Bank of Canada hails U.S. bailout plan
By Randall Palmer
OTTAWA (Reuters) - Bank of Canada Governor Mark Carney threw his support behind Washington's "bold and timely" $700-billion financial industry bailout package on Thursday, saying it could minimize the economic cost and duration of the global credit crisis if well executed.
He said Canada's financial institutions were much better capitalized than their U.S. and global peers, but warned that the Canadian economy is not immune to the fallout from the global financial crisis.
Carney said several articles of faith in the financial system have been shaken -- that good collateral can always be used to raise liquidity, that certain institutions are too big or interconnected to fail, and that this was merely a liquidity crisis.
"Fortunately, even this ferocious storm has a silver lining: its cathartic nature and the decisive policy response it is prompting could mark the beginning of the end of a 14-month crisis that has gripped the global financial system," he said in a speech in Montreal.
The U.S. bailout plan being examined in Washington now would help firms "right-size" their balance sheets, re-liquefy closed markets and establish market prices for distressed assets, Carney said.
"This should eventually encourage private buyers to re-enter the market and complete the deleveraging process. A well-executed program will undoubtedly speed the resolution of this crisis and limit its economic cost."
This was the last scheduled speech by the Bank of Canada before its October 21 interest rate decision. Carney did not directly address rates except to say the central bank would not deviate from its "relentless focus on monetary policy to achieve low, stable and predictable inflation".
However, he did say the bank was revisiting its projection for the U.S. economy and now sees a greater risk that it could underperform the bank's estimate of 1.5 percent growth next year due to a "negative feedback loop between a weaker U.S. economy and tighter credit markets". Continued...