What Carney missed in Nottingham, and why he’ll need mortgage controls
There are two Mark Carneys. There is one struggling to get the barbecue of UK growth prospects up to cooking temperature. And conversely there is one that in 2015/16 might have to put out a raging credit-fuelled inflationary consumer conflagration. That is what explains his policy paradox and constructive vagueness. Nottingham, which hosted the new Governor for his maiden speech, is the perfect place to see both sides.
So on the one hand he wants to excite the animal spirits of business investment and consumer demand with still easier money, and the promise of prolonged low interest rates. He is in an arm wrestle with financial markets unconvinced by his forward guidance policies. And he has promised to act if they continue to call his bluff, betting that unemployment will fall below 7% in two rather than three years. But he is, as he was today here in Nottingham, appeal over the heads of the markets directly to the businesses sitting on piles of cash, and banks sitting on lending capacity. He wants to offer a jolt of confidence to the key decision makers in the economy.
At the same time he wants to be in a position, if things get out of control in two or three years, to limit credit, rein in banks, and raise rates, if things get too hot too quickly. He has one eye on explaining to Britain why, if inflation rises and credit spirals out of control, he needs to act. And he wants to be able to say such actions are consistent with his promises today. He is the only serving G7 central banker to have raised interest rates since the crisis [in Canada]. It is a tricky balancing act, some would argue ultimately impossible.
As Governor Carney told me earlier this month, the Bank and Treasury think the current run up in consumer and mortgage debt is benign, containable, and manageable. Indeed it will help nurture the animal spirits necessary for business investment to return, and increase productivity, and then real earnings, as well as jobs.
In Worksop, thirty miles north of Nottingham, the Steetley Dolomite factory is again firing on all cylinders. Four years ago this manufacturer of parts for the global steel industry, suffered in the global downturn. Now, just in the past two months, things are starting to look up, confidence is returning and they are starting to invest for growth, after finally getting the loans they need from the big banks. Music to Mark Carney’s ears. But this company need to continue investing, exporting and creating jobs, for Britain to return to sustained growth. The boss John Carlille told Channel 4 News, after the speech, he was reassured by the Governor’s speech, and it had encouraged him to go and spend more on investment than he otherwise would have. Job done, Mr Carney, at least in this case.
But the credit creation schemes that are always ex ante justified on the basis of channelling credit to businesses like Mr Carlille’s, rather frequently end up ex post being deployed on mortgage finance. As I asked the Governor today, it seems extraordinary to think that the Bank of England is subsidising bank funding (including mortgages and directly buy to let) under Funding for Lending, the Treasury is subsidising mortgages through Help to Buy, Mr Carney is promising lower for longer interest rates, and then on top of that he announced that rules on liquidity for banks and building societies are now to be eased. Imagine a spaceshuttle not quite reaching escape velocity, with Mr Carney firing all the engines on full power to smash through the atmosphere.
The liquidity move could release £90 billion of funding if banks achieve the 7% capital target (Carney’s lucky number, evidently). So banks will have to hold less gilts (more liquid, and that is why gilt yields increased today) and instead, I imagine start up more mortgage securitisations and the like. It will be the fuel, he hopes, for credit growth. But in the first instance I’d predict that this will be much more housing credit growth than business credit.
“The Bank of England is acutely aware of the risk of unsustainable credit and house price growth and will be monitoring it closely,” Governor Carney told his audience.
Perhaps Mr Carney should have popped in to the Nottingham offices of credit company Capital One or credit rater Experian to see where this may be heading. In the medium term Mr Carney will need and has seemed warm to having proper macroprudential tools, such as limits on mortgage loan-to-values. Clearly at this moment, it would be absurd to have the Treasury subsidising 95% mortgages and the Bank of England regulating against them. What would come of the home buyers who got a Treasury subsidised 75% Help to Buy mortgage, that turns into a 95% mortgage in five years time, at the moment when the central banker decides to limit LTVs to, say, 90%.
Perhaps the government will never allow it. But they are standard issue financial regulatory tools in other successful capitalist economies. Or perhaps everyone is banking on a renewed spurt of house price inflation to help such problems disappear. That worked out so well last time.