Carney—Saviour of the United Kingdom?

In Blog by Ian Fraser3 Comments

November 26th, 2012

Finally, the UK chancellor of the exchequer George Osborne has done something right. He has appointed Mark Carney, the current governor of the Bank of Canada, as the next governor of the Bank of England. Carney is due to succeed Sir Mervyn King on 1st July 2013. I guess the bookies have done badly out of this, as they have long had Bank of England deputy governor Paul Tucker as the favourite for the BoE job.

At a bi-lingual press conference in the Canadian capital, Ottawa, Carney, who was sitting alongside Canadian finance minister Jim Flaherty, said:

“This is a major challenge, a major opportunity. It’s very important for global economy that UK does well, and that it succeeds in its reforms and that the rebalancing of UK financial system is completed. I will continue to play a role in FSB; I see this as a challenge and I’m going to where the challenges are greatest because I’m confident the strengths are as deep and a broad as they are here in Canada.”

In a statement, the Bank of Canada said:-

The Bank of Canada announced that Her Majesty the Queen has approved the appointment of Mark Carney as Governor of the Bank of England effective 1 July 2013.  He will serve a five-year term.

Governor Carney will continue to serve in his current position until 1 June to ensure a smooth transition to the next Governor of the Bank of Canada.  The Governor will remain Chair of the Financial Stability Board.

Governor Carney said: “I am honoured to accept this important and demanding role, and to succeed Sir Mervyn King with whom I have worked closely over these past five years and from whom I learned so much.

This is a critical time for the British, European and global economies; a decisive period for reform of the global financial system including its leading financial centre, the City of London; and a crucial point in the Bank of England’s history as it accepts vital new responsibilities.”

The fact that none of the UK candidates was  considered suitable for job speaks volumes about the state of the UK’s financial sector right now. None were untainted by scandal, with Tucker seen as having condoned criminal activity (Libor rigging) by Barclays, and FSA chairman Lord Adair Turner having had the misfortune to have served as non-executive director of Standard Chartered at a time when it was engaged in all sorts of shenanigans.

Writing in his FT blog on macroeconomics, Gavyn Davies, an ex-colleague of Carney’s at Goldman Sachs, said that Osborne’s decision to appoint as King’s successor was a “bold move”. Davies added:-

There is certainly no doubt that he has the intellectual firepower to cope with all of the macro-economics that his new job will throw at him. As governor of the Bank of Canada since 2008, he has handled monetary policy deftly, though there have been complaints in the past year that he has allowed the Canadian dollar to rise too rapidly for the good of the domestic economy. From the outside, it has been hard to tell whether he is by nature a hawk or a dove. A pragmatist, more like.

I wrote about Mark Carney for Qfinance about a year ago, and here are some excerpts from that piece:-

  • Carney, named “Canada’s Banking rock star” in a recent CTV News profile, described the Occupy Wall Street movement as “entirely constructive“, since it has made the extreme challenges that the global economy is facing “tangible”.
  • Carney – who gained kudos after standing up to hectoring over enhanced capital rules from Jamie Dimon, chief executive of  JP Morgan Chase, in September 2011 – said a key determinant of private liquidity is the willingness of the financial sector to provide cross-border financing.
  • In a lecture Carney described liquidity as the “Keyser Söze” of international finance (in the 1995 film The Usual Suspects, Söze is a shadowy crime overlord whose ruthlessness and influence have acquired mythical status among police and fellow criminals). Carney said that, like Söze, liquidity has: “No agreed definition and, as a consequence, there has been no coherent policy approach to tame its more violent tendencies.”
  • Carney said peaks and troughs of the liquidity cycle have been further exaggerated by globalization, as cross-border funding is now so mobile, which in turn “amplifies the cyclical dynamics of domestic credit and asset prices.”
  • He said this was illustrated by what had happened in Ireland in the years up to the crisis. “A huge surge in cross-border liquidity led to a massive increase in domestic debt and unsustainable growth in house prices and housing sector activity.”
  • Carney said that, globally, cross-border bank credit grew rapidly between 2003 and 2007, reaching growth rates of 20% on the eve of the crisis. He said this fed into large currency mismatches, particularly for European banks in US dollars. After the onset of the crisis, cross-border interbank lending fell sharply, reducing funding liquidity, forcing asset firesales and further reducing overall private liquidity.
  • He said the current (Oct-Nov 2011) liquidity crunch, partly caused by the drying up of US interbank funding for European banks, risks tipping Europe into recession.
  • Over the medium term, Carney warned that the continuation of wild liquidity swings may threaten the future of open capital markets and free trade. To avoid this he proposed: (1) Countercyclical capital buffers (2) The implementation of more-resilient financial market infrastructure (3) Reductions in the variability of repo margins (4) Other macroprudential policies such as loan-to-value ratios in property markets

Last month Euromoney named Carney as its central bank governor of the year. The financial magazine said:-

“The governor has rightly earned acclaim in financial and policy circles thanks to his prudent management of Canada’s economy and financial markets, and, since November 2011, his force of intellect, personality and persuasive ability as chairman of Basel’s Financial Stability Board, where he is sketching the new face of global finance.”

Euromoney opined that Carney’s credibility, success and collegial approach to the problems facing global banking make him the ideal person to lead the FSB, which is charged with overseeing the implementation of a wide range of reforms.

“It’s a testament to Carney’s market nous and leadership skills that he now leads the FSB. He is tasked with the challenge of creating a regulatory system that reduces the prospect of another financial meltdown without choking off capital formation in an already depressed global economy. [This] has inevitably made him the target of invective from some. However, Carney has held steady, selling reforms to recalcitrant bankers, attempting to build up the FSB’s enforcement powers, and navigating between competing global interests.”

There are, of course, a few negatives to this appointment. One is that Carney spent 13 years working for Goldman Sachs. That could mean he will put his loyalty to the interests of the “Giant Vampire Squid” ahead of the needs of the UK populace and ahead of desperately needed financial reforms. (On September 7th, 2012, I wrote a piece titled Dear David Cameron: Entrusting economic policy to ex-investment bankers is no solution, in which I outlined some of the risks).

In a Comment is Free piece published this afternoon, Ann Pettifor, director of Prime: Policy Research in Macroeconomics and a fellow of the New Economics Foundation, warned that Carney’s appointment may prove disastrous for Britain. In her view, he will do nothing to rein in the City, despite the fact it is considered by people including UK business secretary Vince Cable to have become “a massive cesspit“, and will lead us towards the sort of financial meltdown predicted by Toby Bray of MoneyWeek last weekend. Pettifor wrote:-

There’s nothing in [Carney’s] speeches that indicates that he will help give Britain’s real economy the protection it needs from its over-mighty – and still very dangerous – banking sector. Nothing, in other words, that indicates the real economy – the productive sector – will be given priority over the City’s preference for reckless global speculation. Instead like many others who adopt a “market-based” approach to regulation, Carney prefers to tinker – retrospectively – with the capital ratios of banks.

Another risk is that, given his background, Carney is so wedded to conventional economic thinking that he may balk at the root and branch reforms that are needed. He is, for example, seen as less likely to re-examine the fundamentals of the monetary system than Lord Turner would have been.

Comments

  1. Good writing Ian.

    Another Goldman Sachs ex banker -God help us.

  2. Hi Ian,

    I have great deal of respect for your knowledge & integrity – but what about this boy’s schmoozing with the Bilderbergers? He’s been for the last 2 years, 2011 & 2012 and Bilderberg just held one of their lock-down confabs in Rome a couple of weeks ago where this appointment was almost certainly discussed. Looks likely Osborne got to know Carney through their mutual Kissinger-esque Bilderberg participation.

    All very well, you may say, but this group was founded by Prince Bernhard of the Netherlands, a former SS Nazi who lied time and again about his membership of the Nazi party in later life.

    It is Goldman Sachs and Bilderberg that are deciding this country’s fate now, and there are plenty of home-grown Brits who would do the Bank of England job much better than a former fully-paid-up member of the NATO zone Goldman banking cartel. Yourself included.

  3. Author

    Tony,

    With the benefit of hindsight I erred here – especially given Carney’s recent Love Letter to the City. Was trying to find something to be positive about!

    Ian

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