The announcement that Mark Carney will be the next Governor of the Bank of England came as something of a shock. The head of the Bank of Canada had previously ruled himself out of the role in August, but such was the Chancellor’s desire to get his man that he crossed the Atlantic himself to persuade him to apply for the job. By all accounts, Dr Carney is a good choice for the role, and brings considerable international experience and expertise. But does he know what he’s let himself in for?
One area where Dr Carney can wield immediate influence is financial stability; he is the chair of the global Financial Stability Board. The UK needs someone who understands and cares about this – Mervyn King apparently used to fall asleep in financial stability briefings, when he bothered to turn up to them at all. With considerable confusion and lack of clarity about just how the BoE will wield its new macroprudential powers, and manage the functions of the FSA being melded into it, Carney has the chance to make a significant – and very positive – impact very quickly. One challenge for him may be to keep other BoE officials onside; notably, Carney was very critical of BoE Director Andy Haldane recently.
Monetary policy is likely to be a bit simpler. The centre of gravity on the MPC is firmly to refrain from more monetary stimulus for the time being, although that could change if the economy falls back into a triple-dip recession. The worst possible outcome would be for the BoE to commit to more quantitative easing just before Carney arrives, thereby tying him implicitly to Mervyn King’s approach. If that happens, Carney’s chance to change monetary policy – and in particular, get important topics like the choice of asset purchases back on the MPC agenda – will be seriously curtailed.
Perhaps the biggest challenge, though, will be to shake up the inner workings of the Bank itself. The recent review of the BoE led by Bill Winters found that Mervyn suppressed dissent and internal debate, making the institution far too hierarchical and deferential. Mervyn dismissed the conclusions of the review out of hand in front of the Treasury Committee. But, knowing several former and current members of BoE staff, I personally think Mr Winters hit the nail on the head. Other senior staff are also quickly moving away from Mervyn’s position, with BoE Director Paul Fisher explicitly saying that it was an issue that had to be addressed.
Mervyn King has been at the Bank of England for more than 20 years. Upon his arrival, he quickly took control of the Monetary Analysis department, moulding it into his own image. Many of the senior figures at the Bank today owe their careers to Mervyn’s largesse, notably Chief Economist Spencer Dale. These figures kept very close to Mervyn, made their analysis fit his view of the world, and told him what he wanted to hear – apparently, an old internal joke was that you could still see the umbilical cord between Mervyn and Spencer. As the likes of Dale rose through the ranks, new entrants saw what ‘worked’, in terms of furthering their careers, and in turn clung to the coattails of the senior people who had risen with Mervyn. People who tried to present different views were sidelined, ignored, or shut out of the debate altogether. This concentration of power and circular analysis – telling the Governor what he wanted to hear – was a big part of the reason that the BoE made so many policy mistakes during the crisis.
This means that, when he arrives, Mark Carney will face a complex network of informal cliques and alliances. If he is to effect lasting change at the BoE, he will have to break those down. This means that some senior figures may lose the power they have jealously guarded, in order to allow others who have been shut out of policy debates to finally be heard. Carney needs to foster an open, accessible culture at the BoE and break the cliques and hierarchy that so damage its effectiveness. Doing so while so many of Mervyn’s boys are still in internal positions of power could prove very challenging indeed.