Stephen Poloz seeks Star Trek inspiration after bad week: Don Pittis

"Does anybody besides me wonder what the banking system looks like in the background of Star Trek?" Bank of Canada governor Stephen Poloz asked a gathering of New York financiers yesterday.

No wonder our chief central banker is looking to outer space for inspiration. It was a week where, just the day before, he had told Canadians their houses might be worth 30 per cent less than they thought. It was a week when the price of oil, the lifeblood of three of our provincial economies, dipped below $60 US a barrel, with predictions of worse to come.

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And the bad financial news didn't stop there. The world's second most powerful nuclear superpower, Russia, is teetering on the brink of very serious trouble, with the ruble plunging and interest rates shooting over 10 per cent. A parliamentary vote in Greece could lead to default and destabilization of the European currency area. China's stock market saw its biggest decline in five years and Japan's economy shrank 1.9 per cent, not the 1.6  per cent everyone had thought.

Avoiding another crisis

The topic Poloz was addressing with his out-of-this-world comments was the future of "financial intermediation." That's a slightly scary phrase that refers to a fairly simple concept: Getting money out of the hands of people who have money and into the hands of the people who are going to use that cash to rebuild Canada's weakened economy.

That intermediation is absolutely essential if we want the Canadian, and world, economy back on track. And lately, it hasn't been working well.

Poloz's point was that the catastrophic financial meltdown in 2007 and 2008 proved that the system we were using then was flawed. In the years since, regulators have made it a primary goal to prevent another similar crisis. But in doing so, Poloz fears the regulators have scared off the financial innovators.  

He told all those New York bankers they needed to keep on innovating, but without breaking the rules. The kind of blue-sky thinking Poloz advised was not just the optimistic space opera analysis of Star Trek.  He said they should even study the dystopic world view of Margaret Atwood.

Atwood economics

"What about the corporatist model of finance, which lies in the background of Margaret Atwood’s novel, The Year of the Flood? Now that’s blue-sky thinking," Poloz told the New York crowd. "People work for a massive corporation, live in the corporate compound, go to corporate restaurants and events, and bank with a financial intermediary wholly owned by their own employer, which in turn invests the funds in growth for the corporation."

I'm not sure I like that one. Or the rest of the world Atwood imagined to go along with it. Poloz's point was — think outside the box.

But despite this hebdomas horriblilis, Poloz was surprisingly upbeat about the Canadian economy. 

"We have been waiting for a resumption of export growth, to be followed by a rekindling of animal spirits, investment in new capacity and new firm and new job creation," Poloz told the New York audience, "And it looks like that natural sequence may have finally begun."

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In some ways it was a warning to bankers. Effectively, he said, if the banks don't figure out a way getting money into the hands of new and young businesses, they are going to be left behind. 

"There is a natural incentive behind financial innovation, since there is a lot of money at stake for those who innovate successfully," said Poloz.

Computer connections

He said that financial incentive has already created a powerful tool — peer-to-peer (P2P) lending through the internet that could grow into something much more dominant. One example is crowdfunding. At a huge cost savings, he said, people with cash are already finding the people who need it directly, in the form of student loans, auto loans and equipment finance.

If there is less credit available from traditional banks, said Poloz, "it’s not a stretch to think that the young, the small and the medium, and the risky companies, will begin to tap into this P2P finance channel to meet their credit needs."

Public finance by governments, pension funds and sovereign wealth funds must also step into the breach, if necessary ignoring traditional intermediaries to make sure the cash gets where it is needed.

With money to be made and money needed, Poloz hopes that "Mother Nature" — or what others might describe as Adam Smith's invisible hand — will find ways of supplying the needed capital. Our space-age central banker expects those new systems of financial intermediation to boldly go where no one has gone before, and after the recent bad patch, relaunch Canadian enterprise.