Carney on debt, Dutch Disease and AC/DC: Full transcript and video

- October 25th, 2012

My interview with Bank of Canada Governor Mark Carney, recorded Wednesday in the Governor’s Private Dining Room at the Bank’s Ottawa headquarters, broken up into four video chunks, with transcript at the bottom.

What’s in your pocket, Mark Carney?


Dutch Disease and how central bankers play politics:

 

 

Should Greece stay in the Eurozone? And are the world’s central bankers independent enough?


Finally: Back in Black or Highway To Hell?


The transcript:

What’s in your pocket, Mark Carney?


AKIN: Governor Carney, thank you for taking the time today. I want to focus in our first segment on pocketbook issues and let me start by asking about your pocketbook. Do you have a credit card or a mortgage or a car loan or something like that?

CARNEY: I certainly have credit cards, yes. I don’t have a car loan, I’m afraid to say …

AKIN: You probably have someone to drive you around…

CARNEY: No, no. I have a car that I drive around but I don’t have a loan on it.

AKIN: I ask that only in the sense that it’s kind of a cheeky way of saying: When the Carney household sits around and looks their own personal financial situation, does the Carney household worry that the Governor of the Bank of Canada one day might rapidly raise interest rates.

CARNEY: Well, certainly one member of the Carney household sits around and thinks about what the appropriate level of interest rates should be. But I think back over the course of my life when we but our first house in Toronto and took on a big mortgage, one of the things we sat down and thought about was, what could this cost? Not what did it cost at that moment but five years from now, if rates adjusted, what could it cost? Should we go fixed? Should we go floating? Even if we went fixed, recognizing that that fixed rate would adjust a few years down the road. So we definitely did that and thought it through and built in a cushion so that if things went more severely in terms of interest rates or in terms of incomes, the family felt that we could hang on to the home because we were a young family just starting out, we’d just had our first child and we wanted to make sure the roof stayed over her head.

AKIN: You know why I’m asking this question. Because the Bank and the government has been saying a number of times, and this week as well, that household debt levels are a bit of a concern. I want you to sketch out why you think there should be a concern.

CARNEY: Well, the first point is, it’s not a universal concern, just to be absolutely clear. We’re not shouting out to every single Canadian that they shouldn’t borrow or that they should never borrow. There are good reasons to borrow. Buying a house is one. A car or a cottage. Something for your child’s education. There’s a variety of reasons to borrow and they make sense. But the important caution we’re trying to provide is that, first, ensure that if you borrow, that you can pay that back over the lifetime of the loan. And in the case of a mortgage, that’s a long lifetime. It’s a 25-year mortgage now. Secondly, recognize that in that context, interest rates can go up. They’re not going to be at these emergency levels forever. And then, thirdly, we are aware that there are some Canadians who have extended their amount of borrowing to what are called vulnerable levels, Canadians who are spending 40 per cent of their income just servicing their debt. And it’s in those situations where you can – can, it’s a possibility – get yourself in trouble. It’s a note of caution, a note of prudence. And I will say this as well: The time to give warnings is before the problem is fully realized. It’s to help people consider when they’re sitting around the table and thinking about taking out a mortgage, for example, whether the size of the mortgage is right or the structure of the mortgage is appropriate for them.

AKIN: I ask that because, at the end of the day, when you come to the assessment a household has to make about how rapidly interest rates are going to rise. And we look at the history… you just mentioned we’re now at an emergency sort of point – but it has been four years that the bank rate has been under two per cent. It’s now been a year, no, two years that it’s been where it is now …

CARNEY: … at one per cent, yes.

AKIN: And your own forecasts for our economy shows growth is going to be, you know, less than two-and-a-half per cent over the next three years which is o.k. but not great and would suggest that the Bank would be maintaining an expansionary policy. I come to the conclusion then: There’s no threat for rapidly rising interest rates – unless you’d like to correct me on that.

CARNEY: There’s two issues here. What’s the speed limit of our economy? How fast can our economy grow? I think we should recognize that unlike the United States, unlike the UK, unlike Europe, unlike Japan, our economy has already recovered all of the losses it had during the recession. We’re in an expansion, not a recovery.

AKIN: Albeit a slowish one.

CARNEY: It’s a slowish expansion but we have an economy that effectively the speed limit in our economy is about two per cent (growth of GDP per year). It’s about 2.1 per cent. It’s also something we had in our [Monetary Policy] Report. It’s also something we also had in our report, is our estimate of what’s the speed limit of the Canadian economy. We get that speed limit by increasing productivity, for example, but let’s call it that for now. So that expansion to two-and-half-per-cent (annual growth of GDP) is a little above the speed limit and that starts to take away what we would call the slack in the economy and that starts to increase the need to raise interest rates or else we’ll start to get bigger inflationary pressures.

So that’s one of the contexts.

The other is: The world’s a difficult place. There’s lots of issues in the United States. There’s headwinds from Europe. There’s other factors that moderate the speed at which we would move interest rates. So I think you probably characterized it a little extremely but there’s no question that what we will do, taking all these factors together, is manage policy so that interest rates rise at an appropriate pace given all these factors.

AKIN: It’s not in your interest, then, for a one per cent jump in, say, the space of, say, three periods or something like that.

CARNEY: It’s not in our interest to anything too abrupty either on the upside or the downside. And, again, part of the reason to talk about household debt, part of the reason why the government has taken some action as well is to prevent those sort of sharp moves, those sort of sharp challenges that would affect Canadian households. We’re well aware of the risks on those side of things.

AKIN: Some other data points that go to thesis that there are concerns about household debt. For every five dollars I have in assets, a household has a dollar in debt. That suggests there’s still a bit of room. We look at wage growth, it’s picking up, it’s pretty good. That goes to the idea that Canadians can afford to carry their debt. We look at the ratio you talked about today which was disposable income to debt is rising but net worth is rising at least as rapidly. So I could point to a lot of other things that suggest Canadian households are still in good shape.

CARNEY: There’s two things there. One is that debt endures. The value of assets can go up and down. Certainly the values of houses, we’ve seen in the United States, how rapidly houses can correct – I’m not projecting that for Canada, by an stretch of the imagination – but when you look at some of the other assets households hold, they are relatively illiquid. It’s not cash in the bank sitting against debt that has to be paid, debt that has to be paid every month regardless of what happens to your personal situation or what happens to interest rates. That’s the first point.

The second is: If we look at the totality of household debt in Canada, we’re up at levels that the Americans and and the British had before they had their crisis. So, as a whole, that’s one factor. The other thing is we’ve got about 10 per cent of Canadian households who are at the vulnerable level. So they’re spending more than 40 per cent of their income just servicing their debt, treading water if you will. And that is a concern. There are reasons for this. And they are the reason why the government has taken steps on four different occasions to tighten those mortgage insurance rules, why the bank regulator has taken steps to tighten some of the underwriting standards and why we talk about this issue. And I appreciate your raising the issue because it is an area where we have to be prudent.

Different Canadian households around different tables are going to take different decisions.

Dutch Disease and how central bankers play politics:

AKIN: So Thomas Mulcair, the opposition leader, makes the argument that Canada’s economy is suffering from Dutch Disease and that that’s not a good thing in Mr. Mulcair’s estimation. You heard that speech, you heard the diagnosis. What did you make of it?

CARNEY: Well, I certainly don’t respond to the comments of an individual, any individual Canadian and certainly the leader of the opposition. This is a topic, it’s a general topic. It’s been raised by various commentators over time. Our view is this, that in a world … we take the elements of Dutch Disease. One is: Are commodity prices temporarily high? Our view is no. Commodity prices will be elevated for some time. The reason, I’ll give you one reason for this ..

AKIN: This is the New Normal?

CARNEY: This is the new normal. That doesn’t mean they’re going to bounce around. But they’re going to be higher than their historic average, about 20 per cent higher than their historic averages. Why is that the case? Well India and China to give you one example. They house, put into new housing in urban centres, the equivalent of the entire Canadian population every year-and-a-half. So we think commodity prices are going stay at for some period of time.

The second thing is: Wha’s the impact on our exchange rate of all this? Well commodity prices affect our exchange rate but the weakness in the United States is almost as important as commodity prices for exchange rate and the fip side of Canada being relatively strong, a good place to invest, having sound fiscal policy, other factors – means that a lot of people want to invest in Canada and that’s helping to keep our currency up. It’s going to keep it up either way.

THe third thing is what’s happening to our manufacturing sector. There’s a lot of difficult adjustments going on there but they’re going on around the world and they’re very similar to what’s happening in Canada is happening around the world. You get to, in the end, what’s the diagnosis? Er, that’s the diagnosis: What should we do about it?

Well, you need to build bridges and we need to open up the emerging markets where the world is growing rapidly – China, India, two examples, not the only ones – So that we can export into those markets. We need to develop our commodities sustainably and intelligently in order to maximize the benefit across the country and we need to manage monetary policy, to bring it back home for the Bank of Canada, in a way that makes sure Canadians, Canadian businesses but very importantly Canadians themselves don’t have to worry about volatile inflation.

AKIN: Now you could have acknowledged all that and maybe it shows up in a report somewhere but you chose at one point, knowing this was a bit of a political hot potato – the prime minister was chiming in on this, the opposition leader – you decided to stand up and give a speech on this very topic and though you didn’t mention anybody by name, it was pretty clear you were contributing to the political debate that was happening.

CARNEY: I wouldn’t say that. I think this is a fundamental economic issue. The question of Dutch Disease and the role of commodities in our economy – it’s a fundamental macroeconomic question. We’re fundamentally a macroeconomic institution. And going across the country in interviews such as this – I had an interview with Radio-Canada where they raised this issue with me a couple weeks before that speech – this was a live issue in terms of the analysis of how the Canadian economy works. And part of our role, our fundamental role, is to understand how the Canadian economy works and obviously set monetary policy accordingly. But it’s also to explain how the Canadian economy works so that Canadian businesses, Canadians, Canadian politicians, others, can make informed decisions with that information. And so that’s why we gave a speech.

I’ll make one other point which is: Obviously in this building we have lots of very complicated macroeconomic forecasting models as you’d expect to try to understand the Canadian economy. Our core model, our most complicated model, is a terms-of-trade model. At its core is driven off how relative prices change, how when commodity prices change, what is the impact of that on the economy. And if you go that speech, which you probably have, we detail a bunch of different scenarios of what’s the impact on Canadian GDP if commodity prices go up because of Asian demand or U.S. demand or because of a global shortage. In every single case, it’s net positive for the Canadian economy.

AKIN: I bring that up as well because as we’re reflecting on Governor [James] Coyne’s contributions to the bank’s development – he had issues, obviously, with John Diefenbaker and resigned as a result. Diefenbacker would go on to lose an election. It was a big kerfuffle. But as you were reflecting recently in the paper, he started to set some ground rules for how politicians and the Bank ought to interact.

CARNEY: Yeah. One of the important things is the Bank is independent in the conduct of monetary policy. And that’s a delegated authority from the government. And one of the ways we square the circle, if you will, with our democracy is that every five years, the Governor and the Minister of Finance agree what the bank’s objective is. And so at the end of this past year, in December, the Minister of Finance and I agreed that we would target a two per cent rate of inflation. We’d conduct monetary policy in order to do that. And it’s then our responsibility, as the Bank, to go and take the sometimes tough decisions in order to achieve that.

Related to all of that is a requirment to explain how the Canadian economy works, what the forces are in that, where the Canadian economy is going and, whether it’s on household debt, whether it’s on commodities, whether it’s on aspects of the financial system, our job is to tell it like we see it, ground that in real research, make it transparent what that research is so others can look at it and challenge it and that’s what we’ve done on both of those issues, all of those issues, rather.

Should Greece stay in the Eurozone? And are the world’s central bankers independent enough?

AKIN: Let’s think about the global picture and before we start talking about that: You’re a restaurant owner in BC, a retiree in Alberta, a farmer in Saskatchewan – these, of course, are the people who the Bank is trying to make sure can be prosperous. As you think about that mission and look at Europe and the U.S., which gives you more sleepless nights?

CARNEY: I would have to say … well, first off, I do sleep at night in order to accomplish my job. But what I worry about most is Europe. Not in the short-term because we do think the measures of the European central bank and the European auhtorities in the last couple of months contains the crisis, insures we’re not going to have a Lehman-type event, if you will, something that happened in 2008 that sort of washes on our shores in the near future.

But in the medium-term perspective, the challenges of recreating, if you will, monetary union in Europe are considerable. So I would put Europe first as the biggest risk. The United States ..

AKIN: And a risk that if something goes wrong there it can hurt the farmer, the retiree …

CARNEY: It would ultimately have an impact on global … it would not have a direct impact on Canada. We have relatively small trade ties. Our financial institutions don’t really have big exposure to Europe. So it doesn’t hit us directly. But it would impact the rate of growth in the global economy which would hit commodity prices, it would hit tourism, it would hit confidence. Which would hit that restaurant owner in British Columbia. Obviously would affect the prices the farmer receives for his goods or her goods.

With respect to the United States – Look, the United States is actually making pretty good progress on its issues in the private sector. Households have clawed back 70 per cent of what they lost in the crisis in terms of net worth. The housing market is starting to pick up. It bottomed out at just under 500,000 housing starts. It’s now at almost 900,000. We see a continued improvement there. The banks are recapitalized. They’re making progress in the private sector. Where they’re not making progress, obviously, is on the public sector side. They’ve got a fiscal cliff. They’ve got a big challenge which starts – forget about popping the champaign corks whoever wins in the election – they should all head to Washington and sort this out. And unfortunately, it’ll probably be messy for a bit of time before they do.

AKIN: I want to ask a little more about Europe. Let me focus on Greece. One way or the other, the people of Greece are going to be in for a rough period. They’re in for some structural reforms if they stay in the Euro. And if they leave the Euro and go back to the drachma, it’s not going to be probably much better. But there’s a lot of people saying – and I wonder if this is at all a part of the discussion – the better long-term move is returning to the drachma, have an orderly exit of Greece, that that would be the best thing for Greece  and, in the end, would be the best thing for Europe.

CARNEY: Well, the people of Greece have already had a very tough time up to now with the level of unemployment and loss of incomes. Unfortunately, that adjustment’s going to continue for a period of time, as you indicated. What we’re working, through the IMF, on and what the Europeans are working on is to try to smooth that path and lessen the adjustment as much as possible. It is the current view that there is a way through a combination of money through the IMF and European authorities,  additional measures by the Greeks, maybe some additional debt relief, that that is the best path for Greece. But it’s a fine …

AKIN: Staying in the Eurozone though ..

CARNEY: Staying in the euro — but it’s a fine judgment and one which constantly needs to be evaluated and we’ll contribute intellectually as much as possible.

AKIN: I also want to pick a little at the politics of central banking and I’ll phrase it this way. Canadians see you and the Bank’s role as independent, as we mentioned a minute ago, of the government. And I think people who look in the U.S. see something similar. As you look at the relationship of central bankers and politicians elsewhere is there always that independence? Is there sometimes not enough independene of central bankers, that they may need to look at that relationship as well?

CARNEY: Over the history of central banking, that’s been one of the challenges, that the central banker in conduct of monetary policy, the setting of interest rates, have not been independent as they might have been or should have been. Because the challenge is everyone wants to lower interest rates, nobody wants to raise interest rates so it takes a measure of independence and objectivity in order to do that in a timely fashion when it’s necessary. That’s the first point.

And so what’s happened, by and large, whether it’s in Europe, here or the United States – and we talked about the Coyne Affair earlier – there’s been more independence given to central banks for monetary policy. That’s a good thing. But the challenge is now that as monetary policy outside of Canada – this isn’t the case in Canada – outside of Canada becomes more unconventional, there is so-called quantitative easing, the buying of government debt by central banks, that the relationship between monetary policy and fiscal policy, which is the responsibility of an elected government gets closer and starts to merge. And then that independence can be called into greater question. The only thing I would say it’s exactly in those situations where there is a need for that independence of the central bank to be maintained because at the end, what people want to know and deserve to know is that their money is going to retain its money. And that is the fundamental responsibility of the central bank.

Finally: Back in Black or Highway To Hell?

AKIN: For our last segment, I’d just to ask a little about you – and I know you’re a shy guy and you don’t want to talk about yourself but how does a kid from from Fort Smith, Northwest Territories become one of the most notorious central bankers in the Western World? How do you go from there to there?

CARNEY: Well, obviously a lot of it’s good luck and good fortune. I’m a product of the Canadian education system. My parents put a lot of value in education. Always had an interest in public service, a belief in public service. And I was fortunate, David Dodge, the previous governor helped bring me to Ottawa and basically from there, I did what was asked of me. And I’m fortunate to have this position as, as it turns out, quite a remarkable time in central banking in the Canadian economy.

AKIN: You’re friend, Peter Chiarelli, the Boston Bruins manager, your Harvard roommate, said “Carney is Canadian, through and through. He left Wall Street and Bay Street, where he was making oodles of money, because even back in university, he wanted to make his mark in public service.” And did you, at some point, say, ‘I can do that by being a central banker’?

CARNEY: Well, yes, to some extent. And talking to David Dodge, the previous governor, there was this opportunity to come join the bank as deputy governor. And I think when those opportunities come along, you take them and try to do your best and, as I say, things turned out. And, look, this country’s given me a lot. It gave me a great education. The Alberta government gave me a scholarship to go to Harvard.  I believe in this country and so when I had a chance to give something back, my way of thinking, that’s what you do and that’s the thinking of most people in this organization.

AKIN: I read somewhere that at Harvard, you played backup goalie …

CARNEY: Backup with a capital B, yes …

AKIN: But apparently before games you get a little revved up with AC/DC’s Hell’s Bells. Ok, so a question governor: Best AC/DC album – Back in Black or Highway To Hell?

CARNEY: Back in Black. But just to be clear, that was in Junior B back in Edmonton. AC/DC ruled in ’82.

AKIN: For the future, you’ve said you don’t want to be the leader of the Liberal party – last chance right now to change your mind? Ok. Well, what is the future? You’re going to be a relatively young banker at the end of this seven –year term. Another seven-year term? What’s going on after this?

CARNEY: One of the luxuries of being a central banker is you can’t think about your future until it arrives. And so I’ve got a couple of years left on this term, a bit more than a couple of years and I’ll just focus on doing that. I’ve got these responsiblilities internationally which have a couple of years left on as well. So I just focus on that. It’s presumptuous of me to talk about me extending any of this and,let’s face it, we’ve talked about a lot of interesting but important stuff already today and the best thing I can do, along with my colleagues is just continue to try to do the best job we can resolving these issues.

AKIN: And to loop back on the Coyne Affair because, as you were writing, there’s a legacy from the work he did, not only with the Coyne Affair itself but with the work he did developing forecasting models and all sorts of things – as you think of your time so far here at the Bank, are there some things you’ve done now that you’ll be able to say, I’m really proud that we did that and that’s something that should last down the road?

CARNEY: Well, there might be little germs of that if you will. But I think we can appreciate the legacy of James Coyne – truly appreciate it – through the passage of time. It’s what endures. The things that seem important at a given moment in time may not be important over the fullness of time. And ultimately legacies are for others to judge so I hope I have some form of legacy but really with central bankers you have to look back in order to judge how they and really the institution, because obviously it’s the institution and not just the Governor, how effective they were.

AKIN: All right. Well, Governor Mark Carney thank you for being so generous with your time today.

CARNEY: Thank you, David.

 

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