There is growing speculation that the Governor of the Bank of England, Mark Carney, will not extend his term. Carney originally agreed to a five-year term, which would end in 2018, but it had been thought he might extend to the more usual eight years for a Bank of England governor. This is now looking increasingly unlikely.
Carney has come under fire from pro-Brexit politicians for warning that Brexit is likely to increase inflation and unemployment and reduce economic growth. They accuse him of “talking down” the UK. This is some chutzpah, from politicians whose incompetence and arrogance has stunned the world. If anyone is “talking down” the UK, it is the Three Clowns currently running the Brexit project, and their baying packs of supporters.
I have been severely critical of Bank of England policies. I don't like the over-reliance on QE: I think it is a useful crisis tool, but far too much has been expected of it. I think that the independence of the Bank of England was undermined by George Osborne's expectation – stated openly even before Mark Carney arrived on the scene – that the Bank of England would provide monetary support to offset the effects of fiscal consolidation. I disagreed with the Bank of England's support for the Help to Buy scheme: this scheme was blatantly intended to buy votes, and the Bank should not have touched it with a barge pole. The FLS scheme was also suspect for the same reason. Under Carney, there has been too much playing second fiddle to a very political Chancellor, and not enough flexing of independent muscles.
That said, Carney has been an effective Governor in many ways. He understands banks and markets, and has taken a personal interest in measures to promote financial stability. Perhaps his moves to regulate banks don't go far enough, but at least he has taken them seriously, unlike his predecessor. I was frankly astounded when the Brexit camp on Twitter lauded Mervyn King as a far better Governor than Carney. How on earth could the man whose inattention to financial stability allowed dangerous imbalances to build up in the UK financial system be a better Governor than the man who has spent most of his term putting in place measures to prevent such imbalances building up again?
But the Brexiteers have extremely short memories. Not only have they forgotten the disaster that Mervyn King helped to cause, they have forgotten the near-disaster that their own actions caused. After the Brexit vote, both UK political parties went into meltdown. The Prime Minister resigned, the Labour party disintegrated, and the Brexiteers – visibly shocked by their unexpected victory – went into hiding, fearful that they would now have to deliver on their promises. The election process for a new Conservative party leader became a toxic charade of backstabbing and poisonous lies.
In the middle of this maelstrom, one man remained standing. That man was Mark Carney. On 24th June, as sterling slid and bank stocks fell, he stepped forward to calm the markets. Here is part of his statement:
The people of the United Kingdom have voted to leave the European Union. Inevitably, there will be a period of uncertainty and adjustment following this result. There will be no initial change in the way our people can travel, in the way our goods can move or the way our services can be sold.And it will take some time for the United Kingdom to establish new relationships with Europe and the rest of the world.
Some market and economic volatility can be expected as this process unfolds. But we are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning. The Bank will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward.
In which parallel universe is this “talking down” the UK economy?
Largely because the Bank of England was seen to be in control, the fact that the UK had no effective government for the entire summer did not cause major problems. Sterling stabilised, gilt yields fell and stock markets rose.
In August, the Bank of England cut interest rates and re-started QE in anticipation of lower growth and rising unemployment due to the Brexit shock. Markets responded positively – but the right-wing press took it badly, once again accusing Carney of “talking down” the UK. They pointed to the comments of Mervyn King, who criticised the policy decision and the Governor's forward guidance that further easing might be necessary, saying that the decision was panicky and Brexit could make the UK better off. But why we should we give King's views any credence? Or, for that matter, those of Lord Lawson, the architect of the 1980s housing bubble, who is now calling for Carney's resignation? These two men presided over two of the worst financial crises ever to hit the UK, though the slimy Lawson got out before the brown stuff hit and has since rebuilt his credibility among the gullible. They are hardly reliable witnesses.
Apart from the accusations of political bias, Brexiteer criticisms of Carney's performance are frankly ignorant. Firstly, it is not the job of the Governor of the Bank of England to “talk up” the economy. That is the job of politicians – a job that they have spectacularly failed to do. The Governor's job is to present a fair and balanced analysis of the state of the UK economy using forecasts produced by Bank of England staff. This is what Carney has done.
Secondly, the Governor does not make interest rate decisions. That is the job of the MPC. The Governor is only one member of the MPC, though obviously an important one. He can be overruled.
Thirdly, on forward guidance, since when have economists been clairvoyant? Forward guidance is information provided to the markets about the expected path of future policy – but it is not a guarantee. If conditions change, the policy changes and the forward guidance is therefore wrong. This is a feature, not a bug.
Now the summer of calm is over and a new government is in place. And we are facing chaos again. The reason is, once again, the utter stupidity of politicians.
The Conservative MP and arch-Brexiteer Jacob Rees-Mogg has been pursuing a sustained campaign to have Carney removed from office. Rees-Mogg claims that by not being more positive about Brexit, Carney has “politicised” his job and undermined the independence of the Bank of England. Other prominent Brexiteers, such as Daniel Hannan, have repeated this claim.
This might have been dismissed as Brexiteer imagination had it not been for the new Prime Minister Theresa May's comments at the Conservative party conference. She appeared to criticise the Bank of England's monetary policy and indicate that a change of regime might be on the cards. In fact, the term “A change has got to come” was a strap-line that she repeated at intervals throughout her speech: it was not aimed at the Bank of England, let alone its Governor. But it was seized upon by those who want to undermine Mark Carney.
Now, legitimised by May's comments, the campaign against Carney is intensifying. The right-wing press is awash with articles criticising his actions, questioning his competence and repeating the allegations of political bias. Some openly call for his replacement. And, in the most insane twist of all in this psychotic fantasy, the Spectator has fingered Jacob Rees-Mogg as Carney's successor. Rees-Mogg, whose degree is in history and whose only qualification for this job is that he worked for a Hong Kong wealth management firm. Plus his extreme right-wing views and hardline support for Brexit, of course.
It is hard not to conclude that Rees-Mogg's support for Brexit is the real qualification – and indeed the Spectator explicitly says this. Brexiteers wanted a Brexiteer Prime Minister. They didn't get one, though May seems to be trying to out-Brexit the Brexiteers. So now they are trying for a Brexiteer Bank of England Governor. Political bias in a Bank of England Governor is fine as long as it is in the right direction, it seems.
Today, the Daily Mail – which has been vilifying Carney for months – gleefully reported that Carney could announce his resignation “within days”. This was a repeat of The Times's allegation that Carney could use the inflation report due out on Thursday this week as an opportunity to announce his departure. The Sunday Times, more balanced and thoughtful, says that this is unlikely, but that Carney will make his position clear before the end of the year.
I have no doubt that a suitable replacement for Carney could be found, if there is sufficient political will. By “suitable” I don't mean the insufferable Rees-Mogg. I mean another senior financial economist with a spotless track record and a reputation for neutrality. These rare beings aren't easy to find and they don't come cheap. But the Bank of England is among the world's premier central banks, and the top job there is prized.
However, I now wonder whether the political will to maintain the Bank of England's independence is diminishing. Philip Hammond, the Chancellor, has defended Mark Carney, saying that he would welcome him extending his term to 2021. But Hammond himself has come under pressure from hardcore Brexit supporters on the right wing of the Conservative party: after the awful Daily Express scented blood, May was forced to express her “full confidence” in her beleaguered Chancellor. This does not bode well.
The Chancellor's weakened position further weakens Carney, since it will be hard for a Chancellor suspected of trying to “water down” Brexit plans to support a Governor suspected of trying to derail the whole thing. And worse, it increases the likelihood of a political replacement. The government may find it very difficult to resist Brexiteer demands that the next incumbent should have pro-Brexit views. May herself seems to want a more hawkish monetary policy stance to please Tory core voters. The pressure to appoint a political Governor may become too intense for Hammond to resist.
It is very worrying indeed that the future of the Bank of England as an independent, non-political institution rests in the hands of an already weakened Chancellor. The populist surge in the UK is dangerous beyond belief. If Carney is forced out, and is replaced with a right-wing, pro-Brexit politician, the consequences for sterling, gilt yields and the UK economy don't bear thinking about.
Defend Central Bankers, Even If You Think They Shouldn't Exist - Forbes
Hands Off - The Economist
Image from Huffington Post.