THE LESSONS OF THE CRASH
A decade after financial crisis, policy still matters, Kevin Carmichael writes
A question for you, via Carolyn Wilkins, the No. 2 at Canada’s central bank: Is money a public good?
Wilkins put that out there at the end of a two-day conference at the Rotman School of Management in Toronto this week.
Rotman invited an A-list of academics and practitioners to discuss the financial crisis, which suddenly is a decade old. However, the group spent most of its time discussing cryptocurrencies, nothing anyone was thinking about in 2008 while some of the world’s biggest financial institutions were imploding. The bankers of London and Wall Street still were getting used to their iPhones, which had been introduced only the year before.
Wilkins’s question matters because the answer will determine the direction of the banking system in Canada for decades. If policy-makers decide that money is indeed a public good, then before too long, your central bank will issue a cryptocurrency. If they decide to stay out of the way, a slew of private outfits will do battle to convince you to use their digital assets and their smartphone applications to do your purchasing. You will pay a little bit for that privilege, and they will own your data, instead of your government.
And those firms probably will wreck the financial system at some point, leaving your government to clean up the mess.
Remember what that’s like? Wilkins cited estimates from the International Labor Organization that assessed the damage to the global economy during the financial crisis at 62 million lost jobs and some $13 trillion in lost output. You might add social upheaval to the tally, as pre-crisis complacency has been replaced by angry populism. It’s harder to assign a value to political instability, but there definitely is an ongoing cost. The Dow Jones industrial average plunged 700 points on Thursday after U.S. President Donald Trump promised to tax Chinese imports, a bigger drop than the one that followed the collapse of Lehman Brothers Holdings Inc. in September 2008, the event that triggered a global panic in credit markets and ultimately the Great Recession.
Everyone thinks there will be another meltdown. Jamie Dimon, the chief executive of JPMorgan Chase & Co., famously described a financial crisis as “something that happens every five to seven years.” He offered that glib assessment in 2010, so we’re in overtime according to Dimon’s clock. “We aren’t going to be able to prevent the next crisis,” said Tiff Macklem, the dean of Rotman and Wilkins’s predecessor at the Bank of Canada. “But we need to improve our readiness.”
The system is definitely stronger than it was a decade ago. The biggest financial institutions must now keep more capital in reserve for tough weather, and new rules restrain the greediest traders. Central banks and regulators benefited from some intense onthe-job training that should help them when next they are needed. The Group of 20 economic powers hasn’t done much lately, but at least the lines of communication are open, which is an improvement over 2008, when the G20 was turned into the steering committee for the global economy essentially on the fly.
But fundamental problems remain.
Julie Dickson, the former head of the Office of the Superintendent of Financial Institutions, said at the Rotman conference that she still worried about the massive pay gap between public service and private finance. Canada’s top financial regulator can make no more than about $300,000 per year, while David McKay, the chief executive of Royal Bank of Canada made $12.4 million during the fiscal year that ended on Oct. 31, 2017. Public servants tend not to be motivated by money, but if governments are counting on altruism alone, they are asking to be disappointed by the quality of most candidates. “You don’t want the B-team or the C-team” trying to keep up with the alphas at the banks, Dickson said.
There also is reason to wonder whether the measures used to reverse the Great Recession will be as effective in the future. Macklem said we may have entered a period where official interest rates stay closer to zero, meaning central banks will have less ammunition to fight the next downturn. Fiscal policy could play a greater role, except politicians have the shortest memories. Trump and the Republican-led Congress cut taxes and increased spending, even though the U.S. economy had surged past its non-inflationary speed limit. That’s the opposite of what you should do if you care about financial stability.
Still, many have grown bored of thinking about the crisis. That’s especially true of the fintech crowd, which sees little point in obsessing over things that may no longer matter. “It was 10 years ago,” said Sue Britton, chief executive and founder of FinTech Growth Syndicate, as if 2008 was ancient history. “Our government is slow to react to change and that’s a problem.”
Many think a housing bust represents the biggest threat to Canada’s financial stability. Britton sees another threat: the country’s staid banking oligopoly and its overseers getting left behind by the inevitable shift to a financial system that revolves around smartphones instead of branches.
She might have a point. Macklem warned his former counterparts at central banks that as with Uber and Spotify, the only thing preventing a mass shift to fintech could be someone coming up with the right business model.
Would Ottawa be ready? To her credit, Wilkins has been thinking about fintech for several years and she is a member of the International Monetary Fund’s advisory panel on the issue. But Canada still lags many of its peers. The financial system is dominated by six highly profitable banks and politicians, and neither group has an incentive to take risks.
If there is a meta lesson from the crisis, it’s that policy matters. The events of 2008 were ultimately caused by decisions made by politicians, policy-makers and regulators years earlier. So I’ll ask Wilkins’s question again: Is money a public good? Ottawa needs to know, even if only a relative few seem to recognize it yet.
We aren’t going to be able to prevent the next crisis. But we need to improve our readiness.