New governor, old policies

Everyone is excited about the Bank of England's new governor. But his record doesn't suggest he’ll be much different to the old one, says John Stepek.

I've never been to Canada. I'm sure it's a wonderful place. It has vast reserves of mineral wealth, there's plenty of space, and it shares a border with the most powerful nation in the world (handy for all sorts of reasons). But one thing I can say for certain is that none of these considerable advantages has come about as the result of having Mark Carney head up their central bank for the past five years. So why is everyone getting so excited by the fact that he's going to take over from Sir Mervyn King as governor of the Bank of England?

We keep hearing that it's great to have an outsider' with a mandate to shake up' the Bank's stuffy' culture. Frankly, I couldn't care less about the Bank's culture, stuffy or otherwise. I'd much rather look at its record on the economy. On that front, the Bank made two really big mistakes over the past decade. The biggest error was to watch a huge property bubble inflate right before its eyes, and do nothing about it. In fact, it aided and abetted the bubble by keeping interest rates at rock-bottom levels and even cutting them when we had a sniff of a correction in summer 2005.

Its second-biggest mistake was in failing to allow the bubble to then burst properly. Americans got lucky, in that the Federal Reserve was unable to prevent their crash. Now it looks like they will bounce back to health before we do. In Britain, we've been left with a semi-deflated bubble, hordes of mortgage prisoners, and a vestigial mini-bubble in London, all of which are holding back our economy.

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So what interests me about Carney is: does his record suggest he'd have done anything different? Sadly not. That Canada is highly dependent on a now-imploding commodity boom is not Carney's fault. But that it also has one of the most overvalued housing markets in the world is at least partly down to his slashing interest rates after the financial crisis no different to the policies followed by every other central banker. There was even a joke website called Crack Shack or Mansion?' in which the viewer looks at pictures of ugly Vancouver properties and tries to guess which are drug dens, and which C$1m-plus homes. It's not easy I got fewer than half the answers right.

The website was set up in 2010 the problem has only got worse since then. The ratio of debt to disposable income for Canadian households is now more than 160%, higher than America at the peak of its bubble. However, it seems the Canadians might soon get a belated taste of the financial crisis the housing bubble may finally be bursting. The latest data suggest that price increases are slowing sharply, and sales have fallen too. So forget about the idea that Carney is coming over here to save us. Quite the contrary. He's escaping from Canada just in time.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.