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.
Comment
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?
