Mark Carney is in a good position to answer some hard questions. Central bank governors usually have to worry about policies here and now, but Mr. Carney is effectively between jobs – leaving the Bank of Canada and not yet installed as governor at the Bank of England. When the U.K. Treasury Committee hear Mr. Carney on Thursday, they should think big. Here are five suggestions:
1. What did Mervyn King do wrong? Mr. Carney's predecessor must have made some mistakes, since the U.K. went through bubble and bust, while the central bank often looked slow or out of touch. Mr. Carney is in a good position to draw some lessons.
2. Are central banks impotent or stupid? Central bankers are pushing unprecedented quantities of ultra-cheap and newly created money into the financial system, but the real economy is not responding. Perhaps Mr. Carney should explain what, if anything, he thinks such policies can accomplish, and whether they really are as risk-free as proponents claim. To start, he may want to justify the years of punishment meted out on savers.
3. How many policy targets should central banks have? The Bank of England has a single target, an inflation rate of 2 to 3 per cent. Mr. Carney has suggested that a nominal GNP target might work better. In any case, the crisis hit when inflation was under control. Perhaps the central bank's mandate should be expanded to include leverage levels, financial asset prices – or protection of savers.
4. Is a large financial sector a good thing? It certainly looks like large and ambitious financial institutions bring structural risks. The issue did not arise in Canada for Mr. Carney, a former Goldman Sachs banker. It is crucial in the U.K., where finance is a leading export industry.
5. Can central banks really be politically independent? The notion that central banks could stand above the political fray looks, well, frayed after five years of making decisions that most people would think of as political. Mr. Carney has no British political connections, but that might not be an advantage.
As for Mr. Carney, this is a chance for him to tell politicians and investors just what to expect. He would be wise to make one request: Don't expect monetary policy to work miracles.