Mark – a marked man, marking time

The knives are out for Mark Carney three years after the Canadian became the new Governor of the Bank of  England, having previously held the position of Governor of the Bank of Canada.  Although his term of office is for eight years it had been agreed that he will quit after five years [2018] due to family plans.  Many critics and commentators are saying that after three years of inaction followed by moves in the wrong direction post-referendum, by the Governor and the Monetary Policy Committee, that the situation is intolerable.  It is also rumoured that he may remain in office for the full term up to 2021 but the dismissal of his guardian angel, George Osborne, makes that questionable.  There have been calls for his resignation resulting from his interventions in the Referendum debate.  The new occupants of numbers 10 & 11 Downing Street could run out of patience, even though the independence enjoyed by the B of E is convenient as it shields them from a degree of criticism.

He continues as Chairman of the Financial Stability Board based in Basel, a position held since 2011, associated with the G20.  Prior to that, from 2010, he was Chairman of the Bank for International Settlements’ Committee on the Global Financial System.  He is also a member of the Group of Thirty [an international body of leading financiers and academics] and of the Foundation Board of the World Economic Forum.  It is also reported that he attended the Bilderberg Group annual meetings in 2011 and 2012.  Even before taking over as Governor at B of E he was reportedly at odds with Andy Haldane its Chief Economist and has since been critical of previous Governor Sir Mervyn King and the Bank’s handling of the financial crisis, together with the Bank’s archaic structure.  Mervyn King has in return been critical of Mark’s performance, and reforms within the Bank have ruffled feathers.   The accumulated outpouring of criticism, including the news media, may or may not be justified.

In last year’s Mansion House speech he lambasted the banks and markets for their unethical behaviour, misconduct and failures of fixed income, currency and commodity markets that threatened real markets, leading to mistrust.  Appearing before the House of Commons Treasury Select Committee in March 2014 he was asked about Quantitative Easing and the asset purchase programme – among other things.  His response was that it may never be wound down.  The sale of £375bn gilts would have a big impact on debt markets.  Unwinding would not take place before several adjustments to interest rates.  Even then, he said, the Treasury would not have a say in the decision.  “With respect to the Treasury, it’s a monetary policy decision”.  The B of E is the most powerful central bank in the world, having been given responsibility for monetary policy, financial stability and regulation of individual banks; but to believe that the Chancellor of the Exchequer cannot influence or tell the Bank what to do is far from the truth.

One of the main criticisms relates to his policy of giving forward guidance of the Bank’s intentions so that the markets are not startled and can factor some certainty in to their calculations.  Much of the time this can be as simple as saying that there will be no base interest rise.  The historically low rate of 0.5% has been in place since 2009 and was in place before Mark arrived at the B of E.  Last month it was reduced to 0.25% because of the result of the Referendum vote, which was contrary to all his forward guidance.  This is rather like the story of the boy who wrongly cried wolf so many times that no body believed him when the wolf finally arrived on the doorstep.  The calls for a gradual increase in the base rate have been growing since 2013.  How does Mark perceive the situation?  Earlier this month he appeared before the Treasury Select Committee to present his periodical report.  To quote from the horse’s mouth:-

“Context – After the longest and deepest recession since the Great Depression, the United Kingdom’s expansion finally took hold about three years ago.  It was driven initially by sharp declines in economic uncertainty and significant improvements in credit conditions.  These helped restore confidence and unleash pent-up household demand.

The nascent recovery was reinforced by a more resilient banking system and accommodative monetary policy, with the MPC’s forward guidance reassuring households and businesses that Bank Rate was not going to rise at the first signs of growth, thereby creating the confidence to spend, hire and invest.  The recovery was supported by a large, positive supply shock – particularly a notable increase in the labour force participation rate.

With time, the boost from lower uncertainty faded, pent-up demand was largely spent, and consumption growth became increasingly supported by greater hours worked, a sharp pickup in real wages (largely due to commodity price falls), and lower saving rates.  Business investment rose with demand and continued improvement in financial conditions.  Trade and fiscal policy continued to drag on growth.

By early last year, growth had begun to slow as the labour supply shock had largely run its course and supply growth became more reliant on modest and somewhat erratic growth in productivity.  By the second half of last year, though still near the top of the G7, growth had settled at around 2%, about the rate of potential supply growth the MPC estimated at the time.

Such continued, solid growth, and the gradual firming in domestic cost pressures it heralded, together with the outlook for an eventual lessening of the effects of sharp falls in commodity prices, suggested a sustainable return of inflation to the target was in prospect.  This led me to vote to maintain Bank Rate at 0.5% and the stock of asset purchases at £375 billion at each MPC meeting prior to the EU referendum, with the expectation that, when increases in Bank Rate did become appropriate, they would, in all likelihood, be limited and gradual in nature.”

As the overall situation improved from 2013 Mark’s first guidance was that the interest rate would rise when unemployment fell below 7%, which he anticipated for 2016.  The target was reached in 2014 and people were left wondering why base rate remained unchanged, and why the Bank and Governor had got it so wrong.   In that same year Britain’s output finally went higher than its 2008 peak, but average annual earnings growth sank 0.7%.  The Bank’s response was that the reduction in unemployment was the wrong sort of reduction; that is part-time, zero-hours contracts, and self-employment.  Unofficially, George Osborne did not want rate rises before the 2015 general election.  After that there was a whole series of guidance that the base rate was to rise, but there was no  action by the MPC.  Then the guidance was reinforced by assurances that the rise would be gradual and that it would not exceed 2.5%.  Again the warnings were false and the markets felt they were being strung along.  With the Referendum and the Bank’s dismal forecast of the consequences of a Leave vote the markets were faced with two choices, bet on a Remain victory and no change or bet on the consequences of a Leave vote, which because of the Bank’s position would require them to finally increase the base rate.  What no one anticipated was the MPC counter-intuitive action to reduce the base rate even further.  When the wolf finally arrived on the doorstep nobody answered the boy’s call for help.

Forward guidance is now totally discredited and should be abandoned.  The British economy cannot be disrupted by the chancers who place bets every time the MPC is due to meet and consider rate rises.  Given Mark’s criticisms of the markets in his Mansion House speech, it is only adding fuel to the fire.  No more guidance and swear the members of the MPC to silence; make the decision and then announce it with the markets left to act on facts.

The second main criticism of Mark relates to his interventions in the Referendum debate.  He has justified that by the Bank’s duty to set out its assessment of the situation resulting from the vote, but that assessment was very one-sided.  Even then it could be justified in the period before the official campaign started, but when that started and the Treasury was prevented from commenting he was able to continue making the argument for Remain and was accused of being the mouthpiece for the Treasury.  This resulted in demands for his resignation.  When challenged by the Treasury Committee he was unrepentant, saying the Bank’s decisions had so far been validated and the extraordinary preparations made by the Bank had cushioned the economy.  Reporting to the Committee in March and before the Referendum he had stated that he was entirely neutral but Brexit was Britain’s biggest domestic risk.  Mervyn King’s stated view was that Governors of the B of E should not help advise people on how they should vote and should keep their counsel.

The third criticism relates to the premature decisions of the MPC in August to lower the base rate, the new Term Funding Scheme of £100 billion of cheap money for the banks and building societies, and the expansion of QE with the purchase of another £60 billion gilts and the new development to purchase £10 billion of UK corporate bonds.  The criticism is that those decisions were based on fears instead of facts, which seems to be justified by this months report by the Office for National Statistics showing that the dire claims of Project Fear have so far not materialised except for the devaluation of the £ sterling.  The actions by the MPC do not make any sense.  Lowering the base interest rate reinforces the lower value of the £ and in due course will increase inflation.  It also increases the likelihood of predatory takeovers by foreign investors.  QE is supposed to deal with the problem of liquidity, but that was not a problem as there was no perceived shortage or as in 2008 a credit crunch.  What it does is further debase the currency.  Cheap money for the financial institutions continues to destroy the savings culture and encourage debt.  The purchase of corporate bonds is a new development and highly controversial.

As we stated last year we are in a Catch 22 situation.  Key to this is the inflation target of 2% set by the Chancellor.  Only when that is reached will interest rates be raised, except that the Bank’s actions have been keeping inflation low with the added fear of deflation.  By keeping base interest rates low it is delaying action on QE and the sale of the gilts purchased by the B of E.  The threat or fear of deflation is heightened because the sale of gilts and burning the proceeds will lower the rate of inflation by revaluing the £.  Outside the EU we could implement a more accurate measure of inflation – a Real Prices Index.  The increased cost of importing food and raw materials will increase inflation above the 2% target, but it will be the wrong sort of inflation.

In 2014 former Chancellor of the Exchequer, Norman Lamont, stated “We are dealing with an unprecedented thing.  There have been things like QE in the past, but never, ever, on this scale.  That is a dangerous situation.  I don’t  believe it can just  go on and on without some consequences.”

I had high hopes when Mark was appointed Governor and on balance think we should trust him as a pair of safe hands, so long as he is focused and gets the right direction from the new Chancellor implementing sound fiscal policies.  As for the Treasury Committee, they have been asking him the wrong questions.  In addition to close scrutiny of QE my two questions would be, 1)  Explain the Shanghai Accord and 2)  Is there a conflict of interest between your position as Governor and that as Chairman of the G20 Financial Stability Board?  The answers would determine whether he should go the full eight years.

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