Truth, lies and history: Mark Carney's role in the Great Recession

Mark Carney, Governor of the Bank of Canada during the last global financial crisis, presents himself as the man for the job in these troubled economic times. The Liberal leader is an impostor, retorts the Conservative camp; it was the Harper government that saved the country in 2008-2009. All this calls for reminders and a review of history’s many nuances.

To believe the Liberal line, “as Governor of the Bank of Canada during the financial crisis of 2008, Mark guided Canada through one of the most turbulent economic periods in modern history, protecting jobs and ensuring that Canada emerged stronger.”

This is false, former Conservative Prime Minister Stephen Harper reiterated this week at a large rally in support of Pierre Poilievre in Edmonton. Mark Carney is taking credit that should go to the Conservative government, and more specifically to its then Finance Minister Jim Flaherty, who passed away in 2014. Don't let anyone tell you otherwise, wrote Mr. Harper last month as part of a fundraising campaign, especially not Mark Carney, who “is trying to take credit for successes in which he played little or no role.”

A crisis in two stages

It all began with the bursting of a real estate bubble in the United States which, aided by the popularity of all kinds of financial products as exotic as they were shaky, caused a cascade of collapses starting in 2007, first among American financial players, then foreign ones, including the famous investment bank Lehman Brothers.

This terrible financial crisis quickly spilled over into the real economy, plunging the world into what has been called the Great Recession between 2008 and 2009.

Canada enters the storm with some valuable assets. Unlike in past decades, its public finances are relatively healthy and give governments some capacity to intervene. A generally more conservative regulatory environment and culture have also prevented Canadian banks from becoming too infatuated with the financial products that are wreaking havoc abroad.

The Canadian financial world was still spooked by the collapse of what was known as “commercial paper” — investment products whose book value fell from $35 billion to zero in one fell swoop until their holders, including the Caisse de dépôt et placement du Québec (CDPQ) and the National Bank, agreed on an orderly way to recover their investment once the crisis of confidence had passed.

Although Henri-Paul Rousseau, then president of the CDPQ, is generally attributed for settling the whole story without too much damage, the Quebec Minister of Finance, Monique Jérôme-Forget, recalled last month on Radio-Canada that it would not have been possible without the help of Mark Carney. “I can guarantee that, when I was on the phone, he was the one acting as an intermediary with [Stephen] Harper, who was not very keen to resolve the problem.”

A central banker on the front line

Having moved from the federal Ministry of Finance to head the Bank of Canada in February 2008, when the crisis had already begun, Mark Carney wasted no time in deploying all the means of intervention at his disposal — and then some.

Once its interest rates had been reduced to zero, the Bank would, for the first time, resort to forward guidance. It committed to keeping its rates at rock bottom for a given period, in addition to opening the door to the massive purchase of financial assets as a way of injecting more liquidity into the economy — though, in the end, the Bank did not resort to that. This time.

Several other central banks did the same, more or less quickly than in Canada. They increased their impact tenfold by supporting each other and coordinating their vigorous actions. Mark Carney personified this collective approach to these issues when the G20 placed him at the head of the Financial Stability Board, a body responsible for rebuilding the global financial system on a sounder and more sustainable footing, where he championed a tightening of international financial regulations.

But that was not the only front on which the battle against the crisis was being fought. The world also needed governments to come to the aid of businesses and workers affected by the recession and to help the economy regain its momentum.

It is estimated that some US$4 trillion and 28 million jobs were lost worldwide during the Great Recession. The shock was almost as severe in Canada as in the United States, but the recession was shorter here than in any other G7 country (three quarters).

This remarkable rebound was due in particular to the Harper government, which deployed one of the largest economic stimulus plans, relatively speaking, with C$47 billion over two years. The effort — based, among other things, on infrastructure spending, renovation credits and generous aid to the automotive industry — was all the more remarkable because it came from a government that had until then been very committed to conservative management of public finances and economic laissez-faire.

Forced and compelled to do well

However, it is important to remember how reluctant the Harper government was to take action. “Minister Flaherty was the most ideologically rigid of all,” a former senior official in his department told Le Devoir. “In the end, it was decided at the G20. When the United States and China agreed on the principle that all governments would go to the maximum of their available room to maneuver, Canada had no choice but to join the parade."

Experts point out that advanced economies also benefited from the ripple effect of China and other emerging powers less affected by the crisis. 

The problem is that, in several countries, governments were pressured to end their economic stimulus measures in order to restore the balance of public finances as quickly as possible. This was the case in Canada, resulting in a sluggish economic recovery.

So, who deserves the credit for Canada's emergence from the crisis during the Great Recession? Both Mark Carney AND Jim Flaherty. But also their predecessors responsible for public finances and banking regulation in Canada, Monique Jérôme-Forget, Henri-Paul Rousseau, other central banks, the G20, the United States, China...