Good luck trumped good planning on this one. A quirk in Canada’s rules for Commercial Paper meant that most of the weight of the crisis fell on companies, not the banks. This has given David Dodge, Canada’s soon-to-retire central banker, precious time to orchestrate an orderly unwinding of all these opaque deals. Britain, on the other hand, is having to deal with a massive all-at-once rollover of commercial paper this week. It’s like Dodge got to pull into the pits to have his car serviced, while BoE’s Mervyn King in London has to crawl out onto the bonnet to make adjustments while the car is zorching around the track at 200 kilometers per hour.
The Economist is looking across the pond with envy [1] at all this. In effect they are saying that this accidental quirk in Canada’s rules is how it should be in general. They also include a fascinating snippet. Dodge is evidently close enough to retirement he felt he could express his real opinions about off-balance-sheet deals.
"Like Mr King, Mr Dodge is fearful of moral hazard. Banks should suffer for their mistakes, he says, though not so much that the system becomes insolvent.
He acknowledged that the Bank of Canada may itself have played a role in stoking the excesses by not raising interest rates enough. ‘One can see in retrospect that we should have been driving those rates harder than we did, because in reality credit conditions were being eased by increased securitisation and movement of stuff off balance [sheet],’ he says. That is an admission that most officials would make only when they are safely in retirement. If the failure to tighten was an error, it was surely one committed by many other central banks besides Canada’s." [my emphasis]
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Notes and References
[1]: "Commercial paper: Unscrambling the eggs; Lessons from Canada suggest it is important to buy time", Economist (subscription required), September 13, 2007.
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