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The Globe and Mail

World watching as Carney delivers policy prescriptions

Mark Carney, Governor of the Bank of Canada, holds a press conference to discuss the contents of the Monetary Policy Report at the National Press Theatre in Ottawa on Wednesday, October 26, 2011.


Mark Carney on Tuesday will deliver his first public remarks since being tapped last week to lead efforts to overhaul international finance, and the topic – global liquidity – is timely.

His speech to the Canada-U.K. Chamber of Commerce – in the heart of London's City, arguably still the world's most important financial centre – comes as liquidity, the lifeblood of banks, is front and centre for the global economy because Europe is still grasping for a lasting solution to its crisis.

Last week at the Group of 20 summit in France, European leaders were unable to secure outside support to double the 440-billion-euro firepower of a euro-zone bailout fund that many policy makers, including Mr. Carney, argue needs to be much bigger to truly stem the crisis. Policy makers from around the world balked at contributing, with many citing the added uncertainty created by Greek Prime Minister George Papandreou's call for and then cancellation of a referendum on whether to accept crucial rescue funds, and Italy's increasingly grim predicament.

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So, more than three years after Lehman Brothers's collapse virtually paralyzed credit markets as lenders and investors scrambled to assess who was solvent and who was not, global liquidity is again becoming strained. And it's unclear whether euro-zone banks will be sufficiently re-capitalized before corrosive rumours swirl about which ones might be in deep trouble.

At the same time, too much liquidity can be a bad thing.

The massive increase in the amount of funding and credit available during the years before the 2007-09 retrenchment helped ignite the imbalances in growth around the world that caused the last crisis – namely, too much spending and borrowing in the U.S. and other developed economies, and too much saving in big, emerging markets like China.

Now, a byproduct of the uneven global recovery is that as advanced economies see sluggish growth, weaker consumer spending and endlessly low interest rates, investors seeking returns have poured capital into emerging markets – stoking inflationary pressures and provoking many to take steps to restrict the flows, mainly by trying to restrain the value of their currencies.

That money helped emerging markets bounce back from the global recession much more quickly than their counterparts in the developed world. However, it has also caused considerable volatility in exchange rates, making life harder for export-dependent economies everywhere and worsening trade tensions at a time when global co-operation is viewed as key to preventing another crisis.

All this is very relevant to a small, open economy like Canada, where commodity-fuelled growth in emerging markets, a weaker U.S. dollar and capital controls in some countries have combined to keep the loonie close to or above parity for much of the past two years.

Mr. Carney has always been an articulate lecturer about the trends shaping the current recovery and economic cycles through history, which is no doubt part of why he caught the eye of his international peers and landed the Financial Stability Board post.

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On Tuesday, though, his speech could get more international attention than any he has given before, so look for him to put all of these liquidity issues into perspective and offer some policy prescriptions for how to make these dynamics work for the global good.

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