Banca Monte dei Paschi di Siena is a warning for Mark Carney

Over the weekend the incoming Governor of the Bank of England  Mark Carney spoke at the World Economic Forum at Davos and there was a lot of interest in what he would say. However some care is needed in taking this as a straight line reference to the UK as has two other jobs right now (Bank of Canada Governor and Chairman of the G20 Financial Stability Board   ) and his comments specifically namechecked the United States rather than the UK.

What did he say?

for monetary policy for the major economies it is to ensure that they achieve escape velocity

This is being translated as being a call for more action but if you think about it this could have been a prescription for monetary policy throughout the credit crunch. At any time in the period the objective would have been for us to “escape” the current mess,what has been missing is a way of doing it!

Too finish the job which has been importantly started

Again this is vague and could mean quite a lot of things. But later we did get something which did give more of a hint about Mark Carney’s views albeit that he was talking about monetary policy in the United States.

part of the point of that in my opinion, as the economy gains traction,within the context of price stability, the stimulus continues to be provided entirely appropriately to ensure that the US economy achieves escape velocity which matters greatly for us

As you can see there are many begged questions here but let me tidy some of this up. Price stability sounds good but for a central banker actually means a stable inflation rate rather than what you might think. Currently that is mostly defined as 2% per annum but there have been calls for 4% for example to replace it. In other words they say price stability but mean inflation stability which is often easier said and promised than done.

We see that “appropriately” comes into the category of words with many definitions, whilst “escape velocity” is on the face of it clear how do you define it? So Mr.Carney has made some vague intangible hints but there is no real beef or detail here.

There continue to be monetary policy options in all the major economies (in response to a point made that it was maxxed out or taken to the hilt).

True and simply stating the obvious.

price stability over the right horizon a clearly explained horizon

This was more interesting as we wonder what is the “right horizon”? As after all in the UK we have had inflation which has been over its target for 37 months in a row with no end to this in apparent sight. Exactly when was this “clearly explained”? It simply was not and left hanging in the air was the implication that it is okay for this to persist.

An Impact?

This morning the exchange rate of the pound has opened weakly again. I discussed this issue in detail back on the 16th of January . But today we have dipped to US $1.573 and 1.1700 versus the Euro. This poses a question for inflation as for example in 2013 so far an oil price which has risen by 2% (Brent Crude) has been added to by the pound falling by 3% versus the US Dollar. No wonder there is talk of more petrol and diesel price rises which of course gives inflation another nudge.

However I counsel some caution in blaming Mark Carney for this as we have also had some poor economic figures such as Fridays report showing that we had not grown at all over 2012. I am afraid that the time-span of “the good news will keep on coming” was somewhat short although somewhat bizarrely BBC News 24 had an “expert” on telling us that the UK had received a lot of good news recently which sadly went unchallenged.

A can of worms?

Much less reported was this about central banks

operational independence is paramount.That is what central bank independence is

You may note that “independence” has received something of a downgrade there! However does anybody really believe that anymore? It is a strange world where the Bank of Japan looks the most independent and if one removed the Monetary Policy Committee in the UK would our politicians have behaved that differently if at all?

Our Banks need reform

One area where Mr. Carney did strike a chord with me was when he mentioned that we needed to solve the too big to fail issue with our banks. I wholeheartedly agree and hope that he really means this and I wish to illustrate the problem with what has happened to the oldest bank in the world.

Banca Monte dei Paschi di Siena SpA

This bank was started in 1472 but the  crew in charge when the credit crunch hit have managed to ruin it which is quite an (anti) achievement I think. The conservative secure business model which had survived and thrived for other 500 years was abandoned in the run up to the credit crunch. Specifically questions have been asked about how she paid over 9 billion Euros for Banca Antonveneta  when the owner Santander had valued it at 6.6 billion Euros only two months earlier.

Of course many banks made bad business decisions over this period but this one then placed some derivatives trades to kick the can of such problems into the future. Or to put it another way the banks true financial position was misrepresented and hidden. The situation has become so bad that the Governor of the Bank of Italy said this last week.

MPS is a sound bank

So sound in fact that the Bank of Italy had to shore it up with 3.9 billion Euros of loans until new financing arrangements could be made! This bought time for a new convertible bond to be issued to the bank from the Italian state of 4.5 billion Euros to shore up its capital. So shareholders faced not only considerable dilution in their position but also a rate of interest on the bond which is an eye-watering -for these times- 9%, which will be a drag on the bank going forwards.

Will the bank survive? Maybe but these sort of things rarely happen in isolation and I fear further revelations going forwards. We can also observe that politicians and banks make a toxic and often explosive mix. However we also see two of the themes of this blog represented. Firstly that current policies like too big to fail invariably end up in private losses being a public liability. Secondly that there are hidden problems in the world’s banks with derivatives and financial alchemy being used to obscure and hide the truth. You could add one more which is the wrong-doers invariably seem to escape any real punishment. Collapsing a bank through fraud seems to be treated much more leniently than say housing benefit fraud which is odd when it is often a million times or so larger.


So today we see that the financial side of the role of Bank of England Governor in terms of how we deal with our banks is likely to be as important as monetary policy. After all if monetary policy was not approaching some sort of limit phrases like “maxxed out” would simply not be in use. I fear that we will discover problems in the UK’s banks as we go forwards not dissimilar to what has happened in Italy over the past few  days. It has been one of my central arguments that we will not get any real economic recovery until we face up and deal with this.

Infrastructure spending

The UK plans to build a new high speed railway to the Midlands and then the North called HS2. All sorts of claims are being made for it although I worry that cutting the journey time to Birmingham by 15 minutes isnt that much of a return for £35 billion! Surely we can find a better use for such money, I would be interested in readers thoughts as the railways were a powerful force for change 150 years ago but are they still?

Mind you some of these things can be powerful. Today on the business section of BBC Breakfast Newcastle city council claimed a multiplier of five for its spending which was unchallenged by the presenter. So I could them any money I have they could double it making me much better off and Newcastle would be three times better off! Fantastic is it not?




This entry was posted in Banking Reform, Banks, Euro zone Crisis, General Economics, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues and tagged , , , . Bookmark the permalink.
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  • James Alexander

    Oh dear, this is frightening. From what you quote, and as you detect, the man is flailing and thrashing about linguistically like a drowning man. He is unable to express himself naturally, clearly and accurately. To a teacher’s eye, this is a certain indication of inadequte mastery of the subject matter.

  • Chris Rick

    In early January I came up with a list if things that might give a ‘good
    bang per buck’. At the time I was thinking of some of the QE money,
    but the scale still works for HS2. This was a list generated after a
    couple of minutes of thought.

    fund a fusion power research programme
    put fibre broadband into every home and business
    build tidal power barriers across some of our estuaries
    fund carbon capture for any coal-burning power station built
    fund recycling of our landfill sites
    put solar panels on every south-facing roof
    fix all the leaks in the water supply

  • Quelgeek

    Dear Goodness!! Until I read this list it had not occurred to me that there are worse ways to spend £35Bn than HS2. The first two items on your list are the only remotely sensible ones, and I would fiercly oppose the second one.

  • DaveS

    To my eye, its a clear example of obfuscation – just like Mervyn’s ridiculous speech the other day which Shaun demolished.

    They don’t dare speak the truth because they know we are bankrupt. They also know that the standard and time tested “solution” is to devalue your currency and inflate your way out of the excess debt. They have spent 3 decades pushing the dogma of low inflation (particularly low wage rises) and they now tie themselves up in knots pretending the dogma stands whilst their actions prove the opposite. Its simply dishonest but as high priests they aren’t held to account.

    The problem is the time tested “solution” isn’t going to work. They think we can shed the excess debt, reset the clock and start the whole debt cycle again. They think the economy is money and they can control it by creating and destroying money at will. The economy isn’t money and these guys didn’t create it – but they can damn well destroy it.

  • Chris Rick

    That is an interesting response

  • Dan Hill

    Thinking of sustainability and safety, rail is the better form of transport. Unchecked individualism and consumerism have led to the rise of the car. So whilst it may be expensive it will be worthwhile.

  • MajorFrustration

    Para “Comment” “I feel that we will discover problems in the UK’s banks….”
    Too right. I think it was only in the last month or so that Merv indicated that the banks needed to look at and come straight on the level of their non performaing assets – which he thought might be a further circa £10b. (So much for the BoEs authority and timelyness|. My own view would be “and the rest” possibly as much as £250b. So what are the auditors doing

  • ernie

    As I said on a previous post about the BoE and its devaluation policies, has anyone ever directly asked King why devaluation didn’t work on all the previous post-war occasions, right back to Harold Wilson? Another point that I take from Carney et al is that they all think/assume that the world will one day go back to the “good old days” pre-2008. They don’t seem to realise that we are not just in an unfortunate dip but that actually we reached the end of that phase of economic history in 2008 and there won’t be a “return to normal”. This accounts for the constant use of only one policy to try and escape from the situation – that of adding debt to the debts to solve the problem.

  • Andy Zarse

    And sadly one that is quite correct. Ecomentalist projects have a terrible financial track record. Unless you’re planning on just wasting the money?

  • pavlaki

    The only draw back is that rail is fixed from A to B whilst road transport is infinitely flexible in both the timing of a journey and multiple destinations. I believe that a balance of investment in road and rail should be made with more emphasis on using rail for transporting goods at off peak hours. I’m not sure that the investment in HS2 provides enough ‘bang for the buck’.

  • Andy Zarse

    Hi Shaun, IMO the HS2 is a solution to yesterday’s problem. The internet will always be faster than even the fastest train, and with the growth in tele-conferencing (how long now until it’s 3D?) it will be rendered a big white elephant so as to put Concorde in the shade.
    I have a business meeting in Milton Keynes on Wednesday morning, then onto my next meeting in Stoke on Trent. I will be travelling from MK to Stoke on Virgin Rail. The journey takes 54 minutes, and I honestly couldn’t care less if it took 34,44,54 or 64 minutes. The days of train travel being an incommunicado wate of time are long gone. With a wireless connection I’ll use the time to send emails and probably have time left over to read your blog! (Then I’m off to Manchester to watch Saints play Utd, that’s another story but one which I suspect is probably going to represent as surefire a waste of money as HS2!)
    Oh, and I also caught the news item on Newcastle. I was muttering economics-based profanities at the screen… It’s a sad reflection on our once-great national broadcaster when their so-called business correspondent is as utterly inept as “Steph” appears to be. In the link with Bill and Suzanna she didn’t seem to know the name of our national flag or that debates in the House of Commons are chaired by The Speaker.
    Andy Z

  • Pavlaki

    The markets continue to favour the Euro zone despite the continuous drip of bad news: Italian sovereign debt now up to 127.3%, no sign of a housing recovery, Spanish bad loans now 191bill or 11.4% of total portfolio, declining Italian confidence etc etc. I fear that eventually the markets WILL take notice and there will be a huge correction and the Euro crisis back with a bang. Should the ECB not be letting the air out of this Euro bubble before it goes pop?

  • Chris Rick

    And another.

  • Anonymous

    I’d suggest the government should be regulating business, not doing business. Governments have a track record of very wasteful spending and poor business achievement.

    Funding research into fusion power is a good idea and the USA has successful science programs that fund university research. Programs like this may not deliver or may fail commercially, but still worth trying.

    As to subsidizing uncommercial solar panels – we should only fund scientific research to create solar panels that profitably generate electricity. Solar panel subsidies reward failure.

  • pavlaki

    I totally agree, we are at the end of an economic era and it’s all change from now. Devaluation is simply stoking up inflation and there appears to be a distinct lack of alternative policy.

  • forbin

    fund a fusion power research programme

    A, fusion power -the power of future – and always will be……
    We know this is difficult – setting a H-bomb off is easy , H power has been beset with difficulties – long term I think.

    put fibre broadband into every home and business

    A, Cuts jobs and a small boost only – Also 1/3rd of the country dont use it – gonna force them ?
    Well make ‘em pay it I guess!

    build tidal power barriers across some of our estuaries
    A, yes this would have some traction if it wasn’t for all those enviromental NIMBYS scupper any attempt to do so. And its sorta hard to match output to demand but otherwise need A Great Leader to push through – not one on the block so far – look at the Banks!!

    fund carbon capture for any coal-burning power station built
    A, for many reasons a waste of money and coal- even if you could get CO2 into the ground – what about leaks? Energy gained is by all accounts going to be expensive as it costs to capture…

    fund recycling of our landfill sites
    A, yep sounds good to me – anyone else know of problems here – apart from its a diverse job?

    put solar panels on every south-facing roof
    A, yep , but we have then the people owning it and not like that tax for windmills we have now that make us pay for it and gives the collateral to the banks/power companies – they will kill it…

    fix all the leaks in the water supply

    A, erm , wasn’t I already paying for this along with everyone else in my water bills ? Like the Windmills one sound like public pay – private owned


  • forbin

    apart it looks to me as if Germany is doing well out of Solar subs


  • Anonymous

    A few German industrialists or Chinese more likely are doing nicely – and the average German taxpayer is picking up the tab …

  • Anonymous

    Hi Andy
    I used the train recently to come back to my flat after I had stayed at my parents for a week or so when I was unwell. I asked for an off peak ticket and was promptly feeling rather out of date as I was told there wasnt one! It was £12.20 for a single fare from Farnborough in Hampshire to Clapham Junction which made me mull on the cost of travelling or commuting by train which the HS2 debate seems to have bypassd entirely.
    My sympathies at the recent loss of your manager who seemed to me to be sacked for doing a good job…

  • Anonymous

    Hi Forbin
    I can add something on this from the London Experience over the “Super Sewer”. The idea is good, as at times of heavy rainfall the sewers flood and effluent is sent down the Thames. However the response seem to be expense- max at £4billion and even worse Thames Water has been loaded with debt whilst sending nice dividends to its owner so guess what it’s higher bills and inflation time!
    Obviously there will be a bill but a well run utility will either put money aside for contingencies or build up its financial strength so that it can borrow itself for at least a decent proportion of the amount required.

  • Anonymous

    Hi James
    There is another concern which is that Mark Carney has spoken out giving the impression that he is in favour of quite a few different and not always consistent policies. Shireblogger who used to comment regularly on here but now replies on twitter has drawn my attention today to a speech which hinted at support for Steve Keen’s debt cycle analysis.

  • Anonymous

    Hi Dan and welcome to my part of the blogosphere
    Trains do have their uses but my point was about this specific plan which will be very expensive for what look like small gains. Something more flexible like some light railways is likely to give much better gains.
    Also how much will the tickets be?

  • Anonymous

    Hi pavlaki

    Unfortunately central banks have been very poor at any sort of “taking away the punchbowl before the party gets going” over the last decade. Also I am reminded of the thougt that this is some sort of Germanic revenge on the easy money policies of the ECB.

    However the £ falls because of a weak economic run and the Euro rises because of the same!? They have not declared their 4th quarter GDPs yet and we have to wait a while yet for some (Italy is mid-Feb) but we get Spain’s on Wednesday.

  • Andy Zarse

    Very well, perhaps you could talk us through the figures then? Or don’t you have any? In which case show us some recent green energy projects in the UK that will actually sustain without massive Govt subsidy?

  • Dan Hill

    A fair point pavlaki. That’s a situation which has come about because rail use is tightly controlled and road very loosely. That and there’s 250,000 miles of road and only 10,000 of rail.

  • Dan Hill

    Thank you Shaun. Long time reader, rare participant.
    Yes, I don’t think any amount of arithmetic will make the sums add up in favour of that specific plan or any additional rail line for that matter. Getting a new transport path up through the spine of the country would always be expensive.

    Trouble is, the whole transport system is suffering a capacity crisis. It needs an overhaul rather than this pricey tweak. Sadly, we’re a long way from electing such a visionary government.