anxiety, to lend a bit of his own confidence to financial markets that could badly use some.