The Governor of the Bank of Canada, Mark Carney, made a remarkable presentation last week at an international conference in Montreal. His speech was made to a group of economists and bankers, but his text serves as a reliable and convenient primer on the global economic crisis. You’ll find the complete speech, “Rebalancing the Global Economy,” on the Bank of Canada web site.
In essence, Carney proposes that the world is now laying the groundwork for a new wave of globalization. He identifies a series of imbalances which need to be addressed. The challenges include stimulating consumer demand in producer countries such as China; managing fiscal stimulus policies so as to encourage, rather than replace, private risk taking; and increasing coordination among central banks, including greater emphasis on peer and external review. Carney urges all countries to accept their shared responsibilities, which means “recognizing spillovers between economies and financial systems and working to mitigate those that could amplify adverse dynamics.”
Carney makes some very useful comments on the distribution of risk between the private and public sectors.
We need to think carefully about where risks are best held as we emerge from this crisis. There are two considerations. First, risks that can be priced are best borne by the private sector, whereas uncertainties that have a wide and significant potential impact are best borne by the public sector. Second, risks are endogenous: Public policy and private decisions influence aggregate risk in the system. For example, the widespread private use of collateral to mitigate counterparty risk reduced credit risk but sharply increased liquidity risk. Similarly, the public sector’s recent assumption of some risks creates moral hazard. If left unchecked, this will eventually promote private behaviours that will add overall risk to the system.
After reading Carney’s text, I have a better understanding of the central banker’s focus on balance. In the global environment, flows and counterflows are the lifelines of prosperity. During the recent global meltdown, Carney writes, “the reverberations of contracting U.S. consumer demand spread rapidly via global supply chains, and a global inventory glut developed virtually overnight. A 3 per cent decline in U.S. consumption of goods over the past six months fed a 20 per cent fall in Asian industrial production. A relationship that had been symbiotic became virulent.” The sudden contractions required dramatic responses from the international system. Today, with reverberations that will last through 2010, Carney favours an orderly retreat of the public sector. “The expedient should not become permanent,” he writes.
Since I’m not a trained economist, there were times when I wanted to use Kevin Kline’s line from A Fish Called Wanda … “What was the part in the middle?” I have an extremely tenuous grasp of Ricardian equivalence, Augustinian economics, and black swans. Still, if you’re looking for an orderly and concise discussion of how we got into the current situation and what should be done, it’s a great read.