With 1,400 employees, $79 billion in assets, and a licence to print money, the seventy-five-year-old institution enjoys a reputation for professionalism, conducts extensive economic research, and maintains a wide network of international contacts among other central banking authorities. It is also a bureaucratic Fort Knox in Ottawa, where it occupies an imposing granite and glass complex on Wellington Street. When Carney — whose conservatively groomed good looks and charming manner give him the air of a character out of Mad Men — took over as its eighth governor in February 2008, he arrived as an outsider.

Born in the Northwest Territories, he moved with his family to Edmonton when he was six. He played competitive hockey at Harvard as an undergrad, then did his master’s and doctor-ate in economics at Oxford. After graduation, he spent thirteen years at the Wall Street investment bank Goldman Sachs, working in several of its global offices, including Tokyo and Toronto. Eventually, he and his young family grew weary of the peripatetic world of investment banking, and he accepted an appointment as a Bank of Canada deputy governor in 2003. A year later, he left his lucrative job for a senior post with the Department of Finance, settling in Ottawa’s upscale Rockcliffe Park neighbourhood.

Carney’s most notable initiative at Finance was to convince his political masters to close a tax loophole that allowed huge companies to boost their profits by converting themselves into tax-free income trusts — a practice that was draining billions from government coffers. Paul Martin’s Liberals, with their extensive Bay Street connections, waffled on the proposal, and Stephen Harper, too, opposed the change. But Carney managed to persuade Conservative finance minister Jim Flaherty of its merits, and when the Tories made their surprise reversal in 2006, senior citizens, a core Tory constitu-ency, were furious about the hit on their portfolios. Coming off the income trust battle, Carney put out the word that he had broader ambitions. In late 2007, the government executed a trade with the Bank of Canada. Long-time Bank insider Tiff Macklem moved to the Department of Finance to become Ottawa’s emissary to the G7 and G-20, while Carney headed to the Bank to succeed David Dodge as governor.

Carney took the job at a time when the political debate over the Bank’s role in the Canadian economy — and its relationship to the government of the day — had been largely settled. But it was not always thus. In the late 1950s, then-governor James Coyne insisted on jacking up interest rates to battle inflation — a controversial move that put him on a collision course with the Diefenbaker government. He re-signed in 1961. To preclude future fights, Coyne’s successor, Louis Rasminsky, moved to codify the Bank’s operational in-dependence, laying out a set of rules to mediate major disagreements with Ottawa. During the early 1990s, John Crow, a caustic former International Monetary Fund official, started pushing to rein in inflation. Crow and Paul Martin didn’t get along, and the Liberals, irritated by Crow’s harping, let him walk at the end of his first term, in 1993, and brought in Gordon Thiessen, a Bank insider.

Since that time, the Bank and successive governments have been negotiating “inflation target” agreements (typically in a band around 2 percent) that are periodically renewed. These deals effectively allow the Bank to do whatever it takes to contain inflation, even if that means pushing interest rates to a level that makes it expensive for the government to borrow. The US Fed, by contrast, lacks such institutionalized monetary policy discipline.

After Thiessen retired in 2001, the Liberals appointed David Dodge, Martin’s long-time deputy. Dodge was known as a brilliant, professorial civil servant unafraid to speak truth to power, but his appointment also aligned the ostensibly independent Bank’s goals with those of the Liberal government. Nevertheless, Dodge (who recruited Carney) brought a deep knowledge of the Canadian economy, and he presided over the Bank during a period of unparalleled prosperity. It was toward the close of his term, in the summer of 2007, that the first tremor of the sub-prime meltdown rippled through the economy. The red-hot market for “asset-backed commercial paper” — short-term notes made from bundles of mortgages, car loans, and derivatives — had seized up as investors learned that some of those underlying loans were the tottering sub-prime mortgages that had begun to default in large numbers in the US. Under Dodge, the Bank relaxed its lending criteria, thus injecting liquidity into the banks just as the abcp crisis was threatening to freeze lending.

Carney, who took over from Dodge less than two months after the abcp intervention, is one of the youngest Bank of Canada governors ever, and certainly the only one with such a long stint in investment banking. Economists who’ve dealt with him thus far like what they see. Don Drummond, chief economist at TD Bank Financial Group, describes him as a “good fit.” Some observers note traces of self-importance: “He’s a clever guy, and he wears that on his sleeve,” says former Paul Martin adviser Karl Littler. Both Drummond and Littler note that he’s quite media savvy (although he has resisted requests for one-on-one interviews, including for this article). And nearly everyone I spoke to pointed out that his finance background is vital, because it gives him an insider’s understanding of what’s ailing the markets.

A week before Christmas 2008, Carney was in Toronto to deliver a speech to a group of female investors that he pointedly entitled “From Hindsight to Foresight.” In the US, despite the optimism about Barack Obama’s election and the ensuing parade of awesome bailouts, banks still weren’t lending, and that alarming dynamic was preventing consumer spending and business investment. To keep Canadian banks lending, Carney explained, the Bank had pumped $36 billion of liquidity into the market (the federal government had also bought $75 billion in mortgages). Despite such moves, he had come in for some backbiting in the media for not lowering interest rates more aggressively. “Few forecast these events,” he noted archly, “although, in an outbreak of retrospective foresight, an increasing number now claim they saw it coming.”

Carney had returned a few weeks earlier from a G-20 summit for finance ministers and central bankers in São Paulo. They had agreed to begin figuring out how to improve the oversight of the unregulated corners of the freewheeling global banking industry, as well as “systemically important” financial institutions, such as huge hedge funds and insurance companies. The G-20 leaders subsequently appointed Canada and India to lead a working group that would develop the necessary regulatory reform standards. Tiff Macklem, the Bank of Canada veteran who’d jumped to the Department of Finance, was named co-chair of the diverse group.

As these senior bureaucrats laboured away behind the scenes on a shopping list of dauntingly technical reforms — updating accounting standards, improving bank capital ratios, crafting new disclosure rules for hedge funds and private equity pools — Carney set out to sell a couple of key ideas about how the G-20 could promote financial stability. One had to do with the need for what he called “macroprudential” oversight. Ottawa is awash in financial agencies — the Office of the Superintendent of Financial Institutions, the Canadian Deposit Insurance Corporation, the Canadian Mortgage and Housing Corporation, the Department of Finance, etc. — and the heads of these organizations convene regularly with the Bank of Canada governor to exchange notes. But Carney felt the Bank should play a more assertive role in scanning the economic horizon for puffs of smoke that could turn into forest fires.

To that end, Bank economists have been working on a “financial stress indicator,” a kind of heart monitor that would predict trouble by looking at a range of interconnected statistics, such as rising household debt. Carney also told his Toronto audience that he wanted to see key international institutions take on similar roles, all with an eye to informing policy-makers of brewing trouble. His appealing, if not altogether convincing, belief was that sensible leaders would heed credible warnings. But, he cautioned, “In the rush to respond, we must avoid building the financial equivalent of the Magi-not line — over-preparing for a repeat of current events while remaining vulnerable to the root causes of the next crisis.”

The surprising sturdiness of Canada’s banking sector received a great deal of political attention on the road to London. Harper and Finance Minister Jim Flaherty took turns touting the stability of our banks, and in one interview Carney went so far as to characterize the fate of the sector’s hobbled global rivals as a case of “vicious natural selection.” cnn and Newsweek magazine commentator Fareed Zakaria joined in. “Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors,” he wrote. “Yup, it’s Canada. In 2008, the World Economic Forum ranked Canada’s banking system the healthiest in the world. America’s ranked 40th, Britain’s 44th.” It all came down to leverage, Zakaria continued: the Canadian banking sector lent out eighteen dollars for every dollar on deposit. US banks had a vertiginous 26-to-1 ratio, Europe a “frightening” 61-to-1. Suddenly, our banks’ irritating tics — the negligible interest rates on deposits, the outrageous user fees, the institutionalized disinclination to lend — were being recast as signs of national virtue.

There is, of course, a lot more happenstance in the health of Canada’s banking sector than its boosters acknowledged. Queen’s University economist Tom Courchene points out that in the late ’80s, during the run-up to the free trade deal with the US, Canada’s big banks snapped up the country’s large investment houses after Ontario securities regulators threatened to lift ownership restrictions. As a result, the cautious culture of the chartered banks subsumed the freewheeling underwriter-cowboys of Bay Street. In addition, the banks didn’t get too massive to manage, because Ottawa blocked mergers. And their ample capital reserves are partly a legacy of past economic instability, such as the dot-com bust, which prompted them to limit their exposure to risky investments.

But, as Carney noted in a bbc interview, federal regulators also stood up to the big banks when they sought approval to jump into riskier ventures. “They didn’t like that, and they would come in and complain about it regularly, because it was stopping them from doing some of the sexier things that their international competitors were doing,” he said. “But it turns out some of the sexier things that [their competitors] were doing were quite foolish.”
Whatever the cause, Canada’s banks have swanned through the downturn in comparison with their international counter-parts, accounting for less than 2 percent of the $923 billion in writedowns suffered by the industry worldwide last year. The big five banks collectively posted $3 billion in profits for the first quarter of 2009 (although several, including rbc, took big hits on their US loan portfolios). As Carney has observed with an air of triumphalism, US and European banks would have to come up with $1.4 trillion in additional capital simply to match Canada’s stubbornly prudent leverage ratios.