© The Financial Times Ltd 2016
FT and 'Financial Times' are trademarks of The Financial Times Ltd.
The Financial Times and its journalism are subject to a self-regulation regime under the FT Editorial Code of Practice.
June 28, 2013 2:00 pm
He had dodged the question for months, but Mark Carney was cornered last August. Shifting uncomfortably in his seat in a TV studio, and fixing a smile to his face, he could no longer avoid answering whether he was interested in becoming the next Bank of England governor. “Is that a ‘no’ or a ‘never’?” he was asked. “It’s both,” came the reply. With that categoric denial began the intensive stage of a courtship that would culminate with the Bank of Canada’s governor eating his words. By November, the British chancellor was boasting his “brilliant” candidate was “simply the best” and Britain’s central bank waited nervously for another period of radical change in its 319-year history.
The anticipation over Carney’s arrival is now almost over. All around the world, central bankers have been making a mark. Last July Mario Draghi said his institution, the European Central Bank, was ready to do “whatever it takes” to save the euro, and with those few well-chosen words earned his reputation as “Super Mario”. Haruhiko Kuroda, the new Bank of Japan governor, has revolutionised the conservative institution, shifting the money printing presses into overdrive. From July 1, coincidently Canada Day, it is the BoE’s turn for a new broom. Change is coming to the bank. It is getting an immaculately groomed new governor with an exterior that is part Hollywood star and part financial markets geek. But what is the 48-year-old Carney really like?
The one person who had a clear answer was George Osborne, who had wanted Carney in the bank’s hot seat for over a year before his appointment. The British chancellor had started wooing Carney in a Japanese restaurant on the sidelines of the Group of 20 meeting of finance ministers and central bank governors in Mexico City in February 2012 where, over dinner, he sounded him out. Pleased not to get a firm rebuff, Osborne soon recruited Sir Mervyn King, outgoing BoE governor and Sir David Lees, chairman of the bank’s court of governors, to the task.
Top officials from both the bank and the Treasury have told how the Carney gambit suited their side. Although relationships between the institutions have been transformed from the bitterness of the dying days of the last Labour government, trust between the bank and the Treasury remains low. For the BoE, where some officials talk of a hundred years’ war between the central bank and the finance ministry, such an unusual choice would give the bank a leader able to demand and receive whatever he wanted from the Treasury. Top government officials reckoned the BoE needed shaking up after the financial crisis, so hiring an outsider was the only option. But so delicate was the operation that secrecy was paramount, and when the FT got wind of just some of the manoeuvres, denials flooded in. The Bank of Canada said the report was wrong and an aide to Osborne says the list of people in the know could have been counted on one hand.
Carney’s initial interest waned in the summer of 2012 and by the time he was on the television set, he had decided against coming to London, but Osborne had not quite given up hope. In telephone calls and a meeting on the sidelines of the October International Monetary Fund annual meeting in Tokyo, the chancellor told Carney he was still the preferred candidate and would modify the terms of employment if there were any sticking points. By the time they met again at the same Mexico City hotel a few weeks later, Carney recalls “the Chancellor suggested to me that the position could be for a period of five years”, which suited the educational needs of the eldest of his four daughters. By this stage, Carney’s financial requests – demanding a rock-star salary to go with his image – were not going to be a barrier. The British establishment had got their man. Interviews and the decision thereafter were a formality.
Announcing his surprise choice to a packed House of Commons on November 26, Osborne and his closest aides were delighted nothing had leaked. The team devised a strategy to defend the appointment process and huge uplift in salary package – from £308,000 for Sir Mervyn to £874,000 – based on Carney’s supreme abilities that would rescue Britain from its economic and financial woes.
“We needed the best – and in Mark Carney we’ve got it,” Osborne told MPs. Saying it was an honour to be asked, Carney justified his move as a desire to be “going to where the challenge is greatest”.
. . .
If Carney was nervous at the ticket-only pre-appointment hearing before MPs in February, he didn’t show it half as much as his press office minder from the BoE sitting directly behind him. The 10 weeks since he had become governor-designate had been far from smooth, belying his reputation as the world’s best communicator among central bankers.
In December, he had given a speech on monetary policy, concluding that if an economy was suffering badly and “yet further stimulus were required, the policy framework itself would likely have to be changed”. This crossed a line in Britain where the central bank has operational independence to hit a remit set by government and the BoE does not comment on its goals. In circumstances that sounded just like the British experience, Carney said a central bank should consider targeting nominal gross domestic product – the amount of spending in an economy – words that sent expectations even higher. Whether George Osborne approved or not, the Treasury had no choice but to back its brilliant candidate.
At January’s World Economic Forum in Davos, the governor elect upped the ante. Refusing to take questions from journalists on a public panel and again displaying the fixed smile he adopts when facing difficult questions, Carney had no doubt that monetary policy was far from “maxed out”, meaning it still had scope to boost growth, and could enable economies to achieve what he called “escape velocity”. But by then he had already cooled on nominal GDP targeting, making his practical thinking far from clear.
After this faltering start, more sceptical questions were being whispered in the corridors of power. Was it really true that there was no suitably qualified British candidate to be BoE governor? Hadn’t the English football team’s persistent disappointments showed that hiring Swedish or Italian management was no panacea? A waspish BoE official even delighted in pointing out that Carney had copied the phrase “escape velocity” from the overlooked and now departing deputy governor, Paul Tucker.
Sitting in a waiting room for economics journalists before the Commons hearing, I shared the scepticism. I thought it unlikely that anyone could be quite as amazing as Carney’s billing. I was sure that one person could not be the simple answer to dealing with something as complicated as the British economy after a catastrophic crisis. And I was disappointed in how difficult Carney had made it for journalists to understand his plans for the Bank of England. Waiting for his hearing, journalists inevitably swapped notes, and conversation turned to what we did not like about him – mostly arrogance, ego and overconfidence – though we were all aware that we did not really know.
Discovering more in the months that followed has remained remarkably difficult. After much negotiation and vetting, Carney declined to help the FT with this article. The FT has also spoken to numerous sources in Canada and the BoE who did not wish to be identified.
Canadians have a real sense of pride in Carney’s appointment and see it both as a promotion and a reflection of Canada’s success. Slightly eerily, friends and acquaintances use the same words to describe the new governor time and again – “engaging”, “direct”, “versatile”, “prepared”. But in other public appearances, a prickly side is also evident. At a public interview in April in Washington DC packed with British journalists, he described one questioner as “very, very, very sneaky” for perfectly reasonably trying to explore known policy differences between him and Sir Mervyn.
Back in February, it was this side of him that everyone was curious to see as he sat in the parliamentary committee room. Though the MPs present were never going to criticise his appointment, many intended to give Carney a rough ride to test his mettle. But if they thought they might score some easy debating points over a foreigner without experience of their hectoring questions, they were wrong. Immaculately briefed, he did not irritate them by talking down to them or appearing bored, a failing of many BoE officials. Unlike Bob Diamond, the ousted chief executive of Barclays, he refrained from overfamiliarity and attempts to ingratiate himself to the Treasury committee.
His salary was necessary to attract him from Ottawa, one of the world’s cheapest capital cities, to one of the most expensive, he told them straight. There was none of the traditional British squirming over money. No, he was not infallible, he also told the committee, and the BoE would make mistakes on his watch. The likely failures ahead were softened with a touch of humour: “I prefer low levels [of failure] to medium levels, yes.” He was honest in admitting he didn’t know whether the two part-nationalised banks should be broken up. And he had no intention of breaking the central bankers’ taboo and printing money to finance the government. “I cannot envisage a circumstance where I would support that as a strategy,” he said, adding that he thought the BoE still had plenty of tools available to stimulate the economy if that were necessary.
Serving as governor would be “the pinnacle of my career”, he said, and his performance convinced those present. As the marathon session wore on, questions become gentler and the committee room purred with approval. When the meeting ended, MPs of all sides rushed over to congratulate his performance. Journalists were also impressed and we wrote flattering reports.
From many conversations with those who have come across Carney in their professional lives, his performance under pressure is a common theme. Gordon Nixon, the chief executive of the Royal Bank of Canada, describes him as “the quarterback” who bashed heads together and forced banks to find a solution to Canada’s only real experience of financial crisis, in 2007-08. Sporting metaphors often relate to his love for ice hockey, in which he played goalkeeper. Former colleagues say he is the man who is always on the pitch as the last line of defence, the one that’s willing not to take the credit. According to Tim Adams, head of the Institute of International Finance, representing the world’s largest banks, who was his US opposite number in Group of Seven negotiations almost a decade ago, “He may destroy your intellectual argument, but you still like him a lot.”
Now known for central banking and making money, Carney was not born into wealth or power. With both parents working as teachers, he spent his first years in Fort Smith in the Northwest Territories before his family moved to Edmonton. There, in a house he has described as “filled with books”, Carney began to concentrate on academic studies, which culminated in a partial scholarship to Harvard. As an undergraduate there in the late 1980s, he shared a room with ice hockey-playing Peter Chiarelli, now the general manager of the Boston Bruins, who told the Globe and Mail newspaper that Carney “worked like a bastard” and had to be good with money as he was on financial aid. Influenced by lectures from JK Galbraith, he increasingly specialised in economics, graduating in 1988. While the Canadian-born liberal economist who popularised the subject with best sellers from the 1950s was an early hero, Carney now declines to name any academics who shape his current thinking and told MPs “no theorist captures … the complexities of modern central banking”.
After a brief stint with Goldman Sachs, Carney became a graduate student at Oxford university, where he completed his MPhil and subsequently a DPhil in only two years. His 1995 thesis, entitled “The Dynamic Advantage of Competition”, attacks the idea of offering “national champions” looser domestic competition rules in the name of greater national “competitiveness”. Dr Meg Meyer, his doctoral supervisor, remembers him as exceptionally versatile. “It was very impressive to see how he got to grips with new approaches and new tools,” she says. As for attacks on national champions, a policy already unfashionable and something of a “straw man” according to professor John van Reenen of the London School of Economics, Meyer conceded Carney “took some liberties” with the motivation of the thesis, although the substance, she insists, was not behind the times.
While at Oxford, Carney met Diana Fox, a wealthy farmer’s daughter with a cut-glass English accent who had been educated at Marlborough College and played in the university ice hockey team. They married shortly before Carney finished his doctorate, and while he was earning big money back at Goldman Sachs, she worked in overseas development specialising in policies for sustainable living. Carney and Diana, 47, now have four daughters, evenly spaced between the ages of six and 12.
For most, an undergraduate degree from Harvard and an MPhil and a DPhil from Oxford would be sufficient to demonstrate their abilities. But for Carney, external recognition is also important. In his biographical note supplied to MPs, he chose to include a few of the awards he has collected. One deemed worthy of inclusion was his selection in 2011 as Most Trusted Canadian by editors at Reader’s Digest Canada (he came 19th in the public vote).
Having won over many sceptics with his single performance in Britain since his appointment, and raised expectations to levels almost guaranteed to produce disappointment, the question is whether Carney can replicate his Canadian reputation once in post at the bank.
. . .
Carney’s big idea
As George Osborne rose to deliver his annual Budget in March, Treasury officials were already fretting that Carneymania was running out of control. Naturally the chancellor wanted his new star to play a huge role in underpinning the first part of the government’s strategy of “monetary activism with fiscal responsibility and supply side reform”. But Osborne also recognised that changing the way monetary policy worked required some deliberation and contained risks. The Treasury decided to buy time, requiring the new governor to give the BoE’s views on a new monetary strategy not at the first meeting in July, three days after Carney’s arrival, but in mid-August when the BoE publishes one of its quarterly economic forecasts.
It is no secret that Carney’s big idea for that August strategy document is a relatively new concept in central banking for depressed periods, known interchangeably as “forward guidance” or “conditional commitments”, in which policy makers commit themselves to an exceptionally loose policy until certain conditions are reached. The governor designate has mentioned the subject in almost every public appearance since his appointment and, seeing himself as a global pioneer, having introduced a version of it in April 2009 in Canada, he loses traditional central banker caution over cause and effect when speaking about its effect.
“Our conditional commitment worked because it was exceptional, explicit and anchored in a highly credible inflation-targeting framework,” he said in his December speech on the subject. “It also worked because we put our money where our mouths were by extending the almost $30bn exceptional liquidity programs we had in place for the duration of the conditional commitment. And it worked because it reached beyond central bank watchers to make a clear, simple statement directly to Canadians.”
Not everyone in Canada sees the move as quite such an unqualified success. Bill Robson, chief executive of the CD Howe Institute, one of Canada’s leading public policy think-tanks, says Carney showed “deft” handling of the crisis, but is far from convinced about the effects of guidance. “It wasn’t clear [the guidance] was anything more philosophical than saying ‘we will do the right thing’” and it was “classically illogical” because it provided the markets with no new information, he says, although he adds that the words “seemed to provide some comfort”.
Introducing guidance will be harder in Britain than Canada. Financial markets already expect interest rates to stay at rock bottom until 2016, so its impact will be trivial on the expectations of markets, and with inflation currently stuck above the 2 per cent target it is not obvious that more stimulus is required.
With green shoots appearing across the UK economy, the whole issue of guidance might appear less relevant, but most economists have looked at recent gyrations in global financial markets and concluded the opposite: Carney is right and guidance is needed to reassure markets that interest rates will not suddenly leap higher. Michael Saunders, chief UK economist of Citi, says that at a time of market turmoil and worries that central banks might remove stimulus, clear guidance can work in “reassuring households and businesses that interest rates are likely to stay low for an extended period”.
But excitement about the new policy tool will not necessarily help Carney’s big problem of inflated expectations of his ability to turn the economy around. The more City economists are excited about how forward guidance is added to the BoE’s weaponry in August, the more the public will expect the economy to improve in double-quick time.
. . .
Putting it to the test
April fools’ day this year was momentous for the BoE as it marked the moment when it became the world’s most powerful central bank, almost uniquely spreading its tentacles across monetary policy, system-wide financial stability and the regulation of individual banks.
If there is one group that is salivating more than others at the prospect of the change at the top of the BoE, it is bankers, whose relationship with Sir Mervyn had initially been almost non-existent and then sour during the crisis. Not only has Carney been a private sector banker, but in two spells totalling more than a decade he has scaled the heights at the most renowned bank on the planet, Goldman Sachs. And he comes with glowing references from senior Canadian bankers. Describing Carney as “open, transparent and engaging”, Nixon says “it was very easy to deal with Mark as he has a tremendous understanding of markets”. Terry Campbell, president of the Canadian Bankers Association, says Carney is “very straightforward, very engaging, very direct and a very charming fellow”.
It is nevertheless wrong to think Carney will be soft on banks. He augmented his time at the BoC with running the Financial Stability Board – the body which attempts to co-ordinate financial regulation around the world. “The head of the BoC is a pretty boring job – inflation and banks are fine – so he concentrated on international work,” says Warren Jestin, chief economist of Scotiabank. Criss-crossing the globe on FSB work, Carney has proved a tough interlocutor. His uncompromising stance on the capital buffers that banks needed to make them safer drew the ire of Jamie Dimon at a private meeting of bankers in 2011. Having been yelled at by the chief executive of JPMorgan did not trouble Carney and he came out fighting in public two days later, putting a gathering of international financiers in their place. “If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much, too soon,” he said.
Bankers like Carney because he listens, is direct, gets stuck in, talks their language and doesn’t duck responsibility. The Treasury can hardly wait for the change as Osborne believes the BoE has put too much weight on financial stability to the detriment of growth, generating what the chancellor describes as the “stability of the graveyard”. One senior official said the Treasury has had to curb a “jihadist” tendency in the BoE against banks.
When Carney was in a tricky spot at the BoC, trying to forge consensus in the face of obstructive forces, close observers say he had a favourite trick. He would look up at the pictures of former governors hanging on the wall, making sure that others did so too, and comment that some day his picture would be on the wall and future governors would be sitting where he was. “They are going to look at my image and say either ‘thanks for doing a good job’ or ‘I can’t believe you stuck me with this doo doo.’” “That obviously caused people to rethink what they were proposing,” says Tim Hodgson, a former adviser who is now managing partner at Alignvest Capital Management.
On July 1, Carney will be ushered into the governor’s office on the ground floor of the BoE, in a suite of rooms for senior staff that are located behind locked doors in an area known as Parlours. There will be no shortage of former BoE governors and deputy governors looking down on Carney from paintings hung on the walls, who will be silently judging his actions, waiting for him to unleash a raft of staff and structural changes as he did in Canada. Officials expect a hard taskmaster.
What they will certainly find is a change in tone. Out will go King’s ability to speak and write in grammatically perfect English and in will come a new element of corporate management speak. “My leadership approach has been to develop a shared vision for the organisation, set out clear priorities to achieve that vision, ask critical questions to engage colleagues and spur analysis, and work towards consensus to take actions,” Carney said in written evidence to MPs. Welcoming his new enforcer of management edicts, Charlotte Hogg, as chief operating officer, Carney commented that her experience would “catalyse that change”.
As an outsider with the same Harvard and Oxford educational background, Hogg is moulded in Carney’s image and will be an enforcer of her new boss’s desire to shake up management practices. “I’ve seen a harder edge,” says Robson. “He knows how to turn that on or off.” But one of the new governor’s easier initial jobs will be encouraging most officials to bend to his wishes. With its hierarchical structure, the BoE is finely tuned to performing whatever task Carney wants and, like the late Eddie George, governor from 1993 to 2003, he will enjoy the “mollycoddling”.
Yet all is not well in Threadneedle Street. Nervousness and paranoia mark the mood as much as excitement. For the most senior staff below deputy governor level, the situation is most acute. With Paul Tucker’s imminent departure and deputy governor Charlie Bean’s retirement next year, they will either achieve promotion or face career-limiting blockages in the BoE. Those not seeking advancement themselves are excited by the prospect of the brown-nosing about to commence. Departures of the disappointed can be expected.
The nervousness inside the organisation is heightened by the weight of expectations. As advisers he has hired both in the UK and from the BoC acknowledge, whatever Carney’s talents, so high are the expectations from George Osborne, MPs, economists and bankers, that the only way is down. Britain’s media, they add, has a tendency to build someone up only to knock them down. Even before his first day, Carney has been alarmed by attacks on his wife, first for wearing vegan shoes and recycling plastic bags, and later for her joke in a tweet that an exodus of French people from London might mean the family could afford somewhere to live, after all. This was despite a £250,000 housing subsidy, which itself is more than seven times the median London full-time salary. She has had to defend her words on Canadian TV, insisting, “People are OK with Mark and I being separate people.”
If dealing with the media is potentially difficult, the sphere of central bank policy is also far from a pushover. Carney’s problem is that if obvious, non-inflationary, routes for the central bank to revive prosperity existed, the BoE would already have grabbed them. Monetary Policy Committee members who have been outvoting Sir Mervyn’s calls for more stimulus in recent months are not in the mood to melt just because a new man is in the chair. Four of them, Martin Weale, Spencer Dale, Ben Broadbent and Charlie Bean have already expressed public reservations about guidance in a UK context, so the question is not whether Carney’s reputation falls, but how far and how fast.
He recognises this and is already planning a charm offensive once in post. As Hodgson says, “No one will be more prepared.”
Prepared he is certain to be, but he will find it hard to live up to the expectations or the billing as “simply the best”. So Carney is set to disappoint people in Britain. But if the economy’s recovery continues to build momentum and banks avoid fresh disasters, the public are unlikely to remember the inflated expectations and might give credit even if it is not entirely warranted. Future governors will one day look at his portrait on the walls. As long as they do not curse and accuse Carney of leaving them in the mire, he will have succeeded.
Chris Giles is the FT’s economics editor. To comment on this article, please email email@example.com
Letter in response to this report:
Copyright The Financial Times Limited 2016. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.