The appointment of Mark Carney as governor of the Bank of England is a historic event. It is extraordinary - and admirable - that a country should choose to give its most important official position to a foreigner such as Mr. Carney, even if Canadians are not very foreign and the governor-designate, with his English wife and connections, less so than most of his compatriots. Yet it is also both a surprise and a gamble. It is a surprise because Mr Carney, a widely respected governor of the Bank of Canada, did not - so far as I know - apply for the job. It is a gamble because a foreign national will be assuming a job that is inescapably political and, in the current difficult economic and financial circumstances of the U.K., even more political than usual.
George Osborne, the chancellor of the exchequer, deserves credit not only for choosing an exceptional person but for persuading him to take the job. Unquestionably, Mr. Carney is a man of quality, with a broad background in economics, finance and central banking. In person, he is both brilliant and forceful. On one celebrated occasion, he engaged in a fierce row with Jamie Dimon, the redoubtable boss of JPMorgan - and held his ground.
Mr. Carney has undergraduate and postgraduate degrees in economics from Harvard and Oxford. He worked for 13 years at Goldman Sachs. He has been governor of the Bank of Canada since 2008 and chairman of the Financial Stability Board since 2011, when Mario Draghi, another Goldman alumnus, left to become president of the European Central Bank. He has, not least, gained credit for the relatively robust performance of the Canadian economy during his period at its central bank. How far he is responsible for this happy outcome is unclear, as such things so often are.
Nevertheless, Mr. Carney faces three huge challenges in his new job.
His first is political. The idea that the job of running the Bank of England is essentially technocratic is plainly wrong. In an economy using pure fiat (or state-made) money, the central bank makes discretionary decisions with huge consequences for income distribution, financial health, economic performance and fiscal solvency.
No neat technocratic solutions exist. This is vastly more obvious today, after the financial crisis, which demolished the erroneous notion that stabilising inflation was a sufficient condition for stabilising the economy. The BoE’s decisions are deeply political. They are political in themselves. They become still more political when the governor is enjoined to comment on fiscal policy or to intervene in the financial system. An outsider will have some advantages in making these difficult decisions. He will be more independent. But will he also be viewed as legitimate?
Mr. Carney’s second challenge will be organizational. He will inherit a world in flux - not just at the BoE itself, but also in the British, European and global regulatory architecture and financial systems. Under the new regime, the BoE has consolidated responsibility for monetary policy, financial policy and banking supervision. The range of these new responsibilities is daunting, the need to integrate decision-making within the BoE itself is challenging; the obligations both to co-ordinate policies with the government and to explain them to the public are pressing and onerous.
A huge problem, in my view, is the difficulty of co-ordinating policy inside the BoE. It is simply untrue that financial stability and monetary policy can be treated separately, particularly in times like today’s. Policies that address the stability of the financial system, such as raising capital requirements or constraining lending, have powerful and direct consequences for monetary policy and vice versa. Under the envisaged plans, however, only a few permanent officials sit on all committees. This will give them extraordinary influence over the process and leave the outsiders who sit on only one of these bodies at a huge disadvantage. This is a mistake.
Beyond that, the investigations of the BoE’s performance during the crisis have revealed serious failings. Examination of performance before the crisis might reveal still more important failings. As an experienced outsider, Mr Carney is in a relatively good position to act as the needed new broom. He must do so. But as he does, he must pay attention to making the BoE less centralized without thereby making it less able to respond quickly to events.
Mr. Carney’s third and biggest challenge is intellectual. Unlike Canada, the U.K. has fallen into a dire economic condition. Despite exceptional monetary ease, the economy is stagnant. Coalition fiscal policy is controversial. The sources of future growth are obscure, while the challenges of needed economic rebalancing are daunting. Over the next governor’s term, the BoE must chart a voyage back to something close to normality, in co-operation with the government. It must avoid both permanent stagnation and high inflation. Yet these are still largely uncharted waters for economics and monetary-policy makers. Mr. Carney’s biggest task of all, then, is to guide the central bank and the economy towards the least intolerable destination. Good luck.
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