Mark Carney, the high-flying Canadian hand-picked by the chancellor to run the Bank of England, could hardly have heavier expectations weighing on his shoulders when he starts his new job tomorrow – Canada Day. George Osborne is hoping the slick former Goldman Sachs banker will shake up the fusty corridors of Threadneedle Street, fix the fragile banking system and put a rocket under the recovery.
Yet he arrives at a time when economists – most recently at the central bankers' club, the Bank for International Settlements – are starting to question whether quantitative easing has reached the point where it is doing more harm than good.
Meanwhile, investors are waiting anxiously for fresh signs of when Federal Reserve chairman Ben Bernanke plans to begin "tapering" the $85bn (£55.7bn) a month bond-buying spree that has helped pump up financial markets across the world. They are also combing every pronouncement from China's policymakers about the risks of a credit crisis.
Carney has made it clear that he believes there is plenty that central banks can do to rekindle growth, even with rates at record lows. But at his first monetary policy meeting, starting on Wednesday, he will have to contend with the six members of the monetary policy committee who have repeatedly ignored Sir Mervyn King's arguments for a fresh round of quantitative easing.
Carney will also have some tough hiring decisions to make, with two of the Bank's key deputy governors – Paul Tucker and Charlie Bean – due to leave within months. And with his £874,000 pay-and-perks package making him considerably more expensive than his predecessor, Carney will have a lot to prove.
We asked five experts to offer their advice to the new governor.
Director, Policy Research in Macroeconomics
Last week the UK's gilt market suffered heavy falls and a rise in yields, a result of turmoil caused by the Federal Reserve's decision to drop long-term calendar guidance on the direction of interest rates in favour of a new, less predictable outcome: the 6.5% unemployment threshold.
The 10-year UK government bond yield rose to 2.5% – way above the bank rate of 0.5%. On 25 June, the day of greatest upheaval, the UK's debt management office committed British taxpayers to paying 3.65% for the next five years on the £5bn gilt it issued. This rise in yields is bound to increase rates on UK mortgages and loans, and lead to defaults. This will affect our zombie banks, weighed down by the world's heaviest private debt burden.
As you know, the Bank of England does not help to co-ordinate monetary policy and the government's (unwise) debt management, and long ago gave control over the full spectrum of rates – short and long, safe and risky – to the "invisible hand" of "submitters" in banks, such as Barclays, operating in the Libor market. This misallocation of responsibilities is dangerous for Britain's private debtors, so please give the determination of the full spectrum of rates your full attention.
Former City minister
Governor Carney, you need to restore the credibility of the Bank, make it fit for purpose and then get to grips with some very big issues.
On the credibility front, I recommend that you immediately commission an independent review into the Bank's performance during the runup to the crisis. And you need to convince people that the Bank is committed to meeting the 2% inflation target. If you think the target is too low for the good of the economy and society, you should tell the chancellor he should either set a higher target or accept the consequences of you remorselessly pursuing the one he has given you.
This brings me to your relationship with Mr Osborne. The Bank's monetary policies have provided excessive cover for his failed fiscal strategy. Tell him that the Bank has gone far enough and to go further would further compromise its integrity. And own up to the fact that the Bank's policies have political consequences – quantitative easing has penalised savers and rewarded borrowers.
Insist on appointing your own deputy governors and delegate real authority to them – essential with the wider responsibilities now given to the Bank. Get to grips with the culture and bureaucracy – headcount doubled under Mervyn King. You don't need more than 150 economists in the monetary division of the Bank. The Bank's building looks impenetrable and its internal structure reeks of hierarchy, like a Freemason's hall. Bring in new people but protect the best of those you inherit – there are a couple of stars just below deputy governor level. Sell the building – I am sure it will appeal to an oil sheikh, oligarch or Holiday Inn. Donate the waiters' pink frock coats to Oxfam.
Finally, on monetary policy, in a couple of years you are going to have to contend with unwinding QE (unless you think that by limiting your appointment to five years you might pass this hot potato to your successor) while at the same time funding a large running deficit. Investigate whether some of the £300bn of gilts currently owned by the Bank – effectively a borrower owning its own debt – could be cancelled. Some will say that this is inconsistent with your inflation obligation but you have plenty of tools to handle this. Let it be known that you are going to abstain at your first three meetings of the MPC. You need to get a better feel for the UK economy. Always vote last at MPC meetings – don't intimidate others with an early vote.
I hope this helps. And don't overdo it with the housing allowance – avoid any postcode in which Goldman Sachs partners live.
Director, Fathom Financial Consulting
Mark, welcome back to London and congratulations on your new role. It is barely possible to exaggerate how crucial that role will be in shaping the UK's near-term, and perhaps its long-term, economic performance. That is not because monetary policy can fix everything but because it has an essential role to play in achieving escape velocity. But it will take fresh thinking.
You have highlighted the key part played in the current crisis by overvalued housing, overleveraged households and overextended banks, not just in Canada but across the developed world. You were right to do so. That unholy axis is the fundamental problem facing the British economy. The UK banking sector has large, unrealised losses on its balance sheet, most relating to the household sector. There are other bad assets too, but the household sector is the big one.
A related problem is the damage the banking crisis has wrought on the UK's supply potential. It will not be easy, but you must do your best to withstand the arrant nonsense of short-term wheezes such as Help to Buy, designed to boost short-term demand and court political favour, but certain to heap more on to the debt mountain.
First, fix the banks. Housing is the principal troubled asset in the UK; a British version of Tarp [the US financial rescue scheme] must be part of the solution.
MPC member 2006-11, and senior economic adviser to PricewaterhouseCoopers
Governor Carney, welcome to the UK and the task of managing the Bank of England through one of the most challenging periods in its history. Your main challenge over the next five years is to wean the UK economy off the current policy – very low interest rates and periodic injections of quantitative easing, which has sustained us through the crisis and the early phase of the recovery. This is not a task that can be left much longer. There are already signs that the long period of monetary stimulus from 2008/9 onwards is distorting our economy, sustaining high inflation and supporting a bubble in the stock market and in housing.
Over the next five years, you will need to manage the transition to a more normal monetary regime – not the same as the one we left behind in 2007 but a level of interest rates and a financial climate that strikes a better balance between savers and borrowers than exists at present. That means raising interest rates to wean borrowers off life support and give a better deal to savers. This can only be achieved gradually and hence you need to start soon, and prepare the ground with your early public statements. Good luck!
Labour MP and member of the Treasury select committee
Dear Mark, welcome to Britain and to your new job. The textbook response to a financial crisis adopted in recent years in the UK of loose monetary policy and tight fiscal policy has yet to produce any meaningful economic growth. You will be expected to be bold and imaginative in the use of monetary policy to try to address this, but be careful not to become the government's fall guy by allowing it to pass on to you responsibility for what it has failed to achieve.
Our banking sector – which is huge relative to the rest of our economy – is going through a number of important reforms in terms of capital levels, ringfencing, regulation and most recently the standards and culture changes recommended by the parliamentary banking commission.
Do what you can to drive these changes through but do not believe they alone are enough. It would be rash to claim that "too big to fail" has been resolved and there are still big questions around the size of these organisations and the potential risks they pose. Banking reform is not yet finished. Aim to keep a strong financial sector in the UK – but don't let it hold taxpayers or the rest of the economy to ransom. Good luck.
Interviews by Heather Stewart, Katie Allen and Jill Treanor
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