Carney Will Gain by Exploring the Territory
Op-ed in the Financial Times
© Financial Times
Yes, Mark Carney will be taking over the only central bank in the world where he will be greeted by members of his security team wearing pink morning coats and top hats. Beyond that, the Bank of England (BoE) will not feel foreign to any experienced central banker, just as the United Kingdom will not feel all that strange to any Canadian. The Old Lady has been at the center of global monetary and financial policy making for centuries, welcoming foreign ideas for much of that time—inflation targeting, central bank independence, and now macro-prudential policy. And most of its failings are typical of other central banks rather than reflections of any lingering hidebound traditions or institutional culture.
However, a central banker who seems foreign to the BoE, and more importantly to the British people, will be a particular challenge. Great intelligence, technocratic skill, toughness, and an incredible capacity for work are traits shared by the current and incoming governor but they alone are not enough. The ability to anchor inflation expectations, supervise financial institutions, and to stabilize the British economy depends to a surprising extent upon the persuasiveness of the governor. The powerful policy instruments at the bank's disposal have their limits, and their use cannot be sustained without public support.
Carney will have to prioritize public engagement and open debate in the BoE, rather than closed international discussions and CEO-style decision making. Anyone who needed to be wooed with promises of a 60 percent salary rise over his predecessor's, as well as London living expenses in order to have the honor of serving as governor, will have an uphill climb to be perceived as a British public servant rather than a globetrotting corporate free agent. Coming from a central bank in Canada where the governor alone has the final say on monetary policy, to one where committees make the key decisions, puts the premium on collegiality even higher.
The three most important words I employed repeatedly in my time on the Monetary Policy Committee were "we", "us," and "ours." "We" the committee were deliberating and deciding, even if at times my views were out ahead of where we got to. And whether facing Members of Parliament (MPs) of the Treasury select committee, bankers in the City, or activists from trade unions, I always affirmed that the public were right to be holding all of "us" at the BoE accountable.
Most of all, it was "our" economy that was suffering, our households that had to adjust to energy price shocks, our growth prospects that had to be assessed. If a bank official makes such statements, it becomes more than a matter of form—they constitute an agreement with the British people. (Of course, it also helps to treat parliamentary appearances as chances to respond to the concerns of MPs and their constituencies, rather than as opportunities to give lectures.)
To be persuasive, as well as to improve the economic forecasts, the new governor also has to take into account the unique attributes of the country's political economy. I do not mean the various codes of British life, such as buying and wearing poppies ahead of Armistice Day (which I did) or the subtle nudges and winks of Oxbridge graduates (which I was oblivious to), let alone the latent snobberies within the BoE. What I mean is that Carney has to absorb substantive structural knowledge of the British economy, from the nature of its regional divergences, to the strengths of its labor market practices, to the deficiencies of its domestic business lending. It is not enough to simply apply general economic principles top down, though they are of course relevant. In learning these important institutional characteristics of the British economy, the incoming governor should use it as a great opportunity to empower and listen to the bank's staff, for that is one of its greatest areas of expertise.
My final advice to the new governor is to get out into the entire United Kingdom, all four nations and every region, using the geographic network created by the BoE's Agencies. The Canadian will be surprised and inspired by the welcome—and the insights.
Some will say that the inviting of a foreigner to be governor displays the openness of the City as a global financial center. Others will see in it a Gordon Brownesque "government of all the talents" push. Both have an element of truth. I believe, though, that the acceptance of foreigners into the halls of power in London is primarily a reflection of the liberal openness of the British people today well beyond the City and Westminster. I made nearly 20 regional visits during my three years on the Monetary Policy Committee (MPC), speaking with a few thousand British citizens and businesses in total from Aberdeen to Bournemouth, from Anglesey to Skegness. In all of those encounters, not once did someone challenge my standing as a US citizen to speak about, let alone make, British monetary policy.
Nevertheless, in all of those encounters, it was critical that I was there to engage substantively with the public and to show with my openness that the BoE is concerned about the whole British economy, not just about the City and its global counterparts. That is the right orientation to demonstrate, not just for political reasons, but for policy reasons. How can Britain rebalance its economy if its policymakers don't engage with all the country?
Between the huge management challenge of implementing the bank's broadened financial supervision role, the incoming governor's continuing global responsibilities chairing the Financial Stability Board, and his acknowledged expertise, Carney's understandable temptation will be to focus on technical aspects of bank regulation. Doing so at the expense of engagement with the broad economic concerns of the British people and their representatives, however, would be a mistake, and it also would squander an opportunity to energize the BoE's staff when they can contribute most. To be a persuasive and thus effective governor of the Bank of England, a foreigner must go exploring.