Is It Bananas to Bring Mark Carney to UK Markets?
Mark Carney's taking over the reins at the Bank of England from outgoing Governor, Mervyn King, has already been greeted with such unprecedented fanfare that Financial Times Reader, John H V Gilbert was prompted to write:
"Given the outpouring of plaudits for Mark Carney…might we expect Mr. Carney to save money for the British Government money by walking across The Atlantic?"
I've nothing against Mr. Carney, never having met him, but I do have three overriding concerns about his appointment - other than my abiding general concern that Walter Bagehot was right and that the main qualifications are to be quiet, serious and devoid of banking experience. These three concerns are:
1) Can Mark Carney live up to the hysterical billing that he's been given? Has he really performed exceptional feats of financial management - especially during the GFC (global financial crisis) - or was he simply in the right place (i.e. a commodity economy) at the right time. Commodity economies in general were spared the worst of '08, by virtue of their fortunate positioning at the rear of the line for knock-on effects. All appear to be facing far greater challenges from this point on.
The next year or two might be a more instructive guide as to how much macro-prudence has really been displayed by Mark Carney and his Australian, Brazilian and South African counterparts but until then any glowing assessments may be premature. Let's hope that Mr. Carney's clearly impeccable timing extends to sovereign decision making and not merely his own career interests.
(Read More: Currency War Could Heat Up When Carney Joins BoE)
2) Even if he is a Messianic figure deserving of such star billing, what range of policy choices is now available to Carney or any G8 central banker right now beyond the single, failed strategy of stimulate, stimulate and then stimulate more? Despite which real economy indicators (PMI, production growth, capacity utilization, freight data, energy usage etc.) all stubbornly refuse to boom - even the much trumpeted U.S. housing "recovery" has been a direct consequence of $60 million being forced into the housing market by the U.S. government for each and every incremental sale produced.
Is a central banker's key role simply to produce a positive response from capital markets by using the only remaining (blunt?) object left in the central bank 2013 toolkit? This would seem to be more true than ever following the unprecedented dash by many of Emperor Bernanke's most senior minions to reassure markets "don't worry, Ben didn't really mean it and his new QE (quantitative easing) clothes are more stylish than ever" following the apparently "misunderstood" FOMC (Federal Open Market Committee) minutes and Bernanke's subsequent clarifications.
(Read More: Millionaire Homes Mark Carney Can Afford)
With only a binary range of policy options (QE Yes/No, ZIRP Yes/No), the key role of a central banker these days is much less about policy making and more to do with speech making, as evidenced by "Super" Mario Draghi's bizarre but market-stirring invocations about bumble bees and subsequent absence of policy follow through. Thinking back to the Bank of England's formation back in 1694 and its almost immediate role in fostering the South Sea Bubble, maybe it was ever thus?
3) This leads to the most controversial aspect of Mr. Carney's ability to make a positive difference (or not) - how much personal influence does any central banker have in 2013? Debates about central bank independence have started to flare up again, in light of apparent collusion among governmental and central bank policy makers. The day before the Bank of Thailand's May policy meeting, with Governor Prasarn Trairatvorakul under intense public pressure from The Ministry Of Finance to cut the policy rate by 50 Basis Points, Squawk Box Asia host Bernard Lo suggested that, in such nuanced times, such old-fashioned, direct, specific, plain-speaking was reducing Thailand to "banana republic" status.
One possibility is that the BOT and MOF were simply engaging in typical Bangkok negotiating techniques - if you want 25 of anything (whether bananas, basis points or mangoes) you start by asking for 50 and generally end up at 25 after a period of haggling. My own view is that it's increasingly hard to know what constitutes Banana Republics (or Kingdoms) these days, but in the U.K, Japan or the U.S, central bankers appear to be operating almost as agencies of the governments in terms of facilitating very easy policy (and the ECB seems to have an unnaturally close working relationship with the German parliament) whereas Thailand has actually had a very strong counter-balance between the BOT (which clearly sees that its job is to stop things getting out of control) and a Finance Ministry committed to promoting growth.
(Read More: UK Economy: Pre-Crisis Levels to Remain Elusive)
Therefore Thailand appears less like a banana republic than some of the developed economies where central banks have been rather more pliant. That said, playing out policy-making in public, as the BOT and the Ministry have tended to do (especially when, on the day before the policy meeting, Dr. Prasarn had to cancel a long-standing luncheon engagement as he was "kept behind"| by the Prime Minister and Finance Minister) clearly isn't appropriate in foreign eyes but it has had the desired effect of weakening the Thai baht in recent weeks. Maybe these actions provide a benchmark against which to judge the independence and effectiveness (or not) of Mark Carney's reign in coming months and years?
Since May, I've had the opportunity to catch up with Dr. Prasarn who expressed concerns that the public expects too much of certain central banks and of celebrity central bankers and also that there may be widespread unrealistic expectations of the range and effect of policy choices open to these banks and bankers –"Once you lower policy rates to zero you can't literally lower them any further and you can only effectively lower them by the kind of unconventional, innovative fiscal stimulus that we've seen since 2008 and which, just five years ago seemed unthinkable. Monetary policy can increase aggregate demand but can't increase growth. Mathematics can't solve multiple indeterminate variables."
Above all he seems concerned - as perhaps he should being in the firing line – about the perceived proximity between policy makers –
"How to answer that?" – one very long pause later –"In free countries everyone must be entitled to their own opinions but above all it is important to have mutual respect….conflicts in opinions become more apparent when policy changes are required because even when you agree the need to step up policy you might have different views on the timing and scale of such changes."
A cynic might wonder whether Mark Carney is an unproven wunderkind recruited because of a glowing reputation into a situation where no policy room for maneuver exists in the United Banana Kingdom wherein mutual respect between government and central bank is a relic of the past. Would perhaps Dr. Prasarn have been a better choice?
Paul Gambles, managing partner of MBMG International, is a regular speaker on markets, business consulting and legal issues. He is featured regularly on CNBC's "Squawk Box." Paul's regular MBMG Updates can be found at www.mbmg-group.com/mbmg/blog and he can be contacted at firstname.lastname@example.org