Britain’s two cheers for Carney

When Mark Carney, the respected head of Canada’s central bank, was appointed on Monday to the even more august position of governor of the Bank of England, Britain’s reaction was a characteristic blend of self-deprecation and smugness.

The self-deprecation was publicly expressed by an Opposition MP, Barry Sheerman: “Isn’t it a little surprising that the leading banking nation on earth could not find a British candidate for the job?” This feeling of mild embarrassment seemed to be quietly shared by many Britons in addition to the distinguished domestic candidates who were passed over.

The smugness has been much more in evidence. There has been a veritable orgy of self-congratulation among British politicians, media commentators and financiers at having nabbed “the outstanding central banker of his generation,” as George Osborne, the British chancellor, described his new hire. Embarrassment and praise are both justified, but for other reasons.

Starting with the embarrassment, there was actually no shortage of outstanding British candidates to run the BoE. All four Britons who publicly revealed their interest – Adair Turner, Paul Tucker, Terry Burns and John Vickers – have credentials that easily match Carney’s and would have put them in the top league of global central bankers alongside Ben Bernanke and Mario Draghi. This appointment, therefore, was definitely not an example of the “Wimbledon syndrome,” whereby Britain hosts the world’s best tennis tournament but never produces a player who is good enough to win.

Why, then, did Osborne go to Canada to fill the BoE post? The reason, and the true cause for British embarrassment, is the failure of Osborne’s economic policy, for which Sir Mervyn King, the departing governor, will now become a useful scapegoat.

Had Osborne appointed a serving official, like Turner or Tucker, this would have been a vote of confidence in the economic institutions that he had inherited from Gordon Brown’s Labour government. By choosing a complete outsider, Osborne maximizes his freedom to blame Britain’s economic problems on Brown’s mismanagement and King’s errors of judgement – and to some extent, this is justified.

Not only did the BoE initially mishandle the 2007-08 crisis, but more importantly, King played a key role in crafting Osborne’s self-defeating fiscal strategy of sharply higher taxes and slashed public spending in the midst of an economic slump. King assured Osborne after the 2010 election that BoE monetary easing would counterbalance the deflationary effects of any additional fiscal tightening, but then failed to provide the genuinely radical monetary policies that might have delivered on this pledge. The consequences have been a deeper and longer slump than Britain experienced even in the 1930s and failure on all the government’s fiscal objectives.

Given that Canada has done better than any other G7 economy since the crisis, Osborne clearly hopes that Carney will sprinkle some fairy dust and that Britain’s economic prospects will be transformed. But Canada did not face the structural devastation caused in Britain by the meltdown of international banking. So Carney’s record in Canada says little about handling what he himself has described as the “much greater challenges” at the BoE.

Now for the good news. The first reason to cheer Carney’s appointment is, ironically, his background as a Goldman Sachs banker. This has helped him challenge simplistic arguments on regulation, both from self-interested bankers and from their extreme opponents who see breaking up big banks as an end in itself.

Carney’s financial background gives him some insight into the value of a dynamic and innovative financial sector. This understanding puts him in a different category from most central bankers and academic economists, who tend to see finance as a socially destructive and parasitic activity, which extracts excessive “rents” from the “productive” economy that are totally disproportionate to any services provided.  This is nonsense. Finance is arguably more useful and less damaging to society than the manufacture of over-powered cars that kill people and pollute the atmosphere, or the production of wines and spirits that cause alcoholism and liver diseases.

But even if it were true that finance was a totally unproductive, zero-sum game for the world as a whole, the fact is that it has been Britain’s most successful industry since the 17th century, and it probably will be for decades, if not centuries. Britain will therefore continue to earn a large part of its income from hosting what cynics describe as the global financial casino. And since in reality finance is indispensable to any economy advanced enough to involve trade, savings and long-term investment, financial activities are bound to grow rapidly as economies become more complex, interdependent and globalized.

Given London’s position as the world’s financial hub, it is essential for Britain to have a central banker who understands the importance of international finance for global economic growth. Because of Britain’s history of profiting from this industry, this justification may sound less self-interested, and therefore more convincing, if it comes from somebody who is not, himself, British.

Britain’s openness to welcoming foreign talent, initiative and enterprise is another reason for self-congratulation in the appointment. While the United States is universally recognized as a nation created by immigrants, Britain’s openness as an economy and a society is widely understood. The share of Britain’s population born abroad is now about the same in Britain (11.3 percent) as in the States (12.9 percent) — and in London (34 percent) as in New York (36 percent).

While the “Wimbledon effect” and the management of the English football team by a string of unsuccessful foreigners is a standing joke in Britain, few societies are more ethnically diverse and tolerant of cultural differences. As a quintessentially “foreign” Briton, it has often struck me that it is a country so unusually secure in its identity that it does not even feel the need to agree on its name: Britain, England or the UK.

Recently British politics has succumbed to minor signs of xenophobia, partly encouraged by the Cameron government’s muddled immigration policies. Carney’s appointment should act as a reminder that Britain has, throughout its history, recruited not just merchants, football managers and central bankers, but even kings, from around the world.