How Stephen Poloz proved that the opponents were wrong

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Stephen Poloz first dreamed of becoming Governor of the Bank of Canada in 1974 when he became passionate about economics as an undergraduate at Queen’s University in Kingston, Ontario. Thirty-nine years later, it happened. How many of us can match this? Not a lot.

But it would have taken a dark soul to design the pre-mortem to prepare Poloz for the end of his dream story come true which included the death of more than 360,000 people worldwide and effective control of travel and interactions human.

But in the days of COVID-19, you do what you can.

On May 22, Poloz attended his last “international” meeting via a Webex link from his home in the suburbs of Ottawa. Rally President Jerome Powell of the United States Federal Reserve found a way to recognize the extraordinary career of his Canadian friend. Before going on to the agenda, he ordered the technicians to reactivate all the lines. Over 50 central bankers began to applaud.

“They all applauded so I could really hear it,” said Poloz in an exclusive exit interview on May 25. “It was very touching, but, of course, not the same as being able to shake hands with everyone and say goodbye properly. It’s just like that. “

The ninth governor of Canada’s central bank made a strong impression, proving that anti-rock stars can also get things done. Like ovation online, proof that he made a difference is something Poloz can take with him when he completes his last duties on June 2 and hands things over to Tiff Macklem. Many of us did not think it was in him to leave such a mark.

“Steve Poloz was the perfect blend of sophisticated and sophisticated monetary policy considerations, based on a solid academic and practical understanding of complex issues,” said Christine Lagarde, President of the European Central Bank.

“Steve and I have always had a lot to say,” said Philip Lowe, Governor of the Reserve Bank of Australia. “I’m going to miss exchanging notes with him. “

* * *

Mark Carney, outgoing Governor of the Bank of Canada, on the left, shakes hands with Stephen Poloz, new Governor of the Bank of Canada, at a press conference in Ottawa, Ontario, Canada, May 2, 2013.


Patrick Doyle / Bloomberg

Seven years ago, when Mark Carney ended his governorship 19 months earlier to take control of the Bank of England, the prevailing view was that Poloz was too parochial to be an effective decision maker when concerns were as important as local concerns.

Macklem, the chief deputy governor of the Bank of Canada at the time, was seen as a shoo-in to replace Carney because he had acquired so much experience in fighting the financial crisis alongside his boss . Poloz, president of Export Development Canada, was in the conversation, but only because of his reputation as an outstanding economist. Otherwise, he was an invisible man.

It turned out that this was exactly what Stephen Harper, then Prime Minister, and his Minister of Finance, the late Jim Flaherty, wanted from a governor. Presented with two strong candidates, the one who looked the least like Carney had the advantage, especially when it seemed that the Bank of Canada was trying to force his candidate for government.

There were also persistent suggestions that Poloz got the job in part because he was soft on the dollar.

“There has always been the question, or the suspicion, that we did not know how the exchange rate would play a role in political decisions,” said Pierre Siklos, professor of economics at Wilfrid Laurier University in Waterloo, in Ontario.

It was a difficult way for Poloz to start. Ideas for a new approach to monetary policy were already beginning to gel, and the university and Bay Street were not used to the turmoil. The conflict was approaching, so it was unnecessary for Poloz to be seen by some as a political choice, not the best choice.

This may be one of the reasons why questions about the dollar continue to boom.

Real estate bubbles were forming in Canada’s largest cities when Poloz took power, and the level of household debt was similar to that of the United States before the crash in 2007. Yet the new governor did not not raise interest rates until the fourth year of his term.

Poloz insists he has taken a “lower for longer” position because he has seen that the Great Recession had hurt the economy in ways that did not appear in standard models. Higher borrowing costs would have created a headwind that the economy was not ready to overcome.

“The dollar went down as a result of this reset and I was told,” Oh, you are sweet on the dollar, “” he said. “I was just trying to be honest about what we didn’t know and I think in the end it worked for us. “

* * *

Many residents of Bay Street like to be led by demigods who tell them what to do. Predicting the path of interest rates had become a one-sided bet on the carefully chosen words of a central bank executive. After all, analyzing the language required less effort than compiling an economic forecast.

Central bankers such as Mario Draghi, the former president of the European Central Bank, and Carney used their powers for good during the financial crisis, entering a leadership vacuum left by incompetent and bleak politicians.

The Carney years were about embracing stress, not avoiding it. The former Wall Street investment banker, who was named president of the influential Financial Stability Board in 2011, was ambitious and expected his staff to continue. Without Carney, the Bank of Canada returned to its natural weight category in terms of international influence, but today it could be a healthier institution because of that.

Bank sold out under Mark

economist Angelo Melino

“The bank was exhausted under Mark,” said Angelo Melino, an economist at the University of Toronto, who served at the Bank of Canada as a special advisor in 2008 and 2009. “Stephen is a human being, a player in ‘team. It worked well. It is part of his heritage. “

Fighting a fire is different from rebuilding from one, especially a blaze like the one that destroyed the United States and Europe in 2008 and 2009. The scars were severe, yet Carney and others have continued to project certainty as to the direction of policy.

Poloz decided that each new policy statement would start as a blank page, which forced market participants to stop searching for code words and to think for themselves. While Carney introduced himself as someone repeating each sentence, a Poloz press conference was like a bar conversation.

“I rebelled against this feeling of a little too much authority, too much clarity on what was going to happen, when I really didn’t think it could be that simple,” said Poloz.

Bank of Canada Governor Stephen Poloz, right, and Minister of Finance Bill Morneau at a press conference in Ottawa on March 18, 2020. Poloz’s legacy will be determined to some extent depending on whether the Canadian housing market will survive the COVID-19 crisis.


The new style of communication was disruptive, but Poloz went out of his way to explain what he was trying to achieve and reassure the experts that he had thought it over. In October 2014, he published a 12-page working paper entitled Integrating Uncertainty and Monetary Policy-Making: A Practitioner’s Perspective, his argument for adopting a “risk management” approach to setting interest rates rather than a mechanical approach.

The treaty drew the attention of other central bankers, including Powell, who applied Poloz’s ideas to Fed policy. But Canada’s cliquey financial community has struggled to reach agreement on the merits of Poloz’s folkloric approach.

“I’m not a Poloz fan,” Chris Catliff, chief of BlueShore Financial, a credit union in Vancouver, told me in July 2017 in a fit of pity for what he considered inconsistent messages. In December 2015, Douglas Porter, the frequently quoted chief economist at BMO Capital Markets, told Reuters: “I wouldn’t say the reaction function is very reassuring. “

Porter was still considering the central bank’s decision in January of the same year to cut the benchmark rate by a quarter of a point when the housing market was supposed to be the biggest concern. He and virtually all of the other Bay Street forecasters had failed to adequately report the possibility of a cut to their bosses and customers.

The drop in interest rates on January 21, 2015 is perhaps Poloz’s best moment

But the Bank of Canada’s commodity price index had plunged 26% in just six weeks, a terrible omen for an economy that depends on oil exports for a significant part of its wealth. Central bank models suggested the economy was in trouble, and calls to leaders in the energy sector confirmed it. Since Poloz had told investors that they should look at the data, not his comment, policymakers weren’t bothered by market promises, real or imagined.

The drop in interest rates on January 21, 2015 may be Poloz’s best moment. The economy would slow down later this year and conditions would likely have been worse if the Bank of Canada had been behind the curve like Bay Street, rather than ahead.

“I don’t really know what it was about Steve,” said Myles Zyblock, chief investment strategist at Toronto-based 1832 Asset Management LP. “His message, at least for me and for the portfolios we manage, did not worry me too much. “

Frances Donald, chief global economist at Manulife Investment Management, said, “Poloz’s ability to say, ‘We will do what we have to do for Canadians and won’t try to hold hands on Bay Street,’ was a very powerful message that I think many central banks would have liked to be able to achieve. “

* * *

Legacies need time to form. Alan Greenspan, the legendary Fed chairman, retired in 2006, signed a multi-million dollar book deal, and his reputation was destroyed by the financial crisis.

Poloz’s legacy will be determined to some extent by the survival of the Canadian housing market from the COVID-19 crisis.

Canada’s chartered banks had approximately $ 541.6 billion in household credit at the end of March, according to seasonally adjusted figures compiled by the Bank of Canada, a 23% increase from the first. Poloz’s months of work. Carney oversaw a 65% increase.

Nevertheless, a group of tenacious critics insisted that Poloz should have done more to reverse what his predecessor had started. This group is certain that we will pay it in the form of a local financial crisis once the credit bubble bursts.

The extent to which Poloz should be blamed for the epic rise in debt is highly questionable. The Harper government has been consistently slow to compensate for low interest rates with tighter credit restrictions, and Prime Minister Justin Trudeau has not done much better.

The main job of the Bank of Canada is to keep inflation at around 2% and it has faced two major recessions, two oil price crashes and trade wars since 2008. A housing bubble was a concern, but deflation was the most important.

“I know that counterfactuals are very difficult for people to imagine, especially when they are behind their backs,” said Poloz. “So they just look around and say,” Wow, you kept interest rates really low and, as a result, the housing market really went up and it caused all this, all this debt and these vulnerabilities. “Well, no, it was instead of a long recession, maybe a depression. So aren’t we much better off? “

We were, and may still be, dependent on COVID-19.

By mid-2019, the economy was at full employment, wages were rising at a decent rate and the household savings rate had climbed to around 3%, meager by historical standards, but still the highest since 2017.

Inflation was also anchored to the target. The consumer price index remained in the central bank’s comfort zone for inflation 92% of the time under Poloz’s tenure, a better record than any governor since the central bank began targeting inflation in the early 1990s, according to the National Bank.

Canada’s economy slowed to slow in the second half of 2019, as the effects of the trade wars began to bite. But Poloz and his deputies resisted the urge to cut interest rates like most other major central banks. Why? Because they determined that the benefits did not outweigh the risk of relaunching a new credit crisis.

“If COVID-19 had not arrived, we could congratulate it as the most effective normalizer in central bank policy,” said Donald.

* * *

Stephen Poloz stands alongside Patty Hajdu, Minister for Status of Women, Wanda Robson, sister of Viola Desmond, and Bill Morneau, Minister of Finance, during the unveiling of the new $ 10 bill with Desmond on December 8, 2016.


Bank of Canada

Ask Poloz what’s on their legacy list and the first thing they mention is their risk management policy. “You hope you have changed standards in the art or the area of ​​central banking,” he said. “It’s great to hear other central bankers use this term. “

He also listed the new $ 10 bill with Viola Desmond. Apparently, it wouldn’t have happened if Poloz hadn’t pushed. On the first day, when signing a future offer, he asked how long it would take for a Canadian to receive the money. About a decade, she was told. Desmond bills have been around since 2018.

“You would think it would be a routine, but it was not,” he said. “Getting that rock up the hill was really difficult, and doing it on my schedule. I have a lot of people to thank for that, I didn’t do it myself, but I insisted. “

Like so many of his accomplishments, the change has been subtle, but the effect could be lasting. Bill Morneau had the glory of putting a woman on a bank note, but Poloz’s signature will remain on the notes long after the finance minister’s departure.

• Email: [email protected] | CarmichaelKevin



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