Jack Layton is right to rant. As the editorial board of a business publication, we don’t often get to say that. But in a recent outburst aimed at bankers for musing about the possibility of a monetary system revolt, the NDP leader helped push an issue that needs to be addressed.
We do not agree (as Layton argued) that new laws are needed to get commercial bankers to respect Bank of Canada rate decisions (and let’s forget Layton’s idea about regulating credit card interest). After all, it remains unclear what the bankers in question were thinking in mid-January, when industry insiders suggested they might no longer drop prime lending rates in step with monetary easing by the BoC.
Some banks were officially quick to deny any conspiracy. And if they did lag any (widely expected) rate cut, that might not be a big surprise: the banks are worried about loan defaults arising from the economic slowdown, which is what has central bankers lowering rates around the world. “The prospect of generating revenues from [some formerly profitable] businesses has deteriorated,” one economist told a national newspaper. “So they might have to achieve it the old-fashioned way — with wider credit spreads.”
Fair enough. But if the murmurs about bucking the BoC came from the banks, and if those were intended to influence BoC decisions, then it is the worst possible time to play that game — during a changing of the guard of a central bank in fire-fighting mode. If the banks are not playing that game, they should clearly state they are onside with BoC authority, and leave it at that.
Promoting growth and stability while trying to keep inflation in check has never been easy. But modern financial engineering has made central banking harder. And now it must deal with a credit crisis created by, well, the world’s banks. Outgoing BoC governor David Dodge always conducted monetary policy for the nation as a whole. By all accounts, Mark Carney will do the same. Even if commercial bankers can justify not following the BoC’s lead, they don’t have to publicly talk about a revolt. They have a responsibility to respect the need to maintain confidence in the system.