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What we learned from the Lehman collapse Add to ...

Canada, for its part, stumbled out of the gate. Prime Minister Harper decided to play politics with his fiscal update in November, 2008, including provisions that would have forbidden federal public servants from striking and would have ended public subsidies for political parties. The opposition parties united to try to take down the minority Conservative government, which was saved only by Harper’s controversial decision to prorogue Parliament.

Flaherty backtracked — and backtracked fast. His next budget in January, 2009, was modelled on a classic Keynesian stimulus plan. He didn’t worry about fancy legacy projects such as high-speed rail and solar farms. He was content to fix up community colleges and build hockey rinks. If an infrastructure project was ready to go, Flaherty was ready to pay for it. He also instituted deadlines: No dilly-dallying; use it or lose it. That’s how emergency stimulus is supposed to work: timely, targeted and temporary. When asked by reporters in February, 2009, whether he was worried that the money would be misspent, he shrugged. “There will be some mistakes made,” he said. “Stimulus for next year is not what we want. We need it now, this year.”

Relative to the size of its output, Canada’s stimulus program was one of the larger ones among the world’s major economies. In total, Harper’s government spent about $47-billion (Canadian) directly on stimulus, spread over 2009 and 2010, which amounted to about 3% of gross domestic product each year.

The Auditor General of Canada concluded in the fall of 2011 that Flaherty’s “Economic Action Plan” got the job done. While stimulus laggards such as the U.S. suffered historic contractions, Canada’s downturn was relatively short and less severe than recessions in the 1980s and 1990s. “Our analysis clearly shows that the fiscal stimulus by the federal and provincial governments worked,” says Glen Hodgson, chief economist at the Conference Board of Canada, an economic research outfit based in Ottawa.

Flaherty had been inspired to get into politics by former prime minister Pierre Trudeau’s indifference to making the right side of the accounting ledger match the left. But Flaherty took the government deep into deficit and demonstrated that John Maynard Keynes’s Depression-era economic theories are still relevant.

Somewhere, Keynes is smiling. So is Trudeau, although for slightly different reasons.

Central bankers are gods — they have to be
In the 1990s and the early 2000s, then-Federal Reserve chairman Alan Greenspan appeared to have one of the sweetest jobs in the world. Central bankers were like commercial airline pilots: A lot of training was required to get to the top, but once there, modern economies basically fly themselves. Keep an eye on inflation and move the benchmark interest rate a little bit up or down — or just hint that you will. Easy.

There’s nothing easy about central banking now. Led by Bernanke, who succeeded Greenspan in 2006, central bankers took on a new persona: superhero. In the immediate aftermath of the Lehman collapse, the world’s central banks, most of which were born in crises, had to rise above the financial and political chaos quickly and dramatically.

Bernanke seemed especially well-placed. The Great Depression scholar, who, as happenstance would have it, wound up leading the U.S. Federal Reserve at the start of the next great global economic conflagration, reminded the world of the critical reason central banks were created: to put money into the economy when no one else will. From early October until December, 2008, Bernanke slashed the Fed’s benchmark federal funds rate from 2% to essentially zero. In November, he announced that the Fed would buy up to $600-billion worth of housing agency debt and mortgage-backed securities to inject cash into the economy. In March, 2009, he said he would expand those purchases, and buy government Treasury bonds, up to a total of $1.75-trillion — an amount almost double all Federal Reserve assets prior to the crisis.

Throughout the 2008 crisis and afterward, Bernanke acted with what veteran U.S. financial writer Roger Lowenstein describes as a “preternatural calm.” The day after Lehman failed, Bernanke immediately authorized the New York Fed to lend up to $85-billion to the giant life insurer American International Group (AIG), to prevent it from becoming the next massive financial domino to fall. When Congressman Barney Frank asked Bernanke if he had the money for the rescue, Bernanke coolly replied, “I have $800-billion.”

Later that month, as the skittish Paulson struggled to persuade legislators to give him $700 billion for his Troubled Asset Relief Program — needed, he said, to buy toxic mortgage-backed securities and other severely battered holdings off banks’ and insurance companies’ balance sheets — the lawmakers listened to the Fed chairman. After several of them said they saw little evidence of an economic downturn in their districts, Bernanke warned, “You will.”

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