On U.S. Thanksgiving in 2007, shortly after he was named the next governor of the Bank of Canada, Mark Carney and I met at his office in Ottawa. After a bit of discussion about the economic backdrop, he asked me: “Who is the smartest person on mortgages over at the Merrill desk in New York that I can talk to?”
I asked him why. He showed me reams of data from spreadsheets he had created and said, “Do you see these bracket signs at the bottom?” The brackets indicated negative numbers. I nodded. “This is Freddie Mac’s balance sheet,” he said. “It’s insolvent. And if it is, Fannie Mae isn’t far behind.” Needless to say, that finding sent a chill up my spine. We all know what happened next: both Fannie and Freddie met their demise about eight months later.
The story speaks volumes about Mark Carney’s intelligence. And his brains, combined with his experience, work ethic, and ability to keep his cool as others lose theirs, will serve him well in his new role at the Bank of England. But how will history judge Mr. Carney’s performance at the Bank of Canada?
The governor’s objectives are set out in the Bank of Canada Act – “ to control and protect the external value of the national monetary unit,” smooth out fluctuations in the economy and “generally to promote the economic and financial welfare of Canada.” On this basis, it would be difficult not to give him straight A’s.
Despite the recurring global market crosscurrents and volatility in commodity prices, the external value of the Canadian dollar has held its value around par on the greenback. It’s at the same level, on a trade-weighted basis, as it was when he took over from David Dodge nearly five years ago. And the internal value of the currency has also been stable, with core inflation at or below 2 per cent nearly 90 per cent of the time during his tenure. Today it is running at 1.3 per cent, which would make even the likes of John Crow – Canada’s equivalent of U.S. inflation-buster Paul Volcker back in the late 1980s and early 1990s – crack a smile.
To be sure, Mr. Carney is leaving Ottawa at a time when the economy is cooling off, but that is the same practically everywhere on the planet. His sound monetary policy has blazed the trail for a capital spending revival of late. Business spending relative to GDP is now a full percentage point above the historical norm; in the United States that ratio is a percentage point below average, and it is two percentage points lower in the U.K. All of a sudden, we have Ben Bernanke talking about the possibility of a secular decline in the U.S. potential GDP growth rate, but there is no such talk in Canada any more.
One of Mr. Carney’s top concerns when he first took office was Canada’s lagging productivity performance, but I don’t hear that any more. And maybe it is because we are starting to see the benefits of this covert “strong dollar/stable monetary” policy, in terms of it nurturing growth in the private sector capital stock – and in turn, sparking a nascent revival in Canadian productivity, and by extension, Canadian living standards.
No wonder the Bank of England chose Mr. Carney as the first leader from outside Britain in its 318-year-history. As with the trade of another great one, hockey superstar Wayne Gretzky, to Los Angeles in 1988, there is a sense that Canada is now trying to replace the irreplaceable.
A few final thoughts. First, I realize that there may be concern about who could possibly fill Mr. Carney’s shoes. But Canada has no shortage of able successors to fill the role, as was the case in the other seven periods of leadership change during the 78-year history of the central bank. Second, Canadian exports go far beyond just rocks, trees and oil – we export our brains as well. Our country has a long history of punching above its weight when it comes to assisting in the realm of global international finance. To take one notable example, former prime minister Paul Martin has been called on, time and again, to provide fiscal guidance for the U.K. government and he still acts as an advisor to the IMF.
Third, while I wish Mark Carney and the Bank of England well, I want to remind everyone that the Los Angeles Kings never did win a Stanley Cup after the Wayne Gretzky trade.
But the Edmonton Oilers did!
David Rosenberg is the chief economist and strategist with Gluskin Sheff + Associates Inc.