Mark Carney’s legacy, in his own words

Bank of Canada Governor Mark Carney has 30 more days on the job, and he is determined to avoid the question that every journalist and MP would love to get him to answer: What does he think his legacy is? He dodged it at his last hearing before the Finance Committee last week, and aptly deflected it again this evening in Edmonton, where he was speaking at the University of Alberta: “I’m a member of a team, the Governing Council of the Bank of Canada,” he quipped, “if my legacy turns out to be bad, I’m taking them down with me.”

But the governor took Wednesday’s lecture as an opportunity to look back at the “fascinating, sometimes harrowing” five years he’s spent at the helm of Canada’s central bank—and in that sense he delivered the closest thing to an assessment of his own legacy that we’ll get from him for quite some time. Here’s the gist of it:

• The BoC went into the crisis better equipped than most. Stephen Gordon noted on Econowatch that the BoC had some advantages facing the financial meltdown of 2008-09 over most other central banks. The governor seems to concur, particularly when it comes to inflation-targeting, or the practice of targeting a certain level of consumer price inflation (usually two per cent). It wasn’t until recently that two of the world’s top banks adopted a formalized, numeric target. “Ultimately,” Carney noted in prepared remarks, “the combination of the scale of the demand shock [after the crisis], the need for clear communications, and the imperative of anchoring inflation expectations all helped to convince both the Federal Reserve and the Bank of Japan to adopt inflation- targeting regimes.” In Canada, though, that has been the cornerstone of monetary policy since 1991.
• Early on, the BoC set the example on how to tackle the mayhem. Wise as it was, the practice of telling the public that the central bank was aiming at two per cent inflation turned out to to not be enough to tackle the worst financial crisis since the Great Depression—so the BoC pulled out an unconventional weapon: “In April 2009, the Bank of Canada pioneered the second generation of guidance.” With no more latitude to further cut interest rates, the governor told Canadians that he’d keep rates low through the second quarter of 2010, the idea being that letting people know that borrowing was going to stay dirt cheap for a while would provide further stimulus to the economy. The governor’s assessment on whether that was a good move is unequivocal: “It worked because we ‘put our money where our mouths were’ by extending much of the almost $30 billion in exceptional liquidity programs we had in place for the duration of the conditional commitment. And it worked because it reached beyond central bank watchers to make a clear, simple statement directly to Canadians.”
• But after that the BoC didn’t need to use the full arsenal at its disposal, as Canada’s economy quickly returned to relative good health. After the early days of the crisis, things improved enough at home that the BoC was able to let the pioneering to others. It was the Federal Reserve that experimented with what the governor dubbed “third generation forward guidance,” when it tied an interest rate hike to unemployment falling to 6.5 per cent late last year. Similarly, quantitative easing, the practice of printing money to buy assets in order to make their yields fall, remained only a contingency plan for the BoC: It had the luxury of sitting back and observing how it would work out for others—the Fed, the Bank of England, the European Central Bank and the Bank of Japan—that had no choice but to try it first.
  
• The glass is “more than half-full.” The governor is very aware that low-for-long interest rates tend to push people to take on excessive risk and/or debt and create financial instability. That was one of the great lessons of the financial crisis, he said. He is also fully aware that Canadian homeowners are now the ones who’ve taken on too much debt—but he doesn’t see that as a reason to raise interest rates yet. It’s not enough of a threat to warrant the bazooka approach of conventional monetary policy. “Bluntness makes monetary policy an inappropriate tool to deal with sector-specific imbalances,” he noted, “but a valuable one to address imbalances that may have economy-wide implications.” And Canada’s imbalances, in the governor’s view, are limited to real estate: Much better to let government regulation—a precision weapon, if you will—try to prick that bubble. Also, the governor is aware that the current state of Canada’s economy leaves room for improvement: exports have disappointed for years, he told reporters, and cheap and volatile oil prices are frustrating an important source of growth in the west. But the glass, he said, is “more than half-full.” And for the last time, no, he doesn’t believe that Canada will ever suffer from the Dutch Disease (or that more money than warranted is flowing to the oil sands: “it is logical and profitable to pursue projects consistent with the achievement of a North American energy security.”)

As he packs his suitcases to fly to England, it seems, his conscience is clear.