Carney Will Have Hands Full

Duplicating Success in England

In the world of high finance few can currently claim to have achieved greater or more well-deserved clout than Canada’s own Mark Carney, a 47-year-old native of Fort Smith, Northwest Territories, who last year was surprisingly named to take over as the next Bank of England Governor. Surprising not because of his capabilities, but rather in that he becomes the first non-British Governor in the Bank of England’s 318-year history when current boss Sir Mervyn King retires.

To put it bluntly, Carney has been tasked with fixing the United Kingdom’s economic banking mess, which will be no small feat. He’s assigned with changing a culture that may not yet be ready to fully embrace it. The English Central Bank was so insistent he be the one to lead them down the path back to prosperity, it seems they “broke the Bank” to get him. The Brits did essentially allow Carney to write his own ticket in luring him out of his current post here in Canada. When he initially balked at the expected eight-year term of service, they allowed him to cut it to five. He’s also reportedly going to earn considerably more than his predecessor, with the total salary expected to be somewhere in the neighbourhood of $1 million along with a $400,000 per year housing allowance, plus other perks that go with the job. Those points have rankled some old-fashioned Britons who are no doubt displeased with having a foreigner come in to fix their terribly hobbled banking system. Some have been more vocal about it than others.

If Carney succeeds in his new role, most – if not all – will likely be forgotten. But there’s no guarantee he will be able to duplicate the success he’s had here in Canada and odds may in fact be against it, depending on how flexible the English politicians and lawmakers prove to be. Keep in mind that here in Canada Carney enjoyed the complete support of Finance Minister Jim Flaherty, especially in the early years, which emboldened him with the type of strength needed to carry out his job in the successful manner he did. There have been rumours of a growing rift between the two men as Carney’s star began to brighten, with some opining that the bank man’s brash aggression sometimes landed him in Flaherty’s political space. Not quite a bull in a China shop, but an uncomfortable setting nonetheless.

Detractors may also say that Carney was in a win-win situation as his star power continued to ascend. That’s because it was Flaherty who assumed the political risks and could have faced demotion by the prime minister had many of the pro-growth finance strategies not taken hold. Carney, a public servant with a seven-year term, was largely immune from any political fallout in that regard – had there been any. Yet, when the recession faded, Carney’s reputation as a saviour of the economy was every bit as pronounced as Flaherty’s, if not more.

There are also many exterior economic factors completely out of Carney’s control both here and in England, such as the strength of other nations in their efforts for an economic rebound. Carney can’t singlehandedly take credit for all the success, nor do we suppose he would try. The many successes, and by that we mean keeping our collective heads above water, required patience and belief from his bosses; it was a team effort to be sure, which is an aspect seemingly lost in certain circles in the making of this fiscally-sound celebrity. Once again, Carney will be playing with an entirely new roster over in England. Perhaps there will be chemistry – perhaps not.

Banking Regulations Are Vital

Furthermore, it has without a doubt been the strength of our banking system here in Canada and stringent regulations that takes much credit for our economic resiliency. But as the face of the Bank of Canada, it is Carney who benefits most. There is no doubt he is a brilliant man, and it’s hard to imagine anyone doing a better job. But “right place at the right time” factors into all of this as well. How much? That’s the question nobody really has an answer for, but will possibly be made clear once we see what transpires in the UK under a markedly different set of circumstances. By extension, Carney is going to need that same cooperation from his new bosses – or things could head south very quickly.  Compromise is not likely to be the word of the day.

Current Bank of England Governor King recently ordered UK banks to provide more “honest” assessments of hidden losses on their balance sheets. He also has expectations they will come up with methods to fill what could be a £60 billion ($90 billion) shortfall. Additionally, he’s insisting taxpayers won’t be saddled with the burden. This is still going to be a front-burner issue come the summer, so it’s one of many headaches Carney will be inheriting. 

It’s still half a year away before Carney takes his new position, and already a number of recommendations are pouring in from various English financial enterprises in terms of what he should focus on as his top priorities when he assumes office. There have been repeated cries from Great Britain that he imposes more of his current power base to strengthen the position of small and medium sized businesses. They’d love to see Carney lower borrowing costs for SMEs to allow them more capital and time to pay back their loans. As Syscap notes, Carney and the Bank of England could accomplish this by purchasing leases and other asset backed loans from lenders. This would allow those same lenders to provide new funding to SMEs, with the desired effect being to drive down the costs of funding for SMEs.

Another demand that’s going to require immediate clarification is the length of time the Bank of England expects to hold interest rates at a steady level. It’s a question many Canadians have asked over the past two-plus years, with little foresight other than “they’ll have to go up soon.”  There’s a good chance Britons are going to become accustomed to hearing that same broken record. Then again, during January’s Bank of Canada announcement that its trendsetting overnight rate would remain unchanged at an even 1 per cent, Carney didn’t even bother with the usual pronouncement that rates would eventually go up. Truth be told, there is no sign on the horizon that’s the case, so it appears even Carney grew tired of parroting the phrase. In fairness, however, when the day comes that interest rates do go up, there is huge concern a large number of Canadian debt-holders could be in immediate danger of forfeiture if the rates were to go up by much more than a percentage point. 

Surveys indicate many Canadians are stretching their every last dollar to pay the bills. Carney has admitted being frustrated that he can’t increase borrowing costs to discourage consumers tempted by historically low interest rates. He wants to put out the warning signal via increased rates, but the national and international economies just won’t support such intervention right now. He has repeatedly warned consumers that they are risking bankruptcy by taking on too much debt. It’s a rally cry that has largely fallen on deaf ears.

Meet the New Boss, Same as the Old Boss?

British Finance Minister George Osborne, whose official title is Chancellor of the Exchequer, will be Carney’s new boss as of July. The relationship forged between the two men will be an interesting one to follow. Although Osborne and Flaherty are both Conservatives, their personalities are quite different, which begs the question as to how the new relationship will unfold. For this experiment to succeed there’s going to need to be a fair amount of give and take, with Osborne on the receiving end of much of it. Additionally, Osborne has warned British citizens that economic growth will be weaker than expected. Such candidness may be refreshing, but could also put a big dent in his party’s hopes of winning an election in two years with David Cameron serving as prime minister, with the most recent polls showing the governing Conservatives trailing the Labour Party by a considerable margin – upwards of 10 percentage points in some cases.

In a budget update to the British Parliament, Osborne said weak growth means he’ll be about a year late in coming through on a self-imposed target of seeing debt falling as a percentage of Britain’s national output by 2015-16. Osborne said Britain must stick with its austerity program, despite economic headwinds from the Eurozone debt crisis and weak global growth.

“Britain is on the right track. Turning back now would be disaster,” Osborne said in a recent session of Parliament, amidst expected jeering from the opposition.

“It is a hard road, but we are getting there.”

Prior to Carney’s appointment, Deputy Governor of the Bank of England Paul Tucker had been considered the odds on favourite to be tagged by Osborne. It’s not yet known whether Tucker will remain on or seek out new challenges after being overlooked. Tucker’s main downfall was being pulled into the Libor interest rate scandal that resulted in former Barclays boss Bob Diamond losing his job. The 54-year-old Tucker has repeatedly refused to comment on whether he’ll serve out his term until February 2014, although it seems highly unlikely.  That non-answer is the answer – he’ll be leaving and most assuredly before Carney touches down at Heathrow Airport. If and when he steps down, it will create a massive hole to fill at the top of the Bank with his 30-plus years of experience walking out of Threadneedle Street (where the BofE is located).

2013 Forecast

Meanwhile, based on figures from the independent Office for Budget Responsibility, at last word the British economy had been forecasted to grow a scant 1.2 per cent in 2013, which is far below the initial rosy 2 per cent predicted in the early part of 2012.

Carney is going to be landing smack dab in the middle of Britain’s biggest budget deficit since World War Two, so there won’t be much time for getting into a comfort zone. But he’s not without his knowledge of the UK. After graduating from Harvard, Carney attended St. Peter’s College and Nuffield’s College at Oxford University for his Master’s and Doctorate degrees respectively, which is where he met his wife Diana, a British economist. 

If there’s good news to be had, it’s that the U.S. appears to be stabilizing and has shown marked improvement over the past few months. Unfortunately, much of Europe remains in recession and facing an unresolved sovereign debt crisis. China is still experiencing expansion, just not to the same degree as it was previously.

Too Much Power?

There are some financial experts who also believe Carney may be receiving too much open-ended power in this position, but time will tell. One of those who previously expressed concerns was former Bank of England rate-setter Adam Posen, who respectfully declined our request for a one-on-one interview with The Canadian Business Journal, but he had previously been quoted in The UK Guardian about the potential for Carney to be given too much authority.

“You just don’t want to put too much power in one person’s hands,” Posen stated during that interview. “And the new rules means the UK governor has enormous amounts of power and discretion.  You have a guy, irrespective of his individual traits, who has been wooed outside the interview process, got to negotiate his own pay packet and be told by everybody that he is wonderful. It will take a great deal of wisdom and restraint on Carney’s part to not let that lead to over-reach by one individual.”

Carney has enjoyed much of his success here in Canada due to his often unconventional, hawkish approach. But it’s not yet clear if he’ll be given that same latitude to spread his wings in the much more hierarchical institution known as the Bank of England.

Since 2008 the Bank of Canada’s projections at the start of each year for annual GDP and inflation have been a bit better than private sector expectations, according to an analysis by Doug Porter, deputy chief economist at BMO Capital Markets in Toronto. Bank of England forecasts have been marginally worse than the private sector, with underestimated inflation values dating back to 2007.

“It’s going to be tough to justify raising rates if growth stays at 2 per cent or less, inflation stays below 2 per cent and the currency remains above parity,” says Porter.

Although most of Europe remains in recession and facing an unresolved sovereign debt crisis, the world’s two largest economies — the United States and China – appear to be showing signs of stability and modest recovery. That bodes well for Canada, the United Kingdom and the rest of the world for that matter.

While attending Harvard in the late 1980s, earning a degree in economics, Carney showed some athletic prowess as the backup goaltender for the Crimson varsity hockey team. If he wants some after-work sporting exercise with his new financial team in England, he may need to get out on the pitch and learn to dribble a soccer ball instead.

By Angus Gillespie