Mark Carney’s six-year tenure as governor of the Bank of England has come to an end. In one of the many Carney retrospectives (this one by Eric Reguly in the Canadian Globe and Mail) Charlotte Hogg, who resigned as chief operating officer under Carney after failing to declare that her brother worked for Barclays, is quoted commenting on Carney’s future thus: “He will do something amazing…He has so much to contribute. He’s immensely able. He will change the world, whatever he does.”
This comment naturally makes one wonder: did Carney do anything “amazing” at the Bank of England? If he can “change the world”, did he change the bank and its policies? And for the better?
One of the first things to change under Carney was the end of the taboo surrounding talk of future interest rates. Before Carney’s arrival, the bank maintained the fiction that thoughts about future interest rates did not happen and did not need to. “We play one ball at a time”, Carney’s predecessor Mervyn King liked to say, deploying a cricket metaphor.
But this was not true. The bank’s policy instruments take time to have their full effect, so policymakers had to try to guess how interest rates and quantitative easing (QE) would evolve over the future. The bank simply did not want to grapple with its future strategy, or to have itself boxed in by talking about it openly.
There were two catalysts involved in breaking this taboo. Firstly, the appointment of Carney, who had no stake in the previous regime. Secondly, the need, at the time his appointment was announced in early 2013, for further monetary policy stimulus. A way to achieve it was to commit to keeping interest rates low for the foreseeable future. If people believe central bank rates will stay low, interest rates for longer-term borrowing will fall, and this will boost spending and investment. This works – at least in theory – even if today’s interest rate is already at its floor.
In the event, the new policy of “forward guidance” was fluffed, but for reasons somewhat outside of Carney’s control. As time wore on in 2013, economic and financial conditions warmed up to the point where there was no longer any support for trying to talk down longer-term interest rates through forward guidance. But dropping the thing entirely involved losing too much face. So forward guidance was begun anyway on the grounds of adding “clarity”, not lowering longer-term rates.
Unfortunately for Carney, but fortunately for the labour market, events conspired to make forward guidance much less clear. A clause was included in the policy to the effect that interest rates would be held at the then floor of 0.5 per cent unless unemployment fell below seven per cent. At this point, perhaps, the Monetary Policy Committee would reconsider. (Much ink was spilled by the bank and others over whether this seven per cent number was a “trigger” or not.)
What happened, for reasons we are still puzzling over, was that unemployment fell much further than anyone guessed, and at the same time inflationary pressure did not increase as it might have been expected to. So there was no need to consider raising rates after all, and the earlier coded warning subsequently looked misguided.
Despite all the confusion, the unproductive taboo over talking about future rates had gone. Perhaps this helped prompt Gertjan Vlieghe, an external MPC member from 2016 onwards, to go as far as any have done yet in the UK, sketching numerically his own personal forecast for interest rates.
Carney’s own comments about future rates were not always welcome and earned him the nickname “unreliable boyfriend” among City scribblers and journalists. Several speeches were taken as comments on whether the market was forecasting too many or too few interest rate rises, and these speeches did not seem to predict well his own or the MPC’s own votes.
The nickname was perhaps somewhat unfair, as the problem wasn’t that Carney had a commitment problem. “Boyfriend’s friend who for understandable reasons can’t forecast what his friend is going to do and isn’t clear about on whose behalf he is speaking” might have been a fairer description, although it might not have been memorable or insulting enough to stick.
Carney’s tenure will also be remembered for the bank’s involvement in the Brexit debate. Here too his record is mixed. On the one hand, the bank was resolute in explaining the costs entailed in various forms of Brexit, costs that they – and the overwhelming majority of other economists – saw as deriving from the erection of trade barriers between the UK and the EU.
On the other, Carney’s credibility as a neutral interlocutor on Brexit was harmed by his willingness to talk outside the immediate concerns of his remit and reveal his own distinctively liberal politics. Launching a report on the anticipated effects of Brexit on the bank’s monetary and financial stability goals, Carney allowed himself to wax about the “dynamism” deriving from our openness to the EU. Elsewhere, he spoke urging a more “inclusive capitalism”. He has spoken relentlessly about climate change and its effect on financial stability, perhaps the crucial issue for humankind, but not necessarily an imminent threat to UK financial stability. These interventions allowed the bank to be painted as a participant in a culture war, rather than (as in fact was the case) reflecting a consensus in the economics community.
The former governor Mervyn King, whose frequent interventions in the debate made clear his pro-Brexit views, felt so exercised by the bank’s position that he felt licensed to break his own self-imposed rule that “you just cannot appear to do anything which potentially makes life difficult for your successor”. He made pointed remarks impugning the bank’s judgement and integrity, implying that their analyses had been tilted to help out the government. No doubt there will be some who found King’s intervention ironic, as it was he who had intervened in the controversy in 2010 to stress the need for fiscal prudence, clearly aligning himself with the narrative of the Conservative Party, in opposition to the then government.
Many new outsider chief executives like to stamp their personality on their organograms. Carney set about this ritual test of virility with gusto. He hired McKinsey and Deloitte to report on the bank’s operations and launched his conclusions at the Mais lecture in 2014.
A new deputy governor post was created, bringing the total to five. A new layer in the hierarchy gave birth, or rather rebirth, to the post of “director” working under each “executive director”. Numbered salary scales were rebranded with letters. The bank acquired an organisation-wide, uniform screen saver that displayed the motivational phrase “One Bank” and carried with it, presumably, the criticism that before the screensaver there had been several “banks”. And Carney dismantled the two-wings-reporting-to-two monetary and financial policy committee structure and replaced it with an “every-box-reporting-to-every-committee” structure. By a curious historical echo, and one that called to my mind an old Dilbert cartoon featuring organogram cycles, this mirrored the structure that existed prior to the 1994 “Ashridge” reforms, trumpeted with senior management fanfare at the time.
In the Q&A following the launch of the organisational reforms, Carney commented that had the bank had this structure in place before the 2008 crisis, perhaps the outcomes for the UK might have been more “Canadian” (Canada did not almost lose its banking system, and its central bank had an “everyone reports to everyone” structure).
This seemed quite a bold claim. Canadian banks were protected from the competition that encouraged others to compete in risky, unconventional business, and also lent into a private sector that was enjoying the gigantic windfall of having its raw materials bid up in price by the emerging behemoth of China.
It would not have been a disservice to the Bank of Canada’s worthy staff to point out that their organogram was probably not a decisive factor in the trajectory of the Canadian economy. The curse of financial stability policy is that we can never know if Carney’s reforms made UK financial outcomes “more Canadian”. Most of the time there are not financial crises. Good financial policy lowers the frequency of crises from “not very often” to “less often than not very often”. This is also why bad financial policy persists and crises do sometimes happen: there are not enough prizes for politicians determined to tightly regulate finance, giving up tax revenues today for the prospect of maybe avoiding a crisis in the future.
Carney arrived after the UK’s new post-financial crisis architecture was put in place. Highlights of this were: a new regime to take control of failing banks; tighter capital requirements (banks funding themselves through share issues that they don’t have to pay back, as they do with debt or deposits); tighter liquidity requirements (banks investing more of their funds in assets that can be sold reliably and cheaply); a new Prudential Regulatory Authority to replace the discredited Financial Services Authority, and, put back under the Bank of England, a Financial Policy Committee to oversee, and in particular wield “macroprudential policy” (crudely, tweaking lending and liquidity standards to fit where the economy was in the cycle).
Carney’s tenure has covered an awkward period. Policymakers and politicians wanted many inconsistent things from banks. Balance sheet rebuilding by retaining profits, but not with margins too high to antagonise voters still resenting the banks for the crisis; they didn’t want dividend payouts to evil shareholders, but at the same time they wanted banks to be ready to raise more money by issuing shares.
Balance sheet repair also had to happen without throttling lending to consumers or businesses and restraining the recovery, hindered by concern that the Bank of England’s monetary policy levers were already maxed out. The post-crisis settlement has its critics. The chair of the Banking Commission Report and former BoE chief economist, John Vickers, favoured a regime in which banks were forced to fund a much greater portion of their lending by issuing shares. Andrew Haldane, the current chief economist, wrote critically of the complexity of the rules governing how risky lending is judged to be, and therefore how much capital – funding from sources that don’t have to be repaid as with debt – has to be set against it. Their disagreement may have been behind Carney’s decision to move Haldane out of the Financial Stability Directorate and into the Monetary Policy Directorate when he took over as governor.
One of the costs of politicising a technocratic job, as Carney has, is that it makes it more likely that the successor is chosen on grounds of political acceptability and not economic or financial acumen. This risk does not seem to have materialised, Andrew Bailey, a long-time bank staffer and the current head of the Financial Conduct Authority, was appointed governor, and seems to have no political profile whatsoever.
Carney’s liberal signalling was assumed by many to be aimed at facilitating a move back to Canada and into politics, perhaps to succeed Prime Minister Justin Trudeau as leader of the Liberal Party. But Trudeau survived the recent general election and, if there was such a plan, this has thwarted it. Instead, Carney leaves the Bank of England to take up a high profile but voluntary campaigning role on the issue of the moment, climate change, as a UN special envoy. It was the issue he signalled his commitment to early on, probably even before he chided outgoing executive director for financial stability, Spencer Dale, at his farewell party for joining BP.
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