Appearance: urbane, besuited and calm
Newsworthiness: the British media turns on the only steady hand in the post-Brexit confusion
Oh, the irony. After the Brexit result of June 23, as the leadership of both the Conservative and Labour parties imploded, the person who stepped up to save the system was a Canadian. An immigrant! Taking a British job! In fact, the first immigrant to hold the governorship of the Bank of England in its 322-year history. As the system flailed and sterling’s value collapsed, Mark Carney calmly allocated £250 billion to steady the markets, and promised more should it be required.
In a series of speeches over the next ten days, Carney laid out the fundamental issues with respect to Brexit — uncertainty, economic damage, the loss of Britain’s position as a global power — and provided leadership when none was forthcoming from a political class which, to its eternal shame, did not do its job. He said: “At times of great uncertainty, households, businesses and investors ask basic economic questions. Will inflation remain under control? Will the financial system do its job? Will I keep mine?”
These were the questions the Brexit result placed in the minds of many citizens and subjects in Britain and in nearby Ireland, which stands to take a hammering if Britain’s exit from the European Union is messy and fractious. Early indications are that negotiations will be protracted, messy, and bitter. And conducted in French.
Governor Carney said of the post-referendum Britain: “The question is not whether Britain will adjust but rather how quickly and how well.” He could have said the same about Ireland. Right now, the engines of the Irish state are trained on obtaining the maximum foreign direct investment from Britain, in particular its financial system. Minister of State for Financial Services Eoghan Murphy must have a serious build-up of air miles at this stage from the Dublin/London commute. The reason Ireland needs this kind of foreign direct investment is that we know the impact of a hard Brexit on our trade and our long-term economic development is otherwise entirely negative.
Back to the moments after Brexit. With Britain’s political class frozen, Carney stepped in and made what the pro-Brexit camp saw as negative remarks about the nature of the British exit. Saying he saw the job of the Bank of England to “identify risks, not to cross your fingers and hope risks would go away”, many painted these remarks as critical of the government.
The British press is not known for zen-like calm and, in hyperbolic terms, they accused the governor of politicising his office. As if being the head of a G8 central bank wasn’t a political office. As if running a 322-year-old global behemoth wasn’t a political job. Central banking has always been deeply political. Carney, under intense public pressure, made a series of moves last August to stimulate the British economy further. Interest rates were reduced to an all-time low of 0.25 per cent; the bank announced it would buy £60 billion more of government bonds, expanding its quantitative easing programme to a total of £435 billion.
Carney also announced plans to buy £10 billion of corporate bonds. He made a series of bold moves to prop up the economy which Brexiteers didn’t like, despite the fact that Carney probably saved them from an outright recession.
Push forward to the Conservative Party conference in early autumn. Theresa May’s speech made waves around the financial world. She rightly pointed out that the ultra-low interest rate policies of the Bank of England had increased economic inequality and made house prices more expensive by making savings worth nothing and enriching already-rich people who own stocks and shares and housing. In fact, she was drawing on the bank’s own research in this area. The problem with May’s speech was her tone. Addressing monetary policy directly, she said that “a change is going to come and we are going to deliver it”.
When those words were said by a British prime minister about monetary policy, it was seen as a directly negative comment about the policies being pursued by Mark Carney. The next question out of everyone’s lips was: what specifically are you going to change? The throwaway line became a headline. It was a PR disaster for the government and for the Bank of England.
The head of a central bank either enjoys the total confidence of the government, or they don’t. There is no in-between. Modern central banking relies almost entirely on confidence and credibility. Without the backing of the government, Carney is toast. But without Carney in place, May’s economic strategy is in deep, deep trouble, as she will need to borrow vast sums to keep Britain afloat as Brexit begins to bite into the British economy.
In reality, May’s speechwriters made a total cock-up by using that phrase, and her government has rowed back on much of that language since, as sterling’s value fluctuated wildly with the rumour that Carney would leave his post early. Carney was supposedly deeply unhappy about May’s phrase that a citizen of the world is a citizen of nowhere. As an immigrant himself, educated at the world’s best universities, and a doyen of the globe-trotting Davos set, Carney represents the pinnacle of the elite pro-Brexit people spent months banging on about before the referendum.
Such were the wobbles in the currency markets on the rumours of Carney’s early departure that a hasty meeting was called in 10 Downing Street last week, where Carney agreed to stay on for another year to 2019, which is still less than the eight-year term most governors serve. This is for personal reasons, as Carney’s children will be finished school in 2018. The extra year is a bandage, because it retains Carney’s prestige while allowing May the chance to choose the next governor of the bank before the next election.
It is also important to note that Carney was appointed by the previous regime in a sign of international openness. His appointment by then chancellor George Osborne was greeted the way superstar footballers get unveiled.
The only thing it lacked was an England jersey. Theresa May’s new government was more parochial, more insular — literally — and so Carney’s star was sure to fade with the new government, regardless of what he said or did.
In the modern world, monetary policy — control of inflation by means of interest rates and expanding and contracting the size of the central bank’s balance sheet — is seen as superior to fiscal policy, which is spending tax payer’s money on large projects like roads and hospitals, as well as transfer programmes like social welfare and pensions.
Monetary policy is superior because interest rate decisions are made independently of politicians, meaning the Chancellor of the Exchequer can’t formally write to the governor of the Bank of England instructing him to change interest rates. Monetary policy also works far faster than fiscal policy. Politicians face very different incentives than central bankers, and it is this difference that prompted Tony Blair, in one of his first acts in office, to make the Bank of England independent of government. In the context of Brexit, which aims to sever a 40-year relationship, undoing the independence of the Bank of England, which has an 18-year history, would not seem like a big deal.
But it would be. Right now the financial markets are incredibly jittery. Losing the Harvard and Oxford-educated Carney, whose personal credibility as a former Goldman Sachs banker and former head of the Canadian Central Bank is undisputed, would have been a huge blow to Britain’s ability to fund itself.
Undermining the credibility of the main engine of sovereign borrowing when you, the sovereign, need to borrow, is pretty stupid indeed. So expect the bank to retain its independence for some time yet.
Seriously. Imagine that, through a series of machinations, Boris Johnson becomes chancellor after the Bank of England has lost its independence. Who has more credibility with the financial markets? Johnson, who recently predicted Brexit would be a ‘Titanic success’, or Carney? Actually let’s think of a fairer comparison. Who has more credibility with the financial markets? Johnson, or a crisp white envelope filled entirely with lard? At least the lard wouldn’t say anything stupid.
So Carney remains on as governor to see the Brexit transition through. This is a good thing for the British economy, and a good thing for Ireland. His replacement as governor in 2019 should command at least as much respect as Carney does, and so Japan’s Kuroda or India’s Rajan might be on the shortlist, were it not for the tea-and-biscuits insularity of the May government. To be acceptable to this Brexit government, the next governor will have to be so British, he or she will need to bleed milky tea. That’s a pity, but that’s reality.
Carney is the last vestige of the Cameron government with real power. It’s good for everyone that he keeps that power.