Mark Carney, Bank of Canada governor and surprise pick to replace Mervyn King as incoming governor of the Bank of England, dove straight into the monetarist looney bin today with policy proposals.
The Telegraph reports Mark Carney hints at need for radical action to boost ailing economies
Mr Carney, the current Bank of Canada governor who takes over from Sir Mervyn King next June, said central bankers should consider committing to low interest rates until inflation and unemployment met “precise numerical thresholds”, or even changing “the policy framework itself” to stimulate a desperately weak economy.
His words were directed at the Bank of Canada but will be seen as a hint that he will push for radical action in the UK, where the economy has been stagnant for two years. On his appointment, he said that he would be going “where the challenges are greatest”.
Addressing the Chartered Financial Analyst Society in Toronto, Mr Carney said that in major slumps: “To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up.
“To ‘tie its hands’, a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus.”
He added: “If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.”
The proposals would be anathema to Sir Mervyn, who has publicly refused to abandon the inflation target or commit to long-term low rates.
Only arrogant fools think they can overpower markets without causing even more severe problems down the road.
If fiscal and monetary stimulus worked, Japan would be a glowing success today instead of having a debt to GDP ratio approaching 250%.
The US housing bubble is another case in point.
By holding interest rates too low, too long Fed chairman Alan Greenspan bailed out banks then deep in hock with nonperforming loans to South America and dotcom companies going bust. The end result was a housing bubble far bigger than the dotcom tech bubble that preceded it.
Indeed, Fed policy has spawned bubbles of ever increasing amplitude over time. The only beneficiaries of those bubbles have been the banks and the already wealthy.
Carney the “Talented” Speaker
Carney is a talented speaker, able to speak out of both sides of his mouth at once, each saying opposite things.
In light of Carney’s “radical action” statements, please consider Bank of Canada warns of low-rate risk.
The Bank of Canada says low-interest policies that it and other central banks have put in place are adding another layer of risk to the already stressed global financial system.
The Canadian central bank says that the near record level interest rates that have been in place since the 2008-09 recession are taking their toll on insurance companies and pension funds.
Low rates, it adds, are even increasing the appetite of investors to take risks in search of higher returns.
Bank governor Mark Carney has warned about the dangers of low interest rates — which most Canadians consider a good thing — sporadically in the past.
Also consider these December 11, snips from the Globe and Mail.
“Our current guidance indicates that some policy action may be necessary, encouraging a degree of prudence in household borrowing,” Mr. Carney said in his speech, echoing the warnings of the Bank of Canada’s last policy statements.
As it has said in the past, the biggest domestic threat to financial stability “continues to stem from the elevated level of household indebtedness and stretched valuations in some segments of the housing market.”
Nothing like warning about debt and low interest rates, while pledging to keep interest rates low until artificial central planning targets are met.
Carney stated the central bank “would clearly say we are doing so” if it chose to act on consumer debt.
Yep, I don’t doubt that. Indeed, I suggest that Carney would notify banks in advance of any major policy moves.
Goldman Sachs Background
Let’s back up a bit and look at Carney’s background as listed on Wikipedia.
Carney spent thirteen years with Goldman Sachs in its London, Tokyo, New York and Toronto offices. His progressively more senior positions included co-head of sovereign risk; executive director, emerging debt capital markets; and managing director, investment banking. He worked on South Africa’s post-apartheid venture into international bond markets, and was involved in Goldman’s work with the 1998 Russian financial crisis.
Goldman’s role in the Russian crisis was criticized at the time because while the company was advising Russia it was simultaneously betting against the country’s ability to repay its debt.
From a Goldman Sachs and JP Morgan standpoint, Carney is the perfect candidate to head the Bank of England. Who could possibly be better than a currency crank promising clear signals, with a background of advising Russia while betting against it?
As a practical matter, however, should Carney actually implement his “radical action” policies, I suggest the UK would quickly be in ruins.
Mike “Mish” Shedlock