Bank of Canada Governor Mark Carney
Upbeat stories to spin were in short supply at last week's G20 summit at Cannes. The host, French President Nicolas Sarkozy, narrowly avoided disaster on his home turf when the destabilizing prospect of a Greek referendum on the country's debt crisis faded. U.S. President Barack Obama remarked on how European decision-making in the face of economic calamity struck him as "laborious" and "time-consuming," before heading back to Washington, where laborious, time-consuming efforts to cope with America's deficit continue. Prime Minister Stephen HARPER, though, claimed bragging rights on the Riviera thanks to the naming of Mark Carney, the governor of the BANK OF CANADA, to head an increasingly powerful body called the Financial Stability Board. "His appointment," Harper said, "is both a tribute to his personal qualities and a reflection on Canada's superior performance in monetary, fiscal and financial-sector policy areas."
Carney's emergence as the international poster boy for everything admirable about the Canadian economy is among the more improbable stories of the Harper era in Ottawa. It's not that he's Ottawa's first appointed public servant to outshine the elected politicians. Former auditor general Sheila Fraser, after her 2004 report on the sponsorship affair that rocked the then-ruling LIBERALS, became the face of honesty in government. Retired general Rick Hillier's outspoken pride in Canadian troops made him, as chief of defence staff, the voice of patriotism. But Carney offers nothing like Fraser's down-to-earth quality or Hillier's entertaining populism. He's a Ph.D. economist and former investment banker, and seems like one. His star quality counts for more in elite circles than among Canadians in general. Still, during this prolonged stretch of anxiety over when the next RECESSION might hit, a figure who embodies sophisticated economic leadership is an invaluable political commodity.
As Harper's comments in Cannes confirmed, Carney's skills and Canada's strengths are now being sold as a combo pack. And Carney is highly marketable. At just 46, he's unusually young for a central banker, and cuts an athletic figure. (He ran the Ottawa marathon in three hours and 48 minutes last spring.) His bio comes complete with a Canadiana prologue any political mythmaker might envy. Born in the Northwest Territories, where his father was school principal in remote Fort Smith, he's said one of his earliest childhood memories is the smell of the furs his mother bought for making parkas.
The family moved to Edmonton when Mark was still a boy, and his father became a University of Alberta education professor. Carney dreamed of playing goalie in the NHL, but settled for earning economics degrees at Harvard and Oxford universities, and spending 13 years as a high-flying Goldman Sachs banker in London, Tokyo, New York and, finally, Toronto. It was there that David Dodge, then Bank of Canada governor and a legendary long-time top federal bureaucrat, hired Carney in 2003. He moved to Ottawa with his economist wife and four young daughters, and shone during stints in the Finance Department and the central bank.
The new recruit was touted as a rising star from the outset. In 2008, he was appointed to succeed Dodge, just in time for the infamous fall of Lehman Brothers. Carney is credited with sensing early how the New York investment bank's collapse could spell big trouble for markets and the economy. He moved fast to cut Canadian interest rates. "So among central bankers," says University of Toronto political science professor John Kirton, "he's known as the guy who saw it coming and tried to stop it."
Of course, he couldn't. But through the 2008 financial market crisis and the recession that followed, Carney became a source of noteworthy commentary. On the bankers whose reckless loans got the world into its mess, he suggested they were too distracted by "opera or the ski slopes of Davos." Accused of being overly optimistic in a forecast, he rebutted, "We don't do optimism, we don't do pessimism, we do realism at the Bank of Canada." More recently, asked by CBC's Peter MANSBRIDGE about the so-called Occupy movement, Carney praised the tent-city demonstrations as "entirely constructive." "I understand the frustration of many people, particularly in the United States," he said. "You've had a big increase in the ratio of CEO earnings to workers on the shop floor."
Empathizing with the average worker over income disparities is not expected to be the strong suit of, well, a suit. But Carney doesn't seem to identify closely with the world of private-sector high finance from whence he came. Earlier this fall, he collided behind closed doors in Washington with Jamie Dimon, chief executive of JPMorgan Chase & Co., who angrily opposes the stricter banking regulations that Carney so prominently champions. Dimon slammed the planned new rules as "anti-American" and needlessly burdensome on U.S. banks. "If some institutions feel pressure today," Carney fired back in a speech, "it is because they have done too little for too long, rather than because they are being asked to do too much, too soon."
His feud with Dimon was top of mind for insiders when Carney was affirmed at Cannes by the leaders of the 20 major economies as the new chairman of the Swiss-based Financial Stability Board. The FSB, which coordinates policy among central bankers and regulators, was created after the 2008 credit crunch, to prevent lending from grinding to a halt again. It's now being given more clout and resources to prod countries into implementing financial reforms, especially requiring big banks to bolster their capital reserves. The University of Toronto's Kirton, a veteran observer of economic summits, says Carney's Goldman Sachs background will shape his FSB approach: "He knows how [private bankers] will try to slip around whatever regulation you try to impose on them."
At the FSB, Carney's impact will come largely from "naming and shaming." He has already listed 29 banks (none Canadian) that need special attention because they're so big and interconnected that letting any one of them fail would jeopardize the global economy. As well, he plans to name "systemically important non-bank financial entities," like some hedge funds, which amount to a shadow lending sector that must somehow be reined in.
All this is key to making financial markets less volatile, preventing the sudden freezing up of credit that can turn a slump into a full-blown recession. In his first speech as FSB chairman this week, Carney told a business audience in London that liquidity--the ability of companies, individuals and financial institutions to borrow--has swung too wildly in recent years. Scared by the staggering debt problems of Greece, Italy and other European countries, the continent's private lenders are again pulling back. "The effects are not limited to Europe," Carney warned. "As global liquidity recedes, volatility is increasing and activity falling."
As he takes over the FSB for a three-year term, Carney will remain the Bank of Canada governor. The conditions he faces on the home front are worrying at best. Canada lost 54,000 full-time jobs in October, the worst one-month drop since the 2009 recession. Back in those dark days, Carney took the unprecedented step of guaranteeing low interest rates for 15 months, a market-calming innovation copied this year by the U.S. Federal Reserve.
But Carney has scant room to drop the Bank of Canada's benchmark rate, already just one per cent, to boost the economy. That puts pressure on Finance Minister Jim Flaherty to either spend or cut taxes to aid growth. Indeed, the G20's Cannes communiqué committed countries with sound balance sheets, including Canada, to take "discretionary measures to support domestic demand should economic conditions materially worsen."
Even before the release of October's grim jobs figures, the outlook was deteriorating. Carney's forecasters project Canada's economy will grow just 1.9 per cent next year, down from a disappointing 2.1 per cent this year. When Flaherty delivered last spring's budget, he expected growth near three per cent this year and next. This week he backed off his pledge to balance the federal books by 2014, admitting the weaker economy has forced him to push that target out to 2015. As well, Flaherty cut in half an EMPLOYMENT INSURANCE premium hike scheduled for Jan. 1, a move that will cost Ottawa $600 million a year, but will leave that cash in the pockets of workers and companies--a shift from deficit-shrinking austerity to stimulus.
Changing tack with the economic winds is unavoidable. But short-term course corrections won't satisfy experts who demand urgent attention to Canada's longer-term challenges. From retirement, Dodge has used his prestige to warn that Canada's manufacturing base, especially in Ontario, is in trouble, and that governments must prepare for an inevitable health-care cost crunch as Canada's BABY BOOMERS retire. Kevin Page, the parliamentary budget officer, recently estimated that an aging population--which means a smaller tax haul and bigger health and other outlays--will leave Ottawa and the provinces with a $46-billion-a-year fiscal gap to fix by cutting spending or hiking taxes. Another worry, recently highlighted by the INTERNATIONAL MONETARY FUND, is historically high Canadian household debt compared to incomes.
Deep concerns like these don't fit with the reassuring story of economic competence that's now closely associated with Carney's enviable image. Don McCutchan, an international policy adviser at the Toronto law firm Gowlings and a former senior federal official, calls Carney "tough, effective and the smartest guy in the room." But McCutchan also sees the government's continued touting of Canada's sturdy banks and low deficits as a worn-out pitch. "When you go to the World Bank and the IMF meetings," he says, "they're very quickly tiring of hearing how great Canada is." After all, the federal books were cleaned up and banking rules toughened up more than a decade ago. "Our progress was made from 1995 to 2003," he says, "and we've been leaning on the oars since then."
McCutchan points out Canada hasn't solved its chronic problem of low productivity growth. It's manufacturing sector has struggled, while the mining and energy sectors took up the slack. Riding a commodity boom, he adds, isn't much of a strategy. But cutting-edge technology companies and top-flight research institutions, hallmarks of innovative economies, aren't obvious Canadian advantages. "Where are our great universities?" he asks. "Why is there only one RESEARCH IN MOTION? Why aren't there 10 RIMs?"
Those aren't questions for the Bank of Canada governor, or even the FSB chairman. They must be posed to politicians in charge of setting broader policy. As Cannes showed, though, immediate worries have a way of crowding out long-term thinking in times of high economic anxiety. Trusted by a jittery world to ease the risk of the next crisis, Carney represents the best of a smart, tough Canadian regulatory style. But his job, for all its global profile, is limited. Canadians might well wonder when equally impressive leadership will emerge to tackle challenges that have less to do with safeguarding the next quarter's growth and more with securing the next generation's prosperity.
Maclean's November 21, 2011