Mark Carney at the Inclusive Capitalism conference
Here is the text of Mark Carney’s speech on Inclusive capitalism: creating a sense of the systemic, given at a conference yesterday. When you read the first few pages, you may think that this man is a raving leftie, far more extreme than anything you find in this blog (although if so you probably won’t be reading). Here at least is the vocabulary of the left: social justice, fairness, community – and even a nod to Rawls. But after a while, the penny drops: this is what his audience wants to hear, not necessarily what he really thinks (and presumably not what he said to George Osborne before he got the job). And then we move on to the bit that matters: what is he, as leader of our central bank, entrusted with far more tools than his predecessor, going to do about the mess we’re in?
We won’t disagree about the four headings he chooses, but we may about what action is under each. Number one is end too big to fail. Most commentators now accept that we’ve done virtually nothing effective in that direction. Carney however tells us that “the leaders of the G20 have endorsed measures to restore capitalism to the capitalists by ending too-big-to-fail”, so that banks can be resolved “without exposing the taxpayer to loss.” Moreover “this is the year to complete that job.”
Really? Is his grasp of the problem so inadequate? What does this mean in practice? If on 2 January 2015, after these G20 initiatives are complete, Barclays or Lloyds collapses, are we really going to stand by and see all deposits over the trivial compensation limit take massive losses? If so the depositors currently receiving 1% interest rates will be pretty angry: they should have been getting closer to 10% for the risk. But when he is overruled by George Osborne (despite his own previous protestations, but assuming he intends to stand for reelection), we will discover what the market already assumes, namely that these deposits are guaranteed. And then we’ll notice that the taxpayer has not received the 9% their historic guarantee has been worth. What Carney (and so many others) fail to acknowledge is that banking survives (and thrives) on this fundamental mispricing.
Carney’s next initiative is “creating fair and effective markets”. Of course he knows this may not be easy, but on recent scandals “The upcoming FSB report on these issues, co-chaired by the Financial Conduct Authority’s (FCA) Martin Wheatley and the Fed’s Jeremy Stein, will be decisive in this regard.” On the need for more general ethical principles, “There should be clear consequences including professional ostracism for failing to meet these standards.” Well that will certainly do the job.
On compensation, he is still locked into the idea of deferral and clawback without recognising that the whole quantum of compensation is mad and the concept of alignment fundamentally misplaced and inimical to shareholders and society alike.
Finally, he wants to buld “a sense of vocation and responsibility.” This he thinks will be achieved by the Banking Standards Review Council which intends to “encourage a process of continuous improvement, and regularly assess and disclose the performance of each bank under the three broad headings of culture, competence and development of the workforce, and outcomes for customers.”
So that’s all good then.
Postscript – 29 May
A Bloomberg post (courtesy of Ian Fraser on Twitter) points out that Carney intends to leave the QE mess for his successor. One wonders whether his rhetoric on clawback for those “who could reasonably have been expected to identify and manage risks…but did not take steps to do so” applies to his own package.