Great Expectations for Carney at Bank of England

By The Fiscal Times  NOV 28, 2012 11:30 AM

Carney's appointment may be a very welcome development. He seems to have exactly the kind of skills that that are in need to help Britain extricate itself from a difficult economic and fiscal situation.


Many decades ago, when newly appointed Bank of England Governor Mark Carney was still a small child playing in the small town of Fort Smith in Canada’s Northwest Territories, I was learning my first lessons in just how Canadians were seen by the British establishment. The establishment in question was my London day school, whose staff included in its ranks at least one member of the nobility and many of whose students came from upper-crust homes in Belgravia, Knightsbridge, and Chelsea.

When I, the resident Canadian, was caught sticking out my tongue at my headmistress behind her back (or so I thought) and sent to her office to be chastised for my bad behavior, the punishment was accompanied by a lecture. “You may be a colonial,” the redoubtable woman announced, with a sniff. “That means you may well never accomplish as much as some of the other girls here. But that doesn’t mean you can get along without good manners.”

Flash forward four decades or so, and now Mark Carney – a fellow colonial – has been tapped to take the helm of that most British institution, the Bank of England, founded in the late 17th century. Some fusty Brits may still share those antiquated and patronizing ideas about the worth of “colonials,” but even among these individuals, Carney’s appointment may be a very welcome development. Not only does he have manners, but he seems to have exactly the kind of skills that that are in need to help Britain extricate itself from a difficult economic and fiscal situation.

Carney may be a colonial, but he’s a particularly savvy one, well equipped to tackle the challenges associated with his new tasks: Setting and monitoring monetary policy as well as the more sweeping regulatory oversight responsibilities that the British central bank has taken on.

This is a leap into the big time for Carney, but one that shouldn’t come as too much of a surprise for anyone who has monitored his career – Goldman Sachs (NYSE:GS), Canada’s finance department and finally, in 2003, the Bank of Canada (TSE:RY) (NYSE:RY). The Harvard- and Oxford-educated economist has toiled in the trenches of investment banking, getting firsthand insight into some of the risks facing national governments in today’s high-speed global markets, such as Russia’s sovereign debt crisis in the late 1990s that brought about the collapse of Long-Term Capital Management.

Carney may have learned the messages of that crisis better than many of his peers. Certainly, under his eye, Canadian financial institutions largely steered clear of the debacles that brought their US counterparts to the edge of disaster (and sent Bear Stearns, Lehman Brothers, Washington Mutual, and others toppling over the edge.)

While it’s foolish to assume that Carney can simply step in and quickly guide a country in a very different set of economic circumstances – with a very different regulatory regime and facing different problems – back to health, he does have several advantages in his new position.

Firstly, and perhaps most crucially, he carries little baggage. In contrast to some internal candidates for the job, he is tainted neither by failures to keep Britain’s economy from succumbing to a double-dip recession or to prevent its financial institutions from succumbing to the financial crisis in the first place. The failed policies of the past belong to others, which means he’ll enjoy a honeymoon of sorts – the more so, since while he is reasonably well known to Bank of England officials with whom he has and will be working, he won’t be seen as the candidate of any particular coterie within “The Old Lady of Threadneedle Street,” as the bank is often called. Secondly, Carney brings with him a reputation for being not only smart but flexible and pragmatic. He is the kind of person, says one former colleague, whose interest is in what policy will achieve the desired results. In 2010, the Bank of Canada was the first G-7 member to raise interest rates after the financial crisis, but Carney warned shortly afterward that “no particular path for monetary policy is preordained” and that the central bank’s future decisions would depend on domestic and global events.

Similarly, while he has been a big advocate of banking reforms, including more significant capital requirements envisaged under Basel III, Carney isn’t a big fan of the so-called Volcker Rule requiring banks to no longer invest in hedge funds or engage in proprietary trading. On the other hand, despite his stint at Goldman Sachs, Carney has a firm view of where financial institutions belong in the hierarchy: They must move on from their “self-appointed role as the apex of economic activity to once again be the servant(s) of the real economy,” he told an audience in Montreal in 2009.

Which brings me to my third point: Carney calls it as he sees it, and rejects glib conclusions. If companies are hoarding cash, he apparently doesn’t think it’s only because they are afraid of what the future holds. As he said last summer, it’s more likely to be because they can’t find anywhere interesting or profitable to invest it – in which case it’s time for them to hand it back to shareholders and keep the wealth circulating. Similarly, if banks aren’t lending, he has argued, it’s more likely to be because of a lack of demand than because the financial institutions are fearful or crippled by regulations.

His willingness to speak his mind has won him at least one powerful opponent – Jamie Dimon, CEO of JPMorgan Chase (NYSE:JPM). Back in 2010, Carney referred disdainfully to the “jaded attitudes” Dimon displayed in dismissing the financial crisis as the kind of thing that happens every five to seven years when explaining events to his daughter. A year later, in the autumn of 2011, the two men clashed face to face in Washington, with Dimon blowing up at Carney and arguing that the latter’s push for banking reforms – and higher capital requirements – discriminate against giant US institutions such as JPMorgan. Reportedly, Dimon referred to that as “anti-American” and “cockamamie nonsense” dreamed up by individuals with no real understanding of today’s financial markets. It took Goldman Sachs CEO Lloyd Blankfein to smooth down the ruffled feathers.

The confrontation with Dimon shows that Carney – seen as mild-mannered but incisive – won’t back down when he believes he is right, and raises some interesting questions about how he’ll interact with Dimon in his new role – London is a major headquarters for JPMorgan Chase and other big financial institutions. But it should give British Prime Minister David Cameron confidence to know that his new financial honcho is unlikely to be seen as too much of an insider in the City of London.

As part of his relocation, Carney has said he’ll be applying for British citizenship (his wife is British by birth and his children are dual nationals), but that he’ll only be staying in the post for five years rather than the traditional eight – enough time, it is hoped, to tackle the turnaround of the much larger British economy. Of all the central bankers in the world today, Carney has one of the strongest reputations, but by reaching beyond the country’s borders to tap a “colonial” for the job, Cameron and his government are still taking a risk. (The last Canadian-born colonial to play a major role in Britain’s government was press baron Lord Beaverbrook, during World War II.)

The task that lies ahead is a big and complex one, which is more difficult than anything Carney has confronted to date. Because of his reputation and track record, expectations are high – and so are the stakes.

Editor's Note: This article by Suzanne McGee originally appeared on The Fiscal Times.

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