Should we be worrying about a 'Carney put'?

Stackelberg Follower makes a point about the appointment of Mark Carney as Governor of the Bank of Canada that has been studiously avoided by commentators until now:

I remain unconvinced that investment bankers should be running the central bank.

Now, I don't have a pathological hatred that most of them will likely earn more than I ever will if I end up in academia. But I remain unconvinced that anyone who is fundamentally part of the investment community should be running the BoC.

Maybe I should justify this belief? I'll give it a shot. The investment community is a very small part of the real economy. Yes, financial services are the biggest things in the economy, by market-cap, TSX weight, or whatever. And yes, I'm pretty sure a lot of banks add to the bottom line by playing with exotic trading instruments, but their fundemental strength is derived from the average Canadian who is happy with low-cost index funds and fixed income.

It seems that most investment types take this sort of news poorly. I mean, looking at the American whining to rescue equity markets - whining which was indeed sated. Slate has a good article on this: The toddlers who are running the global economy. There is no law that says speculative losses will derail the economy, and I don't think they can, really.

Now, I'm pretty sure even if there come times when Carney caters to the TSX more than I'd personally care for, this doesn't mean the big bad seventies are coming back. By no means. But I'd much prefer someone who can push an agenda I think would be much more profitable in the long run than bailing out Bay Street; things like the stability of the time-path of prices.

This is something worth thinking about. An important part of the Bank of Canada's accumulated stock of inflation-fighting credibility has been based on the flinching certainty that it will not cut interest rates in order to provide a floor for stock prices. When the Bank was being run by career civil servants, this sort of focus was relatively easy to maintain: the decision-makers simply didn't care if they were personally popular on Bay Street. Or anywhere else, for that matter: John Crow is a case in point.

Carney's familiarity with financial markets is his strongest  asset in his new job; the Bank's major challenges over the next few years are likely to involve trying to avoid such things as the subprime meltdown. But he's only 42, and he may be entertaining the possibility of returning to the private sector after his mandate as Governor.

Comments

[Simon van Norden]

"Carney's familiarity with financial markets is his strongest asset in his new job; the Bank's major challenges over the next few years are likely to involve trying to avoid such things as the subprime meltdown. But he's only 42, and he may be entertaining the possibility of returning to the private sector after his mandate as Governor."

When I try to think seriously about this, several questions come to mind.
1) Have past governors of the BoC had any trouble finding private sector employment after their tenure?
2) One of the nice things about the BoC job is that it boosts your international profile, what with all the G7 and BIS and IMF etc. meetings. Does being tough on the Canadian financial sector hurt your prospects in the international talent market?
3) Ambitious types often shift from public to private or vice versa. (C.D. Howe comes to mind as an example.) Given Carney's good private sector credentials, what is his marginal benefit from further polishing them versus establishing his bona fides with the public sector?

[Stephen Gordon]

Those are good points. Presumably - hopefully! - a willingness to be hard-nosed and unpopular in order to do one's job properly would be considered an asset in that market.

[Ron]

If you want to see what happens when a central banker gives in to the financial community, look no farther than down south. Bernanke seems all too eager to cut interest rates to spur some definition of "growth" at the expense of price stability. The BoC should avoid such antics at all costs.