Bank of Canada Governor Mark Carney has publicly backed the U.S. Federal Reserve's latest move to stimulate the U.S. economy, despite a growing controversy about it that threatens to bog down this week's Group of 20 meeting in Seoul.
After a speech in Geneva Tuesday about the need for policy makers to strengthen their efforts to make the financial system safer, Mr. Carney was asked about the Fed's plan to buy $600-billion (U.S.) in government bonds in a bid to bring down longer-term interest rates and spur spending. "We have absolute confidence in the measures taken by the Federal Reserve,'' he said.
Senior officials from several of the world's economic powers, including China, Germany and Brazil, do not share that confidence. Some of them have been sharply critical of the Fed plan, arguing that the new money created by it will simply leak into already-hot emerging markets like Brazil, pushing up asset prices and currencies, stoking inflation and putting the global recovery at risk. The issue is one of the most difficult matters facing the G20 leaders' meeting, which begins Thursday.
But Mr. Carney, referring to Fed chairman Ben Bernanke's statements that his so-called quantitative easing plan was needed to cut joblessness and avoid deflation, said the scheme makes sense "in the context of the weakening U.S. economy.''
While Mr. Carney said he understands the concerns in other countries, he also said that "extraordinary times call for extraordinary measures.''
Avery Shenfeld, chief economist at CIBC World Markets, said Mr. Carney's refusal to join the chorus of naysayers is sensible, since the link between quantitative easing and a weaker U.S. dollar - the flipside of which could be a stronger loonie - is somewhat overrated.
"What the U.S. is doing is textbook economics for a central bank that has rates at zero and it's not proving enough," Mr. Shenfeld said.
European Central Bank president Jean-Claude Trichet said earlier this week that the Fed's decision was driven by a desire to keep inflation expectations from sliding, not a deliberate ploy to depress the U.S. currency.
Should G20 officials prove unable to contain the dispute, other issues may be punted. Namely, how to ensure that the next time a major financial institution gets itself into trouble, there's a way to wind down its operations without threatening the wider system or requiring a taxpayer bailout.
"To paraphrase Sherlock Holmes, the dog that is not going to bark at this summit is `too-big-to-fail,' which has been overwhelmed and taken over by events like these currency fights between China and the U.S. and Germany and so forth,'' Ian Lee, the MBA director at the Carleton University Sprott School of Business and a former banker, said in an interview.
Mr. Carney said in his speech that public support for certain big institutions at the height of the crisis two years ago was necessary but created "enormous moral hazard." On top of higher capital and liquidity standards for banks, Mr. Carney said firms need to be exposed "fully" to the "ultimate sanction of the market" when their risky investments go wrong, through measures including "living wills" that allow for troubled institutions to have some operations wound down.
In response to another audience question, Mr. Carney also poured cold water on the notion that gold - the price for which has broken records in recent weeks - would play a role in the slow but sure overhaul of the global monetary system. World Bank President Robert Zoellick wrote in Tuesday's Financial Times that gold should be used as a reference point for investors' expectations about inflation, deflation and future currency values.
With files from Bloomberg News