Mark Carney is a symbol of George Osborne's failure, not his success

After a Carney-free fortnight in Asia Minor, I returned to Blighty to find even my dentist singing the praises of the new governor.

Having temporarily abandoned his ambition to be prime minister of Canada or head of the IMF – at 48, he has time on his side – Carney has in effect accepted the role of frontman for George Osborne's election campaign.

The governor enjoys the limelight, and turned down an invitation to share a stage with the chancellor and other dignitaries at the Institute of Directors' annual conference in favour of his recent solo media event in Nottingham, where he seems to have impressed television viewers such as my dentist with smart answers to questions about the prospect for exchange rates: some would go up; some would go down.

A famous spin doctor who spoke to me on condition of anonymity suspects that Carney is riding for a fall. We shall see. He is certainly trying to be the George Clooney of central banking, and ought to have sufficient grasp of history to beware of fostering his own personality cult.

The dangers of disregarding history are vividly explained in a new book When the Money Runs Out by Stephen D King, the group chief economist at HSBC. King castigates his fellow economists for choosing, in their obsession with "precision-engineered mathematical models", not to recognise "the myriad economic failures that have occurred throughout the ages, believing that those past failures had no relevance to the modern world".

Yet here we are, having experienced the worst economic depression and slowest "recovery" of several lifetimes, and we have a government that talks about "rebalancing" the economy – towards more physical investment and a solid capacity for exports – but in fact is doing its best to stoke up an old-fashioned consumer and house price boom, of the sort that history tells us is almost bound to end in tears.

Osborne's gamble, of course, is that the tears will not be shed until after an election victory. Meanwhile, he hopes to fool most of the people until that time with the illogical and wholly unjustified claim that the cynical policy of austerity has been worthwhile, because it has "laid the foundations" for recovery.

In fact, Osborne's policy has been shaking the foundations rather than laying them. And to judge from Carney's public utterances and his written evidence to the House of Commons Treasury committee, he has made a serious study of recent British economic history and understands the trading problem, which was exacerbated by years of overvaluation of the pound, until the post-2007 devaluation.

It is worth recalling the background to Carney's appointment. The chancellor sought him out, and pursued him like a love-struck bobbysoxer, because he knew that his own economic strategy had failed.

"Expansionary fiscal contraction" proved to be the oxymoron it always seemed to be: while investment in infrastructure was cut, and the poor suffered disproportionately from the savage squeeze on social services and local authority expenditure, the private sector did not fill the gap.

Osborne's belief was that a spontaneous revival of the private sector would fill that void, encouraged by loose monetary policy. But real incomes were reduced both by the ill-advised increase in VAT in 2010 and by the way that strong demand in China and other so-called "emerging" economies kept oil and other commodity prices high.

Economic history teaches us that there comes a time when, even in the face of crass macroeconomic policies, economies will eventually hit bottom and begin to revive. That this is happening at last is obviously to be welcomed, although the emphasis the government is putting on boosting demand for existing houses, as opposed to the massive housebuilding programme advocated by Labour, is disturbing, and even caused the outgoing governor, Lord King – who had been all too supportive of the fiscal squeeze – to register his concern about what the government was up to.

Carney seems too relaxed about the dangers of the house-price bubble, which is being encouraged by the government and his own promise of low interest rates for the indefinite future. That shrewd observer Trevor Greetham, of Fidelity Worldwide Investments, warns: "The government has lost patience with talk of living within one's means. With the 2015 general election coming into view it has unleashed the beast, tempting consumers to leverage their balance sheets into a new housing bubble."

Nevertheless, any signs of a more broad-based recovery are to be welcomed, as long as people are not fooled into thinking this is the result of misconceived and wasteful policies of austerity. It remains to be seen how widespread this incipient revival will prove, and how sustainable.

It was that great Bank of England chief economist, Christopher Dow, who used to say, before the summer holidays, "things will look very different in September".

They do – for the moment …

Powered by article was written by William Keegan, for The Observer on Sunday 8th September 2013 00.05 Europe/London © Guardian News and Media Limited 2010


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