The man who could be King?

Sir Mervyn "no mates" King still has over a year left of his term in office as Governor of the Bank of England, but speculation over who will replace him has been running wild for months. Most of the candidates are entirely predictable.  They include the Bank's Deputy Governor Paul Tucker and former civil service boss Sir Gus O'Donnell, whose acronymic nickname, GOD, seems especially appropriate.  Today, however, a new name has emerged straight out of left field: Mark Carney, current Governor of the Bank of Canada, and also head of the global Financial Stability Board set up in the wake of the financial crisis.  The story has been widely covered on both sides of the Atlantic.  Here, for example, is a partly tongue-in-cheek take on it from the Globe and Mail in Toronto.

Sir Mervyn will be a tough act to follow, for the worst possible reason:  unfairly or not, he's now widely seen as having messed up most aspects of the job. Under his leadership, the Bank is accused of having been excessively lax in monitoring the health of the financial system prior to the financial crisis.  The fact that the government had taken much of the responsibility for regulation away from the Bank years before the crisis is not seen as offering much mitigation, as the Bank was still clearly the dominant player.

Since the crisis, the Bank is seen as much too lax in tolerating above-target inflation as it attempts to get the economy growing again.  Just this morning, Deputy Governor Tucker admitted that inflation could stay above 3% at least for the rest of 2012, a forecast that directly contradicts assurances made by Gov. King only weeks ago.  Complaints that stubborn inflation and rock bottom interest rates are punishing senior citizens are now a staple of radio phone-in shows.

If Mark Carney really is being sounded out as a candidate, there are two possible interpretations.  One is that the government is so dissatisfied with the Bank's track record in recent years that it wants to see a wholesale change of direction and management.  This would certainly exclude Paul Tucker from consideration as the next Governor, though it would not seem to rule out GOD, or some of the other non-Bank candidates.

The other interpretation is that the government wants to send a signal that it intends to take financial stability much more seriously.  With no disrespect to either Canada or to Mark Carney, it's hard to see that experience in running monetary policy in Canada can count for too much on Threadneedle Street.  The Bank of Canada may no longer be regarded as "the eleventh Federal Reserve District", but there's no denying that it has a lot less room to manoeuvre, and that its actions have far fewer global consequences,  than is the case for the Bank of England.

On the financial stability front, however, there may be a lot more to learn from Canada.  The Canadian banking system is one of the most stable in the world, and needed very little government help to weather the global financial crisis.  Much of the credit for this goes to decisions taken long before Mark Carney's time in office, notably the government's decision back in 1998 to disallow proposed mergers involving four of Canada's "Big Five" banks.  Still,  Canada's record of keeping a tight rein in its domestic banks may well be a key factor commending Mark Carney to the UK government.  If that's the case, the City of London is likely to be aghast. Let the lobbying begin!