In international central banking circles, it counted as a bombshell: The new governor of the Bank of England will be Mark Carney, currently governor of the Bank of Canada. Carney is to take over for Mervyn King in June, when King's term ends.
The announcement signals more than the fact that David Cameron, the British prime minister, is willing to look across the former British empire for talent. It also signals more than the fact that the British and Canadian governments are shockingly good at secret-keeping (consensus was strong enough that Bank of England Deputy Governor Paul Tucker would get the job that bookmakers had stopped taking bets on him).
More than anything, the promotion of Carney from the helm of a $1.75 trillion economy to a $2.4 trillion economy is a signal of how much the world of central banking has changed in the aftermath of the financial crisis.
In each of the world’s major Western economies, the central banks have emerged from the crisis with greater expectations than before that they will be able to ferret out risks to the financial system and stop them. Keeping inflation low and stable, which a generation of central bankers set as their overriding goal, isn’t enough. They must also be able to detect when a housing bubble is developing, when the banking system is becoming overly leveraged, and what risks might lurk in novel financial products with funny names like CDO and SIV.
They have vast new powers to try to fulfill that mandate. It is true for the Federal Reserve, which gained new authority over the financial sector in the Dodd-Frank Act. It is true of the European Central Bank, which is on track to become the overseer of all Europe’s banks. And it is doubly true of the Bank of England, which, having shed much of its authority over the financial sector 15 years ago, is now merging with the Britain’s Financial Services Authority in what the corporate world would call a hostile takeover.
Carney is a master of this delicate intersection between markets, regulation and central banking. He led the Canadian economy through perhaps the best performance of the major Western nations during the crisis itself; there were no major failures of Canadian banks at a time when their international counterparts were falling like dominos, and the economic downturn in Canada was relatively mild. Carney is chairman of the Financial Stability Board, a group of leading regulators and central bankers who aim to deal with financial risks.
Apart from his time as a central banker, Carney has also been a creature of the financial markets. He spent 13 years at Goldman Sachs. While he has a PhD in economics from Oxford, he never worked as an academic economist. (He does not have British citizenship, though he has deep ties to the country, including his years at Oxford and a British-born wife).
Compare Carney's background with that of the man he will succeed. Mervyn King was one of the most accomplished British economists of his generation and played a crucial role in the 1990s reforms that before the crisis had the Bank of England aiming for 2 percent annual inflation above all else—and having to explain itself to parliament when that goal wasn't met. The bank happily gave up its role supervising banks in 1997. (King taught at MIT and the London School of Economics before becoming the bank’s chief economist through most of the 1990s, then deputy governor starting in 1998 and governor since 2003). His way of viewing the economy is crisp, rigorous and theoretical. But where King is at home in the world of macroeconomic modeling, he had less appetite, particularly in the runup to the crisis, for the messy, legalistic world of overseeing banks and financial markets. That inclination made the Bank of England flat-footed in the early days of the financial crisis.
David Cameron and the British government are essentially saying that it is now more important that the governor have an adept sense and long experience at the nexus of finance, banking and economics. Theoretical economics is less important. They are also signaling that the challenges facing the British economy are profound enough: It has been mired in stagnant growth for the better part of Cameron’s 2 1/2 years in office.
One wonders in this new world if a future Ben Bernanke would be selected as U.S. Federal Reserve chairman. When Bernanke was appointed in 2005 (he took office early in 2006), his policymaking experience consisted of three years as the resident academic on the Fed board of governors and less than one year as the White House chief economist. The bulk of his career had been spent in the academic world. He learned financial markets and bank oversight on the job as Fed chair, and while he has proved adept at the job, it is doubtful that a future president will want to take that chance when they look to appoint a Fed chief.
The reality is that being a central banker is a harder job in the post-crisis world than it ever was before, and to do it well calls on a mix of skills that few people on the planet possess. Bernanke’s term ends in January 2014; in selecting a replacement (assuming he does not ask Bernanke to stay), President Obama will need to sort through the same tradeoffs to find someone who can be as skillful a bank regulator and overseer of markets as he or she is an economist.
Mario Draghi, the president of the European Central Bank since late last year, is one of the few central bankers who has both. He has a PhD in economics from MIT, yet also long experience in the Italian Treasury, in the financial world at Goldman Sachs and as head of the Italian Central Bank. (He was head of the Financial Stability Board before Carney).
But people with the broad experience of Carney and Draghi don’t come along every day. And as the heads of governments around the world go about selecting the next generation of central bankers, they will have to weigh the trade-offs. With its poaching of Carney, the British government is sending a signal about what skills are most important in a post-crisis age. The world can only hope that these different resumes for central bankers will create different economic results.