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?
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!
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.