Mark Carney, the incoming governor of the Bank of England, is widely praised. So how good a job has he done in his five years in charge of Canada’s central bank?
He is described by Chancellor George Osborne, who picked him, as “quite simply the best, most experienced and most qualified person in the world to do the job”.
Fellow Canadian Michael Ignatieff calls him the “smartest central banker in the world”. Soon, amid signs that the British economy is beginning a slow recovery from one of the most severe downturns it has ever experienced, we shall find out just how smart he is.
Mark Carney is familiar with Britain. He studied economics at Oxford, where he met his British wife Diana Fox, an economist.
For 13 years, he worked for the US investment bank Goldman Sachs, earning a seven-figure salary.
The Canadian finance ministry followed, with Mr Carney responsible for the sale of the government’s stake in Petro-Canada, earning plaudits for his understanding of the financial markets.
He then joined the Canadian central bank as deputy governor, becoming governor in 2008, in the midst of the financial crisis. At the time, he was the youngest central bank governor in the G20, whose financial stability board he chairs.
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He is credited with protecting Canada from the worst effects of the crisis, which began in the US before infecting Europe. Profiles of him portray him as the courageous captain single-handedly steering the ship away from the rocks.
Traditionally, the Bank of Canada cuts and raises interest rates by 0.25 per cent at a time. But fearing the worst after looking across the border in March 2008, Mr Carney opted for a 0.5 per cent reduction – a significant step given that he had only been in the job for a month.
In 2009, he moved again, announcing that Canada’s near-zero interest rates would remain at this level for at least a year, providing inflation was subdued. The US Federal Reserve followed suit.
So three cheers for Mr Carney? To an extent, yes. But David Madani, an economist at Capital Economics in Toronto who used to work for the Bank of Canada, told Channel 4 News that what saved the country from a UK-style meltdown was a stable, well-regulated banking system – that had been in place for many years – along with a “snappy rebound” in housing and commodity prices.
“Why did Canada perform better? A stable banking sector that was better regulated. A stable banking sector meant monetary policy worked,” he said.
“A stable banking sector meant banks continued to extend credit throughout the financial crisis. They weren’t allowed to do some of the things other banks throughout the world were allowed to do.”
Mr Madani believes it is a “myth” that the Bank of Canada took more aggressive action on interest rates than other countries, but he does concede that Mr Carney’s announcement about long-term rates was “innovative” and that overall he “was dealt a good hand and played it well”.
Then there is the other side of economic policy. Mr Carney was responsible for monetary policy, but it was the Canadian government that was in charge of tax and public spending, and Mr Madani believes its decision to boost infrastructure spending during the downturn also played an important part in healing the economy.
We do not think Canada’s past performance is an indication of Canada’s future performance. David Madani, Capital Economics
In London, Mr Carney may go down a similar road, making clear that low interest rates are here to stay. Base rate has remained at 0.5 per cent since March 2009, and this would be a significant departure from the way things have been done in the past in Threadneedle Street.
Of course, Mr Carney may choose to say nothing, secure in the knowledge that he has a reputation as a central banker who is committed to low interest rates. And would George Osborne have chosen him for the top job if he had been an interest rate hawk?
Another matter that will need to be resolved is the bank’s £375bn quantitative easing programme: will the new governor want to print more money?
There is also the issue of communication: the chancellor clearly believes that the bank’s monetary policy committee could do a better job of explaining its decisions and this is where Mr Carney comes into his own.
“He did provide good leadership,” said Mr Madani. “Communication is a big part of monetary policy.”
Assuming there is no repeat of the financial crisis, what we can say with some degree of certainty is that he is unlikely to face the same pressures Sir Mervyn experienced during the dark days.
In fact, if the British economy continues growing, he may well reap the dividends as the right person in the right place at the right time.
Mark Carney is usually talked of in glowing terms: young (he is 47), bold, a dynamic leader: the sort of character you want in charge of your central bank.
Mr Osborne wanted him so badly he was prepared to pay big bucks for his expertise: an annual salary of £480,000, pension contributuons of £144,000, along with a London housing allowance of £250,000 for the father-of-four and his wife.
Current governor Sir Mervyn King has had to make do with less: £305,000 a year, plus and another £300,000 in pension contributions.
Questions are now being asked about where Mr Carney will choose to live: could it be Notting Hill (near the chancellor’s family home) or Primrose Hill (home to Ed Miliband)?
It is noteworthy how much credit he receives for Canada’s great escape, but are there any concerns about Mr Carney’s stewardship of the bank of Canada?
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Ultra-low interest rates may have helped Canada through the financial crisis, but household debt has also risen to record levels, reaching 165 per cent of average household incomes in March, making Canadians among the most indebted people in the world.
Most of this debt is tied to mortgages, with low interest rates pushing up house prices. In Britain, there is now an understanding of the havoc debt can wreak and the dangers it poses to the economy.
Critics say a rise in interest rates, which have remained at about 1 per cent for the last four years, could have persuaded Canadians to cut back on their borrowing.
Mr Madani said: “Time will tell how successful Mark Carney has been in terms of leading the Bank of Canada. We do not think Canada’s past performance is an indication of Canada’s future performance.
“We don’t see Canada performing anywhere near as well as it did coming out of the recession. We are not very confident about the housing market in the next few years and have told our clients to expect a correction.”
To give him credit, Mr Carney is acutely aware of the dangers, saying in a speech in Montreal: “We cannot grow indefinitely by relying on Canadian households increasing their borrowing relative to income.
“Nor can residential investment remain near a record share of GDP, particularly given signs of overbuilding and overvaluation in segments of the real estate market.”
It may be that Mr Carney is leaving Canada as the chickens come home to roost.