From the Financial Times:
Treasury Open To Carney Radicalism
The Treasury opened the door to a more aggressive monetary policy on Wednesday, as aides to the chancellor welcomed the next Bank of England governor’s radical views on stimulus measure for flagging economies.
In a speech on Monday, Mark Carney suggested setting targets for the overall size of the economy, or nominal gross domestic product, rather than inflation. While Treasury officials said there were currently “no plans” to ditch the BoE’s 2 per cent inflation target, a spokesman for George Osborne added that “there’s quite a lot of interest in what he has to say … It reaffirms the fact that he is the central banker of his generation.”
Mr Osborne’s aides added that the chancellor was well aware of Mr Carney’s views on inflation targeting when he was appointed.
Any move to nominal GDP targeting would require the BoE to embrace bolder stimulus measures, even at the cost of higher inflation. Under its current governor, Sir Mervyn King, the BoE has been dismissive of nominal GDP targeting, even though some senior bank officials are privately attracted to its simplicity.
Spencer Dale, BoE chief economist, softened his stance on Wednesday, saying no ideas should be ruled out. He maintained, however, that nominal GDP targeting risked letting “the economy overheat relative to what you otherwise would have done”.
Mr Osborne’s aides are concerned the chancellor’s deficit reduction targets have slipped because the economy is not growing fast enough.
There is also wider political support for a new approach. In June, Vince Cable, business secretary, called for more “innovative” monetary policy that would generate a “robust recovery in money spending and GDP”.
In an August interview for the BBC, Mark Carney was definitive about the Bank of England governorship. “So is that a ‘no’ or a ‘never’”? he was asked. The reply came: “It’s both”.
Public denials of interest were reinforced in private by Mr Carney and his aides. Such was the certainty that the question on Monday was how did “never” become “yes”.
That affirmative took Westminster and the City of London by surprise when Mr Osborne announced that the Canadian would take over from Sir Mervyn King at the British central bank, in preference to an array of domestic candidates, with a mission to shake up the bank as it assumes sweeping new powers.
Announcing the appointment of the first foreigner to the post in the BoE’s 318-year history, Mr Osborne told the House of Commons that the ex-Goldman Sachs banker was “quite simply the best, most experienced and most qualified person in the world to do the job.”. . .
But come the summer, Mr Osborne was a disappointed man. The Financial Times story in April, saying Mr Carney had been approached for the governor’s job, had forced the Canadian to issue ever more vehement denials. The Treasury believed them and was told “no” definitively, so officials believed.
They insist Mr Carney was not lying because his denials were true at the time.
Mr Carney had told UK officials he did not want the strings attached to the job: a central bank with an economy in severe difficulties; a salary much lower than he liked, the need to move his wife and four daughters to Britain, and the prospect of serving an eight-year term.
According to people who have spoken to him, personal issues had held him back from applying. “His wife is happy in Canada and his kids are all happy in school. Personal issues were looming quite large,” said one friend.
But for each problem raised by the Canadian, Mr Osborne found a solution, such was his desire to have an outsider with a reputation as a brilliant manager as well as policy maker.
Instead of Sir Mervyn King’s salary of £305,000, Mr Carney will receive £480,000 plus a 30 per cent pension contribution. He could serve only five years instead of the eight stipulated in law. And the BoE will also provide relocation and housing expenses, never cheap in central London, although the Treasury insists the BoE will not pay Mr Carney’s school fees.
The BoE’s flexibility with the relocation and housing allowances were a key swing factor. Though Mr Carney had previously earned banker’s pay levels while at Goldman Sachs, he has been relatively modestly remunerated at the Bank of Canada.
Once the deal was sufficiently sweetened and Mr Carney had joined the race, aides to the chancellor say the process moved very quickly in a successful attempt to avoid leaks.
So they got the best central banker in the world, and like his ideas to go for growth. Does it seem likely that the Treasury will say no to NGDP targeting?
Is it possible that this might really happen?
PS. David Beckworth and Ramesh Ponnuru have an excellent new article on the fiscal cliff:
It could counteract the effects of the fiscal cliff, too. The Fed could best do this by explicitly adopting a nominal-spending target. The more credible that target, the less the Fed would have to do to reach it: Private-sector expectations of future spending powerfully influence current spending levels. Knowing that the Fed would do whatever it takes, including aggressive open market operations, to maintain steady nominal GDP growth would create confidence and more economic certainty for households and firms — regardless of whether the government was cutting spending. The effect should be to offset every dollar of reduced government spending by roughly a dollar of increased private spending.
The Fed cannot undo the effects of any bad policy Congress enacts: It can’t, for example, restore incentives to work, save, and invest if legislators stifle them. What the Fed does have the power to do is to keep the Keynesian nightmare from taking place. We might fall off the fiscal cliff and then go into a recession. But if we do, it will be because the Fed failed to do its duty.