Bank of Canada ready to monetize distressed equities
If a central bank purchases distressed government bonds and securities, then the money of the nation becomes proportionately based on debt rather than value. That’s a good step towards inflation. Those who think deflation has its downside haven’t seen anything until they’ve seen Weimar-era style inflation.
Heather Scoffield, Globe and Mail Update
December 17, 2008
Bank of Canada Governor Mark Carney says the central bank has prepared a range of options, beyond interest rate cuts, to stimulate the Canadian economy, but says it’s “premature” to put any such plans into action right now.
In comments to The Globe and Mail’s editorial board Wednesday, Mr. Carney said his bank has done plenty of research about how it could help the Canadian economy, as interest rates approach zero.
“We have full legislative authority to undertake a range of actions. We obviously look at a very broad range of scenarios,” he said. “But it’s premature to talk about putting those into place if you understand the distinction. Certainly, work is being done on non-conventional monetary policy.”
As the Federal Reserve takes its key interest rate to zero and announces increasingly creative ways to increase borrowing and lending in the U.S. economy, some experts are urging Canadian authorities to prepare for similar circumstances here.
Since Canada is in a recession, and interest rates are heading toward historical lows, the central bank should be ready to move beyond its lending programs to buy securities outright, especially securities with longer terms, says Mark Chandler, head of North American fixed income strategy at RBC Dominion Securities Inc.
While the Bank of Canada’s key interest rate is not nearly as low as the near-zero rate set in the United States, it’s low enough that the central bank should be ready with non-conventional measures, and prepare to buy Government of Canada securities of various expiries.
And the central bank should hold public consultations about what options would work best in the Canadian system, Mr. Chandler added, so that the financial system can be sure the Bank of Canada is well prepared.
“It’s useful to have a public discussion.”
As the financial crisis deepens, the Bank of Canada needs to become more aggressive, by taking on high-risk collateral from commercial banks, and even consider buying equities, added Nicholas Rowe, economics professor at Carleton University and a member of the C.D. Howe Institute’s shadow monetary policy council.
The central bank’s current measures to keep money markets moving have helped somewhat, he said, but the commercial banks are still shouldering all the risk, and that makes them reluctant to lend. The Bank of Canada could alleviate the risk by becoming “a pawnbroker of last resort” and accepting high-risk loans as collateral.
“I think they could be a lot more aggressive… Let’s go crazy and go into markets and buy the index of stocks.”
But while the Bank of Canada is wise to consider its options and prepare for the worst, there are several reasons why Canada does not need such non-conventional measures right now, said Stewart Hall, economist at HSBC Canada.
For now, the central bank and most economists are not predicting a long, deep recession for Canada, and foresee a slow recovery starting late next year. Plus, Canadian banks are still lending to households and corporations, and so the central bank does not have to break up a credit logjam that exists in other countries, Mr. Hall said.
In the United States, money is barely trickling through the financial system, while in Canada it is chugging along, he said.
Plus, Canada can benefit substantially from the non-conventional measures implemented in the United States, he added.
“It might be the case that the Bank of Canada can sit back” and let the U.S. measures work through the Canadian system.
“There are a lot of moving parts that tend to suggest they don’t need to be looking in that direction [of non-conventional measures] at this juncture.”
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