The five questions Mark Carney must deliver answers to
Mark Carney makes his first appearance in front of the Treasury Select Committee today. But what should the influential committee ask our new Bank of England governor?
It certainly shouldn’t waste time questioning his salary. Whether the governor is paid £305,000 like Sir Mervyn King, or £874,000 as Carney will be, pales into insignificance against the cost or profit to the UK economy of a governor making the right decisions. The Bank under King made a hash of its financial stability mandate, at the cost of billions. The committee should discover how Carney plans to improve this situation. And it must cover five areas.
First, the organisation of the Bank. Carney was appointed as an outsider to shake things up. And he has a track record of doing so. At the Bank of Canada, he replaced not only the existing deputy governors but a number of other senior staff when he took office. The committee should press him on how he intends to change the Bank of England – particularly how he will reorganise it, given the dramatic increase in its powers care of its additional responsibilities for financial and prudential supervision.
King had a near iron grip, with key decisions flowing through him. But the new job is too big for one man. The governor should be more of a chairman and less of a chief executive, as former Monetary Policy Committee member Adam Posen has recently argued. Carney must put his own men in place as deputy governors and give them the room to run their respective divisions. And he should be allowed to bring in more people who understand financial markets, solving one of the biggest weaknesses of the Bank under King.
Second, the committee must ask Carney what he thinks the Bank can do to further stimulate the economy. King now talks of monetary policy having reached its limits. But he was just pulling the wrong levers. Carney ought to discuss the importance of getting bank lending growing, rather than just buying government bonds.
Thirdly, the committee should ask Carney whether he intends to be more lenient with banks on capital. King focused on forcing the banks to raise capital ratios. While this has probably improved their financial strength, it has done little to stimulate lending. We would like to see a governor who encourages banks to increase profitability through increased lending, which has been falling for over two years.
Fourthly, Carney has talked about moving away from a pure focus on inflation targeting to having more of a growth bias. The committee should ask him how he thinks this can best be done, and whether he will be push for a formal change in the objective of the Bank of England.
Finally, we need to know how Carney would judge whether he has been a success at the end of his five-year term. How he ranks his objectives will be key. Ideally he would like put growth first and foremost, subject to inflation and financial stability. The US Federal Reserve has recently done this, and Carney should follow Ben Bernanke’s lead.