Few decisions in British economic policymaking have been so acclaimed in recent years as George Osborne's appointment of Canada's rock-star central banker, Mark Carney, as the man to drag the Old Lady of Threadneedle Street into the 21st century.
Carney comes with formidable charm, a fearsome intellect and the polish we've come to expect from alumni of that great Wall Street finishing school, Goldman Sachs. His close relationship with the chancellor, who hand-picked him over several stalwarts of the British financial establishment, will also be a great asset.
But like any central banker – or chancellor, for that matter – Carney will only be able to play the hand he has been dealt. As the start of his term in London approaches, there are at least four reasons to fear that the cards are already stacked against him.
First, if the new governor wants to take fresh action, of whatever kind, to stimulate the economy, he will have to win over his eight colleagues on the MPC, six of whom have consistently resisted the arguments of the outgoing governor, Sir Mervyn King, for an extension of quantitative easing in recent months.
Even if they are to be persuaded of the case for more intervention, it is likely to take some time: MPC members rightly value their independence and must justify their votes publicly. Some, including Bank chief economist Spencer Dale, have expressed concerns about the risk to its reputation if it continues to turn a blind eye to above-target inflation. One – Paul Tucker – had dearly hoped to be sitting in what will now be Carney's chair himself.
The second reason is that many of the measures required to get the economy moving will lie far outside Carney's bailiwick. It's a key part of the rationale constructed by the Tories for their deficit-cutting strategy that tight fiscal policy frees the monetary authorities to be "activist" without the risk of sparking inflation. It's a legitimate argument, but it risks placing too much of the responsibility for rekindling growth in Threadneedle Street. King has been careful in recent months to warn of the limits of monetary policy, and in an economy with a bust banking system and households still battling to absorb the debts they ran up in the good times, that must be right.
The International Monetary Fund's mission to London this month will be best remembered for a bust-up about tax and spending, but it also warned the government that "the effectiveness of monetary policy would be enhanced if it were supported by other policy measures" – not least fixing the banking system, which is preventing the Bank's low policy rates finding their way to many borrrowers out in the real economy, even after the introduction of the more radical Funding for Lending Scheme.
At a Resolution Foundation seminar on fuller employment last week, Professor Wendy Carlin of UCL warned that the downturn had exposed deep weaknesses in the UK's productive capacity that had been ignored for decades, and would continue to cripple the recovery until they are addressed. Many of these shortcomings were exposed by the International Monetary Fund last week, too.
Osborne's target of a doubling of UK exports is a bold attempt to achieve some of the rebalancing Carlin called for, but it's not clear that a few ministerial trade visits to India and Brazil, or a smattering of grants for hi-tech manufacturers, will get us anywhere close to achieving it. Many exporters are in positive mood, but the decades-long hollowing-out of industry has inevitably constrained the economy's ability to respond snappily to the sharp depreciation in sterling seen since the onset of the crisis.
A third doubt about Carney's ability to help the economy achieve "escape velocity" comes from his chosen method: so-called "forward guidance". As King made clear at his final inflation report briefing, financial markets have no expectation that interest rates will top 1% for four years. It's not at all clear how much extra stimulation the economy would get, then, from an announcement that QE will continue until, say, unemployment falls to a certain rate (to echo the US Federal Reserve's approach).
Forward guidance might become much more critical when the economy is closer to a turning point, and investors (and the public) start to speculate that rates are on their way back up. But as last week's wild gyrations after Ben Bernanke's gentle hint at a future withdrawal of QE demonstrated, clear forward guidance won't prevent markets getting way ahead of themselves as soon as they catch a whiff of a recovery.
And that's the final reason to fear that Carney may be doomed not to live up to his formidable reputation: in a way, he's damned if he doesn't save the economy and damned if he does, because the way out of QE is a such a fraught and dangerous one.
The point was made in colourful terms by the IMF in another recent paper on unconventional monetary policies. It warned that the scale of recent QE in the world's major economies had been so large that central banks may struggle to extricate themselves without sustaining major losses on the vast quantities of bonds they will be selling back into the markets (which doesn't matter too much to the real economy) or being subject to currency volatility and violent movements in market interest rates (which matters a lot).
Bank of England experts have been working for some time on the best way out, and if the economy strengthens enough for the unprecedented levels of stimulus to be withdrawn, it will be a positive sign; but it will also be a moment when the risk of what economists call "policy error" is extremely high.
Carney's valedictory speech in Montreal was titled "Canada Works". If he can make a similar claim about the UK in five years' time, he'll be worth every penny of his £874,000-a-year remuneration package.
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