Jean Boivin wants to be clear about one thing: Neither he, nor his colleagues at the BlackRock Investment Institute, are predicting a global recession any time soon. Which seems incongruous, considering that he has been telling central bankers they need to get ready now for the next big one.
A study Mr. Boivin, a former deputy governor at the Bank of Canada, published last month with two ex-central bankers from Switzerland and the United States has caught the attention of the investment world by warning that “there is not enough monetary space to deal with the next downturn.” As a result, central banks will not be able to resort simply to lowering interest rates to stimulate the economy. Instead, they will need to get money directly into the hands of those most likely to spend it.
Mr. Boivin, former Federal Reserve vice-chairman Stanley Fischer and former Swiss National Bank head Philipp Hildebrand have dubbed their approach “Going Direct” and it would involve the creation of a “standing emergency fiscal facility” that could be deployed by central banks during a crisis to boost inflation and rescue economies from stagnation when traditional monetary methods no longer work.
“In the event of a big economic shock or slowdown, all the [available monetary] measures have already been put in place and they all work in the same direction, pushing short- and long-term interest rates lower,” Mr. Boivin told an audience of investment professionals in Montreal on Wednesday. “Given where rates are, particularly in Europe, the level of rates cuts required [to counter a recession] would be beyond the limits of what we think is reasonable.”
Hence, borrowing the words of former Fed chair Henry Paulson, central banks will need a new “bazooka” that does not currently exist among their arsenal of monetary policy tools. It would take the form of a “monetary-financed fiscal facility” that would be negotiated with governments in advance of a downturn. The size of the fiscal facility would be determined by the central bank "to achieve the inflation objective” and deployed at the time of its choosing.
While such a mechanism might blur the lines between fiscal and monetary policy, or even compromise the role and independence of central banks, Mr. Boivin argues that “spelling out the contingency plan in advance” would prevent that.
Indeed, when a recession hits, central banks and government typically scramble to each respond in their own way. While monetary policies can be implemented quickly, it can take weeks or months for politicians to put in place fiscal stimulus packages, reducing their effectiveness. A fiscal facility negotiated in advance would be ready to be deployed by the central bank exactly when it’s needed.
Mr. Boivin is aware of the obstacles facing his plan, not the least of which would be persuading a U.S. Congress plagued by gridlock to authorize the creation of special account at the Fed that the central bank could deploy when a recession hits. His study notes, however, that policy co-ordination between the Fed and U.S. Treasury has happened before – including during the 1950s – and could happen again.
The study produced by the BlackRock Investment Institute, the research arm of investment firm BlackRock Inc., which Mr. Boivin has run since leaving his job as an associate deputy minister in the federal Department of Finance in 2014, applies principally to central banks in the United States, Europe, Britain and Japan. Mr. Boivin insists, however, the approach could also be implemented here, with the creation of special emergency fiscal-facility at the Bank of Canada.
“The Canadian piece is not the core element here. That said, the logic applies everywhere,” Mr. Boivin said in an interview with The Globe and Mail following a question-and-answer session at CFA Montréal. “I think the question for Canada now is, after having seen the rest of the world go deep into unconventional [monetary] tools, do we need to follow the exact same path.”
Unlike other central banks, the Bank of Canada has not resorted to quantitative easing (QE), the main monetary policy innovation of the past decade. But Mr. Boivin suggests Canada might be able to skip QE altogether during a future recession with the “going directly” approach his study discusses.
Mr. Boivin, who turns 47 next month, is well aware that his name has come up as a potential successor to Bank of Canada governor Stephen Poloz, whose current term expires in early 2020. A native of Chicoutimi, Que., the father of three children at the ages of 15, 11 and 8 would be the first francophone to take the helm of the central bank since its creation in 1934. While flattered, he is not openly campaigning for the job.
“I’m passionate about having an impact,” he offers. “There are many ways you can do that.”
After graduating with a PhD in economics from Princeton University – former Fed governor Ben Bernanke, a Princeton professor at the time, was among his thesis advisers – Mr. Boivin taught at Columbia Business School in New York and HEC Montréal before moving to the Bank of Canada in 2010.
His current job at BlackRock, based in London, has put him at the vortex of global finance at an unpredictable moment. An escalating U.S.-China trade war has heightened the risks of a downturn, accelerating a process of “deglobalization” that will have devastating implications for trade-dependent economies such as Canada’s.
Even so, Mr. Boivin doesn’t see a global recession on the horizon in 2019 or 2020.
The reason is simple. Central banks have already moved in recent weeks to lower interest rates and markets are anticipating additional rate cuts in the months to come.
“Despite the fact that the economy is in a record-long expansion, despite the fact that unemployment is historically low, and despite the fact that monetary policy has not returned to normal since the last recession, [central banks] have already started to lower rates,” Mr. Boivin said. “That makes [the current situation] very inhabitual.”