Severity of crisis could be blessing in disguise: Bank of Canada chief

Canada's central bank chief sees a bright side to the latest world financial crisis. Because it has hit so hard, it may be over sooner, he reckons.

"The events of the past few weeks in global financial markets have been dramatic," Bank of Canada governor Mark Carney said Thursday. "Money and credit markets seized up.... Equity markets convulsed and some of the most storied names in finance succumbed."

But the severity of the crisis may be a blessing of sorts, he suggested in remarks prepared for a speech to the Canadian Club of Montreal.

"Fortunately, even this ferocious storm has a silver lining," he said. "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.

"A restructuring that for some countries took a decade is now likely to take only a few years in total in the United States. This will greatly reduce the cost in terms of lost output and employment in that country, as well as the negative spillovers to the rest of the world."

Even so, the coming months will bring more financial losses and increases in the cost of capital, he said. "The eventual reordering of the financial system will be historic."

Meanwhile, he said, the world needs a $700-billion US bailout package proposed by U.S. Treasury Secretary Henry Paulson.  Key U.S. legislators reported Thursday that there is agreement in principle on the bailout, which would save many financial firms from their own folly.

"In this environment, the U.S. government’s initiative to buy distressed assets is critically important," Carney said, calling the plan "bold and timely."

"The size and breadth of support provided by this measure will help firms 'right-size' their balance sheets, reliquefy closed markets and establish market prices for these distressed assets," he 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."

Canada's banks are in better shape than their foreign rivals, he stressed.

"The stronger financial position of Canadian banks means that they now borrow at rates considerably lower than those of many of their international peers," he said.

"In addition, the Bank of Canada has eased its overnight rate substantially since the onset of the crisis. As a result, the effective borrowing costs faced by banks, businesses and households are estimated to have fallen over the past year. This decline contrasts with the experience of most other developed countries."