Mark Carney’s tenure and the state of monetary policy

Mark Carney’s tenure as Governor of the Bank of Canada overlaps some challenging economy history. Appointed in early 2008 just as the US housing bubble was popping, Carney took the helm in time for a financial crisis that brought the global economy to its knees. We are still living that history in terms of a post-recession stagnant recovery, with depression economics centre stage, with deleveraging due to falling asset prices (housing and other financial assets).

The events of the past four-plus years have (thankfully) driven concerns about inflation well down the priority list for monetary policy. Carney himself raised interest rates prematurely in 2010, suggesting that if he were Governor in normal times we would have seen a much more hawkish presence on inflation. The culture of the Bank of Canada is to see inflation around every corner, which makes it a conservative institution that mostly works for the Establishment. Indeed, the Board of Directors is uniformly while, almost all male, and very affluent – not exactly representative of Canadian society as we know it. The Governor is the most powerful non-elected person in government.

Still, for a central bank governor whose roots are in Goldman Sachs, Carney did an effective job steering monetary policy through the crisis. Goldman Sachs, it should be noted is perhaps the powerful and influential investment bank in the US (Krugman’s piece here shows how Goldman played the White House during the crisis). Yet, Carney developed the opposite reputation for taking on the bankers, pushing for regulatory reforms at the international level through the Financial Stability Board. On the other hand, as David Macdonald points out the Bank of Canada orchestrated more than $100 billion in cash-for-asset swaps (also involving the Canada Mortgage and Housing Corporation) at the height of the crisis. We can debate the semantics about whether that constitutes a “bailout” or not, but clearly Carney’s Bank of Canada was there for Big Finance when the chips were down. If only households in crisis could get such a great backstop.

Carney’s biggest asset, and the reason why the Bank of England is willing to pay $1 million per year to a foreigner, is that he played the confidence game very well. The actions of a central banker matter, but perhaps more important than the empirical impact of, say, a quarter-point change in short-term interest rates is communicating the perception that a firm hand is on the tiller: signalling to the markets that eagles eyes remain peeled for any sign of inflationary rodents. While seeking to maintain the confidence of financial markets (and to some extent, other governments), Carney was able to bask in the glow of more prudent regulation of the financial sector — that predated his tenure — as a pointer to the stability of the Canadian financial system, and economy. In addition to the “bailout”, banks were chafing against regulations in the years before the crisis, and the Conservatives added fuel to the fire by increasing the CMHC-insured mortgage limit to 40 years, factoids that were deftly swept under the carpet.

Whoever picks up the reins at the Banks will encounter an ongoing delicate recovery, and a pent-up demand by hawks that interest rates must rise back to “normal” levels. Yet, pushing up interest rates due to inflation fears will only further inflate the Canadian dollar (overvalued by 25% according to the OECD), and make it harder for households to pay off debt, which is now at record levels exceeding those seen in the US and UK before the financial crisis. At the same time corporate Canada is sitting on piles of cash, a fact that Carney has pointed out, but exhortations are not the same as action that would put that money to use (raising corporate taxes to fund public infrastructure, for example). And housing prices are looking to soften, with some calling for a burst of Canada’s bubble, after a successful rally in the past couple years.

These are some serious structural imbalances. While it is one thing to assert the strength of the Canadian economy, how those play out will be a big determinant on how history remembers Mark Carney.


  • Marc,
    Readers may also want to look at Marshall Auerbach’s blog post at

    In a nutshell Carney was more lucky than good and is very much an establishment guy as you point out.

  • All this talk about Carney, yet not much of a mention about how the bank of Canada did nothing to contain a dollar that shot around like a yo-yo under his command, ending up 20 some points above PPP. For me that was a failure of the bank of Canada, as it ushered out a competitiveness and investment from the Canadian value adding economic landscape.

    I agree with Auerbach that he was mainly lucky, as he was riding high upon a very long history of bank regulation and given the massive size and privilege banks have been given in Canada, we were already basically too big to fail in terms of banks before crisis. It was those before him that prevented the housing sector meltdown, not him. ( of course his work is still living within the current economic state as consumer debt is at quite staggering levels and it was him that guided this ship).

    So rather than stick it out and see us through this storm, he abondons ship. Lucky for him he has a great looking resume, but substance is much more than a good C.V.

    So to me his main test was still ahead of him, and instead of congratulating him, we should be labeling him as a quitter, leaving at precisely the time where everything is coming to a head.

    I guess that potentially is bad foreshadowing for the potentiall mess we may find ourselves in- so his motto is get out well the gett’n is good.

    There is a great reckoning coming here in Canada, as we move with Harper into the land of yesterday- commodity extraction third world economic infrastructure.

    Just last week the super computing top 500 supercomputers was released, Canada had 2 in the top 100, and that mainly due to IBM investing 170 million of the 220 million building U of T new super computer, which ranked at 64. You want an advanced innovative economy, start with building the basic industrial infrastructure.

    Japan, US dominated the list.

  • Garth Turner (former Mulrony cabinet member and present housing bubble watcher) has a very good recap of Carney’s career over at his blog:

  • “The Bank of England is willing to pay $1 million per year to a foreigner… because he played the confidence game very well.”

    Not only that, but as the FT points out, the BoE also needs someone who can ruffle its feathers and counter the “culture of excessive deference and groupthink.” I don’t think he was hired based entirely on this his past experience, but what the BoE envisions he will bring to the table going forward.

  • My understanding is that a major part of Canada’s economic strategy post Lehman Brothers has been to prevent our asset price inflation bubble from popping through dramatic increases in CMHC exposure. Off the federal government’s balance sheet but likely to come home to roost now that the government has decided it is time to face the facts. My prediction is that Mark Carney will wear a good part of the taxpayer bailout of CMHC when it comes.


    looks like others are now starting to take note of Carney’s exit as more of an exit now that he has let the problems fester. Yes Carney is not in charge of the CMHC, but he must have had a lot of say in signalling policy choices.

  • Excellent piece, Marc! Your views on the BoC and economic policy in general have always been right on.

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