‘IT WASN’T HARD TO IMAG­INE THAT IT COULD GET WORSE’

Canada dodged worst of Great Re­ces­sion, and not just by luck,

Saskatoon StarPhoenix - - FP SASKATOON - Kevin Carmichael says.

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.

Yes, 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.

GALIT RODAN/BLOOMBERG FILES

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.”

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