After a double-dip recession and a modest recovery in the second quarter, the UK economy is in need of some fresh ideas. Enter Mark Carney.
The former Bank of Canada governor, took the reins from Mervyn King on July 1.
And then there is his erudite background. He has a bachelor’s degree in economics from Harvard, an MPhil in economics from Oxford, and a PHD in economics from Nuffield College, Oxford. He then spent 13 years at Goldman Sachs before transitioning to the public sector.
As governor of the Bank of Canada he was considered to have the Midas touch. He was credited with steering Canada away from the worst of the financial crisis and helping put it back on the path to recovery much faster than other developed economies.
So, it’s understandable that he managed to negotiate a £874,000 package to move to London, according to The Guardian, including a monthly £10,000 housing allowance. He will also only be serving a five-year term, instead of the usual eight.
Forward guidance: First order of the day
The pressure is on for Carney, as an outsider, to bring with him a change in “the culture of an institution that has been dominated by a single personality for the past 20 years,” according to UBS’ Amit Kara.
He is expected to introduce forward guidance, similar to the Fed i.e. signal monetary policy stance ahead of time. But Kara argues that forward guidance is likely to be less effective in the UK because of “the unpredictability of the UK economy.” The Bank of England on the other hand has managed to get its forecasts wrong. From Kara:
“Mr Carney will most likely announce a framework for guidance in August along with publication of the Inflation Report. The framework will be necessarily cautious and, as such, include a heavy dose of conditionality to satisfy other MPC members that are similarly sceptical about the benefits of forward guidance.
“We have also contended that Mr Carney will bring about a welcome change in the culture of the institution. In this context, though, it is important to remind ourselves that the BoE has been one of the most aggressive and innovative central banks in recent years, and that is one aspect (along with the traditional pink coats of the doormen) that the new governor will be keen to preserve.”
But others argue that forward guidance could help ease some of the volatility and spill over from rising rates in the U.S.
How different will Carney be from his predecessor, Mervyn King?
First, in his testimony to the Treasury Select Committee (TSC) in February, Carney said central banks should consider nominal gross domestic product (NGDP) targeting if QE measures aren’t enough, since this would allow for a more aggressive response. Carney did however say that inflation targeting was preferred over NGDP targeting.
In this regard he is quite like King, because he believes there is “considerable flexibility in the current inflation targeting framework and a very high bar for switching from it,” according to a February note by Jamie Dannhauser at Lombard Street Research.
Second, both Carney and King justify extending the time frame for inflation to be brought back to target, though Carney is more likely to have a time frame.
Third, like King, Carney is expected to vote for more gilt purchases. Remember King was looking for an additional £25 billion in gilt purchases but had six members of the MPC vote against it. Dannhauser thinks the MPC under Carney will vote for more gilt purchases in 2013-2014, but that they would not take centre stage in the committee’s tool box.
Fourth, unlike King, Carney is in favour “of using monetary policy to ‘lean against the wind’ of asset bubbles,” wrote Dannhauser. He thinks it is important to use interest rates to ensure financial stability.
“In all likelihood, the differences between Bank of England policy under Carney and that under Mervyn King will be more apparent than real…
“Carney himself questions the magnitude of QE’s benefit on the real economy, and while acknowledging that the marginal benefit is likely to be positive, notes that there are potential costs from long- lasting monetary stimulus. Like Mervyn King, Mark Carney does not appear persuaded by some of the more radical monetary ideas that could be considered, e.g. money-financed fiscal policy, or notably a change of fiscal course. Both are also persuaded of the need for swift and radical reform of the banking system, and at the same time complacent about the short-term damage to output growth and the increasing pro-cyclicality of bank regulation.
“All in all, we do not believe that much of substance is going to change. Monetary policy will continue along the same path, i.e. aggressive stimulus and an extended time frame over which inflation is brought back to target.”
Remember, Carney was hand-picked by Mervyn King. So, in the near term, the biggest difference we see might just be the changes he brings to culture and hierarchy at the Old Lady of Threadneedle Street.
Not everyone’s a fan
Some have raised questions about his time at Goldman Sachs and his decision to appoint another investment banker, Banco Santander’s Charlotte Hogg, to be the BoE’s first chief operating officer.
“That resumeé rundown isn’t meant to impute personal venality to any of these officials; it’s to point out the corruption of a system governed by unelected ex-bankers colluding in unprecedented austerity for the poor, while shoveling hundreds of billions at bankers ,” wrote Aditya Chakraborty in The Guardian.
Societe Generale’s Albert Edwards said Carney’s stance on NGDP targeting was cause for concern because it showed the willingness of “policymakers to become more and more interventionist in their monetary experiments.”
He even compared Carney to Alan Greenspan:
“In 2005 I described Alan Greenspan as an economic war criminal when most others had decided he was “the greatest central banker who ever lived”, Hence I note with alarm that some commentators are so excited about the appointment of Mark Carney to the Bank of England Governorship that now he Carney, is now being dubbed “the world’s greatest central banker”. Oh dear! From everything I have read so far I fear that in the fullness of time he will have more similarities with Alan Greenspan than just this unwanted accolade and his legacy will be equally destructive.”
Of course the course isn’t easy for Carney at the Bank of England. Dissent from the other members of the monetary policy committee could dampen his agenda, as could the constraints of fiscal policy.
Carney will preside over his first meeting as the governor of the Bank of England this week. He isn’t expected to announce additional gilt purchases at his first meeting.
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