Why I’m worried about Mark Carney’s Governorship
This is an extended version of my article on Mark Carney that appeared in the print edition on Saturday.
As a political conjuring trick, George Osborne’s unexpected announcement last week that Mark Carney will replace Sir Mervyn King as the Governor of the Bank of England next year was an unmitigated triumph. The pundits of Fleet Street and the wallahs of the City of London were united in agreement that the Chancellor had pulled of a terrific coup by persuading Mr Carney, the 47-year-old Governor of Canada’s central bank, to apply for the job. Here, we were told, was a trained economist, a respected regulator and a new broom to sweep the dusty corridors of Threadneedle Street clean. But the most attractive part of the CV was Canada’s impressive economic record in recent years, attributed to Mr Carney’s deft skills at the central bank.
The country pushed through the thickets of the global economic crisis of 2008-09 and emerged with barely a scratch. Its banks, which were also under the supervision of the monetary authority, did not need bailouts, unlike ours. Not since General Wolfe audaciously captured the Heights of Abraham from the French in Quebec have Canadian feats so gripped the British imagination. But as any sensible investor knows, one should never buy at the top of the market. And Mr Carney’s reputation now seems to reside on a vertiginous precipice.
Canada indeed coped well with the global bust, experiencing the shallowest recession of any G8 country thanks to conservative macroeconomic policies in the preceding boom. But that was more due to the traumatic debt crisis of the 1990s (which led to the Wall Street Journal describing Canada as an “honorary member of the Third World”) rather than any inspired monetary activism by Mr Carney. A natural resources boom, which lifted Canadian commodity exports, has helped the country recover exceptionally strongly this time around too. True, Carney didn’t mess it up by raising interest rates prematurely, but he shouldn’t be credited with magical macroeconomic powers.
As for the robustness of Canada’s banks, that too owes more to the 1990s crisis than anything that Mr Carney can claim responsibility for. Politicians put shackles on lenders after they went bust two decades ago. This ensured domestic banks could not join the grotesque lending binge that kicked off on both sides of the Atlantic in the 2000s.
And what of Mr Carney himself? Like the present governor he has made supportive noises about the global “Occupy” protests, suggesting a social conscience. Yet that did not stop him holding out for a hefty pay rise on his present salary for accepting the Bank of England job. His remuneration will be £624,000 a year, against Sir Mervyn King’s £305,000. Even allowing for the fact that Mr Carney’s pension is less generous, that’s still a significant payday. Mr Carney will take British citizenship to show his commitment to Britain. Yet he still insisted on a five-year term, rather than the eight that the succesful candidate was supposed to serve. Mr Carney will also, apparently, be keeping his position as chair of the G20’s Financial Stability Board (FSB), which is supposed to co-ordinate global banking reform. The Governor’s chair – already widely seen as too big for one person to handle ‑ will thus be filled by a part-timer. As Adam Posen, formerly of the Monetary Policy Commitee, has pointed out in the Financial Times (subscription), Carney looks rather less like a British public servant than “a globetrotting corporate free agent”.
And when it comes to banking reform Mr Carney looks like the status quo man. Much has been made of an attack he attracted last year from Jamie Dimon, the boss of JP Morgan, for Carney’s attempts, as FSB chair, to force banks to hold larger equity buffers under the new “Basel III” capital rules. This, many have suggested, shows Mr Carney’s admirable steadfastness in the face of the financial lobby.
Yet the arguments about Basel are really a civil war within the cosy banking/regulatory establishment, rather than a dispute about anything that will make a difference when it comes to protecting taxpayers’ wallets from too-big-to-fail banks. Even under its toughest interpretation, Basel allows the banks to run with extremely modest capital buffers. It is rather telling that it was Carney’s former employer, Goldman Sachs, that leapt to the defence of our next Governor when Mr Dimon went on the offensive.
When the Bank of England financial stability director, Andy Haldane, argued in September for a genuinely radical new approach to banking reform, he received a petulant rebuke from Mr Carney (even though Mr Haldane insisted last week that there is not a “fag paper” between him and his future boss on regulatory reform).
Mr Carney has also aggressively attacked the US “Volcker Rule”, which will prevent American investment banks playing the global capital market casino, in language ominously similar to that used by the banking lobby. Paul Volcker, the grand old man of US monetary policy, has described these objections to his rule as nonsense.
Radical structural reform of the banking sector looks likely to be anathema to the next Governor. Sir Mervyn has been a powerful advocate of splitting up the banks into their retail and investment arms to protect taxpayers from future bailout costs. Mr Carney, by contrast, seems to be intensely relaxed with the so-called universal banking model, which prevails in Canada. And while Sir Mervyn has been a stern critic of bankers’ bonuses, Mr Carney’s views here are unknown. Hopefully we’ll hear more on his attitude to these subjects – as well as Carney’s views on the government’s “ring-fencing” for retail banks – when he appears before the Treasury Select Committee in a “pre-appointment hearing” in due course.
Mr Carney deserves the benefit of the doubt. He may turn out to have the monetary Midas touch and that he will turn Britain into another booming Canada. Mr Osborne, who I’ve heard has been frustrated with Sir Mervyn’s refusal to pull out all the monetary stops to boost the economy, will doubtless be hoping so. It is possible too that Mr Carney will show his true colours as a banking reform radical, leading a charge up the lobbyists’ Heights of Abraham, just like Sir Mervyn and his colleagues in recent years. Maybe. But I’m afraid that nothing in Carney’s record gives me much hope.Tagged in: bank of england, Mark Carney, paul volcker
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