'You're the main author of that bubble': Andrew Bell grills Poloz on household debt
Central bankers have to choose their words carefully. Fortunes in the bond, equity and currency markets hang in the balance when they opine on interest rates, the state of the economy, and global risks.
Communication is central to the job, and Bank of Canada Governor Stephen Poloz crafted a singular style during his tenure.
It’s a type of straight talk that’s often folksy and peppered at times with metaphors both colourful and sometimes perplexing. Recall the spaghetti sauce model aimed at explaining post-financial crisis monetary policy? (If not, scroll down for a collection of Poloz’s greatest hits).
With the governor preparing to step down in June, BNN Bloomberg asked several of our regular guests: Was Poloz effective and clear in his communications to Bay Street during his tenure, and what did you make of his style?
Here’s what they had to say:
“In a word, mixed. I have to admit that at least half of the post-meeting press statements during his tenure left me scratching my head, including the last one. I sometimes wondered if we were looking at the same set of data, and I say that with deference because his economics team is bigger than mine. But models sometimes can only take you so far.
That said, he delivered the best speech any central banker on the planet has in the past decade which was his "Lower For Longer" sermon in October 2016. That was a seminal piece, one for the ages, and to this day has not gone out of fashion. For all our differences, he deserves a passing grade for that piece of research alone.” – David Rosenberg, chief economist & strategist at Gluskin Sheff + Associates
“From a communications perspective, Poloz got off to a rocky start – the January 2015 rate cut was not well articulated in advance, and triggered shock (not awe) when it dropped. But he learned from that episode, and took steps to improve transparency during his tenure.
He also brought a strong sense of humility to the role. His folksy metaphors helped to communicate otherwise-academic concepts to people in the real economy, and his insistence on discussing the central bank’s limitations was refreshingly Canadian – particularly in contrast with Mark Carney’s Wall Street ‘Masters of the Universe’ approach.
But his legacy may be a bit tarnished by the fact that household debt continued to rise during his time.” – Karl Schamotta, chief market strategist at Cambridge Global Payments
“In terms of central bank communications with ‘The Street’ in general, he has moved along the same path as all of the other central bankers, which is to have way more open disclosure. Problem really has become that the market is effectively driving Fed/BoC policy through their expectations, as opposed to the reverse.
Poloz has done well in terms of communicating [the Bank of Canada’s] moves, with a few exceptions back in 2016/17, but they really are hamstrung by the data as well as U.S. policy, which they can’t escape from since it has such a large impact on the currency.” – John Zechner, chairman & founder of J. Zechner Associates
I think of Stephen Poloz as the ‘sunny ways’ central banker -- his consistent trait has been optimism. Early in his term even as oil prices were cratering, he was forecasting that the fall in the Canadian dollar would lead to a manufacturing export revival (it never came). He followed that with an overly optimistic forecast on business investment. The positivity trickled down to the broader bank, where forecasts have been consistently rosy. Perhaps that was by design in the hope that a confident, optimistic central bank leader can inspire risk taking and economic activity.
In the bigger picture, missed forecasts led to a couple notable U-turns on policy and that’s likely his legacy. Yet within that he should get credit for correcting the mistakes quickly and ultimately putting rates about where they should be.” – Adam Button, chief currency analyst at ForexLive
And here’s a collection of some of Governor Poloz’s more memorable metaphors.
September 2013 – Explaining Post-Financial Crisis Monetary Policy
“I sometimes use a spaghetti-sauce model to help explain this. When the bubble burst in 2008, we were left with a crater, which is where we now find ourselves. If you look carefully at a pot of simmering spaghetti sauce, under every bubble there is a crater that’s equal in size. So, a seven-year bubble, a seven-year crater. Central banks have been filling that crater with liquidity, so we can row our boats across it. We need to make sure we’re getting to shore and not just hitting a rock. But when we get to the other side, when we get home and can climb out of the crater, central banks can gradually reduce the rate at which they add liquidity.”
December 2013 - On Charting Monetary Policy Post-Crisis
“As central bankers, here in Canada and globally, we are in new territory. It brings to mind the sailors of another era who were driven far off course by a nasty storm. When things calmed, they found themselves in the southern hemisphere. Suddenly the navigational chart that they relied on - the night sky - was completely different.”
April 2014 – Explaining Movements in the Canadian Dollar and Trade
“It’s like walking a dog on one of those leashes that stretch out and snap back. You might hope he’ll stick by your side, but in reality the dog is always off in all directions. By the end, your respective tracks zigzag all over the place, much like an economist’s chart. But when you leave the park, you’re still together. That’s how the relationship between the terms of trade and the dollar looks: it’s loose, but dependable.”
June 2017 – On Assessing the Risk of a Housing Correction
“It’s like a crack in a tree, so you analyze that crack every spring or every fall and decide if you need to take that tree down or if it’s healing itself, etc. It just needs the right kind of wind to come along to knock that tree down and perhaps cause some damage. So that’s the risk, the vulnerability is the crack. So we spend most of our time on the vulnerabilities.”