Mark Carney: The Wolf of Threadneedle Street

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“He’s going to tear through London like a lion. He’s the guy you want to have at your table at dinner; you want to be on his side of the room at the cocktail party.”

*** EMBARGO: NOT FOR RELEASE OR PUBLICATION BEFORE 12:00BST, ON MONDAY, JULY 1, 2013. *** Mark Carney, governor of the Bank of England, walks to a monetary policy committee (MPC) briefing on his first day inside the central bank's headquarters in London, U.K., on Monday, July 1, 2013. Carney takes the Bank of England helm today facing a struggle to make his policies count more than those of his U.S. counterpart for U.K. government debt. Photographer: Jason Alden/Pool via Bloomberg *** Local Caption *** Mark CarneyWere you to read that quote plainly you would be forgiven for thinking the speaker was talking about a superstar actor, a magnanimous rock star or even an enigmatic sports personality. But no, these were the words reserved for the incoming Governor of the Bank Of England, Mark Carney, back in 2011 before he took over from Sir Mervyn King.

Being the first non-British head of a 316 year old British institution comes with hefty expectations, and you can also expect to have every one of your moves watched, every question you ask will be interrogated to the fullest extent and people will look to you to attain the unattainable.

However, for Mark Carney the pressure is nothing new. After graduating from the University of Oxford, he went to work for Goldman Sachs for over a decade, swiftly rising to the position of managing director, after which he went to work for the Canadian finance department. Maintaining his steep ascension through the ranks, Carney landed at the Central Bank of Canada, where he proved his quality by leading the country through the global financial crisis that crippled every other nation on earth.

When appointed to the position of Governor of The Bank of England in 2013, Carney was given two jobs by the British public: Sort out the British banking system and Keep inflation rates low. 2 years on, how has he done? We investigate.

Sorting Out The Financial System

On the international stage he won plaudits for a package of measures presented last month at the G20 summit in Brisbane to ensure banks are no longer too big to fail, but at home Carney has had to work on the Bank’s reputation after it was drawn into the foreign exchange rigging scandal. As it investigates its own staff for possible market manipulation during the financial crisis, Carney is trying to get his colleagues to raise concerns more readily.

Carney has won numerous plaudits for his part in introducing hard hitting measures that helped stabilise the international financial system, and was endlessly further praised last month for a package of measures presented during the G20 Brisbane summit. The packages eradicated the era of banks being too ‘big’ to fail, and ensuring the common mans money was safe. However, at home within the Bank of England, Carney was fighting a war to clean up the financial system from within. Staff were investigated for possible market manipulation during the financial crisis. Despite this, Carney has not lost sight of the bigger goal;

“The G20 has worked intensively over the past six years to correct the fault lines that led to the global financial crisis,” said Mr Carney. ‘’While the job is substantially complete, further work remains in order to build a fully resilient system’’. Following on from his Bank packages, Carney unveiled the last major piece of crisis reforms, a provision that required every Bank to hold equity and bonds in the region of 16% – 20% at any one time in relation to their risk weighted assets in order to further protect and shield Taxpayers.

The Bank of England has also introduced tougher standards on derivatives and credit default swaps, although Carney himself does admit that the implementation of these points was a bit slow and lagged behind schedule. Upcoming will be sanctions and protocols on ‘’shadow banking’’ and non traditional credit institutions. Of more immediate concern to him though is the need to rebuild trust amongst regulators in order to prevent other countries from making unilateral decisions that could fragment years of hard work.

Next on his agenda is the pay of top bankers.

Mark Carney, governor of the Bank of England, speaks during the bank's financial stability report news conference at the Bank of England's Moorgate auditorium in London, U.K., on Tuesday, Dec. 16, 2014. Co-Operative Bank Plc failed the Bank of England's first public stress test of the country's lenders as Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc barely passed. Photographer: Chris Ratcliffe/Bloomberg *** Local Caption *** Mark Carney

 

Taking On The Bankers

Carney made a prediction earlier last year that simply imposing large fines on banks was not helping anybody and was most certainly not curtailing the misbehaving of top bankers. It’s tantamount to punishing the school for the pupil’s misdeeds. Behaviour will not change by that avenue.

Instead, Carney has a more radical idea. The plan is to take a large portion of the banker’s salaries, and categorise them with their bonuses, so as to put both their bonus and salaries at risk. Some institutions may even go as far as to implement performance bonds in place of a portion of the bonus’s and salaries. This potentially ‘elegant solution’, as Carney puts it, would be fair and transparent as the bonds would pay out should things go well and be surrendered should misconduct be discovered at a later date.

When he says it is an ‘elegant solution’, he is retorting the position taken by the EU which was of implementing a bonus cap, an ‘inelegant’ position that has just seemingly made a bad situation worse. However, critics of Carney point out that ‘performance bonds’ would just add to the complex nature of senior bankers pay packages. They have salaries, bonuses, allowances, term share based carrots and add-ons. Transperacy would be sure to suffer. But Mark Carney disagrees and hits back that the principal is sound.

Mark Carney, governor of the Bank of England, left, and Andrew Bailey, deputy governor for prudential regulation at the Bank of England and chief executive officer of the Prudential Regulation Authority (PRA), react during the bank's financial stability report news conference at the Bank of England's Moorgate auditorium in London, U.K., on Tuesday, Dec. 16, 2014. Co-Operative Bank Plc failed the Bank of England's first public stress test of the country's lenders as Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc barely passed. Photographer: Chris Ratcliffe/Bloomberg *** Local Caption *** Mark Carney; Andrew Bailey

The Future: Stable Interest Rates

When speaking of the low interest rates he has delivered for the UK, Mark Carney said “Enjoy it while it lasts, for this will go away over the course of the next year.” The main targets of the low interest rates currently are falling energy and food prices. Naturally, once these factors fade out inflation will again rise above the Bank of England’s 2% target. Carney has said that The Bank of England would only consider easing monetary policy should wages remain persistently depressed, or if expectations for inflation fell dramatically.

So in what circumstances would still easier monetary policy become appropriate? “The risk is that you go through a period of very low prices, say inflation around zero for the balance of the year, and that is principally driven by the big falls in petrol prices. That moves into inflation expectations. It influences wage settings, it broadens out to a range of other prices, and that imparts a persistence to low inflation.” Such circumstances might warrant “some additional stimulus“, he said.

Despite this, such an outcome is not very likely, “The path of monetary policy is consistent with limited and gradual rate increases, and I wouldn’t want to leave any misimpression,” he insists. Carney is more, if anything, upbeat about the future outlook of the UK economy, much more so than he was at the time of the November Inflation Report. This could be attributed to his thinking that the current state of low inflation is a benefit and a blessing in disguise, as it provides a much need and well timed boost to supplementing disposable incomes, underpinning and further supporting the rising rate of consumer spending. Because of this, a naturally cautious Bank of England has decided to raise forecasts for growth even higher than expected for 2015.

Our expectation is that we have this one-time adjustment in prices that washes out of the inflation figures about this time next year, and … that’s a scenario that is consistent with some limited and gradual increases in interest rates.” Says Carney.

Even so, this optimistic outlook and improving situation is not all about the boost from lower energy and food prices, it is also, according to Mark Carney, down to the UK being in a much better position within Europe, since the European Central Bank has made a recent announcement on open ended quantitative easing. Carney is not concerned about the possibly impending departure of Greece from the Eurozone , or how that would negatively disrupt the Bank of England’s plans for the UK economy. He claims such scenarios are hypothetical and therefore not something he can factor into the equation for the global economic outlook.

Carneys new strategy going into 2015 is to be pro-active and act pre-emptively, rather than being reactive and waiting for the level of inflation to be changed before the bank takes any action. This has led many economists to speculate that the Banks next rate rises will take place at the end of 2015.

Commentators have often, and will continue to do so, about Carneys so called ‘forward guidance’ and if it has had any impact at all on the British recovery. Most remain sceptical, , but what they cannot deny is that in the almost 2 years that Carney has been in the job, he has proved himself to be exceptionally lucky with his timing. Even though the UK recovery was already on the upward trend by the time he arrived, he has demonstrated his pre-emptive mindset and also an ability to nip problems in the bud before they become too troublesome.

So when and exactly how far will rates rise? “The easy thing to say with a very high degree of confidence is that it’s unlikely for some time to reach the historic level of 5 per cent type interest. The not so easy thing to say is where it will get to…. [but] without validating any particular market curve, it is reasonable to expected it is quite a bit lower than it would be historically. That reflects not just shorter-term happenings because of weakness in Europe and deleveraging at home. It also reflects the changes we made to the financial system. We put a lot more capital and liquidity in banks – they’re going to charge their customers for that.

And what of the highly optimistic predictions of the Bank of England? “the most immediate comes from abroad, whether it’s geo-political, where there’s a fast-moving set of circumstances as we sit down today, or these questions around the ability of Europe to move out of a period of stagnation to a higher level of growth”.Yet Mr Carney is more optimistic than some. “There has been progress since November, so that’s part of a reason for a shift in tone and obviously that’s been reinforced both in Europe and certainly globally because of continued moves in oil prices.

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However, he feels very differently about the Eurozone. “Speaking strictly as an economist, in order to have an effective currency union, you need a full range of private risk sharing, banking union, capital markets union and you do need an element of public risk-sharing. Experience here and experience across currency unions bears that out.” full

Feature Editor

Dolce Vita Diamond, Editorial Team

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