Mark Carney: The Right Man for the Job?

On his appointment, George Osbourne described him as the ’outstanding central banker of our generation.’ The Economist had glowingly called for his appointment. Sir Mervyn King declared him ’the outstanding choice to succeed me.’ The pound even hit a two and a half year high against the Canadian dollar on the day the news was announced. Mark Carney has a lot of questions to deal with on his appointment as Governor of a Bank of England with increased powers; but his suitability for the job (which he will start in June 2013) is certainly not one of them.

This positive reaction is not surprising even though this is an unexpected announcement. The media had ruled him out, the city had ruled him out, and even Carney ruled himself out in the summer (although perhaps the appointment of another ex-Goldman Sachs man to a top European job should not have been a surprise). Most of the praise for the appointment stemmed from the job that he did as Governor of the Bank of Canada; he seemed quick in his attempts to tackle the problems that the financial crisis caused, notably quicker than the Bank of England. As the crisis worsened, he repeatedly cut the target for the overnight rate in an attempt to increase liquidity, and in April 2009, pledged to keep it at just 0.25% until the second quarter of 2010. Indeed, over the course of 2008 the BoE’s bank rate was over 2% higher than that of Canada. This, combined with other factors, meant that Canada was the fastest G7 economy to recover to its pre-recession peak.

Mr Carney also seems more aware of the problems that the major western economies are facing. Both he and Sir Mervyn King have worried about the lack of credit available for small and medium sized businesses, but Mr Carney has also repeatedly highlighted the problem of larger firms hoarding piles of cash; what he terms ’dead money.’ Canadian companies now hold $300 billion in cash , 25% more than in 2008. He suggested that these firms ’put money to work and if they can’t think of what to do with it, they should give it back to their shareholders.’ The governor of the BoC has also warned that in Canada the public were consuming beyond their means.

These are problems that afflict Britain as well, so his apparent lack of in-depth knowledge of the British economy might not be such an issue if he already understands the problems that face it. Indeed, Alistair Darling suggested that ’He stuck out from other central bankers in his understanding of the crisis and what needs to be done about it.’ Contrast this with the accusations that the MPC was ’behind the curve’ (David Blanchflower aside) at the start of the crisis.
Carney will also take charge at a time when many of the powers surrendered to the Financial Services Authority in 1997 will be returned to the bank. It will now have the job of supervising and regulating individual banks, and will play a crucial role in the raft of regulations that Mr Osbourne wants Threadneedle Street to oversee in order to protect the banking system from the type of shock it has just experienced. Mr Carney has served as chairman of the Financial Stability Board since November 2011, which would suggest that he has experience in this area. On the other hand, as Malcolm Barr at JP Morgan suggested, this might mean that he ’is relatively orthodox in the [field of] financial regulation. This isn’t Andrew Haldane coming in with a lot of views which are a little bit more challenging to the mainstream.’

It is hard to tell what type of approach Mr Carney will take to Britain’s monetary policy. Even though Canada’s monetary policy has been tighter than Britain’s it is tempting to suggest that Mr Carney will be slightly more loose than Sir Mervyn King was as the outgoing governor’s transformation from superhawk to vocal dove was probably brought about by the extreme conditions of the last few years. However, due to the bleak economic outlook in the short to medium term not a lot is likely to change with regards to monetary policy. The Bank of England will continue to pursue QE and other measures such as Credit Easing when it sees fit, and will also forgo changing the interest rate to meet the inflation target in fear of paralysing growth.

Robert Peston suggested that Mark Carney was central banking’s equivalent of Pep Guardiola, but there are some criticisms that have been levelled at him. Already much has been said about the fact that it was Canada’s relatively tight regulation that kept their banks away from dangers such as sub-prime mortgages. Consequently during the crisis non-performing loans rose to only 1.3 percent of total loans, compared with 5.4 percent in the United States, 3.5 percent in the United Kingdom and 3 percent in the eurozone. Yet this is probably not an area where Mr Carney can take credit; many of Canada’s key tough regulations stem from the banking crash in the early 1990’s. It is telling that Sweden’s banks, which went through a crisis at the same time, emerged similarly unscathed this time around. There are also suggestions that his policies of cheap liquidity may have caused a housing bubble as in Toronto last year house prices rose by 8.3% .

What is welcome is that Mr Carney arrives as an outsider, as there are legitimate questions to be asked about the BoE’s insularity and rigid chain of command. This would have been one of the flaws with appointing Paul Tucker, who has been at the bank for 30 years and served as a deputy to the current governor. The fact that Mr Tucker was the favourite says a lot about the lack of suitable British candidates for the job, given his alleged involvement in the Libor-rigging scandal which surfaced in June. However, those bemoaning the appointment of a non-British national could do with remembering that the Bank was founded by William of Orange.

Mr Carney’s glowing reception upon his appointment will quickly evaporate if he does not quickly get to grips with the multitude of problems that face Britain. On top of that, he will have an expanded remit from the chancellor and must oversee changes in Britain’s financial system that will attempt to prevent what happened in 2007 from happening again. Luckily, it seems as if Britain has appointed someone who appears able enough to try and face this daunting task.