Howard Green is the author of three bestselling business books. His latest is Railroader: The Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison.
The person I was interviewing on stage was someone who oversaw a gazillion in investments, the head of asset management for one of America’s biggest banks. From my vantage point, I could see the doors at the back of the ballroom swing open. The Prime Minister of Canada stood in the doorway, hands clasped in front of him, waiting for his turn to address the gathering. But the market seer expounding to the audience was running overtime, and I tried in vain to signal him to wrap it up. He had no clue he was keeping the head of a Group of Seven country waiting.
It was 2016, and someone had asked my guest how long interest rates would remain at such historic low levels. After all, eight years had passed since a crisis exposed the global financial system as a charade of epic proportions, destroying wealth and jobs by the hour.
The New York asset manager then turned the tables on the questioner. How old are you? he asked the person in the audience, who was likely in his mid- to late 50s. Because, the investment expert added, you’re going to be living with low rates for the rest of your life. It was the most important thing said that morning. I have no idea whether the Prime Minister heard it, but if he did, that would have been the time to begin building every bit of infrastructure imaginable.
Actually, let me correct that. The time to unleash the world’s most ambitious infrastructure projects would have been during the financial crisis. If ever there were a wasted moment, that was it. A dozen years later, we still have abnormally low interest rates and decayed infrastructure. The actions of global central banks, while noble and well-intentioned, rest on the market assumption that rate cuts solve problems. True, they can be lifesavers. Credit is the bloodstream of the economy, but it’s not the entire body. At the risk of being cheeky, viruses don’t care what the Fed does.
During the financial crisis, I recall a casual conversation with one of the most senior officials at the Bank of Canada, a well-educated, experienced, dedicated person steeped in the theology of monetary policy. How long would it be before rates normalized, I wondered? He told me he was convinced it wouldn’t take long. Thoughtful as he was, he was dead wrong. Since those frightening days, even with economies growing, reflated asset prices and low unemployment, countries such as ours turned into low-rate junkies.
We were always told central banks had lowered rates to such a degree, there wasn’t much more they could do in the event of an exogenous economic shock such as COVID-19. And here we are. After a 50-basis-point rate cut on each side of the border last week, central bankers have even less dry powder. U.S. Treasuries – even the 30-year bond – have seen yields fall below one per cent. Investors are desperate to stuff their money into the government mattress, as far as possible from assets being brutalized by contagion and fear of recession. They’re willing to accept virtually nothing or less for their money just so it’s protected. Once again, savers are screwed, retirements imperilled.
As the cliché goes, central bankers have been the only game in town for years, with just monetary policy at their disposal. Meanwhile, government use of fiscal policy – spending to build, while borrowing or taxing to pay for it – has essentially become a third rail since Ronald Reagan’s presidency.
In the wake of the last crisis, if our societies had the fortitude to begin building things instead of obsessing with the price of money, 12 years later maybe we’d have new subways, bridges, sewers, schools, parks and even new research labs that could help defeat this new coronavirus.
But we can’t get off the drug of ultra-low rates. Borrowers think it’s normal, and maybe now it is. Once the virus is contained, perhaps it’s time to try something else, like building real things we all need.