OTTAWA - The Bank of Canada's hard call on interest rates Tuesday may be the most closely watched in years and not solely for what it says about the state of the economy, but for what it means to one of the bank's most celebrated governors.
For David Dodge, Tuesday represents one last chance to adjust, tinker and fine-tune the interconnected layers of financial levers and pullies he has lovingly helped assemble over three decades into one of world's most successful economies.
Few doubt that he can resist the temptation, and most bank watchers expect a quarter point cut in interest rates to help cushion the economy from the fallout of a looming U.S. recession.
Around Ottawa and to many television news watchers, the 64-year-old Dodge, who retires on Jan. 31 after seven years as Canada's central bank leader, may be better known for his scruffy tartan cap, ever-present pipe and raspy voice.
But those who have followed his remarkable career paint a picture of the most influential public servant since the legendary Jack Pickersgill, a straight-shooting doer who has had his fingers in almost every significant economic and fiscal measure enacted by the federal government over the past 35 years.
"He is probably one of the top civil servants I think Canada has had,'' says Len Farber, an Ottawa tax expert who worked with Dodge in the Finance Department during the late 1980s and 1990s.
"Committed to his job, cerebral, hard-working, and a good advocate for the department and a good advocate for the ministers in bringing them to that unique position between the right policy and political imperatives.''
The list of credits is long, momentous, and often controversial.
It includes the Trudeau government's major tax reforms in the early 1970s, heading research at the Anti-Inflation Board and becoming an early advocate of free trade during a government hiatus in the late `70s.
Later, Dodge was involved in ill-starred proposals to de-index old age security and the baby bonus that became part of the Mulroney government's first budget in 1984, the massive tax overhaul of 1987-88 and the introduction of the GST in `91. His crowning achievement in government was to team up with then finance minister Paul Martin to help end decades of budgetary deficits in the mid-`90s and balance the books.
While it is difficult to apportion degrees of authorship on most of what government does, those who have worked with Dodge suggest the public servant could claim as much credit for initiating as implementing many of the policies he worked for.
"Everywhere he went some major reform took place at that time, so you can decide for yourself if they moved him to places where they wanted to reform, or whether reform followed him,'' says Don Drummond, TD Bank's (TSX:TD) chief economist who worked with Dodge both for the deficit fight and the GST measure.
For instance, Dodge had made reining in government spending and putting a stop to the seemingly endless string of deficit budgets a personal quest inside the department long before Martin rode into the room.
'Lennon and McCartney'
Drummond describes Dodge as "a man on a mission'' who would tell colleagues he was prepared to be fired rather than back down. In Martin, he found someone who would not only back his deputy, but who also became equally convinced that a financial abyss lay ahead if the government did not mend its fiscal ways.
"In the final analysis, David couldn't have done it without Paul Martin, but Paul couldn't have done it without David Dodge either,'' he said. "It was like John Lennon and Paul McCartney.''
The austerity measures that made the victory possible left many casualties, resulting in cuts to social programs such as health care, but they also set the country on the path to recovery and on to the second-longest growth period in its history.
In a recent interview with The Canadian Press, Dodge said the painful lessons have taught both governments and Canadians the importance of sound fiscal policy.
"We often badmouth ourselves a little bit in this country,'' he said. "(But) I along with all Canadians can be quite proud how we have developed since the beginning of the 1970s in terms of being able to seize better the opportunities presented by the world.
"We now understand that it's very important that public finances be kept in good shape, and we all understand the value of low and stable inflation.''
Dodge's groundwork at Finance likely made his task as Bank of Canada governor appear almost easy by comparison. But it didn't start out that way.
He faced his biggest challenge mere months after arriving at the mirror-facade towers on Ottawa's Wellington Street when he had to cope with the economic aftermath of the Sept. 11, 2001 terrorist attacks on the World Trade Centre and the Pentagon.
To avert a recession, Dodge quickly sliced half a percentage point from the bank's key rate, then followed it up with another three quarters of a point in October, then further half point and quarter point cuts. In total, the bank cut its key overnight rate in half to two per cent within four months to stimulate the economy.
The medicine may have appeared drastic, even panicky, but it kept the Canadian economy out of recession, something the U.S. failed to avoid.
There were side effects, however, as the narrowing of interest rate spreads between Canada and the United States dragged down the Canadian dollar towards its all-time low, hitting 61.79 cents US on Jan. 21, 2002.
Dodge's good judgment
Economist Jack Mintz, who holds a public policy chair at the University of Calgary, says Dodge's steady hand at the bank should not be underestimated. The result: Canada's economy has performed strongly and the bank has been able to keep inflation close to the two-per-cent target throughout most of his seven-year term.
"He made a couple of very good judgment calls on interest rates that he was later proved right on,'' said Mintz, but as important, he added, Dodge early on began talking about the importance of efficient capital markets.
"I remember there was a proposal for zero down payment mortgages in Canada ... and David came out publicly and tore a strip off that. When you look at that in hindsight, he was 100 per cent right and who knows, maybe if he was the Federal Reserve chairman he would have prevented subprime mortgages.''
The rapid growth and collapse in subprime lending to risky U.S. borrowers who often had no down payments is a main cause for the slump in U.S. housing, which has had wider fallout for credit markets and the general economy.
Dodge, whose last day at the bank is Jan. 31, leaves at a precarious time for the Canadian economy.
Unemployment is at a 33-year-low, 2007 growth was solid, inflation is under control and the loonie is at or near parity. But the worsening housing crisis in the U.S. has many fearing a recession in the U.S. in the first half of this year, and a severe slowdown in Canada, especially the manufacturing industries in Ontario and Quebec.
Asked about the situation, Dodge said that his successor, Mark Carney, is more than capable of charting the correct route. But Drummond says his old boss won't leave without making one last adjustment to ensure Canada's economic engine doesn't stall.
"He will give us a 25 basis (quarter point) cut to four per cent. Absolutely,'' said Drummond.
