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How economic synchronization kept Canada from the edge of the ‘fiscal cliff’

Bank of Canada Governor Mark Carney reacts while waiting to testify before the Commons finance committee on Parliament Hill in Ottawa April 24, 2012.


European leaders are so far incapable of coming together to guide their economy back from the brink, and at the same time members of congress in the United States are bickering beside the edge of a "fiscal cliff."

Meanwhile, here in Canada, everyone seems to be getting along just fine.

In a remarkable show of collaboration, the Bank of Canada, politicians, and government agencies are synchronizing their efforts to steer the Canadian economy through the ongoing financial crisis.

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"You can see good co-ordination between monetary policy, fiscal policy and regulatory policy," Craig Alexander, the chief economist at Toronto-Dominion Bank, said.

The Bank of Canada has been facing a dilemma. It has been holding on to the low 1 per cent overnight benchmark interest rate since September 2010 to encourage people and businesses to borrow and spend, but the low rate has also led to higher-than-ever levels of personal debt for Canadians, especially related to mortgages. The central bank has been unable to raise its overnight rate for fear of harming the overall economy, but worried about unsustainable debt levels that could leave many Canadians vulnerable if home values fall or when interest rates do eventually rise.

"How do you deal with that dichotomy?" Mr. Alexander asked. "You target it with regulation."

Last week, others stepped in to help out with that. Finance Minister Jim Flaherty announced new rules supposed to keep people from buying homes they cannot afford, and Canada's banking regulator, the Office of the Superintendent of Financial Institutions, announced finalized guidelines that force banks to limit their risk when writing residential mortgages. Together, these rules restrict people from purchasing homes that are too expensive relative to their income and savings.

"This is actually ideal … both of these policies take the pressure off of the Bank of Canada," Mr. Alexander said. "They are doing the work for the Bank of Canada."

This is in contrast to the dysfunctional relationships in Europe and the United States.

"When I look in Europe I see a lot of strain between monetary and fiscal policy," Mr. Alexander said.

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Some say the European Central Bank could be doing more to promote lending through quantitative easing, but the bank has generally resisted.

In the case of the United States, Federal Reserve chairman Ben Bernanke has expressed frustration with lawmakers' seeming unwillingness to enact fiscal stimulus that would boost confidence in the American economy. Monetary policy alone cannot fix the economy, Mr. Bernanke has said.

With the "fiscal cliff" looming – the point at the end of 2012 is when present fiscal policies will expire and be replaced with automatic tax increases and budget cuts unless congress can compromise on new policies – American politicians have an opportunity to respond to Mr. Bernanke's concerns. But their track record is not good.

"What we've seen in the United States is compete political gridlock," Mr. Alexander said.

Luckily for us, this is in "dramatic contrast" to what we've seen in Canada over the past week.

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