Macklem’s boss, the late Jim Flaherty; Mark Carney, the Bank of Canada governor; and their counterparts from the Unites States, Japan, Germany, the United Kingdom, France, and Italy would declare that no other big bank would be allowed to fail as Lehman Brothers Holdings Inc. had a few weeks earlier.
That doesn’t sound like much anymore, considering the world’s major economies have spent hundreds of billions of dollars to keep their economies afloat during the pandemic. But back then, the G7 promise was considered an extraordinary intervention, especially after it was endorsed by the larger G20 soon after. “It was effectively suspending capitalism,” said Macklem. “It wasn’t a decision that anyone would take lightly and it wasn’t a decision that anyone could have imagined taking even a few weeks earlier.”
It was effectively suspending capitalism … it wasn’t a decision that anyone could have imagined taking even a few weeks earlier
Bank of Canada Governor Tiff Macklem
This moment in our conversation stood out because it demonstrated the biggest difference between the global crisis that we continue to endure and the last one twelve years ago.
It’s unlikely that veterans of the COVID-19 crisis will be holding onto memories from the international meetings they attended in 2020 as markers of important turning points. To be sure, images of global leaders talking over video link make for poor art, but the main reason is that the G7 and the G20 were nonentities in a year that saw the biggest global calamity since the Second World War. Those institutions exist for moments like these. It was embarrassing.
“When our currency changes for reasons that are unrelated to Canada, in that case, it’s not acting as a shock absorber,” he said. “It’s becoming a force in its own right. It’s not offsetting something else; it’s becoming a force in the economy.”
If, say, oil prices rose, and the exchange rate stayed the same, the dollar would probably fade as a threat to the economic outlook. That’s because oil is Canada’s biggest export and we generally sell as much as transportation networks can handle. The windfall from a higher crude price would offset lost sales of other goods and services that were uncompetitive at a higher exchange rate. It’s unfortunate for those uncompetitive exporters, but the numbers even out from where the Bank of Canada sits.
It’s becoming a force in its own right. It’s not offsetting something else; it’s becoming a force in the economy
Bank of Canada Governor Tiff Macklem
But if oil prices don’t come back, or other commodities falter, then a stronger dollar is a negative variable that could impede the recovery. Macklem acknowledged on Dec. 15 in a speech to the Greater Vancouver Board of Trade that an elevated exchange rate was partly responsible for the unexpected export weakness that followed the Great Recession. When Poloz took over as governor in the summer of 2013, he said an export-led recovery was imminent, but it didn’t happen until much later in his term. The lesson is that policy-makers can’t take an export rebound for granted.
The dollar is “becoming its own source of drag,” Macklem said in the interview. “As we make our projections of the Canadian economy, it’s beginning to become a material factor. It’s on our radar screen. In our press releases, we highlight things that are material, that are on our radar screen, and that’s why you’ve seen it in the last couple of press releases.”
Stephen Poloz concluded the public portion of his tenure as Bank of Canada governor on May 28 with a visit to the Senate finance committee, where he told senators he was confident the central bank’s response to the COVID-19 crisis was working, but that policy-makers could do more if required.
Now for the denouement.
In an uncanny bit of synchronicity, Poloz’s last day on the job was spent overseeing the completion of the Bank of Canada’s latest round of interest rate deliberations.
Typically, the work is over by the early evening, so the new policy statement will be posted June 3 at 10 a.m. on the central bank’s website. But that part will be Tiff Macklem’s responsibility. Poloz’s seven-year tenure ends at midnight.
In all likelihood, the outgoing governor will quietly walk off the stage.
Since March 4, Poloz has led the most radical phase in the Bank of Canada’s 85-year history. He and his five deputies dropped the benchmark interest rate by 1.5 percentage points, to effectively zero, and set up programs that have so far purchased financial assets worth almost $300 billion, more than tripling the size of the bank’s balance sheet.
“We have succeeded in restoring good functioning to many key financial markets that had been showing signs of significant stress,” Poloz told the Senate committee. “The combination of aggressive fiscal action by governments and monetary stimulus by the bank, supported by our actions to ensure well-functioning financial markets, will create the best possible foundation for the recovery period.”
That’s not how generals talk when they are preparing to return to the battlefield. More could be needed eventually, but with markets stable, there is little else the Bank of Canada can do at this stage.
“It will be important for the governing council to show continuity of leadership and predictability of policy in highly uncertain times,” Veronica Clark, an economist at Citibank, said in a note to her clients on June 1. “The policy statement should reiterate the BoC’s commitment to supporting the economy and financial system as necessary, but will likely also acknowledge slowly rebounding activity as the country starts to reopen.”
All the backward-looking data are terrible, and will only get worse as they catch up to what happened in April and May.
Statistics Canada last week reported that Canada’s gross domestic product shrunk at an annual rate of 8.2 per cent in the first quarter as the lockdowns took hold. The collapse accelerated into the current quarter, probably to an annual rate of about 40 per cent, according to Royal Bank of Canada’s economics unit. We’re experiencing the most brutal recession ever.
But it remains possible that the severe pain will subside relatively quickly. RBC sees economic growth at annual rates of 35 per cent and nine per cent in the third and fourth quarters, respectively. It will take time to get back to where we were at the end of 2019, perhaps a year or longer, but a depression is the base case of only the most pessimistic forecasters.
National Bank’s “back-to-normal index,” which uses Google mobility data to track store and office activity, is still a long way from its early February baseline, but the measure has been crawling steadily higher since mid-April. The recovery has begun, although it’s too early to know if it will last or if the economy can generate enough momentum to climb out of the crater it’s in.
With policy essentially set for now, the central bank might instead try countering excessive negativity by pushing back against a broad embrace of the most dire scenarios of the future.
The word “depression” has easily slid into the discourse about the crisis, even though it remains a low-probability event given the scale of the rescue efforts by governments and central banks. Poloz’s testimony at the Senate finance committee last week was a battle against worst-case scenarios. As he told his interrogators, the data suggest the Bank of Canada’s best-case outcome — a sharp, partial rebound followed by a slower grind back to pre-crisis output levels — is the most likely result at this stage.
To be sure, Poloz’s confidence is rooted in an instinctive notion of how the next year will unfold. He foresees a “surge” in entrepreneurial activity, as individuals and smaller companies take advantage of the destruction caused by the lockdowns to start new profit-making endeavours.
“Resources are being freed up because of sudden destruction, that’s how creation happens,” Poloz said in an interview last week. “If you were to get laid off, what an opportunity for you to take those nuggets and do them better, get people to outsource to you. That’s the kind of thing I’m talking about. It will happen in spades.”
He said that “blossoming” will require “really friendly” policies, suggesting the outgoing governor would have been an advocate for a long period of low interest rates. “Those are the jobs of the future,” he said. “Anyway, that’s somebody else’s job.”
Tiff Macklem will be Bank of Canada governor after all.
Macklem, once the runaway favourite to replace Mark Carney in 2013 before falling short of the mark, will instead take over from Stephen Poloz when the current governor retires on June 2.
“Governor-designate Macklem brings a deep knowledge of the economy and financial markets,” Finance Minister Bill Morneau, who oversaw the selection process, said at a press conference in Ottawa on May 1. “He was one of Canada’s leading economic stewards during the 2008 financial crisis, expertise that will serve Canada well as we work to deal with the COVID-19 crisis.”
The timing of the announcement will strike some as odd. Morneau cleared space in his calendar this week to put a Liberal stamp on one of the country’s most important institutions even though he is in the middle of fighting one of the most severe economic calamities the country has ever witnessed.
A shortlist of two names survived a three-month search led by the outside members of the Bank of Canada’s board of directors: Macklem, a former central banker who is currently dean of the University of Toronto’s Rotman School of Management, and Carolyn Wilkins, the central bank’s senior deputy governor.
Trudeau had the final say, as the governor of the Bank of Canada is a cabinet decision by law.
“I’m looking forward to getting into the Bank of Canada,” Macklem said at the press conference. “Rejoining the bank, a seamless transition is going to be a first priority and I’m confident that we will be able to accomplish that.”
The Financial Post identified Macklem and Wilkins as the front-runners to replace Poloz when he announced in December that he would retire at the end of his seven-year term. (No Bank of Canada governor has served consecutive mandates since Gerald Bouey, whose 14-year tenure ended in 1987.)
Still, Trudeau’s choice ranks as a surprise, if only because the chattering classes of Ottawa and Bay Street were pretty sure that Macklem was too happy at Rotman, which signed him up for a second five-year term in November 2018, extending his first job outside Ottawa since the 1980s, when he joined the Bank of Canada as a hotshot economist out of the University of Western Ontario in London.
“He was always viewed as a natural central banker,” said Pierre Siklos, an economics professor at Wilfrid Laurier University in Waterloo, Ont., and one of Canada’s leading experts on monetary policy.
“He’s brilliant,” said Craig Wright, chief economist at Royal Bank of Canada, who has known Macklem for decades. “You can tell that he’s spinning a macro-model in his head while he’s talking to you. He’ll be a great governor.”
Macklem overcame the current government’s desire to use every opportunity to correct the gender imbalance in the country’s halls of power. It was widely assumed that Trudeau, who describes himself as a feminist, would take advantage of Wilkins’ emergence to end the reign of white, anglophone men at Canada’s central bank, which is in its 85th year of existence.
Wilkins is probably the most visible senior deputy in the Bank of Canada’s history, earning the admiration of officials such as European Central Bank president Christine Lagarde as she climbed into the top ranks of global policy-making from a staff position she took at the Canadian central bank in 2001. That followed stints at Finance and the Privy Council Office during the 1990s.
For the past couple of months, Wilkins has been leading the country into the unknown, overseeing the design of the Bank of Canada’s efforts to tame extremely volatile credit markets by creating hundreds of billions of dollars and becoming the buyer of last resort of federal and provincial bonds, corporate debt and other financial assets.
Wilkins was merely picking up from where she left off after the Great Recession, when she was responsible for some of the initial grunt work in figuring out what the central bank could do next if it turned out that dropping interest rates to near-zero proved to be insufficient. Carney’s team set up some relatively minor programs, none of which required policy-makers to create money, a strategy known as quantitative easing, or QE.
“Carolyn Wilkins was in a trench developing new capital arrangements, new collateral arrangements, new lanes to help the situation under Governor Carney and there she is today doing exactly the same thing behind the scenes,” Poloz told reporters at an early stage of the coronavirus crisis last month. “That sort of thing gives me a lot of confidence.”
After Mark Carney, in the international economic-and-financial world, he is the most known and respected Canadian
economist Jöerg Asmussen
But while Wilkins was in the trenches a decade ago, Macklem was with the generals. He made a name for himself as a savvy technician both in Ottawa and abroad, first as a deputy minister of finance during the 2008 financial crisis, and then as senior deputy governor at the Bank of Canada from 2010 to 2014.
“He has a deep knowledge,” Jöerg Asmussen, an economist who served as senior German finance official and a member of the European Central Bank’s executive board, told the Globe and Mail in 2013. “After Mark Carney, in the international economic-and-financial world, he is the most known and respected Canadian.”
Macklem’s talents in 2013 weren’t enough to offset the curse that now marks Wilkins’s failed candidacy. The Bank of Canada operates with a great deal of independence, but the governor is ultimately a political appointment, and elected officials have tended to use the opportunity to remind the institution who is boss. Morneau described the selection process as “robust” and declined to say why specifically he chose Macklem over Wilkins. “I won’t be talking about the individual candidates,” he said.
The previous three governors — Poloz, Carney and David Dodge — all arrived from outside the central bank, each of them blocking the ascent of the internal heirs apparent. Macklem’s selection appears to turn that trend into a rule: if you are an ambitious staffer at the Bank of Canada, you will only be taken seriously for the top job if you leave the institution. The last governor to rise from within the central bank’s ranks was Gordon Thiessen, who Paul Martin, the finance minister at the time in 1994, chose over the sitting governor, John Crow.
Assuming Wilkins sticks around for a while, the decision to go with Macklem avoids the added disruption of having to fill an opening at the Governing Council, the policy-setting body that includes the governor and his five deputies. The group that Macklem inherits will lack diversity — five white men and one woman — but it will feature three crisis fighters hardened by the events surrounding the Great Recession: Macklem, Wilkins and Timothy Lane, a former International Monetary Fund economist who was named a deputy governor in February 2009.
There will be raw feelings, but it’s unlikely those will interfere with the job at hand. The COVID-19 crisis won’t afford any of the Bank of Canada’s leaders time for bruised egos. Macklem said history shows there is a “need to try to overwhelm a crisis,” suggesting that he will continue with the whatever-it-takes approach that Poloz and Wilkins have been following since early March.
“You need to think beyond the normal responses,” he said. “You need to restore confidence. When you look at what the Bank of Canada has done so far, when you look at the actions that the Government of Canada has taken to provide a bridge to the other side of this, these are bold, unconventional policy responses that really have embraced this idea that you’ve got to think beyond the normal responses. This is an unprecedented situation and it calls for an unprecedented response.”