What will Mark Carney bring to the Bank of England?

Yesterday saw something of a surprise when the current Governor of the Bank of Canada Mark Carney was announced as the next Governor of the Bank of England. By the time it was announced it was not a complete surprise as some of us were wondering why the Canadian Minister of Finance was having a press conference for “media availability” at the same time?

My thoughts

Firstly let me welcome the fact that someone who is an outsider to the Bank of England and indeed the UK Treasury structure was given the role. Both of them badly need fresh blood which the UK institutional structure was able to respond with only with damaged candidates be it via the Liebor scandal (Paul Tucker) or past support for the UK joining the Euro (Adair Turner). It is not that the UK lacks people of sufficient calibre it is that our failed institutions have the wrong ones at the top. Picking a pure outsider allowed him to have a fair degree of experience as well from being Governor of the Bank of Canada.

On the other side of the coin it is a shame that Mark Carney is not an outsider to Goldman Sachs as he worked there for thirteen years. Such thoughts led me to tweet this after the announcement.

In the future will it be compulsory for Central Bank Governors to have worked at Goldman Sachs?

I understand that after his appointment some nine central bank Governors in Europe will be ex-alumni of Goldman Sachs. Which as some wag pointed out is the same number as the Nazgul in JRR Tolkein’s the Lord of the Rings.

I will leave readers to make their own minds up as to whether the way that Mark Carney’s appointment has been nearly universally welcomed is a good thing. As the last time a central bank Governor was regarded like that- Alan Greenspan- look what happened next!

What might we expect from Mark Carney?

Unlike the current set-up in the UK he has been willing to raise interest-rates when necessary as Canada did so three times in 2010.So you can argue that he has seen some of the dangers of the type of liquidity trap that the UK is now in. However he has stepped back more recently from raising them again. We can say that he is a fan of banks holding more capital so that they are better protected against future financial crises as he has been heavily involved in the proposed Basel 111 rules which require this.

But we remain in a position where we are still unsure of what his policies in the UK will be. He set an ominous note we he used one of Mervyn King’s buzzword’s “re-balancing” during his introductory press conference as Merv’s “re-balancing” has been all talk and little or no action but Mr Carney may have another meaning for it. Also we need to acknowledge that Canada has faced a different set of economic challenges to the UK. For a start her enormous natural resources have benefitted hugely from the commodities boom that has accompanied the credit crunch. So in that respect her conditions are very different to those of the UK.

Also there are doubts about Canada’s housing market which perhaps the best clue to can be given by pointing out that there is a website canadabubble.com! So Mr.Carney may be displaying a nice sense of timing -for him anyway- and we need to say that his record has been good so far…

Mark Carney’s salary has been misunderstood

I watched the announcement of Mark Carney’s appointment and noted immediately that the Chancellor of the Exchequer was very evasive about what he would get paid. His initial claim  that he would be paid the same as Mervyn King faced the issue that £624,000 (made up of a £480,000 salary and a £144,000 pension contribution) is not £305,000! However I will explain below.

Mervyn King benefitted from an extraordinary pension

It may be hard to believe that Mervyn King’s pension was worth nearly as much each year as his salary but let me take you through the numbers. He is a member of the Bank of England Court Pension scheme and we know this about it.

his Bank pension having been fully accrued at the end of his first term.

This allows the Bank of England to give us little detail on the scheme but we can look at the Deputy Governors ones. For example that of the (looked over for the main job) Paul Tucker. Those of a nervous disposition or prone to high blood pressure might choose to look away at this point.

As of February this year Deputy Governor Paul Tucker’s pension is calculated by the Bank of England as having a cash equivalent 0f £5,006,600 and it has risen over the last year by £1,350,000. It rather knocks his salary of £258,808 into a cocked hat does it not?

Applying the same mathematics and methodology  to Mervyn King’s pension brings me to  a value of £7.68 million! No wonder he seems little inclined to do anything about inflation.

How do we get to such a large sum?

The normal retirement age is 60, and the accrual rate allows members to achieve a maximum pension of two thirds of their pensionable salary at normal retirement age after 20 years service.

Normal final salary schemes take forty years to provide such a pension and this is what is known as an accelerated scheme for obvious reasons. Quite how an accelerated pension combines with the job for life attitude at the top of the Bank of England I am not so sure! After all in the biggest financial crisis in my lifetime and after many errors by the Bank of England has anybody been sacked or removed?

Also you may wonder if such a scheme is within the pension rules? Not it is not, so this happens.

During the year ended 28 February 2007, unfunded entitlements were provided for Mr King

That’s code by the way for what George Orwell described as

some animals are more equal than others

What about performance?

We discovered this morning that the Office for National Statistics still feels that the UK economy grew by 1% in the third quarter of 2012. We can permit ourselves a brief sigh of relief at that as the danger was of a reduction but on an annual basis we slipped from flat to -0.1% so we have shrunk (just).

What have we got in return for Mervyn King’s enormous pension?

Today the current Governor has been reporting to the Treasury Select Committee in Parliament. Readers may feel a certain ennui as they read this part.

The economic outlook, described in detail in the November Inflation Report, is for a slow recovery in output with inflation above target for some time,but declining in the medium term.

He has regularly told us this over the past few years with the only difference being that sometimes he has forecast faster growth. What has been missing has been any of this happening apart from inflation being above target.

Also Mervyn King is like a scratched record with his prescribed cure and the emphasis is mine.

It may be unreasonable to expect anything other than a slow and protracted recovery absent a further fall in the real exchange rate.

Should he have got both this and a third term no doubt the Governor would have told us that the “imported inflation” it caused was nothing to do with him!

Comment

So in conclusion I feel that we should welcome Mark Carney to his new role and wish him good luck. We do not know yet what his attitude or policies will be as Governor but we do know that he is unlikely to be worse than the establishment candidates which were the alternative. At least his pay and conditions are a lot more transparent than his predecessor.

This entry was posted in Banking Reform, General Economics, Inflation, Interest rates, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues and tagged , . Bookmark the permalink.
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  • Tokalo

    All this “best man for the job” talk instantly brought to mind that other glorious, bound-to-be highly successful* foreign appointee – Fabio Capello.
    *(that is, based on the adoring press coverage when he was given the job…)

  • Anonymous

    Mr Carney’s role in Canada has been supported by politicians who controlled spending. I’m not sure how much any individual can help the UK given our huge debts and deficits.

    Mr Carney may need to disagree with UK spending plans – this is entering the realms of politics.

  • forbin

    Hello Shaun,

    “meet the new boss, same as the old boss …… ”

    Forbin

  • DaveS

    Its either more austerity or more QE

    George’s mocksterity is a busted flush – deficit is 120bn and rising again, that is just enormous – we are firmly on the path to 100% debt to GDP.

    He’s got 2 years to win some popularity (i.e. spend more money) or we’ve got the two Ed’s when Labour win. The only word we will here then is “growth” (i.e. spend more money) and they will probably achieve it except it will be nominal growth.

    Mark Carney can’t do anything except fund the deficit because the markets won’t – not at 1.8% for 10 year Gilt with inflation at 3%+ and Mervyn talking the pound down. If he doesn’t, Gilt yields will shoot up and he will go down as Central Bank Governor of biggest sovereign default in history – me thinks he will take the pension and add a few rows to his QE spreadsheet instead.

  • Drf

    Hi Shaun,

    “But we remain in a position where we are still unsure of what his policies in the UK will be.” I don’t think so Shaun! On the basis that you have previously inferred that you have eventually realised and have to accept that the BoE is not independent in reality (only in Truthspeak) we DO know what his policies will be: they will be those commanded by the Chancellor! Welcome to captive governor MkII.

  • MickC

    Universal acclamation is, indeed, not a promising start. And as you point out, having worked at Goldman’s hardly qualifies Carney as an outsider.
    Personally, and at the risk of being seen as a brown-noser, some-one such as you would have been a better appointment-both an outsider and realistic. Obviously these are not qualities much in demand for the position.
    Did your application get an aknowledgement? I

  • Rods

    Hi Shaun,

    The chancellor is to be commended for looking past promoting the other suggested main candidates of Paul Tucker and Adair Turner and therefore promoting failure.

    Canada seems to have its own housing bubble at the moment, so it does indeed look like good timing for him to depart, before there is a correction there.

    With the massive shortage of houses in the UK at the moment I’m sure that if or when the UK starts to get some growth, our house prices will start to rise to continue our property bubble.

    I welcome Mark Carney and wish him every success in the the job, as his success should hopefully help all of the UK and our economic depression.

  • Critic Al Rick

    What will Mark Carney bring to the Bank of England?

    Well, I think Forbin hits the nail on the head; I would add: Central Bank Governorment by the Bilderbergers primarily for the Bilderbergers.

    To MickC I would say: in such an environment, what chance would Shaun’s application have?

    Unfortunately:
    a) it’s not what you know, it’s who you know,

    b) there’s honour amongst thieves, and

    c) the days of freedom of speech are almost numbered!

  • Drf

    Hi Rods,

    I do not agree that there is any shortage of housing in the UK; just a diabolical increase in immigration!

  • Rods

    With the free movement of people and goods in the EU, people are going to move where the money and jobs are. We are seeing on a European scale, what we have seen for years in the UK, with migration from the outer regions of the country towards London and the South East.

    We have also had a large influx from ex-commonwealth countries, asylum seekers from many countries with authoritarian governments, economic migrants and the filling of skilled jobs, where there are not enough UK based workers with the required skills .

    The only way to slow down this continued influx is by voting UKIP.

    The reality is that this is not going to slow down anytime soon, with the problems and high unemployment in Southern Europe and the poor wages in Eastern Europe, hence the pressure on houses and their prices. House prices will increase in London and the South East as soon as wages start rising, where there is not enough supply to meet demand.

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Tokalo and welcome to my part of the blogosphere
    The thought also occured to me that the consensus view in economics/finance has invariably been proven wrong in the credit crunch era. However at least Mr.Carney does speak English which is a step ahead of Fabio who made all sorts of wild unfulfilled promises about his ability to learn it.

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Forbin
    Do you mean the Vampire Squid?

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Mick
    Thank you for the compliment but I decided that as I consider the Governor’s role to be two full-time jobs (FPC and MPC) I felt that I would be in danger of being in a Sir Humphrey Appleby type situation. What I mean by that is flooded by paperwork and erroneous meetings when there is much work to be done.
    However I intend to continue to apply for an MPC role as and when they come up.

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Critic Al
    As I have replied to MickC I intend to continue to apply for any MPC roles which come up.

  • Sean_Fernyhough
  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Drf
    Did you see the article in yesterday’s FT on this point? I am not sure if it was only in the online section.

  • Drf

    Quite right Rods, but the influx is not only from the EU. There have been recent articles in the media concerning employers preferring less expensive non EU foreign nationals many of whom are not very proficient in English against more experienced indigenous workers. So in essence you are agreeing with me that it is not a shortage of housing per se, but an increase in immigration which is causing a phantom seeming shortage of housing. (Other factors are an increasing breakdown of marriages and relationships, and single youngsters wanting their own pads earlier in life than previously.)

  • Drf

    Hi Shaun,

    If you are referring to the article concerning Carney’s appointment confirmation then I did see that; but that did not seem to cast any question concerning his independence from the Treasury or otherwise? There is an article in today’s FT though which does discuss this issue, see:

    “Treasury reasserts power over BoE”
    `With its choice of Mark Carney as next governor, the department
    has reasserted its constitutional role as master of the Bank of
    England…’

  • Rods

    Hi Shaun,

    Slightly off topic, but I thought these figures from the ONS today would interest you, showing that underemployment in the UK has gone up by 50% from 2m to 3m since 2008!

    http://www.telegraph.co.uk/finance/jobs/9708047/Underemployed-workers-jump-by-1m-since-financial-crisis.html

  • Critic Al Rick

    I wish you good luck with that Shaun. I sincerely hope you succeed.

  • http://www.facebook.com/ken.ward.3304 Ken Ward

    he will just be the tories poodle

  • Anonymous

    B of E pensions are only part of the story. Any share portfolios, property and consultancies after leaving office?

  • Anonymous

    Hi The UK is a corporatocracy and welcome to my blog
    I guess consultancies and jobs and Quangoes are a danger for the future as people in such roles seem able to move to the private sector with nobody questioning the fact that it may have influenced their previous behaviour. The move of Hector Sants from the FSA to barclays seems to fit that category.

  • Anonymous

    Shaun,

    The FSA legal counsel has just moved to Lloyds as well. How can that not weaken the FSA?
    http://www.thelawyer.com/lloyds-hires-fsas-whittaker-as-new-group-general-counsel/1016036.article

    Did you know ex-MPC member Kate Barker is now a consultant at Taylor Wimpey? Another of her jobs is at Credit Suisse where she joined another ex-MPC member Alan Budd

  • http://www.facebook.com/people/Andrew-Baldwin/100000294792043 Andrew Baldwin

    Sorry, Shaun, I only just saw your column on my compatriot,
    Mark Carney.

    There is a certain irony in him being announced as the next Governor of the Bank of England at the end of November. Earlier in the month, on November 8, the BoE celebrated 20 years of inflation targeting. Although only the third central bank in the world to adopt a full-fledged IT regime, the BoE was the first to choose a target inflation indicator, RPIX, that excluded mortgage interest. This was quite sensible, since it is mainly by hiking interest rates that a central bank tries to stem inflation. Since then other central banks, including the Reserve Bank of New Zealand, the Reserve Bank of Australia and the South African Reserve Bank have followed the British lead, but the Bank of Canada has not. Conceptually the CPI All-items, the BoC’s target inflation indicator, has virtually the same treatment of owner-occupied
    housing (OOH) as the British RPI, although it is an inferior index in practice.
    (Land transfer taxes are proxied, not priced, unlike stamp duty in the RPI.
    Owner repairs expenditures are not smoothed over three years, and for the last two index baskets have been grossly underestimated.)

    Governor Carney declined to make any changes with the renewal of the target inflation indicator in November 2011, nor in the research agenda contained in that document was there any acknowledgement of the work by
    Eurostat or the UK Statistical Authority to calculate OOH estimates based on
    the net acquisitions approach, or any suggestion that the BoC calculate similar pilot indexes. For the BoC, because the CPI All-items is an excellent index for indexation purposes, it is therefore an excellent inflation indicator for a central bank.

    Perhaps there will be a strong lobbying effort by Mr. Carney to get Mr. Osborne to switch to the total RPI as the target inflation indicator. The RPIX series targeted from November 1992 to December 2003 should in no way be acceptable to him. After all, Canada has a CPI excluding mortgage interest series; Governor Carney could have made it the target indicator last November but chose not to. If he does so, British people will wonder why Mr.
    Osborne chose such a dismal throwback as the next Governor. However, Canadians like me would at least have a grudging respect for Governor Carney’s intellectual consistency. In a sense, it would almost be more irritating if he suddenly became a spokesman for the Eurostat proposals. We would wonder why he would be looking out for British people, when he never looked out for us.

  • http://www.facebook.com/people/Andrew-Baldwin/100000294792043 Andrew Baldwin

    What will Mark Carney bring to the Bank of England?

    Posted on November 27, 2012 by Shaun Richards

    inShare

    Yesterday saw something of a surprise when the current Governor of the Bank of Canada Mark Carney was announced as the next Governor of the Bank of England. By the time it was announced it was not a complete surprise as some of us were wondering why the Canadian Minister of Finance was having a press conference for “media availability” at the same time?

    My thoughts

    Firstly let me welcome the fact that someone who is an outsider to the Bank of England and indeed the UK Treasury structure was given the role. Both of them badly need fresh blood which the UK institutional structure was able to respond with only with damaged candidates be it via the Liebor scandal (Paul Tucker) or past support for the UK joining the Euro (Adair Turner). It is not that the UK lacks people of sufficient calibre it is that our failed institutions have the wrong ones at the top. Picking a pure outsider allowed him to have a fair degree of experience as well from being Governor of the Bank of Canada.

    On the other side of the coin it is a shame that Mark Carney is not an outsider to Goldman Sachs as he worked there for thirteen years. Such thoughts led me to tweet this after the announcement.

    In the future will it be compulsory for Central Bank Governors to have worked at Goldman Sachs?

    I understand that after his appointment some nine central bank Governors in Europe will be ex-alumni of Goldman Sachs. Which as some wag pointed out is the same number as the Nazgul in JRR Tolkein’s the Lord of the Rings.

    I will leave readers to make their own minds up as to whether the way that Mark Carney’s appointment has been nearly universally welcomed is a good thing. As the last time a central bank Governor was regarded like that- Alan Greenspan- look what happened next!

    What might we expect from Mark Carney?

    Unlike the current set-up in the UK he has been willing to raise interest-rates when necessary as Canada did so three times in 2010.So you can argue that he has seen some of the dangers of the type of liquidity trap that the UK is now in. However he has stepped back more recently from raising them again. We can say that he is a fan of banks holding more capital so that they are better protected against future financial crises as he has been heavily involved in the proposed Basel 111 rules which require this.

    But we remain in a position where we are still unsure of what his policies in the UK will be. He set an ominous note we he used one of Mervyn King’s buzzword’s “re-balancing” during his introductory press conference as Merv’s “re-balancing” has been all talk and little or no action but Mr Carney may have another meaning for it. Also we need to acknowledge that Canada has faced a different set of economic challenges to the UK. For a start her enormous natural resources have benefitted hugely from the commodities boom that has accompanied the credit crunch. So in that respect her conditions are very different to those of the UK.

    Also there are doubts about Canada’s housing market which perhaps the best clue to can be given by pointing out that there is a website canadabubble.com! So Mr.Carney may be displaying a nice sense of timing -for him anyway- and we need to say that his record has been good so far…

    Mark Carney’s salary has been misunderstood

    I watched the announcement of Mark Carney’s appointment and noted immediately that the Chancellor of the Exchequer was very evasive about what he would get paid. His initial claim that he would be paid the same as Mervyn King faced the issue that £624,000 (made up of a £480,000 salary and a £144,000 pension contribution) is not £305,000! However I will explain below.

    Mervyn King benefitted from an extraordinary pension

    It may be hard to believe that Mervyn King’s pension was worth nearly as much each year as his salary but let me take you through the numbers. He is a member of the Bank of England Court Pension scheme and we know this about it.

    his Bank pension having been fully accrued at the end of his first term.

    This allows the Bank of England to give us little detail on the scheme but we can look at the Deputy Governors ones. For example that of the (looked over for the main job) Paul Tucker. Those of a nervous disposition or prone to high blood pressure might choose to look away at this point.

    As of February this year Deputy Governor Paul Tucker’s pension is calculated by the Bank of England as having a cash equivalent 0f £5,006,600 and it has risen over the last year by £1,350,000. It rather knocks his salary of £258,808 into a cocked hat does it not?

    Applying the same mathematics and methodology to Mervyn King’s pension brings me to a value of £7.68 million! No wonder he seems little inclined to do anything about inflation.

    How do we get to such a large sum?

    The normal retirement age is 60, and the accrual rate allows members to achieve a maximum pension of two thirds of their pensionable salary at normal retirement age after 20 years service.

    Normal final salary schemes take forty years to provide such a pension and this is what is known as an accelerated scheme for obvious reasons. Quite how an accelerated pension combines with the job for life attitude at the top of the Bank of England I am not so sure! After all in the biggest financial crisis in my lifetime and after many errors by the Bank of England has anybody been sacked or removed?

    Also you may wonder if such a scheme is within the pension rules? Not it is not, so this happens.

    During the year ended 28 February 2007, unfunded entitlements were provided for Mr King

    That’s code by the way for what George Orwell described as

    some animals are more equal than others

    What about performance?

    We discovered this morning that the Office for National Statistics still feels that the UK economy grew by 1% in the third quarter of 2012. We can permit ourselves a brief sigh of relief at that as the danger was of a reduction but on an annual basis we slipped from flat to -0.1% so we have shrunk (just).

    What have we got in return for Mervyn King’s enormous pension?

    Today the current Governor has been reporting to the Treasury Select Committee in Parliament. Readers may feel a certain ennui as they read this part.

    The economic outlook, described in detail in the November Inflation Report, is for a slow recovery in output with inflation above target for some time,but declining in the medium term.

    He has regularly told us this over the past few years with the only difference being that sometimes he has forecast faster growth. What has been missing has been any of this happening apart from inflation being above target.

    Also Mervyn King is like a scratched record with his prescribed cure and the emphasis is mine.

    It may be unreasonable to expect anything other than a slow and protracted recovery absent a further fall in the real exchange rate.

    Should he have got both this and a third term no doubt the Governor would have told us that the “imported inflation” it caused was nothing to do with him!

    Comment

    So in conclusion I feel that we should welcome Mark Carney to his new role and wish him good luck. We do not know yet what his attitude or policies will be as Governor but we do know that he is unlikely to be worse than the establishment candidates which were the alternative. At least his pay and conditions are a lot more transparent than his predecessor.