If he wants to turn around the Bank of England supertanker, Mark Carney has a major task ahead

Given that monetary policy decisions take around two years to have any effect on the real economy, expectations are unreasonably high for the new govenor


At the end of the month Mark Carney will take over as Governor of the Bank of England.  He was clearly the best pick available in the central banker draft. There are better ones out there who were not available, not least my favourite central banker, Ben Bernanke, who is run a close second by Janet Yellen.

The expectations are high, but it is going to be hard for Mr Carney, pictured, to deliver very quickly as the Old Lady of Threadneedle Street moves even slower than a massive, Capesize cargo vessel – named because they are so large they can’t go through the Suez or Panama canals and are typically above 150,000 long tons deadweight. Touch the controls and very little happens for a long time. Unless the economy improves the press is inevitably going to turn on Mr Carney as not being good value for his high salary. The concern is expectations may be too high, especially when the Government has been trying to claim that recovery is in the air

Mr Carney is going to have to deal with a Bank of England monetary policy committee ( MPC) that seems set on doing absolutely nothing – he is going to have to persuade them to change their minds. Nothing has ever precluded the MPC from doing “forward guidance” so why start now? 

I wonder what arguments he will bring to bear to get them to start quantitative easing again given the majority have voted against doing more every month for the last 11 and Mr Carney would certainly not want to be in a minority anytime soon. Given that monetary policy decisions take around two years to have any effect on the real economy,  Chancellor Osborne is probably hoping Mr Carney whips them into shape sooner rather than later. He has an election to win and so far he has little prospect of big tax cuts before then as he had hoped given the parlous state of the public finances.  

The MPC voted again last week to do nothing even though the economy remains in the doldrums. The latest purchasing managers index numbers were slightly encouraging, but the labour market certainly does not seem to be taking off.  Plus it is hard to see what the driver for growth is going to be especially given what Capital Economics has called the “underwhelming effects” on lending so far from the Funding for Lending Scheme. This week the Bank of England announced that lending to firms was negative again last month. No lending, no growth.

I have a new boss at Dartmouth who takes over as president after this week’s graduation ceremony.  Phil Hanlon was the second in command as provost and vice-president for academic affairs at the University of Michigan, a Dartmouth alumnus and a distinguished mathematician.  We caught a big fish, and if we hadn’t caught him others soon would have.  Dartmouth is a private university and the president has lots of power to shape things; Mr Hanlon’s main task is to raise money, whereas Mr Carney’s main task is likely to be to print it.

There are some similarities between the positions these two men find themselves in. Both take over from despots with unwarranted self-assurance and are likely to have to change the cultures. 

In the case of Dartmouth it was Jim Kim who is now head of the World Bank, but who showed little interest in anything or anyone other than himself.  Not good qualities for a university president.  He tried to turn Dartmouth into a “Center for Health Care Delivery Science”, whatever that is.  It took him three years to work out that nobody cared – apparently he is doing much the same at the World Bank.  Even the class valedictorian at last year’s Commencement exercises claimed that he was already thinking about his next job after the World Bank.  His main problem was that he didn’t know what he didn’t know.  He had no experience in university administration, and he failed to appoint high-quality administrators so disasters were waiting to happen. He left Dartmouth rudderless and discord prevailed. 

Mr Carney replaces Sir Mervyn King who argued on the recent Desert Island Discs that he had slept well through the crisis and knew precisely what was needed.  The question, of course, is why then didn’t he act as if he knew?  GDP in the UK is still 2.5 per cent below what it was at the start of the recession in 2008.   Sir Mervyn ruled the Bank of England with a rod of iron and slayed dissenters in his path; senior people according to a recent review “have a tendency to filter recommendations” out of fear of how the boss might respond. 

Both Mr Carney and Mr Hanlon have had lots of experience and presumably know what they don’t know.  Time will tell whether they are despots, but early signs suggest that they are not; the best hope is that they are smart, benevolent dictators.

One of their first steps will be to appoint their people to senior management positions. Mr Hanlon has already started appointing people and searches are under way for others. There is little doubt that he will hit the ground running. 

Mr Carney has yet to show his hand – he is likely to have to sweep clean at the top starting with the chief economist, Spencer Dale.   Mr Hanlon probably has a couple of years to find his feet but Mr Carney does not.

There are differences between what is expected of a university president and the Governor of the Bank of England. Both need to avoid crises. Successful college presidents have to make an impression by raising money, coming up with new initiatives and put up new buildings.

My economic historian colleague, Doug Irwin, has pointed out to me that successful governors are the ones who we don’t remember as they managed to avert crises; who remembers Lord Cobbold of Knebworth (1949-1961) or Gordon Richardson (1973-1983) or Robin Leigh-Pemberton (1983-1993)?  The most infamous governor prior to Sir Mervyn was Montagu Norman (1920-1944) who must take a lot of responsibility for the inter-war depression.

My friend Adam Posen once told me that before making interest-rate decisions he would work out what Mr Norman would have done in such circumstances and then do the opposite.  Not a bad piece of advice for both Mr Hanlon and Mr Carney in relation to their predecessors.

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