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Jake Van Der Kamp

“Standards may need to be developed to put non-bonus or fixed pay at risk,” [Bank of England governor Mark] Carney said in Singapore. “This will help rebuild trust in financial institutions.”
SCMP, November 18
 
Ever since having been promoted from governor of the Bank of Canada to governor of the Bank of England, Mark Carney seems to have taken into his head that he must be a big noise on the bank morality lecture circuit. 
When he speaks of trust in financial institutions, I assume he refers to the increasing number of legal proceedings for various financial misdeeds brought by regulators in America and Europe against big bank dealing rooms. That is certainly what the wider public assumes is meant when he also speaks of pay at these banks.
But it is not what a central banker should mean when talking about trust in financial institutions. For a central banker trust should be about whether commercial banks are financially sound and prudently run.

I now present the evidence that trust in financial institutions is steadily being eroded in the world’s largest economies and it has been done by central bankers. This evidence is contained in the chart. Not only have the United States and Japan maintained ridiculously low interest rates for more than six years but now the European Union has joined them.
The thinking is, of course, that low rates are necessary to allow the developed world to recover growth momentum and that these rates will start to rise again when this recovery comes through.
It will not happen. What this environment of artificially low interest rates has actually done is cause a severe distortion in financial markets with entire industries taking on vastly more debt than they can ever hope to manage in a time of higher interest rates.
The big winners have been the financiers who have encouraged this debt mania and walked away with enormous profits from leveraged buy-outs and other financial arrangements they have made. The one big measurable effect of low interest rates has been a widening of income polarity in the countries that practise it.
The debt infection also has their governments in its grip. Government debt in Japan is now greater than 200 per cent of gross domestic product, in Europe it has risen by half in eight years to just less than 100 per cent of GDP and the United States it is now more than 100 per cent of GDP with US$18 trillion in federal debt securities outstanding.
Imagine a world of US dollar treasury yields at only 5 per cent, a world last seen just 14 year ago. It would now cost the US government not much short of US$1 trillion in annual interest charges.
The politicians will never approve and any central banker who recommends it will find himself instantly sacked. Europe and America are now most likely condemned to follow the lead of Japan where growth stalled 25 years ago because of such monetary policies and where the economy is now caught in an iron debt trap of central bank making.
And yet Mark Carney has now travelled to Southeast Asia to spread the word that the big problem is that commercial bankers are paid too much and all will be well if only they are now forced to restrain themselves.
This is the one part of the world where prudence and sound finance are still respected in banking circles and where commercial bank salaries in non-American and non-European banks are still linked to planet earth.
Send the man back to Canada, I say. There at least he used to talk and practice common sense. But he has lost it here and now.
 
jake.vanderkamp@scmp.com
 
 


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Mark Carney

Time to send BOE’s Mark Carney back to Canada

Bank of England governor Mark Carney in Singapore last month. Photo: Xinhua

Business

Banking & Finance

Opinion

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

Jake's View

.css-1m2rp1p{color:#34b8b5;}Jake's View | Time to send BOE’s Mark Carney back to Canada

Jake's View | Time to send BOE’s Mark Carney back to Canada