2008’s financial crisis was a global disaster. When COVID-19 hit, its lessons were Canada’s saving grace

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They sat elbow-to-elbow, stone-faced, projecting a serious aura.

Under guidelines to operate as independently as possible, Canada’s federal finance minister, central bank governor and banking regulator rarely gather in public. But at a news conference on March 13, two days after the World Health Organization declared a pandemic, the three men sat in a single row to put all their crisis-fighting chips on the table.

The Bank of Canada slashed interest rates for the second time that month; the federal bank regulator relaxed capital rules for lenders, hoping to unleash credit; and then-finance minister Bill Morneau started offering new stimulus spending as part of a simple, but crucial, mantra: “We are going to do whatever it takes to protect Canadians and keep our economy strong.”

The slogan may have sounded bland to the untrained ear, but it was carefully crafted – a signal that Ottawa had learned from the 2008 global financial crisis and its aftershocks. When that calamity hit, the whole world relied on trial-and-error policies, and it took years to calm markets and stabilize the financial system.

This time around, Canada had a plan – and Ottawa wanted to show that early and often. “The 2008 playbook was used,” Stephen Poloz, who ran the Bank of Canada when the pandemic erupted in March, said in an interview. Only this time, “it was sped up dramatically.”

Nine months in, it has largely worked. While some economic sectors are still suffering, mainly those that are service-oriented, the S&P/TSX Composite Index is back to near record highs, Canada’s banks have barely been hit and Canada’s retail sector displayed a quick V-shaped recovery over the summer. This means that, for all its carnage, the 2008 crisis turned out to be Canada’s saving grace when COVID-19 hit.

What the last global crisis re-enforced was an old truth: Financial systems are built on trust. If lenders worry they won’t be repaid, they cut off their credit taps and hoard cash. The second that happens, economic activity starts to dry up.

It is crucial, then, for banking and government officials to project confidence and resolve. No matter what is thrown at them, they have to show they can, and will, handle it.

Famously, at the height of the 2012 euro zone debt crisis that came after the near-collapse of the American financial system, Mario Draghi, then-head of the European Central Bank, said the ECB was “ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Not long after, the debt crisis evaporated. The currency union remains intact.

The goal of Canada’s March news conference, and of subsequent announcements, Mr. Poloz said, was to show, “We’re putting everything on the table to make sure people know we’ve got it covered.” In other words, Canada made the same promise as the ECB – but at the start of the crisis, not four years into it.

Messaging can only do so much. There must be policies behind it, and Canada delivered. As current Bank of Canada Governor Tiff Macklem told The Globe and Mail this spring before he was appointed, you have to try to “overwhelm” the crisis. Mr. Macklem took over after Mr. Poloz’s seven-year term ended in June.

In a matter of weeks, brand new federal programs were set up to funnel hundreds of billions of stimulus dollars to Canadians, notably the Canada Emergency Response Benefit, the Canada Emergency Wage Subsidy and the Canada Emergency Business Account, which provided small-business loans.

For its part, the Bank of Canada stepped up as the true lender of last resort. In 2008, many global banks didn’t trust each other’s credit worthiness, so they wouldn’t even lend to one another, let alone to other companies and small businesses. To prevent anything like that from happening again, near the start of the pandemic the Bank of Canada pledged to buy hundreds of billions of dollars’ worth of Canadian federal, provincial and corporate bonds to prevent credit markets from seizing up.

And, little seen by the average Canadian, the central bank also quickly changed its collateral requirements for the repo market, making it easier for financial institutions to borrow money from the central bank if they needed to.

If it seems Ottawa had it easy, because they simply had to follow a playbook, remember that the fog of war is very real. “Doing whatever it takes involves a large leap of faith in a world of uncertainty,” said Peter Routledge, chief executive officer of Canada Deposit Insurance Corp., and a former Bay Street bank and credit analyst.

Ottawa had nothing close to perfect information when the pandemic hit. Instead, officials made a bet: “The cost of inaction is greater than the cost of action,” Mr. Routledge explained.

Now that Canada’s economy has stabilized – and in some sectors, roared back to prepandemic levels – that calculus is facing criticism. Some fiscal hawks argue that Ottawa overstimulated, wasting money in the process. There are some truths to that: Tax-free stimulus cheques were sent to millions of seniors, sometimes regardless of their need, and CERB overpaid some lower-income workers relative to their usual wages. A single-year federal deficit of $382-billion, which is the latest projection, was also once unfathomable.

But this way of thinking tends to gloss over one crucial fact: Despite all that’s been spent, Canada still had a sharp recession, with gross domestic product shrinking 11.5 per cent in the second quarter. And even though the economy has rebounded since, Canada still has a 8.5-per-cent unemployment rate, up from 5.6 per cent in February before financial catastrophe nearly broke out.

When he was still bank governor, Mr. Poloz tried to explain it this way: No one ever blames firefighters for using too much water. It’s better to make sure the fire is completely out.

Now that he’s in the private sector, he’s able to weigh in on government policies, not just the central bank’s. Responding to criticisms of programs such as CERB, he said some of the backlash is “technically fair, but it kind of misses the point.”

All of the traditional fiscal stimulus measures, such as infrastructure spending, take far too long to roll out. Money had to get out the door, and it had to be doled out at a time when everyone – the public servants, the central bank staff – were all working from home.

“It just looks like numbers on a page now,” he said of the full breadth of Ottawa’s policies. But Canada was staring down a massive economic crisis, and in the face of that, he argued, the federal government’s response “was admirable.”

And we have the lessons learned from 2008 to thank for it.

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