The Globe and Mail - 25.11.2019

B4| REPORTONBUSINESS OTHEGLOBEANDMAIL | MONDAY,NOVEMBER25,2019

OPINION&ANALYSIS

DILBERT

I

n the coming months, the
Bank of Canada‘s mandate to
target inflation is coming up
for review. Some have suggested
that the mandate should be ex-
panded to include responsibility
for financial stability, defined as
heading off the imbalances that
could trigger a severe financial
crisis, such as what the world ex-
perienced just more than a dec-
ade ago. In a recent C.D. Howe
Institute report, we argue, mar-
shalling historical and empirical
evidence, that granting the Bank
an explicit mandate to target fi-
nancial stability is not a good
idea, and that doing so would
create a conflict with its tried
and true mandate for price sta-
bility.
Calls for central banks to take
on responsibility for maintaining
financial stability are increasing
the world over. But policy mak-
ers need to be made aware that
such views are sometimes based
on erroneous assumptions.
These assumptions include: 1)
All financial crises are the same.

They are not. 2)We know the

size, timing and spillovers from

financial crises. There is no one-

size-fits-all response to financial

crises. 3) Financial stability pol-

icy is capable of being forward-

looking. Unlike monetary policy,

which has been forward-looking

for more than two decades, there

is little evidence yet that the

same is true for financial stabil-

ity.

How do we come to this con-

clusion? Primarily through a

study of past financial crises in

Canada and nine other advanced

countries from the late 19th cen-

tury to the present. What one

sees is considerable differences

in the timing, form and interna-

tional scope of financial crises;

financial crises vary considerably

across countries and over time.

The cause that has been given

prominence since the financial

crisis of 2007-08 – credit-driven

asset price booms – is only the

case for the recent crisis and the

Great Depression of 1929-33. The

vast majority of crises in other

times reflected other factors, in-

cluding fiscal and current ac-

count imbalances, international

shocks and idiosyncratic shocks

to the banking system.

It is critical to understand that

financial crises are created differ-

ently, since the upshot is that the

Bank would arguably be over-

burdened by having primary re-

sponsibility to prevent them. In

particular, the public needs to

understand that some decisions

in this realm are closer to fiscal

policy. This is not to say the Bank

should have no role; it should be

shared with other institutions.

Moreover, comparing the tim-

ing of “financial” or “credit cy-

cles” to the business cycle makes

the case for an expanded man-

date more questionable, since

they don’t tend to move in the

same direction at the same time.

We find a very low correlation

between financial cycles over the

past century and business cycles

as identified by the C.D. Howe In-

stitute’s Business Cycle Council.

The only exceptions have been

during the two “perfect storms”

of the 2007-08 financial crisis

and the Great Depression.

In both of these cases, the cri-

ses were unexpected. Indeed,

history often suggests that policy

makers are fighting the last war

when it comes to managing fi-

nancial stability. In contrast, the

Bank of Canada, and most other

inflation targeting central banks,

have had more success at con-

trolling inflation, at least over

the past two decades or more.

This is thanks in part to improve-

ments in central banks’ ability to

forecast future economic activ-

ity. Yet, even in this sphere,

many monetary authorities have

also admitted that further im-

provements can be made.

Any renewal of the Bank of

Canada’s inflation target, while

explicitly acknowledging the

Bank’s role as one of several

agencies responsible for the

maintenance of financial stabil-

ity, should not confuse the pub-

lic by adding the burden of meet-

ing a goal that it cannot reason-

ably achieve on its own. Unlike

inflation, which inflation-target-

ing central banks have managed

to control within tolerance rang-

es for more than two decades, fi-

nancial stability requires a much

wider set of tools. If the central

bank were to become respon-

sible for these tools, this would

bring the institution dangerously

close to making political-style

decisions.

RequiringBoCtofollowafinancialstabilitymandateisabadidea

PIERRESIKLOS
MICHAELBORDO

OPINION

Pierre Siklos is professor of
economics at Wilfrid Laurier
University and a research fellow
at theC.D.HoweInstitute.

MichaelBordo is board of governors
professor of economics and
distinguished professor of
economics at Rutgers University.

Calls for central

banks to take

on responsibility

for maintaining

financial stability

are increasing

the world over.

But policy-makers

need to be made

aware that such

views are sometimes

based on erroneous

assumptions.

W

ith the Canadian Nation-
al Railway Co. strike clos-
ing out its first working
week and without an end in sight,
Canada’s 43rd Parliament faces its
first major test even before its for-
mal resumption on Dec. 5.
By now, many of Canada’s
chemistry facilities will be enter-

ing shutdown mode – either be-

cause they have nowhere left to

store products, or because they

can no longer receive the materi-

als necessary for their operations.

While some companies and facil-

ities may be able to transition staff

to maintenance activities, others

will have little choice but to fur-

lough workers until the strike

ends and service is restored. Ulti-

mately, the effects won’t be felt

just by “the economy” – they will

be felt, very sharply, by business-

es, workers and their families.

Rail service is absolutely essen-

tial to Canada’s $58-billion chem-

istry industry. More than 80 per

cent of the industry’s shipments

are by rail, and more specifically,

nearly $40-million a day is ship-

ped on CN’s network. Unfortu-

nately, there is no Plan B to ad-

dress the absence of CN’s service.

Most of Canada’s chemistry facil-

ities are captive to one of the

country’s two major freight rail-

ways – CN or Canadian Pacific

Railway Ltd. Simply put, these fa-

cilities cannot just move ship-

ments onto another rail system

for the duration of the CN strike.

A small number of chemistry

facilities will have access to ser-

vice from both railways. However,

it is no simple matter to simply

move shipments from one carrier

to another. Contracts need to be

negotiated, rail workers need to

be trained on safe handling of

new products, and in either case,

CP has said it is unable to take on

cargo affected by the CN strike be-

cause of its own capacity con-

straints.

That leaves a third option: road

freight. Very few of Canada’s

chemistry shipments travel by

road. The quantities involved and

the need to traverse mountains in

winter make road shipments inef-

ficient and uneconomic. In some

cases, road transit is also unsafe

for certain chemical products. For

example, chlorine, which is wide-

ly used to treat drinking water in

major Canadian municipalities, is

a highly dangerous substance

that must be shipped only in spe-

cially designed, impact-resistant

rail containers.

Only one real option is availa-

ble: CN’s rail service must be re-

stored as soon as possible. Either

both parties must agree to enter

binding arbitration, or the federal

government must legislate a re-

turn to service and impose arbi-

tration.

The current strike makes 2019

the third straight year with signif-

icant rail service disruptions in

Canada. This affects Canada’s rep-

utation as a reliable supplier to

global chemical markets and oth-

er key industries such as minerals,

forest products, agricultural

products and others. Disruptions

also have highly negative effects

on Canada’s reputation among

global investors. Foreign direct in-

vestment in Canada is already in

decline and of concern to the Fi-

nance Minister and his advisers.

Over the past six years, and based

on historical patterns, Canada

should have seen $30-billion in

new chemistry investments. It

has realized only a third of that,

and the other two-thirds have

gone elsewhere.

It’s unlikely that newly elected

and re-elected MPs thought they

would need to consider such an

unpleasant task as an immediate

priority so soon, and before the

planned resumption of Parlia-

ment. Nevertheless, making

timely decisions in difficult situa-

tions is exactly what citizens en-

trust to their elected officials.

There is no Plan B for others to

take. It’s time for Parliament to

act.

ANorthVancouverrailyardislargelyidlelastWednesdayasCNrailworkersstrikeoutsidethegates.TheCNstrikemakes2019thethirdconsecutiveyearinwhichCanadahas
experiencedrail-servicedisruptions.JONATHANHAYWARD/THECANADIANPRESS

ThereisnoPlanB

whenitcomesto

rail-serviceinterruptions

ParliamentmustacttoendtheCNstriketopreventfurthereconomic

lossesasindefinitedelayscontinuetodisruptCanadianindustries

BOBMASTERSON

OPINION

President andCEOoftheChemistry
IndustryAssociation ofCanada