Rock star Central Banker!


Location Date: 
December 19, 2012
Content: 

Last week I had the pleasure of attending a sold-out (1500+ people) luncheon speech delivered by Bank of Canada Governor Mark Carney (Click here to view remarks). Ironically, we were offered the chance to buy a table a while back but passed - I mean how interesting could a dry speech on Canadian monetary policy possibly be? Well little did we know! Yes, we did get the standard dry central bank talk but there was a noticeable buzz, undoubtedly due to the surprise announcement that the dashing 47-year-old Canadian central banker has been tapped as the next Governor of the Bank of England ("BoE"). I overhead a few women in the audience comparing Mark Carney with George Clooney and not in an academic context - thankfully. Suddenly, the 2012 Central Banker of the Year Award winner (I am not sure if they have a Hall of Fame yet but he is on his way) has achieved rock star-status in the world of finance. How many central bankers do you know who could both receive a standing ovation from the UAW at a summer union meeting and be selected to one of most important financial posts globally - in the same year!? 

Part of Carney's appeal is that he is personable and engaging - very different from say Ben Bernanke or BoE's Governor Mervyn King who insists on being addressed as Mr. Governor. Born in Fort Simpson, Northwest Territories (that is a long way from Toronto for international readers!), Carney won a scholarship to Harvard to play in net for the hockey team while earning a degree in economics. Carney then spent 6 years at Goldman Sachs in New York, London, Tokyo and Toronto before moving into the public sphere. His pristine reputation and Canada's banking and regulatory system's performance post-2008 financial crisis, are Saville Row-tailored to fit the needs of a UK banking system in dire need of a fresh start (click here to read more on this). His understated approach can mask the fact that he is happy to use his stick - remember his duel with Jamie Dimon of JP Morgan over Basel III capital requirements? (Click here for a recap

Mr. Carney's new role in London will throw him right into the teeth of tabloid journalism at its very worst -the British are the world's best in this regard. From the heckling he will take if things are slow to turnaround in the UK economy (as any foreign coach of the England footie team would tell him) to the views his wife may have on bankers and the environment, it is no wonder he has opted for a shorter, 5-year term. 

One can look at this development in a hedge fund context (as all things in life). Carney has traded high and bought low... maybe. That is, Canada is currently the poster child of financial sobriety and economic health whereas England is anything but. He has nothing but upside economically speaking with little reputational downside risk and he gets a bump in pay. Pretty good!

On Mr. Carney's talk, I was very impressed by his comments on guidance and its role in monetary policy, especially given the extraordinary circumstances of the global economy. He noted that when nominal rates are at the zero lower bound, forward guidance can be used as an unconventional policy tool in the same manner as quantitative easing and twisting. His speech went on to look at targeting nominal GDP levels in an effort to gain the necessary traction for the economy (rather than inflation rates). This strategy introduces "history dependency". This caused a stir in UK financial circles as Carney could look to do this in his new role, even though he explicitly stated his comments were hypothectical. Hypothectical or not, the Fed has seen fit to adopt a change to its' policy mandate by introducing a formal level of employment targeting (the so-called Evans Model named after the Chicago Fed President). This decision simply added further detail to the September policy decision to be ultra accommodative until the recovery was well underway (i.e. inflation was potentially above the 2% target). There was little in the way of a big market moves as most market watchers are fixated on the Fiscal Cliff and Chinese economic policy. Nevertheless, the idea that the Fed or any other central bank will be able to put the inflation genie back in the bottle in the nick of time seems to me far too good to be true. Fed Vice-Chair Janet Yellen gave a speech in November revealing that this genie management could be done via the Fed's "realistic, quantitative model of the economy ...the FRB/US model; one of the economic models commonly used by the Board". As Jim Grant has pointed out, it is hard to take anyone seriously who says, no matter how soothing the words, they will have the ability to exit from QE without market disruption or control the rate of inflation or forecast GDP accurately. After all, I think they missed one of the biggest bubbles in history.

Jim McGovern 

Source: 

Speech, November 13th, 2012, Vice Chair Janet L. Yellen, At the Haas School of Business, University of California, Berkeley, California
Grant's Interest Rate Observer, Jime Grant, November 16th, 2012, page 10