Column

THEY DONE HIM WRONG

Bank governor David Dodge did the right thing—despite what the economists said

DONALD COXE August 4 2003
Column

THEY DONE HIM WRONG

Bank governor David Dodge did the right thing—despite what the economists said

DONALD COXE August 4 2003

THEY DONE HIM WRONG

Bank governor David Dodge did the right thing—despite what the economists said

Column

DONALD COXE

THE AFTERMATH of the sell-off of the Canadian dollar after the Bank of Canada cut its rate on July 15 was instructive. When the Bank made its announcement, the loonie dove the way it used to on the baddest of the bad old days when the loon was despised as a diving bird. What made the day memorable was what a latter-day Sherlock Holmes would identify as the dogs that didn’t bark. There were no screams of rage at currency traders from prominent Liberals and New Democrats.

Back when the loonie was daily gasping for air, Prime Minister Jean Chrétien once responded angrily to a question about its weakness by dissing currency traders as useless young men in red suspenders. Hearing this, I reflected sadly on what unchecked power can do to a once-sensible man. His fury displayed an Ottawa-induced transformation of the man’s appreciation of manly style. Red braces were emblems of leading-edge aggressiveness at the macho investment house where he and I worked together briefly in the 1980s during his brief sabbatical from politics. At the time, he certainly shared the traders’ sense of cheeky chic.

Three decades ago, when the NDP held the balance of power in Ottawa, a big selloff in the currency market produced outrage from the most respected socialist of that era, party leader David Lewis. His denunciations were almost at the biblical level. He reviled currency trading as an activity, and currency traders as a group, suggesting that such trading should be government-controlled.

It was different this time. Such criticism as one heard was aimed not at traders—belted or otherwise—but at Bank of Canada governor David Dodge. Reporters quoted named economists and unnamed traders who groused that Dodge had “surprised” the markets by “suddenly changing course.” According to Bloomberg News, of 17 economists surveyed, 15 had predicted wrongly that the Bank would leave its rate alone. Some promi-

nent economists criticized Dodge for committing the sin of doing what the economists said he wouldn’t and, therefore, shouldn’t.

Dodge is on his way to recognition as one of the great central bankers of our era. His rate cut was logical, and it was based on principles he has long enunciated. The experts shouldn’t have been surprised. The governor has long stated that the key to fighting inflation is to prevent economic overheating (which occurs when the economy is outgrowing its capacity). The U.S. vastly overbuilt its capacity during the late 1990s New Economy mania, thereby pushing inflation down, but triggering a serious economic downturn from which it is still trying to escape. Canada didn’t get so carried away with the fad. Result: neither Canadian inflation nor the Canadian economy fell as hard as

DODGE’S RATE cut was logical and based on principles the governor has long enunciated. The experts shouldn’t have been surprised.

their American counterparts.

That explains why Dodge had been raising his rates, while bubble-blowing Federal Reserve chairman Alan Greenspan was driving U.S. rates toward zero. Prior to the cut, Dodge’s rate was 225 per cent higher than Greenspan’s—an extraordinary differential with the greenback that ordinarily only occurs when a currency is in crisis—not when it is in a bull market.

The two Canadian provinces that have been supplying most of the economic heat that worried Dodge, Ontario and Alberta, were hit hard almost simultaneously by bizarre diseases—SARS and mad cow. No economist or forecaster could have predicted such science-fictional scourges. SARS drove the Greater Toronto Area into near recession. Mad cow has devastated one of

Canada’s major export industries, as the world immediately banned imports of Canadian beef. Before mad cow, cattle industry exports were worth $4 billion, mostly to the U.S., but also to Japan and elsewhere. According to the beef industry, 70 per cent of all Canadian beef and cattle are exported. Yes, beef is a national industry, but, according to last count, nearly three-quarters of Canadian cattle production is in Alberta. That industry is now in crisis. Dodge was raising rates, mainly because of the (economic) heat: now he’s cutting rates mainly (or partly) because of the meat.

The economists’ resentment is understandable, because a high-profile part of their job is making predictions about what the Bank of Canada, Federal Reserve and European Central Bank will do next. Many traders make short-term bets based on what economists predict. When the economists are wrong, they hear complaints from the traders, and the natural tendency is to say the central bank blew it.

If one is not an economist whose forecasting prestige is on the line, what reason might one have for dissing Dodge? I heard an eloquent critique from a leading Canadian businessman last week. He complained that Dodge’s mistake was to cave in to the loud demands of some prominent Canadian exporters to lower rates in order to lower the loonie’s value. These firms said the “high value” of the loon was hurting them. Too many Canadian firms, the critic observed, have relied on a weak currency to mask their weak productivity.

When a currency is devalued, everyone with assets denominated in that currency loses wealth. The recovery in the loonie finally made the great majority of Canadians richer in terms of their share of the world’s wealth—and Dodge should have rejoiced in that prosperity, not dented it.

If placating a few crybabies were the reason for Dodge’s rate cut, then he would deserve censure. But I don’t believe that for a moment. The loonie’s fall was primarily driven by a strong rally of the American dollar against all convertible currencies— its first since late March. The euro and pound were also being hit hard.

Dodge hasn’t become a shill for badly-run businesses. The loonie will fly again. lifl

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. dcoxe@macleans.ca