Carney's Departure: The Bigger Picture

Well, it has been an exciting couple of days in Canada on the policy side given the juxtaposition of the following news: 1) the federal by-election results suggest a more competitive political environment for the federal Conservatives in the stronghold of Alberta 2) the world-class City of Toronto is deposing its Mayor over a conflict of interest involving a high-school football team 3) the federal government is raising the limit on tax-free savings account contributions by 500 dollars and 4) Mark Carney is heading off to the Bank of England.  What’s the connection?

Mark Carney is to be congratulated on his new position.  He has the talents of a high caliber international performer when it comes to banking and finance and this appointment is a recognition that he was not being utilized to his full potential when it came to the economy he was dealing with.  In some respects, he was a thoroughbred being used to haul a chip-wagon.  Going to the Bank of England will allow him to apply his talents more fully on both a national as well as the international stage.  While the Bank of Canada has always been a class operation with a solid record, the remainder of the economic and political environment he leaves behind is a testament as to why he needs to leave for the sake of his own career development.

While Canada continually touts itself as a stable country that was one of the best performers during the recent global downturn, the fact remains that it is a small country that rarely punches above its weight.  Part of this seems to be the result of a rather peculiar political culture more focused on local and regional issues rather than international ones.  The external environment should be a larger preoccupation given our economic dependence on international trade.  After all, if one looks at our largest city, it is mired in a rather comic conflict of interest case rooted in the election of a rather comic mayor.  Yes, the mayor has broken conflict of interest guidelines but over a high school football team?  On a world political stage, this is rather junior high.  The situation is more serious in Quebec with the corruption inquiry underway but that is hardly reassuring.

Of course, one may argue that all this is irrelevant as Canada is being governed with a stable majority government with an eye on the country’s economic future but even that seems rather precarious in the run-up to the election.  The recent by-election in Calgary, a Conservative stronghold, was a more competitive race than expected.  Maybe it was just personalities but it reminds us that the coming federal election could easily be just as competitive and result in another minority government.  A lot depends on whether the Liberal Party puts forth a credible leader that bolsters its vote share, whether the Orange Wave continues, as well as how much the economy slows down over the next year, undermining the reputation of the Conservatives as economic managers. 

Combine an insular political culture with the political change and uncertainty of another minority government, a slowing economy, declining housing prices, high public and personal debt loads, and you have a recipe for a much more challenging political and economic environment.  The strength of our economic institutions going into the recession was a key factor in our weathering the recent downturn but this was also a form of good fortune and may not work twice especially given the rising debt load.  Mark Carney was particularly concerned with the high debt loads facing Canadian households and has repeatedly warned that they needed to get their household finances in order given the inevitable rise in interest rates.  The federal move to raise the contribution limit on tax-free savings account by 500 dollars can be interpreted as affirming this concern and a gesture towards providing an incentive for households to save more but it will do little to reduce household net debt. 

There is really little more Mark Carney can do in Canada to deal with this set of economic issues.  His work is done.  The key issues coming down the road for the world economy after four years of recession are when will interest rates start to rise and by how much?  Mark Carney will have much more influence over international interest rates as head of the Bank of England than as head of the Bank of Canada. Mark Carney is going to England and he will be there when interest rates start to rise – as they inevitably will.  His departure is an important signal.

Comments

[Simon van Norden]

"Canada ... is a small country that rarely punches above its weight. Part of this seems to be the result of a rather peculiar political culture more focused on local and regional issues rather than international ones. "

Um....really?

When you say small, did you mean small in GDP? geography? or population? When I travel, most of the countries that I visit are smaller on all three counts.

Not sure what you mean by punching above its weight....but I guess you've not thinking about monetary policy, fiscal policy, politics, literature, etc., etc.

But the remark about the peculiar political culture is the one that really seems surreal to me. Have you never heard the expression that all politics is local? You just had the chance to watch a US presidential election: which international issues do you think dominated the local and regional ones? In what country do you think local and regional issues are less important than international ones? Greece? Germany? Israel? Iran? Brazil? China?

[Jacques René Giguère]

Punching above or below our weight: from the '20's to the 90's. we did punch above.
From our influence on preventing Britain going to war against Turkey in the Smirna affair in 1922, to the personnal relationship between MacKenzie King with FDR, our above average standing in the UN with Mike Pearson and even the posturing of PET, we did punch above and were both proud of it and probably benficiaries. No PM until Harper would have thought in the national interest to go to a Tim's rather than the UN.
The Charboneau Commission is a profundly local affair of no interst whatsoever to anyone outside the province ( aprt for those who wonder why all the mafioso iin TO are spending their time doing nothing...)

[Ryan Cousineau]

The by-election result in Alberta is fairly far from indicating weakened Conservative support in Alberta: Colby Cosh sums it up ably, but this is a riding that voted quite enthusiastically for liberalish mayor Nenshi, and whether due to vote-splitting, Justin Trudeau, or whatever, it still went Conservative, and it was a pretty low-turnout election.

There are many scenarios by which the Conservatives may indeed be hurting next election, and a minority government is possible if they falter, but if I don't think these results will give them much pause. It is the great folly of political commentators to read too much into by-elections.

As for Mark Carney, I think it's pretty simple: having done nothing wrong as head of one national bank, he has been given the chance to run a much larger national bank. As you say, it doesn't hurt that there's no pressing matters to be attended to in Canada.

[Livio Di Matteo]

Nice to hear from you Simon. Always a pleasure. We are a small country in terms of our population and GDP as a share of the world economy. As I'm sure you will concur, we are "big" geographically. Let me put it another way. Canada in relation to the world's economy or population is much like Thunder Bay's relationship to Canada. Thunder Bay has about 120,000 people in a population of 33 million and Canada is 33 million in a world population of 7 billion. It is not that Thunder Bay does not make contributions to Canada but they are relatively small in number though we do provide an inordinate number of good hockey players. We in Thunder Bay think we are important and significant to Canada while Canadians believe they are important and significant to the world. However, perhaps my response is being shaped by a purely local perspective which brings me to the next item - all politics is local. I have to admit you are probably right. We are perhaps no more "local" in our outlook than in other countries. However, if you are a large and economically important country, your local issues rapidly become important international issues. "Local" politics in the United States and China often will have a greater international impact than "local" politics in Denmark. Regional politics in China or the United States can involve populations that are larger than Canada.

[CBBB]

"the world-class City of Toronto"

World-Class? In what world?

[Determinant]

The Charboneau Commission is a profundly local affair of no interst whatsoever to anyone outside the province ( aprt for those who wonder why all the mafioso iin TO are spending their time doing nothing...)

I read La Presse regularly to practice my French, and it is interesting to see the variation between the French and English media, but I don't read the Charboneau articles, even though La Presse has made that topic a central figure of its headlines. Arrest the silly !()$#er's already!

In honesty, I can list a sizable amount of corruption I know of personally here in Ontario so we are not angels on this side of the Ottawa river.

[?]

The Canadian banking system is not as sound as they would have you believe. In fact, both the Canadian banking system and the economy as a whole display many of the pathologies of the US economy, in terms of its increasingly financialised character and the corresponding evolution of its banking system. ...

The Canadian economy has become excessively financialised. The practical disappearance of household saving and the ever growing household indebtedness has fueled the expansion of speculative derivatives because of the demand arising from the growing savings of the non-financial corporate sector. ...

The reality is that Canada’s banks were “saved by the bell”. The regulatory apparatus established over many years and upheld during the Chretien/Martin Administrations, was gradually being dismantled by the Harper Government, when it came into power in 2006. ...

The upshot of all of this is that financial innovations, together with these economies of scale and unlimited securitization, was starting to transform the Canadian banking sector into what some have described as a giant “transaction generating machine” — a securitised model of credit that increases turnover of assets while increasing commissions, fees and bonuses via the trading of complex derivatives – much like its American counterparts. ...

Read more at http://www.nakedcapitalism.com/2012/11/marshall-auerback-bank-of-canada-governor-is-wrong-on-too-big-to-fail-and-wrong-on-canadas-banking-system.html

[Neil]

The TFSA thing seems to be getting way more play than it deserves. It wasn't a decision, it was a calculation. The TFSA limit has always been tied to inflation, but, rounded to the nearest $500.

I'm more interested in the Calgary byelection, but not sure it signifies anything, except maybe that divided progressives vs united conservatives remains a losing battle for progressives. Vote share in a byelection probably tells you little except which candidate was more exciting. Once can hope though.

[Neil]

"We are a small country in terms of our population and GDP as a share of the world economy."
I just thought I'd come back to this. By your standard, there's really only 2 large economies, and everything else is small. Depending on who's ranking, Canada is either 10th or 11th in the world for GDP (http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29), so I'm with Simon on this one. Defining 10th largest (out of 193ish) as being small makes it pretty hard to come with an appropriate word for #150 (microscopic? mite-sized?)

It's kind of the same thing as I see in discussions about greenhouse gasses. "Canada's so small, what impact can we have?" All those small pieces add up to a lot - about 2/3 of the world economy. It's easier to understand how things work by focusing only on the biggest players, but ignoring everything that's smaller means you miss a lot.

[Livio Di Matteo]

@Simon,Neil.
Okay, let me borrow from Mackenzie King. We are small if necessary, but not necessarily small. We are often characterized as a small, open economy but now borrowing from the Bank of Nova Scotia, we are larger than we think. So why do some of us feel that we live in a small country of limited influence if we indeed are more influential than we think? Or is it just me thinking this way and everyone sees Canada's place in the world more akin to Simon or Neil?

[genauer]

http://www.ft.com/cms/s/0/ef415826-37da-11e2-8edf-00144feabdc0.html#ixzz2DWmZCBiI

Till | November 26 4:01pm | Permalink
"Before joining the Canadian public service, Carney spent thirteen years with Goldman Sachs in its London, Tokyo, New York and Toronto offices. He ... was involved in Goldman's work with the 1998 Russian financial crisis. Goldman's role in the Russian crisis was criticized at the time because while the company was advising Russia it was simultaneously betting against the country's ability to repay its debt."

[Mark]

"Yes, the mayor has broken conflict of interest guidelines but over a high school football team? On a world political stage, this is rather junior high."

I guess Mayors of big cities should only be found guilty of big things. Gosh I live in such a junior high town where politicians who break the law are found guilty.

My own Carney-Ford connection is that Osborne saw that Torontonians take the law seriously and maybe with Carney at the BoE there will be less chance of another Libor scandal...how's that?

[Livio Di Matteo]

@Mark
The mayor has broken the law but punishment also needs to be proportionate to the scale of the crime. There are better reasons why Rob Ford should not be Mayor of Toronto but his choice as mayor was made by Toronto's electorate.

[whitfit]

@Livio - perhaps you are right about the proportionality of the punishment, but that isn't determined by the judge in this case, but by the law. The judge applied the law. The rule of law is crucial to a democracy. If the judge doesn't apply the law, but decides to ignore it based on political motivations then you have a state where the rule of law becomes less meaningful. It is open to legislators to change the law so that there is some proportionality, but don't blame the legal system or the judgment.

[CBBB]

I don't know why you're so concerned over this Livio. Toronto's not a serious world city any way, never has been never will.

[Bob Smith]

Whitfit,

I think there were reasonable interpretations of the law, as it applied to the Ford case, which could have avoided what is, by any objective measure (as observed by the Judge) an inappropriate result. Saying the law should be interpreted in a way that avoids a ridiculous result (provided such an interpretation isn't inconsistent with A reasonable interpreation of the law - there can be more than one reasonable interpretation of a law) isn't an advocacy for judicial activism or an attack on the rule of law, it's a call for judicial common sense.

[Determinant]

Toronto has more cultural features and head offices than normal for a city its size because it is the largest city in English Canada, the financial centre of Canada and the centre of the English-language media and entertainment industry in Canada. Thus by fortunate circumstances only it outshines Philadelphia. But it's still eclipsed by Chicago, LA, Boston and New York.

The mayor has broken the law but punishment also needs to be proportionate to the scale of the crime. There are better reasons why Rob Ford should not be Mayor of Toronto but his choice as mayor was made by Toronto's electorate.

Municipalities are completely and utterly under the control of the province. They are regulated by provincial acts in a way that no other level of government is. Rob Ford broke the law, the law was applied. Appeals to democracy don't enter into it. If the law should be changed, that is a question for Queen's Park.

[Livio Di Matteo]

@CBBB
Actually, I'm not that concerned. I'm just trying to be social and joining the conversation!:)

[Mark]

"Toronto's not a serious world city any way, never has been never will."

My map of the world says otherwise!

[Simon van Norden]

Livio: you're right about "small" as in "small open economy".

[John B.]

According to the Canadian Census in 2011, Canada has 33 476 688 citizens. This does not look like a small country to me. And to be honest, your article is something rare. You are criticizing that Canadians care more about local and regional politics than the international one and that majors leave their offices for small things. I guarantee that there are many countries, that would love to be able to force their majors to resign. I consider it as a higher political culture rather than negative aspect. Another thing is the bigger importance of local and regional governments. Again, they are more pragmatical and more focused on the solution of the practical problems. Again, I consider this as a better way how to treat politics. Why would we be interested in international politics?

[Nathanael]

When *is* the next federal election? Anything to get rid of Harper; if he stays for another term, the damage from the infiltration of a criminal culture into the government may be irreparable.

Rob Ford broke a whole bunch of laws (driving while reading?). This one was particularly embarassingly arrogant. Hopefully a mayor will be elected next time rather than a clown.