Carney’s reforms are welcome but won’t prevent another crisis

 
Allister Heath

GOOD on Mark Carney. The Bank of England he inherited was in urgent need of a shake-up, and he has now delivered on the comprehensive reorganisation he promised. Some of the jargon that accompanied his presentation yesterday was a tad irritating, but it is good to see private sector management techniques being applied to the public sector.

Carney’s appointment of Nemat Shafik as a deputy governor was another good move: he is hiring outsiders into senior positions, something that should have happened a long time ago.

While Carney himself has private sector experience (he’s ex-Goldman Sachs, as is Ben Broadbent, another new deputy governor), that remains unusual; let us hope that some of the next recruits will be ex-financial practitioners, rather than just regulators or economists. That remains one dangerous area of weakness in Carney’s revamped Bank: theoretical knowledge is no substitute for hands-on experience.

The Bank of England is the one organisation that was genuinely rewarded for failure: it played a key role in fuelling the bubble by keeping interest rates too low and allowing liquidity and the supply of money to grow too quickly, a giant intellectual error caused by a flawed understanding of the economy and inadequate models. It failed to understand risk, lost touch with the marketplace, became too academic and insular, didn’t listen to outsiders, was fully signed up to global regulatory agreements – such as Basel – that exacerbated the crisis and most recently mishandled the forex scandal. In return, it was given more powers and more staff. The FSA, by contrast, was abolished for its own incompetence and failure. It is good news, therefore, that Carney is seeking to make a break with the past.

But will he succeed? He thinks his new tools and structure would have allowed the Bank to prevent the crisis had they been in place in the mid-2000s. I doubt that very much: the global establishment had gone mad and lost touch with reality at the time, so it is unlikely that the Old Lady (even under Carney’s “One Bank” blueprint) would have behaved any differently to the Federal Reserve or any other of the failed central banks. It is true, of course, that Canada – which uses many of the tools Carney is transposing to the UK – escaped the crisis – but its finance sector is very different. Canadian house prices have also reached dangerously high levels, and the ratio of household debt to income has reached a record high of 163.7 per cent, which is not exactly healthy.

Carney is right to warn that risks are building again, though he remains too complacent about housing and too dovish about the rate at which interest rates are likely to have to rise. Sorting the Bank’s corporate governance is a vital step – but it won’t on its own be enough to prevent a catastrophe.

OSBORNE’S BIG DAY
HAS George Osborne got something up his sleeve? Or is he really going to deliver the most boring of Budget speeches? We will soon find out. For those of us who have been urging him to be bolder and more radical, especially when it comes to tax cuts, disappointment is almost guaranteed. But any change to stamp duty, that most absurd of taxes, would be welcome; and the chancellor might feel able to accelerate some of his other changes, perhaps even on corporation tax.

The markets will be watching the latest forecasts for the budget deficit – which hasn’t been coming down as fast as the economy has been recovering – and scrutinising the Office for Budget Responsibility’s predictions to see whether it still expects a rebound in corporate capex.

It may well be that the chancellor is seeking to make the economic recovery the centrepiece of his Budget – but I do hope he has been holding back at least one proper supply-side policy to cheer us all up.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath