06 September 2018
Mark Carney: 50 “whys” to leave your lover
The “unreliable boyfriend” has outstayed his welcome.
By Frank O’Nomics
Just when we were starting to assess the runners and riders to be the next Bank of England Governor it seems that the race has been postponed. Comments from Mark Carney this week suggest that he has, for the second time, selflessly delayed a return to his family in Canada in order to help the UK through the Brexit transition. At the outset we should ask why the government believes that he will be needed so far beyond Brexit, until 2020, given that he was already scheduled to stay until June 2019, some 3 months after the key departure date. However, there are far bigger questions raised regarding the process of extending his tenure, as well as some good reasons why a replacement is needed regardless.
Let’s start with the possible reasons for Mr. Carney being persuaded to stay for so long. The first is the risk that Brexit could be postponed and that there is a need for some continuity until a later date. Given the increased prospects of a no deal Brexit (the Bank itself has changed the odds to 3:1 from 4:1) an extension seems somewhat unlikely, so is it the prospects of a disorderly Brexit that require him to stay? The third possibility is that there is insufficient confidence in his potential successors. The implications of this theory are more disturbing, given that a credible alternative needs to be found at some stage.
Moving beyond the reasons for asking Mr. Carney to stay, there are many of reasons why he should not. The overriding issue concerns the credibility of the bank’s independence, which is called into question given the manner in which Mr. Carney’s extended tenure has been disclosed. Rather than a formal announcement from the government (all governors are appointed by the Chancellor of the Exchequer), Mr. Carney himself confirmed the news which had already been leaked by a former Chancellor, George Osborne, in the Evening Standard. Even though he was speaking to the Treasury Select Committee at the time, it hardly gave any opportunity for the usual parliamentary scrutiny of the appointment of the most powerful unelected position in the country. The process of selecting the governor of an independent Bank of England should be transparent and there certainly should not be any suggestion that the current incumbent is dictating his own length of service and potentially the disorderly Brexit.
The sanctity of an independent Bank would be enough in itself to argue against an extended stay by Mr. Carney, but there are other reasons too, some of which depend on how far you think the remit extends. Mark Carney left most of us in no doubt where he stood ahead of the Brexit referendum and, while he made some very valid points, he has been accused of promoting “project fear” which could have undermined the referendum process. His pro-remain credentials have been displayed again this week as he argued that a disorderly Brexit would lead to a renewed fall in sterling that would lead to inflation again outstripping wage growth, thereby creating a squeeze on household incomes. The Bank is devoting a huge amount of its resources to working out what needs to be done as we leave the EU, gloom mongering does not have to be part of this process.
The other major reason for suggesting that it is time for someone new is the Bank’s approach to raising interest rates under Mr. Carney’s tenure. You will have noticed that I have not so far come up with the 50 “whys” mentioned in the headline. This alludes to a rough estimate of the number of Monetary Policy Committee meetings that Mark Carney will have presided over. The committee’s reluctance to raise rates when inflation was running at levels well in excess of the Bank’s target has had a number of significant consequences. First, the prevalence of low rates has encouraged an unhealthy level of borrowing, leaving households exceptionally vulnerable to an economic downturn. Second, by not raising rates the Bank is left with very little scope to ease if there is a downturn. Renewed quantitative easing many help stabilise asset prices; it is less likely to help those who have few assets. Third, the low rate policy has ensured the preservation of so-called zombie firms; those which would otherwise have gone to the wall, and thereby inhibited productivity growth. We are left with a very difficult situation for a new governor to take on, but the glacial process of raising rates under Mark Carney needs to be questioned.
There are some that would argue that it would be unfair to present a new governor with the consequences of a disorderly Brexit, and not having to find a successor relieves at least one headache for Philip Hammond. It is also unfair to undermine the bigger picture view of Mark Carney’s overall performance. He rightly commands great respect and he has seen the country through a very uncertain economic period. Nevertheless, by his staying we are again pushed into a very uncertain situation. The extension of Mr. Carney’s term still needs official confirmation (there is still time for everyone to change their minds!), but it seems likely that this will happen ahead of the Chancellor’s appearance before the House of Lords Economic Affairs Committee next Tuesday. There is also confusion regarding the appointment process for the deputy governor, given that the post has not been advertised and Sir Jon Cunliffe reaches the end of his tenure in November. There is a need for a greater clarity and a return to a transparent process, otherwise confidence in our most important financial institution will decline still further. The so-called unreliable boyfriend seems to have moved into the spare room for an indeterminate period.
