The new Governor of the Bank of England can’t wave a magic wand but more economic honesty from our politicians would help.
There are some good reasons for feeling more optimistic about the economy in the coming year, and some bad ones. Among the bad ones is the appointment of Mark Carney as the next Governor of the Bank of England.
I don’t mean this in a disparaging way, and I certainly don’t want in any way to rain on his parade. He’s in many respects an excellent appointment and if people are prepared to believe that the mere fact of his arrival presages a bright new dawn, that’s all to the good. Animal spirits have been almost entirely absent these past five years: anything that can be done to revive them is plainly very welcome.
Yet the idea that monetary policy can solve this crisis simply by pushing as yet unpressed buttons is at best a curious one and in truth no more than a case of wishful thinking.
If monetary policy is the cure, you would have thought that by now it would have done some good.
No one knows what would have happened had the Bank of England’s printing presses not been working overtime since 2008, with short-term interest rates held at close to zero. It is possible, many would say likely, that things would have been a great deal worse. But after a slow start, it’s hard to see how the Bank of England could have done much more, and still output remains stubbornly below its pre-crisis peak.
Mr Carney has a pretty much unblemished track record in his ascent up the greasy pole and, among G7 central bankers, quite obviously had a better crisis than anyone else. Yet though he was early in providing the banking system with liquidity when the crisis hit unlike the Bank of England the subsequent, relative success of the Canadian economy didn’t have a lot to do with the actions of monetary policy.
Rather, it was down to the fact that Canada had a much smaller and more robust banking system, and that the Canadian economy had already had a deep fiscal crisis back in the mid 1990s, and therefore had a better handle, going into the present one, on the public finances. And it was also because Canada is rich in natural resources, joining its economy at the hip to fast-growing emerging markets.
The easy money policies run by Mr Carney during the crisis have, moreover, left Canada with a not entirely happy legacy of rapid consumer credit expansion and an overheated housing market. Success in life is as much about timing as anything else, and it may be that Mr Carney has simply had the foresight to get out while the going was still good.
By the same token, it may also be true that he is getting in at the bottom as far as the British economy is concerned. This has been a great year for Britain in many respects, but from an economic perspective, it was grim as grim can be, with a double dip recession and deepening eurozone crisis. It’s hard to see how the coming year can be any worse, and there is some reason for hoping that it might be quite a bit better.
The idea that Mr Carney’s arrival might mark a new beginning for the British economy therefore contains a certain logic. Yet if it does, it is no more than coincidental.
Judging by a recent speech he made in Toronto, Mr Carney is prepared to consider some quite radical approaches to monetary policy, including that of nominal GDP targeting.
But is this not what the Bank of England has in effect been practising?
Certainly, it is hard to think of it as inflation targeting, with prices well above target for much of the past few years. The economy has shown very limited real growth, but inflation has not been under control. Nominal GDP growth has therefore looked quite good, even if real GDP growth has been poor to non-existent. It’s not clear why abandoning the charade of inflation targeting and substituting an overt form of nominal GDP targeting would make any difference.
No doubt there are things Mr Carney can do to improve somewhat on the Bank of England’s performance. For instance, the Bank’s obsession with forcing banks to raise more capital seems peculiarly counter-productive.
Most bankers say both that they don’t need it and would in any case find it virtually impossible to raise in current conditions even if they thought it might help. They therefore intend to achieve the Bank’s demands by closing or selling more capital intensive lines of business, a process which is bound to lead to some further shrinkage in credit.
Mr Carney can help at the margins by applying a more worldly wise set of principles to the banking crisis, but there is nothing in the textbooks to suggest monetary policy can achieve a game-changing shift in the economy. It can certainly help in smoothing and elongating the adjustment, but it cannot eradicate it.
Many of the problems facing the British economy too much debt and a decades long loss of competitiveness are common to other “advanced” economies, but we also face some unique challenges on top. First North Sea oil and then financial services have been major contributors to the economy over the past 30 to 40 years, helping to disguise the steady loss of jobs to foreign competition and technology.
Both are now on the wane, with nothing obvious coming up in the wings to replace them. Sometimes it seems that our political leaders are not being entirely honest, either with themselves or the electorate, in refusing to spell out these realities.