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Mark Carney: what should he do now? Our panel's verdict Mark Carney: what should he do now? Our panel's verdict
(3 months later)
Patricia Croft: 'Act as an agent of change'Patricia Croft: 'Act as an agent of change'
Expectations are high as Mark Carney, the so-called rock star of central banking, takes the helm at the Bank of England. He will be missed. Canada came out of the financial and economic crises of 2007/08 relatively unscathed. And rightly or wrongly, most of that credit lands at the feet of Mark Carney. He acted decisively, slashing interest rates and working closely with bank regulators to ensure the health of our banking system. But to be fair, he also benefited from a highly regulated, concentrated banking system and the credibility of some 20 years of successful inflation targeting. Nonetheless, Canadians listened to him and respected him as a strong and very visible leader of the central bank. He did not shy away from controversy, admonishing Canadian companies' propensity to hoard cash, and wading into the income inequality issue by voicing his support for the Occupy movement.Expectations are high as Mark Carney, the so-called rock star of central banking, takes the helm at the Bank of England. He will be missed. Canada came out of the financial and economic crises of 2007/08 relatively unscathed. And rightly or wrongly, most of that credit lands at the feet of Mark Carney. He acted decisively, slashing interest rates and working closely with bank regulators to ensure the health of our banking system. But to be fair, he also benefited from a highly regulated, concentrated banking system and the credibility of some 20 years of successful inflation targeting. Nonetheless, Canadians listened to him and respected him as a strong and very visible leader of the central bank. He did not shy away from controversy, admonishing Canadian companies' propensity to hoard cash, and wading into the income inequality issue by voicing his support for the Occupy movement.
Are the lessons learned in Canada transferable to the UK? The Bank of England now has responsibility as head regulator for the financial system – Carney's experience in Canada coupled with his role as head of the G20 financial stability board will stand him in good stead. But his powers of persuasion will be put to the test as a key difference is that in the UK he will have just one vote on monetary policy. His appointment of a female Bank COO may be a taste of things to come. My advice to Carney is to continue to act as an agent of change, remembering they are never popular. Outgoing governor King clearly opposed forward guidance and monetary policy activism. Carney will no doubt use all his talents of leadership and communications to try to change this. The UK needs Carney; economic growth is weak, inflation is high and the banking system is struggling to rise above recent scandals. He is the right man for the job, but expectations are very high. Nonetheless, I have no doubt Carney will succeed if the UK lets him.Are the lessons learned in Canada transferable to the UK? The Bank of England now has responsibility as head regulator for the financial system – Carney's experience in Canada coupled with his role as head of the G20 financial stability board will stand him in good stead. But his powers of persuasion will be put to the test as a key difference is that in the UK he will have just one vote on monetary policy. His appointment of a female Bank COO may be a taste of things to come. My advice to Carney is to continue to act as an agent of change, remembering they are never popular. Outgoing governor King clearly opposed forward guidance and monetary policy activism. Carney will no doubt use all his talents of leadership and communications to try to change this. The UK needs Carney; economic growth is weak, inflation is high and the banking system is struggling to rise above recent scandals. He is the right man for the job, but expectations are very high. Nonetheless, I have no doubt Carney will succeed if the UK lets him.
• Patricia Croft is the founder of Croft Consulting and the former chief economist of Royal Bank of Canada Global Asset Management• Patricia Croft is the founder of Croft Consulting and the former chief economist of Royal Bank of Canada Global Asset Management
Joseph Stiglitz: 'Make banks fulfil their responsibility to society'Joseph Stiglitz: 'Make banks fulfil their responsibility to society'
An excessive, almost exclusive, focus on inflation by many central banks has not served our economies well. A more comprehensive mandate, along the US model – inflation, employment, growth, and financial stability, would make the task that confronts bankers such as Mark Carney easier. With the threat of recession, slow growth and unemployment predominating, these should be where attention should be centred. Low interest rates help the economy by lowering the exchange rate, but would help even more if they were translated into more availability of credit at favourable terms, for example, to small businesses and potential homeowners. The credit channel has to be strengthened. And that means banks need to be reorientated back to their traditional functions of lending, not trading (including in derivatives), speculation, market manipulation, etc. Doing so would at the same time help create a more stable financial system.An excessive, almost exclusive, focus on inflation by many central banks has not served our economies well. A more comprehensive mandate, along the US model – inflation, employment, growth, and financial stability, would make the task that confronts bankers such as Mark Carney easier. With the threat of recession, slow growth and unemployment predominating, these should be where attention should be centred. Low interest rates help the economy by lowering the exchange rate, but would help even more if they were translated into more availability of credit at favourable terms, for example, to small businesses and potential homeowners. The credit channel has to be strengthened. And that means banks need to be reorientated back to their traditional functions of lending, not trading (including in derivatives), speculation, market manipulation, etc. Doing so would at the same time help create a more stable financial system.
A more competitive banking system too would help in both regards: in most western countries, too big to fail, too interconnected to fail, and too correlated to fail financial systems pose an ongoing threat, one which has become worse in the aftermath of the crisis. These banks are not only to big to fail, but have shown themselves too big to manage, too big to be held accountable, too big to be brought to justice.A more competitive banking system too would help in both regards: in most western countries, too big to fail, too interconnected to fail, and too correlated to fail financial systems pose an ongoing threat, one which has become worse in the aftermath of the crisis. These banks are not only to big to fail, but have shown themselves too big to manage, too big to be held accountable, too big to be brought to justice.
Financial stability would be enhanced too by substantial increases in capital requirements. The regulatory framework of Basel III should be viewed as a minimum standard, not a maximum. The central insight of modern financial theory, that of Modigliani and Miller, was that increasing leverage simply shifts more risk to equity, and on to the public, as we saw in the 2008 crisis – it doesn't make something out of nothing.Financial stability would be enhanced too by substantial increases in capital requirements. The regulatory framework of Basel III should be viewed as a minimum standard, not a maximum. The central insight of modern financial theory, that of Modigliani and Miller, was that increasing leverage simply shifts more risk to equity, and on to the public, as we saw in the 2008 crisis – it doesn't make something out of nothing.
Making the financial system safer, more accountable, more responsible, more likely to full its societal role should be among the central missions of the Bank. It will require deeper and continuing reforms and monitoring. It will require, in addition to all the other changes noted above, prohibitions on bonus schemes that incentivise excessive risk-taking and short-sighted behaviour.Making the financial system safer, more accountable, more responsible, more likely to full its societal role should be among the central missions of the Bank. It will require deeper and continuing reforms and monitoring. It will require, in addition to all the other changes noted above, prohibitions on bonus schemes that incentivise excessive risk-taking and short-sighted behaviour.
In the days before the crisis, there was excessive faith in the efficiency and stability of markets, in the notion that keeping inflation low and stable was necessary, and almost sufficient, to attain sustained high growth, that monetary policy did and should exercise its influence mainly through interest rates.In the days before the crisis, there was excessive faith in the efficiency and stability of markets, in the notion that keeping inflation low and stable was necessary, and almost sufficient, to attain sustained high growth, that monetary policy did and should exercise its influence mainly through interest rates.
We now know all too well the deficiencies of these models. The failures were not just "an accident", the consequence of a once-in-a-century flood. They were systemic. US monetary authorities have taken the lead in forging strong policies to help get the economy out of the hole that they had helped dig, but they have done little to create a framework for stable growth going forward. Carney's challenge will be to respond to the exigencies of the moment – made more difficult by the travails at his doorstep in Europe, which are likely only to get worse – at the same time as creating a new policy framework ensuring stability with full employment and high growth.We now know all too well the deficiencies of these models. The failures were not just "an accident", the consequence of a once-in-a-century flood. They were systemic. US monetary authorities have taken the lead in forging strong policies to help get the economy out of the hole that they had helped dig, but they have done little to create a framework for stable growth going forward. Carney's challenge will be to respond to the exigencies of the moment – made more difficult by the travails at his doorstep in Europe, which are likely only to get worse – at the same time as creating a new policy framework ensuring stability with full employment and high growth.
• Joseph Stiglitz is a recipient of the Nobel prize in economics and former chief economist at the World Bank• Joseph Stiglitz is a recipient of the Nobel prize in economics and former chief economist at the World Bank
Merryn Somerset Webb: 'Stop transferring wealth to the rich via QE'Merryn Somerset Webb: 'Stop transferring wealth to the rich via QE'
Mark Carney is the great hope of the British political establishment. The idea is that he will bring dynamic innovation to our monetary policy. He is expected to reject out of hand the notion that the various strategies of begging banks to take almost free money, lowering interest rates to one quarter of their previous record level since 1700 and printing hundreds of billions of pounds somehow means that policy is "maxed out". The idea is that he then uses our economy as a testing ground for some kind of mother-of-all-money-creation-experiments that will lift us out of recession and back into a fantasy land of fixed banks and fast growth.Mark Carney is the great hope of the British political establishment. The idea is that he will bring dynamic innovation to our monetary policy. He is expected to reject out of hand the notion that the various strategies of begging banks to take almost free money, lowering interest rates to one quarter of their previous record level since 1700 and printing hundreds of billions of pounds somehow means that policy is "maxed out". The idea is that he then uses our economy as a testing ground for some kind of mother-of-all-money-creation-experiments that will lift us out of recession and back into a fantasy land of fixed banks and fast growth.
He shouldn't do it. It is easy to see why we started down the QE road. Back in 2008, with our banks mainly insolvent and crisis looming, Mervyn King would have felt he had no choice but to do whatever it took to keep the system from imploding. But QE comes with horrible side effects, the worst one being that it effectively acts as if it were a regressive fiscal policy rather than a monetary policy. By that I mean that it shifts wealth from the poor to the rich. QE is supposed to work in many ways – providing cover for the banks to slowly fix their balance sheets and keeping the supply of money constant even as the big banks contract lending (which cuts the money supply). However one of its main consequences is to keep asset prices high as all the new money leaks into prime property prices, stocks, bonds, farmland, art and the like.He shouldn't do it. It is easy to see why we started down the QE road. Back in 2008, with our banks mainly insolvent and crisis looming, Mervyn King would have felt he had no choice but to do whatever it took to keep the system from imploding. But QE comes with horrible side effects, the worst one being that it effectively acts as if it were a regressive fiscal policy rather than a monetary policy. By that I mean that it shifts wealth from the poor to the rich. QE is supposed to work in many ways – providing cover for the banks to slowly fix their balance sheets and keeping the supply of money constant even as the big banks contract lending (which cuts the money supply). However one of its main consequences is to keep asset prices high as all the new money leaks into prime property prices, stocks, bonds, farmland, art and the like.
And who owns these assets? It isn't the poor. No, for them the effect of QE comes more in the form of non-existent interest rates on their savings, the steady erosion of the real value of their fixed wages to say nothing of the rise in the gap between the housing accommodation they can afford and the accommodation they want. It is, in the end, as the Bank acknowledged last year, a clear wealth transfer to the already rich. That's something of a moral problem. But it is also something that should now be voted on at a parliamentary level rather than just waved through by a desperate chancellor. So what Mark Carney should do is to acknowledge that transferring wealth and propping up stock markets is the only thing we know – so far – that QE can do. Given that the economy is not a machine but the sum of many million people's worth of generally irrational behaviour, the rest is guesswork. Then he should say firmly that the transfer of wealth in the UK is none of his business. And stop it.And who owns these assets? It isn't the poor. No, for them the effect of QE comes more in the form of non-existent interest rates on their savings, the steady erosion of the real value of their fixed wages to say nothing of the rise in the gap between the housing accommodation they can afford and the accommodation they want. It is, in the end, as the Bank acknowledged last year, a clear wealth transfer to the already rich. That's something of a moral problem. But it is also something that should now be voted on at a parliamentary level rather than just waved through by a desperate chancellor. So what Mark Carney should do is to acknowledge that transferring wealth and propping up stock markets is the only thing we know – so far – that QE can do. Given that the economy is not a machine but the sum of many million people's worth of generally irrational behaviour, the rest is guesswork. Then he should say firmly that the transfer of wealth in the UK is none of his business. And stop it.
• Merryn Somerset Webb is editor in chief of MoneyWeek• Merryn Somerset Webb is editor in chief of MoneyWeek
Adam Posen: 'Stop buying gilts'Adam Posen: 'Stop buying gilts'
The impact of monetary policy depends on what a central bank buys, and what institutions it transacts with. The Federal Reserve is demonstrating this fact with the huge impact on US residential construction of its purchases of mortgage-backed securities over the last year; the Bank of Japan is putting this principle into action by buying long-duration Japanese government bonds as opposed to cash, purchases of which previously failed to counter deflation. It is time for the monetary policy committee (MPC) with its new governor to observe the examples around them, and listen to the longstanding arguments of current and past committee members for buying something other than gilts.The impact of monetary policy depends on what a central bank buys, and what institutions it transacts with. The Federal Reserve is demonstrating this fact with the huge impact on US residential construction of its purchases of mortgage-backed securities over the last year; the Bank of Japan is putting this principle into action by buying long-duration Japanese government bonds as opposed to cash, purchases of which previously failed to counter deflation. It is time for the monetary policy committee (MPC) with its new governor to observe the examples around them, and listen to the longstanding arguments of current and past committee members for buying something other than gilts.
The Bank of England should be buying securitised bundles of small, medium and new enterprise debt, as I first proposed in September 2011. The more different from cash the asset that the MPC buys is, the bigger the impact its purchases will have on the economy; the more the MPC concentrates its purchases on where British financial markets are dysfunctional, the bigger the impact as well. Both these factors direct the banks towards SME lending. The highly concentrated British banking system, dominated by four big banks and one big mutual society, has largely forgotten about high-street lending, at least to businesses. The funding for lending scheme (FLS), while clever and well-intentioned, was intended to go through that existing banking system rather than around it, and thus was ineffective.The Bank of England should be buying securitised bundles of small, medium and new enterprise debt, as I first proposed in September 2011. The more different from cash the asset that the MPC buys is, the bigger the impact its purchases will have on the economy; the more the MPC concentrates its purchases on where British financial markets are dysfunctional, the bigger the impact as well. Both these factors direct the banks towards SME lending. The highly concentrated British banking system, dominated by four big banks and one big mutual society, has largely forgotten about high-street lending, at least to businesses. The funding for lending scheme (FLS), while clever and well-intentioned, was intended to go through that existing banking system rather than around it, and thus was ineffective.
Governor Carney and the MPC will be tempted instead, for several reasons, to stick with some form of announcement by August that rates will not rise until certain targets are met. There are MPC members who think further QE is ineffective or harmful; there are those who think the UK economy is turning around; there are those who want to keep the Bank from taking on credit risk. Every one of these reasons, however, is misguided: credit easing will be more effective than QE or FLS while addressing a structural problem; the UK economy is still a huge way from overheating, let alone full employment or accelerating inflation; and central banks, including the Bank of England, have bought and sold private assets throughout history. Stopping at cheap talk will not be enough, and the time for giving credit where it's overdue has come.Governor Carney and the MPC will be tempted instead, for several reasons, to stick with some form of announcement by August that rates will not rise until certain targets are met. There are MPC members who think further QE is ineffective or harmful; there are those who think the UK economy is turning around; there are those who want to keep the Bank from taking on credit risk. Every one of these reasons, however, is misguided: credit easing will be more effective than QE or FLS while addressing a structural problem; the UK economy is still a huge way from overheating, let alone full employment or accelerating inflation; and central banks, including the Bank of England, have bought and sold private assets throughout history. Stopping at cheap talk will not be enough, and the time for giving credit where it's overdue has come.
• Adam Posen is president of the Peterson Institute for International Economics, Washington DC. From 2009 to 2012 he was an external member of the Bank of England's monetary policy committee• Adam Posen is president of the Peterson Institute for International Economics, Washington DC. From 2009 to 2012 he was an external member of the Bank of England's monetary policy committee
Richard Koo: 'Tell the UK that it cannot afford fiscal consolidation'Richard Koo: 'Tell the UK that it cannot afford fiscal consolidation'
Unlike the former leadership of the Bank of England, who initially belittled the lessons from Japan and believed that a bold monetary easing would quickly turn the post-Lehman UK economy around, Mark Carney was one of the first central bank governors who took the concept of balance-sheet recession seriously, a concept that was developed to explain Japan's predicament. In particular, Japan was suffering from its private sector minimising debt instead of maximising profits following the bursting of its debt-financed bubble.Unlike the former leadership of the Bank of England, who initially belittled the lessons from Japan and believed that a bold monetary easing would quickly turn the post-Lehman UK economy around, Mark Carney was one of the first central bank governors who took the concept of balance-sheet recession seriously, a concept that was developed to explain Japan's predicament. In particular, Japan was suffering from its private sector minimising debt instead of maximising profits following the bursting of its debt-financed bubble.
But when the private sector as a whole is trying to remove its debt overhang by saving money (including paying down debt) even at zero interest rates, monetary policy loses its effectiveness because borrowers with balance sheets underwater are neither willing nor able to increase their borrowing in response to central bank easing. The economy then enters a deflationary spiral unless government acts as "borrower of last resort" and takes up and spends the unborrowed savings in the private sector.But when the private sector as a whole is trying to remove its debt overhang by saving money (including paying down debt) even at zero interest rates, monetary policy loses its effectiveness because borrowers with balance sheets underwater are neither willing nor able to increase their borrowing in response to central bank easing. The economy then enters a deflationary spiral unless government acts as "borrower of last resort" and takes up and spends the unborrowed savings in the private sector.
Today, instead of increasing borrowing in response to record low interest rates, the private sector in the UK is saving a shocking 6.6% of GDP. The same figure for the US is 8.4%, Ireland 5.4% and Spain 15.6% (all Q4 2012 figures seasonally adjusted). These are absolutely horrendous numbers and indicate that all of these economies are squarely in balance-sheet recessions. Since neither the government nor the central bank can force the private sector not to repair its balance sheets, Carney would do well to explain to the British public why the effectiveness of monetary policy is limited in this highly unusual recession. He should also argue along the lines of the US Fed chairman Ben Bernanke's warning on the "fiscal cliff" that the UK cannot afford fiscal consolidation until its private-sector deleveraging is completed. He should deliver this massage even if Messrs Cameron and Osborne don't want to hear it.Today, instead of increasing borrowing in response to record low interest rates, the private sector in the UK is saving a shocking 6.6% of GDP. The same figure for the US is 8.4%, Ireland 5.4% and Spain 15.6% (all Q4 2012 figures seasonally adjusted). These are absolutely horrendous numbers and indicate that all of these economies are squarely in balance-sheet recessions. Since neither the government nor the central bank can force the private sector not to repair its balance sheets, Carney would do well to explain to the British public why the effectiveness of monetary policy is limited in this highly unusual recession. He should also argue along the lines of the US Fed chairman Ben Bernanke's warning on the "fiscal cliff" that the UK cannot afford fiscal consolidation until its private-sector deleveraging is completed. He should deliver this massage even if Messrs Cameron and Osborne don't want to hear it.
Carney should also think of the ways to mop up the massive liquidity injected by his predecessor via quantitative easing before it is too late. Viewed as a multiple of required reserves, there is enough liquidity in the banking system today to increase money supply by 10 times in the UK, 16 times in the US and six times in Japan. This liquidity will do no harm as long as the private sector as a whole is deleveraging. But we are also facing potential inflation rates of 600%, 1000% and 1600% when those respective private sectors return to profit maximisation. Bringing this massive genie back into the bottle without destroying the bond market and the economy is a challenge only a person of Carney's calibre can possibly handle.Carney should also think of the ways to mop up the massive liquidity injected by his predecessor via quantitative easing before it is too late. Viewed as a multiple of required reserves, there is enough liquidity in the banking system today to increase money supply by 10 times in the UK, 16 times in the US and six times in Japan. This liquidity will do no harm as long as the private sector as a whole is deleveraging. But we are also facing potential inflation rates of 600%, 1000% and 1600% when those respective private sectors return to profit maximisation. Bringing this massive genie back into the bottle without destroying the bond market and the economy is a challenge only a person of Carney's calibre can possibly handle.
• Richard Koo is chief economist at the Nomura Research Institute, Tokyo• Richard Koo is chief economist at the Nomura Research Institute, Tokyo
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