Anyone can sympathize with Mark Carney's frustration, and with the similar feelings of many other central bankers around the world. Although the Governor of the Bank of Canada has pushed interest rates to record lows and promised to hold them there, business growth has remained sluggish. Many companies, exercising their own judgment, have insisted on holding onto their cash until they're sure it's safe to spend.
Mr. Carney scolded companies last week for excessive caution, and his views were echoed on Monday by Finance Minister Jim Flaherty, who told reporters his government has done all it can with tax policy to stimulate growth. "At a certain point, it's not up to the government to stimulate the economy, it's up to the private sector, and they have lots of capital," Mr. Flaherty said.
From the perspective of economists and policy-makers, Mr. Carney's and Mr. Flaherty's opinions are legitimate and their urgings are unsurprising. But for the business community, the implications that their choices are wrong, greedy or even unpatriotic are not fair. Much as Mr. Carney may wish things were different, it is unrealistic to expect business decisions to be made solely because of monetary or fiscal policy.
That doesn't mean, however, that the business community is immune to pressure. Many large public companies whose shares trade on stock exchanges face intense scrutiny from shareholders, investment advisers and analysts about how they use their cash. Having cash on hand is generally welcomed, but companies face significant pressure to deploy the money or boost dividends when the amounts build up too high for too long. In extreme cases, companies become targeted for takeover by activist investors when they insist on stockpiling cash but do not invest to expand the business or return more money to shareholders.
If the investment community is prepared to accept and reward larger cash cushions during uncertain economic times, it is because there is a general consensus that such actions are prudent. Over the long run, however, business exists to grow. If companies sit on too much money for too long, change will be forced upon them by their own investors – an even more powerful constituency than the Bank of Canada.