Marked down

It's a tough time to be Mark Carney.  The superstar of global central banking, now at the Bank of England, is taking a shellacking on both sides of the Atlantic.

With Carney too far away to answer back, CIBC's veteran economist Avery Shenfeld is blaming him for an unhealthy rebalancing of the Canadian economy.  As Shenfeld sees it,  the Bank of Canada's low interest rate policy in response to the financial crisis worked almost too well.  It triggered a boom in housing (read: condo) construction that resulted in the Canadian economy bouncing back faster than the rest of the G7.  That outperformance in turn caused capital inflows into Canada, which drove the Canadian dollar above parity with the US dollar, way above its fundamental value.  The resulting lack of competitiveness caused manufacturers to look for more competitive jurisdictions for their investment plans, exacerbating the demise of the domestic manufacturing sector.

I have to say I'm not altogether convinced by this.  There are a lot of reasons why Canadian manufacturing is on the slide, and it's not clear that a weaker exchange rate would have been sufficient to offset them.  Most notably, Canadian labour costs are significantly higher than in "right to work" US states, or in Mexico.  In Ontario, the country's manufacturing heartland, energy costs are prohibitively high, thanks in large part to a preposterously ill-conceived push for green energy by the provincial government under Dalton McGuinty. Both of these factors, together with the free trade arrangement with the US and Mexico, were in place long before the Canadian dollar became overvalued.

It's also difficult to agree with what Shenfeld feels Carney should have done instead. Normally you'd think of cutting interest rates to hold back the currency, but as Shenfeld sees it, that's what caused the dollar to get too strong in the first place.  He thinks the Bank of Canada should have intervened directly in the currency markets, selling Canadian dollars in the hope of driving down their value.  However, history suggests that central bank intervention of this sort is rarely effective so long as the underlying factors leading to the "incorrect" exchange rate remain in place.

All in all, then, I think Carney would be entitled to dismiss Shenfeld's criticisms in this case.  That's just as well, because he has some serious issues to deal with over in London.  This week he has been grilled by politicians over the latest interbank rate fixing scandal.  You'll recall the overblown crisis over the fixing of the LIBOR rate a few years ago; well, this time, it's exchange rate manipulation that's in focus, once again with the aim of rigging the rate settings used in settling contracts.

Some of the biggest banks in FX trading are in the frame on this one, and this time the Bank of England itself has had to suspend one of its own traders.  Carney was still at the Bank of Canada when all of this was going on, but it's become his mess to clean up, and the tone of the questioning from the assembled politicians was unforgiving,

This is a part of his new job that may be less familiar to Carney than the day-to-day routine of setting monetary policy. There are various official rate settings in Canada that work in a broadly similar way to indices like LIBOR, but they're of limited interest outside the country.  In contrast, LIBOR and its cousins have an impact around the world, and London remains a key global hub in FX trading.  As Carney correctly noted, it's essential that the Bank of England's reputation be cleared, if London is to retain its key role in global finance -- something on which the entire UK economy arguably depends.  Well, nobody said this job was going to be easy.