Has there been a more unreliable boyfriend than Mark Carney?

After looking this week at the trend toward negative interest-rates and the establishment lust for higher inflation today we can take a look at some of the case for their defence. It comes from Bank of England Governor Mark Carney and he will be relaxed as he has been able to do so in its house journal the Financial Times. Although I note that even it does not label him as a “rock star” central banker anymore and there does not seem to be any mention of film star good looks. Mind you film stars I guess are not what they were after this from Stella McCartney after the Golden Globes.

This man is a winner… wearing custom Stella because he chooses to make choices for the future of the planet. He has also chosen to wear this same Tux for the entire award season to reduce waste. I am proud to join forces with you… x Stella #JoaquinPhoenix
#GoldenGlobes

Saving the planet one tux at a time.

Monetary Policy

Governor Carney opens with this.

The global economy is heading towards a “liquidity trap” that would undermine central banks’ efforts to avoid a future recession, according to Mark Carney, governor of the Bank of England.

As ever he is trying to lay a smoke screen over reality so let us break this down. Actually we have been in a type of “liquidity trap” for quite some time now. A major driver of it has in fact been central banking terror of a future recession which means that zombie companies and especially banks have been propped up. There has been little or none of the “creative destruction” of Josef Schumpeter where capitalism clears up many of its failures. Bad at the time but it also provides some of the fertile ground for new companies and growth. The deflection element is that by claiming a liquidity trip is in the future it deflects from his role in where we are now.

Er, who fired the ammunition?

In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.

If we look at it we see that if we just look at interest-rates there is 0.65% left according to Governor Carney. That is the current 0.75% Bank Rate to his view of the lower bound which was 0.5% but is now 0.1%. Sadly he is not challenged on this allowing him to imply this is a worldwide problem.

“It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time,” he said.

An opportunity was missed here to expose the Governor’s rather odd thinking. The blanket view that there is less ammunition has sub-plots. For example the European Central Bank or ECB has an interest-rate of -0.5% and considered -0.6% and yesterday we looked at the Swiss National Bank with its -0.75% official interest-rate. So suddenly we have up to an extra 0.85% compared to his “lower bound”. Also the ECB and SNB could cut further.

I am not sure the explanation about a liquidity trap helps much as it describes a situation we have been in for some time.

A liquidity trap occurs on the rare occasions when monetary policy loses all effectiveness to manage economic swings and looser policy does not encourage any additional spending.

Somehow the editor of the FT Lionel Barber and its economics editor Chris Giles seem to have missed that the credit crunch era has seem many examples of a liquidity trap as highlighted by the use of “rare occasions”

Alternatives

Is there any other sphere where people who have asked for tools used them far more than expected but with little success would be given even more powers?

That meant there was a need to look for supplements to monetary tools, including interest rate cuts, quantitative easing and guidance on future interest rates, he said. “If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space.”

It is nice that the FT below confirms the central banking group think or if you prefer they borrow the same brain cell.

Mr Carney echoed other central bankers, such as the European Central Bank’s Mario Draghi and his successor, Christine Lagarde, in recommending that governments consider fiscal policy tools, such as tax cuts or public spending increases when tackling a downturn. However, he accepted “it’s not [central bankers’] job to do fiscal policy”.

Also this is something that Paloma Faith sang about.

I’ll tell you what (I’ll tell you what)
What I have found (what I have found)
That I’m no fool (that I’m no fool)
I’m just upside down (just upside down)

Central banks were supposed to be independent and run monetary policy yet a confession of failure seems to make them think they can tell elected politicians what to do. I would call it mission creep but it is more of a leap than a creep.

But I’m a creep, I’m a weirdo
What the hell am I doing here?
I don’t belong here
I don’t belong here ( Radiohead )

Mind you the unreliable boyfriend seems to be having doubts about his commitment to his own statement.

The governor said monetary policy was not yet a spent force internationally, with US and eurozone interest rate cuts last year encouraging borrowing and spending. “We’re starting to see that stimulus flow to the global economy.”

Indeed suddenly we find that his successor has loads of room.

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

“The Precious! The Precious!”

Oh and weren’t we raising the banks capital requirements to make the system safer? The unreliable boyfriend does seem to enjoy a U-Turn.

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

Being the FT the failures of his initial period of tenure get skated by.

Demand returned in 2013, just as he took up his position.

The 7% unemployment rate debacle gets a new spin.

how many people could be employed without inflation

I am sure that readers think it is really unfair that the Bank of England had to deal with a changing situation.

The monetary policy committee also had to grapple with structural difficulties

I like the use of “grapple” to describe confusion and inertia as it would be hard to be more misleading. The reality is that the chance to raise interest-rates around 2014 was missed and the boat sailed with the Governor still on the shore dithering over whether to buy a ticket.

Comment

It is perhaps most revealing that the Governor sets out the challenges for the Bank of England without mentioning monetary policy at all.

Amid these economic uncertainties, the main task of the BoE, according to the governor, was to finish core reforms to the global financial system and react appropriately to the political upheavals of the Scottish and Brexit referendums and the challenges of climate change. Mr Carney insists that rather than be too political, as his predecessor Mervyn King has suggested, the BoE had to get involved because it now had a duty to preserve financial stability.

Also there seems to be some form of amnesia about the fact that Governor Carney got into trouble for playing politics when he was at the Bank of Canada.

But frustrations of UK life in the crosshairs of polarised political debate will also haunt him in the search of a new job. “This role is just much more public than the same role in Canada,” said Mr Carney.

Oh and did I mention mission creep?

But he was clear that the financial sector could not mitigate global warming alone and without wider agreements to limit global warming and action to enforce targets.

The Investing Channel

17 thoughts on “Has there been a more unreliable boyfriend than Mark Carney?

    • He’s inflated the property bubble with the help from the Tories and managed to get it put down to the economy being wonderful.

      As opposed to true reason which more ZIRP, more QE, TFS and FFL along with Help to Sell.

  1. Although the BOE may not have many tools left apart from cutting rates to zero and even negative interest rates, there is a way of improving the economy.

    One way is to produce more per employee and today its just been released from the ONS that productivity has improved by 0.1%!

    Such a meagre measure isn’t enough not when one looks at the under production the preceding months and with the government set to raise the minimum wage in April we still lag both the US and Europe.

    Why are we lagging the US and Europe?

    Is it transport problems? We know the public are pig sick of standing up on trains and trains not on time and that must make the public miserable and could account for less productivity, but it must go deeper than just transport.

    Robots and technology was supposed to improve technology, and the UKJ must grasp this as soon as they can. This may mean a loss of jobs in many areas but we need more people in the care industry including hospitals.

    • As we move ever more to being a service economy productivity is going to be rather an odd measure for future evaluation purposes.

      I wonder how ‘they’ measure the online economy as most people I know are now selling online, self employed and advertising online or simply self employed and not easily measured. I wonder if tax income was used by the government as a measure of our productivity what the result would be? Then add a significant percent extra for the black economy.

  2. Hi Shaun

    Well done for holdng Carnage to account. I’d expect you’d be the only one from our pliant media. Carnage was bought in for one thing only – raise house prices. He’d had previous in Canada and it was widely forcasted, but not be our useless media.

    His work is done:

    https://static.halifax.co.uk/assets/pdf/mortgages/pdf/December-2019-House-Price-Index.pdf

    It looks like the ‘biggest monthly increase’ (after manipulating their algorithm) has kicked a YoY decrease into the long grass.

    • Hi Anteos

      It was a really rather odd report as after changing their methodology because they were getting higher numbers than elsewhere we get.

      “House prices in December were 4.0% higher than in the same month a year earlier…… On a monthly basis, house prices rose by 1.7% ”

      As for rationale’ I am at a bit of a loss because any deals would have been done before the election and some a while before so no Boris or Brexit bounce. So it is all rather odd

  3. Great blog and great video as usual Shaun.
    Here is a link to a story by Eric Reguly, the Globe and Mail’s European Bureau Chief, about Mark Carney’s future:
    https://www.theglobeandmail.com/business/article-mark-carney-ends-his-high-flying-career-as-bank-of-england-governor/
    I hope you or some of your readers can get past the firewall around it. I cannot and read the library copy of the Globe. Reguly implies that Carney took out both British and Irish passports after becoming Governor of the Bank of England, when in fact he acquired an Irish passport while still working for the vampire squid, which only became public knowledge after he became governor of the Bank of England. Reguly claims that he committed no serious misstep in his years in office, completely ignoring the flame-out of his state-contingent forward guidance regime based on the unemployment rate after only six months. You correctly saw that this was a dog that couldn’t hunt when he announced it. Reguly does quote Andrew Sentance, a member of our RPI CPI User Group, saying that he thought Carney had been too political in his statements as governor, and Jacob Rees-Mogg, declaring that Carney was just a “second-tier Canadian politician”. Reguly ignores the possibility that Carney might succeed Poloz as governor of the Bank of Canada, even though Carney could conceivably take over that job in June, not even three months after leaving the Bank of England.

    • re : “, declaring that Carney was just a “second-tier Canadian politician”

      good god , Rees-Mogg promoted him then ……. 😉

      Forbin

  4. Along with relaxing banks’ capital requirements, maybe he could find a way of forcing people with the threat of violence or prison down to the bank to borrow £300,000 for that 2 bed terrace on their £30k salary.

    He should have let the property market crash when you came you useless Canadian then at least you could create another bubble to get money into the economy. Instead he just inflated the 2013 bubble.

  5. Ah! You made me ROFL yet again! My favourite phrase so far in 2020:

    Saving the planet one tux at a time.

    Priceless! Great writing!

  6. Shaun, will you possibly be the one responsible for entering the expression “the Carney Moment”(much like Paul McCulley did with Hyman Minsky’s moment) into the lexicon – defining a person completely so out of their depth, reduced to spouting mindless drivel that nobody pays attention to, having told so many lies and made so many incorrect predictions and reversed so many policies and having lost all credibility to the point where politicians ridicule your unreliability in the press?.

  7. Hi Shaun

    To some extent Carney is a victim of the times in that he’s seen as a celebrity, and likes to see himself as such. Fifty years ago no-one knew who the Governor of the BOE was and cared even less; they were invisible and, on the odd occasion they were spotted out in public, oracular. As soon as you see yourself as a celebrity you’re judged as such and Carney has been judged and found wanting.

    Looking at his role as a central banker his time seems to marked by insouciance and a fairly solid under achievement. The build up in debt levels and asset prices has hardly even been acknowledged let alone tackled and he leaves the economy in a more fragile position than he found it when first appointed. In this he is not of course alone but it does not reduce your own hubris by being included with others of a similar stripe. He, like his fellow central bankers, has trapped himself in the Roach motel for years now but cannot acknowledge this.

    The odd thing about Carney is that a central banker is supposed to know what is going on in the World but with him you cannot help an eery feeling that he just doesn’t have a clue what is going on, hardly an inspiring epitaph.

  8. Shaun, at about the 4 minute mark of your video you say that housing prices in the euro area have risen by 4.3%; I believe this is the 2019Q2 annual inflation rate. Of course, it isn’t only housing prices that are left out of the HICP, but owner-occupied housing costs in general. I couldn’t find a composite index for the country OOHPIs for the euro area, bizarrely enough. Using 2019 population weights to calculate an average of the 2019Q2 annual inflation rates I got 3.4%, which is substantially lower, and I suspect an aggregate based on expenditure weights would show the same thing. If Eurostat does not publish a euro area aggregate for this series, why is that? Their heart really doesn’t seem to be in this.
    By the way, ONS now promises to release the 2019Q3 update for the UK OOHPIs on February 19, later than originally scheduled, because of system updates. It is good to know that the ONS still plans to calculate these series after Brexit.

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