When Stephen Poloz attended his last international meeting (virtually) on May 22, 50 central bankers gave him a round of applause.
Bank of Canada Governor Stephen Poloz, right, and Finance Minister Bill Morneau at a news conference in Ottawa on March 18, 2020. Poloz’s legacy will be determined to some extent by whether the Canadian housing market survives the COVID-19 crisis.
Stephen Poloz stands with Patty Hajdu, Minister of Status of Women, Wanda Robson, sister of Viola Desmond, and Bill Morneau, Minister of Finance, at the unveiling of the new $10 bank note featuring Desmond on Dec. 8, 2016.
Stephen Poloz first dreamed of becoming Bank of Canada governor in 1974, when he got hooked on economics as an undergrad at Queen’s University in Kingston, Ont. Thirty-nine years later, it happened. How many of us can match that? Not many.
But it would have required a dark soul to design the pre-mortem to prepare Poloz for an ending to his dream-come-true story that included the deaths of more than 360,000 people worldwide and an effective lockdown on travel and human interaction.
But in the time 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 suburban Ottawa. The chair of the gathering, Jerome Powell of the U.S. Federal Reserve, found a way to recognize the extraordinary career of his Canadian friend. Before getting to the agenda, he ordered the technicians to unmute all the lines. More than 50 central bankers started clapping.
“They all applauded so I could actually hear it,” Poloz said 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 everybody and say goodbye properly. It’s just the way it is.”
Canada’s ninth central bank governor has made an impression, proving that anti-rock stars can get things done, too. Like the online ovation, evidence that he made a difference is something Poloz can take with him when he performs his final duties on June 2 and turns things over to Tiff Macklem. A lot of us didn’t think he had it in him to leave such a mark.
“Steve Poloz was the perfect mix of elaborate and sophisticated monetary policy considerations, grounded in solid academic and practical understanding of complex issues,” said Christine Lagarde, president of the European Central Bank.
“Steve and I always had plenty to talk about,” said Philip Lowe, governor of the Reserve Bank of Australia. “I will miss swapping notes with him.”
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Seven years ago, when Mark Carney ended his term as governor 19 months early to take over the Bank of England, the prevailing view was that Poloz was too parochial to be an effective policy-maker when global concerns were as important as local ones.
Macklem, the Bank of Canada’s senior deputy governor at the time, was considered a shoo-in to replace Carney because he had gained so much experience fighting the financial crisis at his boss’s side. Poloz, president of Export Development Canada, was in the conversation, but only because of his reputation as a standout economist. Otherwise, he was an invisible man.
As it turned out, that was exactly what Stephen Harper, then prime minister, and his finance minister, the late Jim Flaherty, wanted in a governor. Presented with two strong candidates, the one that was the least like Carney had the advantage, especially when it looked like the Bank of Canada was trying to force its candidate on the government.
There were also persistent suggestions that Poloz got the job in part because he was soft on the dollar.
“There’s always been the question, or the suspicion, that we weren’t sure how the exchange rate would play a role in policy decisions,” said Pierre Siklos, an economics professor at Wilfrid Laurier University in Waterloo, Ont.
It was a tough way for Poloz to begin. Ideas about a new approach to monetary policy were already beginning to gel, and the academic establishment and Bay Street were unaccustomed to disruption. Conflict was coming, so it was unhelpful that Poloz was seen by some as a political choice, not the best choice.
Maybe that’s one of the reasons questions about the dollar still rankle.
Housing bubbles were forming in Canada’s largest cities when Poloz took over, and household debt levels resembled those of the pre-crash United States in 2007. Yet the new governor didn’t increase interest rates until the fourth year of his term.
Poloz insists he adopted a “lower-for-longer” stance because he saw that the Great Recession had harmed the economy in ways that didn’t show up in standard models. Higher borrowing costs would have created a headwind that the economy wasn’t ready to push through.
“The dollar went down in the wake of that reset and I got tagged with, `Oh you’re soft 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 out for us.”
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Many denizens of Bay Street like being ruled by demigods who tell them what to do. Predicting the path of interest rates had become a one-way bet on a central bank leader’s carefully chosen words. After all, parsing 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, stepping into a leadership void left by inept and uncourageous politicians.
The Carney years were about embracing stress, not avoiding it. The former Wall Street investment banker, who was appointed chair of the influential Financial Stability Board in 2011, was ambitious and he expected his staff to keep up. Without Carney, the Bank of Canada dropped back to its natural weight class in terms of international influence, but it might be a fitter institution today because of it.
The bank was exhausted under Mark
“The bank was exhausted under Mark,” said Angelo Melino, a University of Toronto economist who served at the Bank of Canada as a special adviser in 2008 and 2009. “Stephen is a people person, a team player. That worked out well. It’s part of his legacy.”
Fighting a fire is different than rebuilding from one, especially an inferno such as the one that wrecked the United States and Europe in 2008 and 2009. The scars were severe, and yet Carney and others continued to project certainty about where policy was headed.
Poloz decided that each new policy statement would start as a blank page, which forced market participants to stop looking for code words and think for themselves. Whereas Carney presented as someone who rehearsed every sentence, a Poloz press conference was like a conversation at the bar.
“I was kind of rebelling against that sense of a little too much authority, too much clarity around what was going to happen, when I really didn’t believe that it could be that simple,” Poloz said.
The new communications style was disruptive, but Poloz went out of his way to explain what he was trying to achieve, and to reassure experts that he had thought things through. In October 2014, he published a 12-page discussion paper, Integrating Uncertainty and Monetary Policy-Making: A Practitioner’s Perspective, his argument for taking a “risk-management” approach to setting interest rates, rather than a mechanical one.
The treatise got the attention of other central bankers, including Powell, who has applied Poloz’s ideas to Fed policy. But Canada’s cliquey financial community struggled to come to an agreement on the merits of Poloz’s folksy 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 pique over what he saw as inconsistent messaging. Douglas Porter, the oft-quoted chief economist at BMO Capital Markets, in December 2015 told Reuters, “I wouldn’t say there’s a lot of comfort with what the reaction function is.”
Porter was still smarting over the central bank’s decision in January of that year to cut the benchmark rate by a quarter-point when the housing market was supposed to be the biggest concern. He and essentially every other forecaster on Bay Street had failed to adequately flag the possibility of a cut to their bosses and clients.
The interest-rate cut on Jan. 21, 2015, ranks as perhaps Poloz’s best moment
But the Bank of Canada’s commodity-price index had plunged 26 per cent in only six weeks, a terrible omen for an economy that relies on oil exports for a material amount of its wealth. The central bank’s models suggested the economy was in trouble, and calls to energy executives confirmed it. Since Poloz had been telling investors they should be watching the data, not his commentary, policy-makers were unencumbered by any promises to markets, real or imagined.
The interest-rate cut on Jan. 21, 2015, ranks as perhaps Poloz’s best moment. The economy would stall later in the year and conditions probably would have been worse if the Bank of Canada had been behind the curve like Bay Street, instead of ahead of it.
“I don’t really know what the big kerfuffle was about with Steve,” said Myles Zyblock, chief investment strategist at Toronto-based 1832 Asset Management LP. “His message, at least to me and to the portfolios that we manage, didn’t give me too much grief.”
Said Frances Donald, global chief economist at Manulife Investment Management: “Poloz’s ability to say, `We will do what we need to do for Canadians and not try to hold the hand of Bay Street,’ was a really powerful message and one that I think a lot of central banks wish they would have been able to achieve.”
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Legacies need time to form. Alan Greenspan, the legendary Fed chair, retired in 2006, signed a multi-million-dollar book deal and then had his reputation wrecked by the financial crisis.
Poloz’s legacy will be determined to some extent by whether the Canadian housing market survives the COVID-19 crisis.
Canada’s chartered banks held household credit worth about $541.6 billion at the end of March, according to seasonally adjusted figures compiled by the Bank of Canada, a 23 per cent increase from Poloz’s first month on the job. Carney oversaw a 65-per-cent increase.
Nevertheless, a stubborn group of critics insists that Poloz should have done more to reverse what his predecessor started. This group is certain that we will pay for it in the form of a homegrown financial crisis once the credit bubble pops.
The extent to which Poloz should be blamed for the epic run-up in debt is highly debatable. Harper’s government was consistently slow to offset low interest rates with tighter lending restrictions, and Prime Minister Justin Trudeau hasn’t done much better.
The Bank of Canada’s primary job is to keep inflation at around two per cent and it has confronted two major recessions, two oil-price collapses and the trade wars since 2008. A housing bubble was a worry, but deflation was the bigger one.
“I know counterfactuals are very hard for people to envision, especially when it’s way in the back,” Poloz said. “So they just look at it and say, `Wow, you kept interest rates really low and, therefore, the housing market really expanded and that caused all of this to happen, all of this debt and these vulnerabilities.’ Well, no, that was instead of a drawn-out recession, possibly a depression. So aren’t we far better off?”
We were, and might be again, depending on COVID-19.
Around mid-2019, the economy was at full employment, wages were rising at a decent pace and the household savings rate had crept up to about three per cent, meagre by historical standards, but still the highest since 2017.
Inflation was also anchored at the target. The Consumer Price Index stayed within the central bank’s comfort zone for inflation 92 per cent of the time under Poloz’s tenure, a better record than any governor since the central bank started targeting inflation in the early 1990s, according to National Bank.
Canada’s economy slowed to stall speed during the second half of 2019, as the effects of the trade wars started to bite. But Poloz and his deputies resisted the urge to cut interest rates like most of the rest of the major central banks. Why? Because they determined the benefits didn’t outweigh the risk of reigniting another credit binge.
“If COVID-19 had not arrived, we might be praising him as the most successful normalizer of central bank policy,” Donald said.
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Ask Poloz what’s on his list of legacy items and the first thing he mentions is his risk-management policy. “You hope that you have moved the yardsticks in the art, or the field, of central banking,” he said. “It’s great to hear other central bankers using the term.”
He also listed the new $10 bank note featuring Viola Desmond. Apparently, it wouldn’t have happened if Poloz hadn’t pushed. On his first day, while rendering a signature for future tender, he asked how long it would take to get a Canadian woman on the money. About a decade, he was told. The Desmond bills have been circulating since 2018.
“You’d think it would be routine, but it wasn’t,” he said. “Getting that rock up the hill, that was really hard, and doing it on my schedule. I’ve got a lot of people to thank for that, I didn’t do it on my own, but I sure was insisting.”
Like so many of his accomplishments, the change was subtle, but the effect could be long-lasting. Bill Morneau got the glory for putting a woman on a bank note, but Poloz’s signature will remain on the notes long after the finance minister is gone.
Copyright Postmedia Network Inc., 2020