It used to be that Governors of the Bank of England expressed their views rarely and elliptically, in an effort not to disturb the markets, which hung on their every word and every nuance. The new Governor, Mark Carney, seems to be trying to achieve the same results by the opposite methods. He speaks so often, and so bluntly in his direct Canadian style, on so many different issues that the markets haven’t the faintest idea which direction they ought to be going in.
The latest is particularly unusual for a Governor. Carney has entered the political debate on equality, citing “disturbing evidence” of declining social mobility in advanced economies, and urging “a basic social contract comprised of relative equality of outcomes; equality of opportunity’ and fairness”. Nowhere is the need to be fair and trusted more acute than in the financial markets, he said.
This is worrying. It is a fair point that if people do not regard their bankers – and other suppliers – as trustworthy, that is bad for business all round. The market system relies on fair dealing and trust. But quite what social outcome the market system does or should produce is a matter for politicians rather than central bankers. (Well actually, as Hayek shows us, the outcome should not really be a matter for politicians either, but it sure as eggs is not the right subject for central bankers to opine on.)
It is worrying to in that the Bank of England regulates the commercial banks, what message is it sending to them? The suggestion that banks and bankers have some kind of obligation to promote “relative equality of outcomes” seems at odds with the Bank’s other instructions that they should strengthen their balance sheets and be prudent and businesslike in their operations. Banks, after all, cannot escape risks. So yes, they should lend wisely. Yes, they should borrow prudently. Yes, certainly, they should comply with the law. And they should adhere to ethical standards – keeping their word, not lying to customers or misleading them, being sensitive to the interests of clients and making sure that those interests prevail.
But is it the proper role of any business to promote any particular social objective? Professor Norman Barry, in his Adam Smith Institute paper of many years ago, Respectable Trade, pointed out that in a properly competitive market, firms would have no cash spare to spend on such agendas, if they had no direct effect on their business. In banking, though, the situation is even trickier, because of the world of risk in which they live. Should banks promote particular social object, regardless of the extra risk that involves? The risk of not borrowing quite so prudently nor lending quite so wisely? That, after all, is what got us into the mess of 2007-08. Coerced by their regulators, American banks started lending to homeowners who could not afford the loans. While in the UK the former building societies, spurred on by politicians for reasons of ‘regional policy’, got quickly out of their depth with some very bad borrowing.
The business of business is business, not civics. Civics is the business of politicians. And something that central bankers should probably steer well clear of.