Central bankers do battle on avoiding bust: Carney vs Draghi

Two speeches in two days have set out the stark differences in opinion between two of the most important men in economics.

Bank of England governor Mark Carney and European Central Bank president Mario Draghi are both ex-Goldman Sachs employees, but that hasn't led to them sharing views on best practice as central bankers.

While Carney is happy to have regulators fight fires - micromanaging policy to deal with individual problems - Draghi would prefer broader and blunter policy decisions.

Mark Carney, New York, 9 December

What of unbalanced growth? The Bank of England is alive to the risks of extended stimulus, and given its responsibility for macro-prudential policy, it can act in a timely fashion to mitigate them. The Bank demonstrated this flexibility recently with a package of measures targeted at the housing market, and it has outlined a broad range of additional tools if further action were required.

The synergies of combining the monetary and macro-prudential authorities in one institution could be considerable. By sharing analysis and clearly assigning a hierarchy of responsibilities between them, the Bank’s MPC and its financial policy equivalent, the FPC, are ensuring that measures are timely, proportionate and targeted. For example, the Bank’s Funding for Lending scheme, originally put in place for monetary policy purposes, was refocused from household to small business lending for financial stability purposes. Similarly, both committees have made it clear that monetary policy is the last line of defence against financial stability risks, thereby establishing clear lines of responsibility and accountability

Mario Draghi, Rome, 10 December

Claudio argues that monetary policy (possibly in combination with other policies such as macro-prudential policies) can do something to prevent costly booms and busts – although it has less leverage than commonly thought in a balance sheet recession which often characterises the “bust” phase. Hence, by being more aggressive in preventing risks ex ante, the central bank may have an easier life ex post, and avoid being over-burdened with excessive expectations in the bust phase. A distinct advantage of monetary policy as compared with macro-prudential policies is its robustness to regulatory arbitrage and its ability to “get in all the cracks”.

Carney has already backed the Bank of England's macroprudential tools in trying to manage what could be a housing sector that's approaching "warp speed".

Lars Christensen, chief analyst at Danske Bank, has argued that central bankers should not try to be superheroes - flying about, and attempting to solve problems as they emerge.

Instead Christensen advocates a rules based approach, where policy consists of clearly defined rules. As he says, bankers aren't superhumans - and "no individual can accurately guess what extremely complex variables such as productivity growth and demand growth will be in the future."