Philip Cross, Research Coordinator at the Macdonald-Laurier Institute and the former Chief Economic Analyst at Statistics Canada, follows up his blog on the legacy of Mark Carney in Canada with an in-depth examination of his reputation as the 'perfect' central banker.
The best friend of the victorious Roman generals being lionised in a parade across Rome was not to be found in the adoring crowds. It was the little slave boy whose job it was to stand next to the great man in his chariot and to whisper in his ear as the crowds roared their adulation, “Remember, you are only a man.”
Our departing central banker, Mark Carney, might benefit from such a friend as the accolades for what British Chancellor of the Exchequer George Osborne, called the “best central banker of his generation” continue to pour in.
Given Mr Carney’s undoubted talents and abilities and his overall track record at the Bank of Canada, such praise is justified. But it might not hurt to point out that the competition is, ah, not very stiff.
It would be hard to do worse than, say, Mervyn King, who Carney is succeeding at the Bank of England. He failed in central banking’s most important role when he presided over Britain’s first bank run since 1914 at the Northern Rock bank. Even with Britain falling into a severe, double-dip recession, he could not consistently attain the inflation target of 2%.
The governors of the European Central Bank were too slow to realize the danger in 2008 was from recession and not inflation, after which they could not calm the upheaval in the eurozone.
The Bank of Japan’s record since the 1990s is too dreadful even to contemplate.
That leaves Ben Bernanke of the Federal Reserve Board as the only competitor with any demonstrable competence, quick to recognize the unfolding crisis, but the jury is still out on the effectiveness of quantitative easing and then how well it can be reversed.
Being the best of this sorry lot, who helped drive the global economy over a cliff, is hardly a reason for chest-thumping, by Osborne or Canadians, particularly when Carney had the advantage of inheriting a sound financial and banking system. Remember, Mr Carney, you are only a man.
Mr Carney can also occasionally fall victim to the besetting sin of the very smart and successful: he thinks that because he believes something to be true that it is true. Several examples come to mind.
In September, he said the US is following the “same dreary path of other developed countries that have experienced financial crises.” This received wisdom was contradicted in a recent NBER paper by Michael Bordo, which found “deep recessions associated with financial crises recover at a faster pace”.
Another example is his famous “dead money” comments, an opinion based on the wrong data. In both instances, the ‘facts’ he asserted conveniently relieved policymakers of their responsibility for creating an environment in which people were reluctant to spend.
Misunderstanding of how census data is used by the National Accounts (basically, it isn’t), Mr Carney weighed in on the debate about the government’s cancellation of the long form census. His intervention led the anti-Census Toronto Sun to editorialize that “Carney’s census issues take precedence” over privacy concerns.
Carney said the Occupy movement’s protests were “entirely constructive.” What did that have to do with monetary policy?
Quibbles? Maybe. But on the other hand central bankers occupy positions of huge and increasing power, and with great power comes great responsibility. Most people assume that when the Governor of the Bank of Canada says something is a fact, it is just that. When they discover it is not, it undermines not just the Governor’s credibility, but that of the Bank itself. And credibility is critical to the Bank of Canada: its commitment to low inflation underpins the efficient functioning of financial markets, and allows the Bank the luxury of changing expectations with words alone, as it did in 2010 when its commitment to a prolonged period of low interest rates helped lower bond yields. And of course once someone publicly commits themselves to an opinion as a fact, it makes it all the harder to change course when the facts turn out not to fit the opinion.
After the recent passing of former Governor James Coyne, Carney rightly picked up his pen to celebrate Coyne’s importance in securing central bank independence, which ought to be at arm’s length from the government. But then should the Governor be expressing opinions about highly political matters like the census and the Occupy Movement that are clearly political and well outside his remit at the Bank? Independence comes at a price.
By far the biggest threat to the Bank of Canada’s independence, of course, would have been Carney moving directly from Governor to lead the Liberal party. Had he done so - he never ruled it out, unlike going to the Bank of England, which he publicly renounced in August - how would people have interpreted his comments about the Census, or the Occupy movement, or ‘dead money’? On all of these, he took positions opposed to the government’s, which would have invited accusations that the Bank’s positions were motivated by partisan politics. Just allowing the speculation to continue unchecked left the spectre of politics floating like Banquo’s ghost over the celebrations of Canada’s relatively strong economic performance.
Mark Carney deserves the victory parade that is currently underway. But being a fallible human being, he is not perfect, and his best friends are the ones whispering in his ear that parades and central bankers come and go and the most dangerous trap is always to start believing your own press.
Read the CPS publication "How to Cut Government Spending: Lessons from Canada".