On his way out the door, former Bank of Nova Scotia chief executive officer Rick Waugh shared some advice that seemed so simple, but has proven invaluable.
A few months before he retired in 2013, Mr. Waugh agreed to an interview for a Globe project that re-lived the 2008 global financial crisis through the eyes of some major players. He did not disappoint, offering up juicy behind-the-scenes anecdotes. But, best of all, he shared his mantra through the darkest days: “All crises end.”
He would know. During four decades at the bank, he had seen it all, including the Latin American debt crisis and an ugly writedown on Scotiabank’s Argentinian arm in 2002. Yet after every near-death experience, the bank, and the broader market, rebounded.
The past decade has delivered even more financial drama – the United States debt downgrade, the European debt crisis, the 2014 energy rout – and through it all, Mr. Waugh’s words have proven to be one of the few constants. They are particularly important to remember these days.
We have also learned immense amounts about the global financial system over the past 10 years, and in the fog of the current financial war, we must follow this wisdom.
Crucially: In Canada, the housing market will likely tell us more about our financial strength than the stock market; central banks must help flood the market with credit; and federal governments must tell the world they will do absolutely everything within their powers to support the economy – and then follow through. Finance relies on confidence, and in the worst of times government must provide a backstop.
So far, the housing market has received very little attention – many investors, and admittedly, the media, have been obsessed with the stock market. But in such a deep crisis, shares swing on little more than emotion. Meanwhile, Gord Nixon, who led Royal Bank of Canada through the 2008 collapse, has stressed it was our housing market stability that helped us get through the global financial crisis.
Now the good news: This stability shouldn’t collapse easily. Residential mortgages account for a huge portion of our bank’s balance sheets, which means the lenders care whether they are paid back. The banking watchdog has made them adhere to tough underwriting standards for this very reason.
And in the event there is a mortgage default, the many of these loans carry insurance from Canada Mortgage and Housing Corp., so the banks will still get paid. That means they can devote capital to offering new credit to businesses.
But the Big Six can’t shoulder the burden alone, so the central bank and the federal government must step up. During the financial crisis, the federal government instructed CMHC to buy up to $25-billion in mortgages from the banks. That meant the capital the banks kept in reserve to backstop these loans wasn’t trapped as dead money.
A few weeks into the current crisis, the Bank of Canada, the country’s banking regulator and the federal finance department have already stepped in with some extraordinary measures.
In little more than a week, Canada’s central bank cut rates by a full percentage point, which lowers borrowing costs; the Office of the Superintendent of Financial Institutions, Canada’s banking watchdog, eased capital rules for major lenders, which should free up $300-billion of loan capacity; and Finance Minister Bill Morneau has promised $10-billion in credit available to Canadian businesses.
Could it have come sooner? Perhaps. But at the very least they’re going big now, and there is a co-ordinated approach with our major economic neighbour. The U.S. central bank has now cut its own interest rate to near zero and promised to provide a staggering US$1.5-trillion in funding capacity, among other measures.
The speed at which these changes are being announced is staggering. But believe it or not, there has to be more. Back up the truck on federal financial support.
Here, messaging matters. During the euro zone debt crisis, Mario Draghi, the former head of the European Central Bank, famously said: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Three of those words – “whatever it takes” – practically saved the currency.
Mr. Morneau seems to know this. On Friday he told Canadians, “We’re going to do whatever it takes to support and stabilize our economy.” Notice the word choice.
The lingering question is how far the federal government will go with financial support, because it faced criticism since 2015 for running small deficits during good economic times. If Prime Minister Justin Trudeau needs moral support, just look at what Germany is doing. The country is normally notoriously frugal, but on Friday the government said it would provide unlimited liquidity to help struggling German companies.
Canada’s government should also know it will have private-sector support. Current RBC CEO Dave McKay has already come out in favour of government stimulus – and he’s not regularly the tax and spend type.
The thought of the government spending $50-billion, or maybe even more, can be dizzying. But we will need all the financial firepower available. And it will be worth it, because when we come out the other side the rebound will feel glorious. Anyone questioning whether this recovery will happen need only repeat after me: All crises end.