‘IT WASN’T HARD TO IMAGINE THAT IT COULD GET WORSE’
Canada dodged worst of Great Recession, and not just by luck,
Tiff Macklem processed many emotions on Sept. 15, 2008, the day Lehman Brothers Holdings Inc. ended and one of history’s most severe financial crises began. One was relief.
Over the preceding six months, Macklem, the Finance official in charge of staying abreast of what was going on in the world, had become consumed with dread.
In March, Bear Stearns, another famous Wall Street investment bank, had been rescued by the U.S. Federal Reserve. The official line was that the Bear situation was isolated and the situation was under control.
“Our financial institutions, our banks and investment banks are very strong,” Henry Paulson, the U.S. treasury secretary, said at the time. “I’m convinced that they’re going to come out this situation very strong.”
They weren’t convinced in Ottawa.
Macklem, along with the late Jim Flaherty, then his boss at Finance, and then-Bank of Canada governor Mark Carney, were preparing for the Big One. But that’s not something the head of a major central bank, or one of the highest ranking officials in the finance ministry of a G7 country, could share widely.
They quietly encouraged Canada’s banks to get ready for a storm. They started work on contingency plans. And they learned to endure high levels of anxiety.
Reflecting, Macklem struggled to find the words to describe what that was like. He eventually gave up trying.
“In some ways, the most difficult parts of the crisis were in between Bear and Lehman because you have this ominous feeling that it was going to get worse before it was going to get better,” Macklem said in an interview.
“By this point, we had done the analysis. We knew how vulnerable the system was. We knew there were other banks that looked like Bear. It wasn’t hard to imagine that it could get worse.
“Knowing it could get worse, but not knowing when or how or what it was going to look like? That was. That was. Yeah.”
There was a pained expression on Macklem’s face. We were in his office at the University of Toronto’s Rotman School of Business, where he has served as dean since 2014.
On the wall is a photograph of Macklem next to Ben Bernanke, the former Fed chairman, at the meeting of G7 finance ministers and central bankers in Washington on Oct. 10, 2008, when the world’s most powerful countries promised to do whatever it took to stop the collapse of the global financial system.
Despite the bad memories, Macklem thinks it is important to fight crisis fatigue. Those who lived through it have a responsibility to make sure the next generation of bankers, executives, investors and policy-makers understand the “enormous knot in our stomachs through that whole period,” he said.
There will be another recession, probably sooner than we think, given the current U.S. expansion is the second-longest on record.
The Bank of Canada listed five big risks to its outlook in its latest quarterly forecast, and only one of them — stronger-thanexpected U.S. growth — flicks at the possibility that things could turn out better than the country’s most sophisticated economic models predict.
“The reality of this period of expansion is that interest rates have been very low for a very long time. Perhaps too long,” Victor Dodig, the chief executive of Canadian Imperial Bank of Commerce, said on Sept. 11.
Macklem, who was in the running to replace Carney at the Bank of Canada, defended ultra-low interest rates as “necessary,” but acknowledged that the extreme levels of corporate, government and household debt that have piled up around the world were an “unintended consequence.”
The central banks knew there would be some borrowing — that was the idea. Regulators in Canada and elsewhere have tried to dissuade borrowers from over-extending themselves, but it’s hard to push back against the allure of once-in-a-lifetime lending rates.
Macklem is stunned the U.S. cut taxes and increased spending when the economy already was doing well.
“It’s time to be paying down debt, not running it up,” he said.
That’s about as specific as Macklem cares to get about what might cause the next crisis; economists are great at exposing vulnerabilities and terrible at predicting triggers, he said. But policy-makers can prepare. Canada had a “good crisis” because the banks were solvent, and because Macklem and others used those torturous months between Bear and Lehman to think clearly about what could go wrong and what could be done to mitigate the damage. Programs that appeared to come out of nowhere were months in the making. That required getting the right people in the right places and putting systems in place that allowed them to get past their cognitive biases.
“We have a tendency to see the world the way we would like it to be rather than the way it is,” Macklem said. “We can be slow to recognize the problems are deeper than perhaps we initially thought.
“What does that mean? It means we have to find ways for ourselves to imagine what could go wrong and we have to force ourselves to think, ‘If this breaks, what would we do?’”
It’s difficult to know if those conversations are being had in Ottawa. High-level committees keep an eye on the financial system, but don’t announce when they meet or reveal what they talk about.
Most men and women who fought the crisis in leadership positions for Canada have moved on. Hopefully, those left haven’t forgotten the lessons of the Lehman collapse. We could need them to rise to the occasion again at any moment. There will be no excuses for not being ready.
Tiff Macklem is credited as the former Finance official who worked with Canada’s top officials to prepare the nation for the 2008 financial crisis. He says it’s vital to ensure the next generation understands the “enormous knot in our stomachs through that whole period.”