Mr Brics: we need supply side reforms

Michael Bow
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Goldman guru Jim O’Neill tells Michael Bow that politics has got in the way of growth

IN A little under 70 days, Bank of Canada chief Mark Carney will sweep into Threadneedle Street as new governor of the Bank of England. One man who could have occupied the prestigious role is Goldman Sachs Asset Management chairman Jim O’Neill, once touted as potential governor.

O’Neill is set to retire from Goldman next week, after an 18 year career at the investment bank. And while the top job at the Bank of England was grabbed by Carney, another ex-Goldmanite, O’Neill says the Old Lady of Threadneedle Street needs to act on bank capital requirements to boost economic growth and help cure the UK’s economic malaise.

“Fiscal austerity is tough enough in itself but fiscal austerity and the persistent pressure for banks to raise capital is a pretty powerful combination to fight,” he says. “If the fiscal policy is to remain this way, you cannot keep wanting to force the banks to raise capital because you’re just not going to get growth.

“This contradiction, that we want our banks to lend more and at the same time they’ve got to raise more capital, it just doesn’t make sense.”

O’Neill, who was made Goldman’s top economist in 2001, says plans first touted three years ago by current governor Sir Mervyn King to introduce counter cyclical capital requirements would go some way to ease the pressure on banks. This would allow banks to have less capital when the economy is weak and force them to raise more when the economy is strong. “The whole politics has got in the way of it, it’s part of the ‘blame the banks’ mentality,” O’Neill says.

The “whole politics” of fiscal tightening is a point O’Neill is keen to stress. He points out the UK coalition came into existence on the weekend of the Greek economic crisis – “senior civil servants were probably saying, ‘whatever you want to do, do something to make sure we don’t allow our debt to rise,’” he says – and many have failed to escape that mindset.

“Part of the problem we’re seeing is that austerity isn’t reform. The Germans have sort of convinced everybody that all you need is austere fiscal policy and some magical growth will happen. But you need to have things that boost the supply side on productivity, and you don’t have that.”

O’Neill, who coined the Bric acronym to describe Brazil, Russia, India and China, and has been one of the past decade’s most influential analysts, is much more bullish on European equities, if not the economies behind them. “Equities are cheap,” he says. “We could easily see 6,500 on the FTSE 100.

This morning he will be celebrating his team Manchester United’s 13th Premier League title. But life outside Goldman also looks appealing. “I’m going to do nothing until I get out of here and breathe the air as a non-Goldman human being,” he says.

1978: Earns degree in economics from Sheffield University

1982: Graduates with a PhD from the University of Surrey

1982-88: Works for Bank of America and Marine Midland Bank

1988: Joins Swiss Bank Corporation

1991: Made SBC head of research

1995: Joins Goldman Sachs

2001: Made top economist at GS

2010: Becomes chairman of Goldman Sachs Asset Management