The race to succeed David Dodge is about calm and stability

JASON KIRBY September 10 2007


The race to succeed David Dodge is about calm and stability

JASON KIRBY September 10 2007


The race to succeed David Dodge is about calm and stability


When David Dodge, governor of the Bank of Canada, announced four months ago that he would step down come January, he created a vacancy in a job that at the best of times leaves a lot to be desired. After all, when central bankers aren’t being publicly pilloried for keeping interest rates too high or too low, or both, they generally toil in obscurity. “A good day is when nobody thinks about what the central bank is doing,” says Dale Orr, an economist with Global Insight in Toronto.

So now, with financial markets in turmoil and the very real spectre of a global economic slowdown hovering nearby, some are wondering how Dodge’s successor will navigate the quagmire should things worsen. An already thankless job could be about to get downright thorny. Yet there’s no shortage of candidates lined up for a crack at the post.

While quite a few Canadians are still hazy on exactly what the Bank of Canada does, for diehard bank watchers this changing of the guard is akin to guessing who’ll lead Team Canada onto the ice at the next Olympics. The bank has said it will announce this fall who will take over as governor for the next seven-year term. Almost daily, the list of candidates being bandied about by economists, analysts and academics seems to grow. Out of the jumble of nine or 10 names, two come up again and again. Paul Jenkins, Dodge’s steady-handed No. 2 and a Bank of Canada lifer, is favoured. But Mark Carney, a former Bay Street investment-banker-turned-boywonder at the Ministry of Finance, remains the dark horse in the race. With a decision that will be as much about politics as about each candidate’s ability to grasp and explain the complexities of monetary policy, no one is assured an easy victory.

What observers want to see most of all is David Dodge, Part II—someone who can carry on exactly where the pipe-smoking, gravelvoiced banker leaves off when his term at the bank ends. That will mean continuing to focus on the Bank of Canada’s two fundamental mandates: fighting inflation and managing short-term financial crises when they arise. Investors and economists haven’t had



a lot to complain about on either front since Dodge was first appointed in 2001. Sure, the manufacturing sector has blasted him for failing to rein in the soaring loonie. But Canada sailed through the malaise of the dot-com collapse and the Sept. 11 terrorist attacks with remarkable ease. All the while, Canada’s inflation rate hovered within the bank’s target of between one and three per cent. Along the way, Dodge also expanded the bank’s push toward greater transparency, begun by his predecessor Gordon Thiessen. That sometimes meant spouting personal opinions on a wide array of topics outside the Bank of Canada’s traditional purview, such as the need for Ottawa to permit bank mergers or the possibility of creating a common currency

with the U.S. His candour helped raise the profile of the bank among Canadians, and observers are now scanning the field for candidates that can fill a similar mandate.

Aside from Jenkins, there are other likely contenders already working inside the bank. David Longworth and Tiff Macklem, both deputy governors, have been heavily involved with research projects at the bank. Meanwhile, Pierre Duguay, another bank deputy and the only francophone among the top contenders, is seen by some observers as a strong candidate who has so far been overlooked. Then there are those former bank staff who have moved on to other jobs but are still in the running, such as Stephen Poloz, chief economist at Export Development Canada, and William White, who now works for the Bank for International Settlements. Finally, several economists suggest that if Don Drummond, the chief economist at TD Bank and a former senior civil servant in the Finance Department, were interested, he’d also have a good shot. “There are a lot of good people,” says Nicholas Rowe, a professor of economics at Carleton University. “They would have to try really hard to get someone flaky.”

Still, this search is all about stability, rather than change, and that dims the hopes of many contenders. Most believe it’s unlikely that one of the deputy governors would leapfrog Jenkins, the senior deputy. “If that happens, Jenkins would be out the door,” says one

observer. The job has traditionally gone to the senior deputy, though that wasn’t the case with Dodge, who took the job after a stint as deputy minister of health. As for the outside candidates, the knock against them is that they’ve been away from the bank for too long.

Which leaves Jenkins and Carney, and most bets are on the former. He’s clocked a quarter of a century at the bank, and since becoming senior deputy in 2003 has seen his profile raised through public appearances alongside Dodge and on his own. Economists who deal with Jenkins on a day-to-day basis say he is articulate and extremely bright, though not as casual in his manner as Dodge. Appointing him as governor would, hands down, be the safest route to take.

But in Ottawa these days, safe isn’t high on the agenda. And this is where the peculiarities of the appointment process come into

play. The bank assembled a special committee of independent directors who are in charge of the hiring process. An outside executive search firm was brought in as an adviser. When the committee finishes interviewing the candidates, which is underway right now, it will come up with a short list of two or three names and forward them to Finance Minister Jim Flaherty. It will be up to him, along with Prime Minister Stephen Harper and cabinet, to make the final call.

It’s no secret Carney is highly regarded within the Finance Department. At the tender age of 38, the young investment banker left a plum gig at Goldman Sachs in Toronto in 2003 to become a deputy governor at the bank. Then, after just a year at the Bank of Canada, he packed up his boxes again and left for his current post in Finance. The fact he

spent such a short time at the bank is seen as a big handicap, but his role as Flaherty’s righthand man could more than make up for that. He’s charismatic and capable. And the Harper government has shown it isn’t above unorthodox political appointments. For instance, the government went outside the Royal Canadian Mounted Police to pick William Elliott, a federal civil servant, to become the force’s new commissioner. Flaherty’s voice at the table could be a major boost to Carney.

Whoever comes out on top in the race to replace Dodge, no one expects a dramatic shift as far as the task of battling inflation is concerned. There is research underway within the bank that’s looking at revising how inflation targets are set, and some candidates may be more inclined than others to make changes. But that’s not likely, say observers, because the current approach has worked so well. The question of who becomes the next governor is more a matter of optics than substantive

reform. “There’s a lot of confidence that whoever is chosen will carry on that mantra,” says Derek Burleton, a senior economist with TD Economics in Toronto.

What matters far more is how the new governor handles financial crises, like the one infecting markets right now. Should world markets continue to deteriorate, it could prove to be a baptism by fire. The actions he takes and signals he sends early on in his term could have profound implications—just ask U.S. Federal Reserve chairman Ben Bernanke, whose performance has been under the microscope throughout the current upheaval. The meltdown that started among high-risk borrowers in America’s mortgage industry has since spread to other debt sectors, while stock markets have been caught in the downdraft, too. In the U.S., it’s expected the Fed will bail

out the markets by lowering interest rates, but it’s not clear that will be enough to stave off a slowdown. The worry here is the U.S. economy could slow down, and drag down Canada with it.

Among bank watchers, there is cautious optimism that by the time the new governor takes over, the current financial crisis will be well in hand. Dodge still has several opportunities to adjust interest rates before his term ends. With inflation holding steady at around 2.2 per cent, many economists believe the board will pull out its knife in October. The

hope is a small rate cut could be enough to ease fears of a slowdown. “The risks have certainly gone up in recent days, but generally the economy is in good shape and able to withstand some of these pressures,” says Burleton. “By the early part of next year the whole turmoil will have cooled off.”

But that is in no way certain, and it would be shortsighted to think otherwise. The new governor may have to calm jittery markets in his first public appearance, while leading the bank in deciding how to deal with the turmoil. Cutting rates further might bail out investors, but could pave the way for inflation to creep up. On the other hand, sitting back and doing nothing could result in a dramatic slowdown in growth, triggering fears of a recession. “These are really difficult questions that anybody who is the governor of Bank of Canada will have to display good judgment on,” says Jack Mintz, a professor

of economics at the University of Toronto’s Rotman School of Management. “It’s not a mechanistic process.”

So who will the next governor be? Above all, in choosing Dodge’s successor, the bank will want to send a message that it’s business as usual. No one wants to see a messy transition, especially with so much at stake at the moment. For that reason, Jenkins looks like the most likely candidate. Carney may be a rising star in Ottawa, but he may be seen as too much of an outsider for the bank this time around. But hey, there’s always 2014. M