C. Peter McColough Series on International Economics With Mark Carney

Tuesday, September 10, 2019
Don Pollard
Mark Carney

Governor, Bank of England


Chairman Emeritus, Council on Foreign Relations; Former U.S. Secretary of the Treasury

Mark Carney discusses monetary policy and the challenges facing the Bank of England.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

RUBIN: Welcome, on behalf of my colleagues at the Council on Foreign Relations, to the C. Peter McColough Series on International Economics. I’m Bob Rubin. I’ll moderate today’s session.

We are deeply honored and very privileged to have with us the governor of the Bank of England, the former governor of the Bank of Canada, and a whole bunch of other things. (Laughter.) In accordance with the practices of the Council, I’m not going to recite from his resume, but if you take a look at it, it is a truly extraordinary career.

I’ve had the opportunity to be with Mark on other occasions. And he is exceedingly well equipped to help us try to better understand what is truly, I think all of us would agree, a very complicated and uncertain time in the global environment, and a very uncertain time with respect to what central bank authorities and policy authorities more broadly can do in response to the issues we face.

Our program will be as follows: For about a little less than half an hour I’ll pose questions to Mark, and then he’d be delighted to respond to questions from any of our members. If you have a question, raise your hand, stand up. You’ll get the mic. Identify yourself, identify your organization, and then state the question briefly so that we can cover as many issues as possible. This will be on the record? OK, good. I wasn’t sure about that, so I’m checking with you. (Laughs.) OK. It is on the record. I guess I was instructed, but I forgot what the instructions were. OK.

So why don’t we start with this, Mark? Who knows what the economies are going to do globally, the United States, the U.K., et cetera, but there’s certainly a broadly held view that there’s some real possibility that we’ll have a significant slowdown. I’m not asking you to predict, by the way. We’ll get to the question. And with fiscal conditions being what they are in the developed countries, and monetary conditions being—interest rates being what they are, how effective are traditional tools likely to be if we do have such a situation? And beyond the traditional tools, where do you think you can go—you and other central bank governors and I guess authorities more broadly—if these conditions develop?

CARNEY: OK. Well, first off, thank you for—thank you for having me and taking time this morning.

So assume a slowdown, is the question. I will sort of exercise economics and central bank prerogative by saying, well, that depends. (Laughter.) It depends on what causes the slowdown. And in all seriousness, in that—the way we see the world and the way we see the major economies—there are some exceptions to this—but in general we don’t see the big imbalances in those economies that would normally precede a slowdown. And yet, various ways to look at it. The probability of that slowdown—which is underway at present, I guess should be acknowledged. The global economy was growing at 4 percent eighteen months ago; now it’s tracking at 2 ½ (percent) in the most recent quarter. The possibility of that slowdown has certainly gone up. So the question’s obviously well motivated.

And is this a demand shock, an uncertainty shock, and an uncertainty shock that is motivated by the possibility of a big supply shock? And it’s—on the first one, do we have the tools? Yeah, we have the tools. Varying degrees of policy space for the major central banks. The most policy space of the major central banks is here in the United States. Bank of England has—we have considerable case. And I’m going to come back to that in a second. A little less than some of the other, but there are things they can do. And we may see some of those things in the coming days and weeks. Fiscal policy likely would need to play a role—again, to varying degrees. And in general, there is considerable fiscal space in the major economies for a cyclical, demand-driven recession.

Where things get more complicated is in the circumstance that it’s uncertainty/supply driven. And obviously I’m—well, maybe it’s not obvious—but I’m alluding to the challenges in terms of the global trading system and multilateral system, which has, to varying degrees—and it’s most acute in the United Kingdom at present for obvious reasons, because Brexit is both more immediate and more substantial than the challenges that are faced in the global trading system more generally. But in those circumstances, you have a very large confidence shock to business. Since the referendum, business investment in the U.K. is tracking almost 25 percent less than trend. That is a huge number that has follow-on implications for productivity, wage growth, others.

And in the event of a supply shock in the advanced economies, which none of us have seen—this room has seen and would know well—but really hasn’t seen since the mid-1970s, mid-to-late 1970s with the oil shocks. Yes, there is an associated demand effect, but the monetary policy response is both less certain—remember, the Bundesbank got it right in the ’70s and some of us, others, got it wrong. They didn’t accommodate. We accommodated and helped feed inflation. So it’s both—it’s not automatic. It’s the language we’ve used. And it’s less fundamental to—as a solution, because the solutions have to be found on the supply side. So hopefully I’ve, you know, said enough that it’s confused everybody about what my core message was. (Laughter.) But it depends. If you have one thing to take away it’s, it depends.

RUBIN: It depends. No, that’s not an unreasonable response. But—

CARNEY: Thank you. (Laughter.)

RUBIN: But let me ask you this. It’s interesting you say this. You say there’s fiscal space, especially in the United States. Our debt-to-GDP ratio was give or take 33-34 percent coming into ’08. Now it’s 78 percent, projected to go to something over 100 percent ten years from now. So you think we still have fiscal space?

CARNEY: You have—yeah, the U.S. has fiscal—I mean, most major jurisdictions have fiscal space. And, of course, intelligently used fiscal space. The ability to borrow below nominal rates of growth is there and is likely to persist. Now, it’s not unlimited. And the U.S. has, by dint of hard work in the past and good policy in the past—

RUBIN: Right. It was a bit ago.

CARNEY: Yeah, it was a while ago, but gifted still with some dividends from that. But also, very much by its position as the reserve currency it puts it in a unique spot, and particularly in this regard. And this is something I’d make two points, if I could. One is part of the challenge, we think, is that we are—we’re not in, but we’re getting closer to a global liquidity trap, OK? And that’s a question in terms of policy space, but it’s also a comment on where we see global equilibrium interest rates going. And it is linked to the challenges in terms of the—I’ll call it the trading system, but it extends to the tech system and beyond, and some of the geopolitics, because the left-hand tail of potential outcomes if fattening, and that is pushing down on the equilibrium interest rates. And in that environment, actually fiscal policy becomes that much more important. But of course, part of the answer is, if you can strip out some of those uncertainties, you get to a much more positive outcome where equilibrium rates are going up, more—there’s more policy space, there’s more options, and business starts to kick back in.

RUBIN: For those of you who haven’t seen it, Mark gave a speech—what was it, about a week or two ago?

CARNEY: Yeah, Jackson Hole, a couple weeks ago.

RUBIN: It’s really worth reading, the Jackson Hole. There was a lot in there, but let’s just focus on one thing, equilibrium interest rates. Your concern, I gather—correct me if I’m wrong—your concern is that they’re coming down and therefore there’s less and less latitude for central banks to operate.

CARNEY: That’s right. And I think a lot of people are—have taken the view that equilibrium rates are lower. We’re in a low for long world, lower than they otherwise had been. There had been some prospect that they were going to increase, partly as we got through the residue of the crisis and the healing of the crisis, and that productivity started to kick back in, in the U.S. particularly. Then on top—what’s happened subsequently to that really—and more intensively in the course of the last couple years, has been, you know, tensions turning to—you know, trade tensions to trade war, challenges around global supply chain, other geopolitical challenges, issues such as those in the European Union, of which Brexit is one component. It’s not exclusive. And, you know, equilibrium rates are the product of many things, but one of them is the distribution of potential outcomes. And the distribution of—you know, the downside risks have increased. That challenge is something that we’re all grappling with, whether we acknowledge it or not.

RUBIN: As you grapple with it, Mark—I was going to go in another direction, but let’s pursue this for one second. As you grapple with it, if it turns out that that left tail is, in fact, fatter than people generally thought it to be and it materializes, what are you tools then?

CARNEY: Yeah. OK. So we have—I mean, we’re seventy-five basis points, our conventional policy rate, so we have room there.

RUBIN: In the U.K., but the EU now has negative rates.

CARNEY: Yeah. Yeah. I have limited influence on the ECB.

RUBIN: Well, that’s—(laughter)—


RUBIN: Well, that’s probably right, but even if that is—

CARNEY: Bob, can I make one—just a couple quick points on the U.K., quickly. So we have some conventional space. We have unconventional space as well—or, so-called unconventional policy space, if necessary. We also have—one of the products of rebuilding the financial system—and I know it’s just starting to come into the debate here in the U.S.; Randy Quarles’ referenced this I saw the other day—is we have put in place what’s called a countercyclical capital buffer for banks. Now, so that’s something that’s built up, it’s part of the capital structure. And if you have a credible capital regime, just like if you have a credible fiscal regime, when things go wrong you can release that and then the banks have more headroom in order to lend.

Now, they may not lend all the capacity that you’re giving them, but to put orders of magnitude around it, we have enough room, the banks have enough room is a better way to put it, that if we release the minimum capital buffer, this buffer, it will give them up to three hundred billion on balance sheet—sterling—in the balance sheet. Last year total lending to the private sector in the U.K. was sixty-five billion. So that’s a tool that, you know, on the margin helps, and we saw it post-referendum when we also released it. That actually, you know, can really improve financial conditions.

So those are some things we have. In Europe in general there are pockets where they have something like that, but not sort of European wide. And, you know, the debate at the ECB and the potential—well, there’ll be a decision on some form this week—probably spans the range of—will be interesting in terms of which of their many tools that they deploy.

RUBIN: Let me ask you this, and if you’re uncomfortable answering, don’t answer. Overall, if you look at all of the tools you have, and then you look at the—say, the, again, the left end of the tail, and if it’s reasonably fat, what are the probabilities that all these tools, given current fiscal and monetary conditions, are going to be sufficient to have a very high probability of stemming a substantial slowdown, if it happens?

CARNEY: Yeah, I think—well, in general—I’ll answer in general and then specifically. In general, downturns, peak to—are cumulative, peak to trough, around 3 percent—percentage points of GDP across the major—the G-7 economies, let’s say. That’s your average downturn. The Fed has monetary policy room to address all of that, if that were to happen, not the most likely scenario, but if it were to happen. The Bank of England, with various tools, is close but not all the way there. And the ECB is farther away, let’s put it that way. So you know, it’s not all in monetary space in order to fully offset. And that’s a more conventional, demand-driven downturn. And then the—what I was talking—trying to talk about at the start, which is you’re left—and, as you say, you picked up on the left-hand tail, which is more a—there’s a systemic shock.

You know, trade war persists, and you start to get a rebalancing of—I’ll give the example of hard Brexit. If there is a no-deal, no-transition Brexit, it will take some time for U.K. manufacturers to adjust their supply chains, shut down certain activities, build up new activities, get new markets. And during that process, there is—there is a supply shock. The actions of the central bank will bear relative—have relatively little impact on what they do. It will have an impact on consumer confidence, the housing market, that side. But it won’t directly offset what is the core driver of the recession.

RUBIN: Gets to another interesting question, Mark. In this country at least, and I don’t know if it’s true in the U.K., equity markets are enormously focused on the Fed. Whenever there are rumors, or announcements, or whatever it may be, markets react. When I was there, and Alan Greenspan, Larry Summer, and I used to have breakfast once a week, we talked a lot about what is the role of the Fed, what affect does it have? And at least it was our view—this is a question not a comment—that the markets had a very over weighted—greatly over weighted—obviously, the Fed’s important. But so are a lot of other factors. And that the markets substantially over weighted the importance of central banks with respect both to economic conditions and markets. Do you agree or disagree?

CARNEY: Certainly there are periods, yeah, where too much attention is given—or, would seem to be given. In the end it’s the actions of the central banks—sort of two things. One was influencing financial conditions, but also—and this is related—signaling an expectation of the outlook for the economy. In times where there are bigger risks, the ability to take away some of those tail risks, particularly for central banks that have a broader range of responsibilities—so, I mean, the Bank of England has quite a remarkable range of responsibilities as, you know, it is the bank regulator, it is the insurance regulator, the macroprudential regulator, the resolution authority, and beyond. So if the actions of the central bank remove some of that tail, particularly in an environment like this, it’s that much more important.

So one of the things that I’ll just gratuitously stick in a commercial here, which is that, you know, we—the core of the financial system in the U.K. is ready for Brexit, whatever form it takes. We’ve been working on it for three years. There’s things like that extra bit of capital. There’s a lot of things that have been done in the plumbing, including in the derivative markets, in order for that statement to be true. I’ve got to think, when—if there is—or, if there are major developments on Brexit, that which we’ve been saying will all of a sudden become relevant to a much bigger proportion of the—of the equity market.

RUBIN: Following up on that, Mark, if there is a hard Brexit—I won’t ask you to make a prediction whether there will be or won’t be—but if there is a hard Brexit, and given all the tools that you have, and a I guess the fiscal tools if they’re relevant to this—how material is the effect likely to be on the U.K. and on the EU?

CARNEY: It’s—I mean, first is it would be material. It’s—we would expect growth to slow. (Laughter.) Currency to go down.

RUBIN: You would like to refine that a touch? (Laughter.)

CARNEY: And inflation to go up, all of those things.

RUBIN: You’re welcome to quantify either one if you like.

CARNEY: Yeah. No, it’s—we expect it would be material, because this is—this is—would be an overnight adjustment to the most important trading relationship the U.K. has. And, you know, every major—you’ve been involved in a number of these. Every major trade deal between—and this is a trade deal, right, in the end. Every major trade deal between advanced economies normally has a two-to-four-year transition period. And normally that a transition for integration, as opposed to immediate de-integration. So that’s what we’re talking about. So it will definitely have a material impact on the U.K., and a lesser but still material impact on the EU.

RUBIN: There’s an inverted yield curve and there are negative interest rates, at least on the continent. What does that tell us about—well, how would you—I guess one way to look at that is, what do you think that says about the views of markets, and market investors, and the like with respect to the outlook for the global economy, the EU economy, and more broadly?

CARNEY: Well, it’s not the strongest vote of confidence in the outlook for the global economy. (Laughter.) It’s easier to invert the curve now than previously. I mean, in a low equilibrium interest rate environment it’s easier. Ben’s here. Students of monetary—there’s many students of monetary history—will know that the period, the 1980s to the early 2000s period where you had a relative high term premium, that’s unusual. So we’re at the sort of low equilibrium rate, relatively flat curve is more usual in the broader sweep of history. That said, even within that environment, and obviously changes in direction tell you something. And it’s a—I mean, look, obviously there’s been some adjustment, price adjustment, in the past few days. But when you’re in—you’re counting the tens of trillions of securities that are trading at negative interest rates, it tells you there is a degree of pessimism about not just the base case, but also the downside to the base case.

RUBIN: Let me ask another question, Mark. Through most of my adult life, up till about ten years ago I would say, there’s always been a substantial—or, at least I think there’s been a substantial concern that inflation has to be watched because it can get out of control on the upside. And Paul Volcker used to say, as you know, that once the inflation process begins, inflation expectations, one thing to another, it’s a very hard thing to control. Now, there’s the—we’ve had low inflation for ten years. I guess the question would be something like this: Are we making a mistake in operating under the assumption that inflation is not a problem, at least for quite some period of time? Or, to put the same thing differently, we have the dual mandate. I guess you must have something very similar.

CARNEY: I mean, it depends how you interpret flexible inflation target, but they come together in the end, yeah. Yeah.

RUBIN: Yeah. So keep inflation under control and have robust output—or, at least fully employment, full capacity. Do you think that it’s a mistake or it’s sensible to not focus concern any—or, doesn’t seem to, at least, focus concern on the possibility of inflation getting out of control on the upside, and really focus predominantly on growth?

CARNEY: Well, it’s—I think it’s a very good framing of the question, because the nature of the discussions in general have been the inverse Volcker, if I can put it that way, which is that there’s a commonality in terms of inflation expectations, but the concern is that inflation expectations are going to become dislodged on the downside. And in a world with limited policy space, and recognizing the difficulties in Japan and how this is—you know, becomes locked in. And I—if you were to characterize the central banks, that is much more—

RUBIN: My question is on the opposite side.

CARNEY: Yeah, yours is opposite direction. Well, I think the voting with their policy instruments, the central banks, are in a different position in that the challenge is to get inflation back—in many jurisdictions—to get it back to target. Now, this is my second gratuitous commercial, which is that, you know, the unemployment figures just came out in the U.K. today and, you know, record—joint record low unemployment and high employment, and inflation is, well, it’s 2.1 (percent) at just above the target, and wages are growing at 4 percent. So dual mandate or not, when we look at it, and when we look at the wage Phillips curve developments in the U.S.—this is really for the Fed to speak to—we actually do think that the underlying—with policy at the right level, the underlying dynamics of the—at least, in the Anglo-Saxon economies—are behaving as they would have—as they would have in the past. So we still are in control of inflation, and we still can deliver on our mandate. And, you know, the Fed has—if you look at the recent outturns, I mean, the Fed is pretty close to delivering on its dual mandate.

RUBIN: Yeah. I guess the thing that worried me—well, the thing that motivated my question was really this: What is the—as long as I’ve been around, at least, you’ve had things—you’ve had conditions in markets where sometimes there can be excesses that remain out of sync with reality for a long time, and all of a sudden a dramatic change. So my question, Mark, was whether we think that the conditions that I’ve just described are, again, something that is out of sync, a little bit, at least with history, and that there could be a dramatic change at some point, inflation would go up in some way that none of us could anticipate? Or is that not something we should worry about?

CARNEY: Well, it is something you should worry—I mean, like, we’re paid to worry, and it is something that we worry about. And so we alternate—when we stress-test our banks, one of the things we do is exactly that type of scenario, so that you have term premia coming back, you have inflation spiking. And certainly in the—in a hard Brexit environment, we would expect, not least because of the exchange rate move, but because of tariffs and other factors, that inflation would go up fairly substantially, at a time that the economy slows. So you move from, you know, divine—you move to a difficult tradeoff that the central bank has to judge now much does it support the economy, versus bringing inflation back down. And so that’s the type of not just stress testing we’ve been doing, but scenario planning and the messages that we’ve been getting out, that it is not as easy as hard Brexit means easy—I mean, everything difficult ultimately results in one policy—one policy response.

But all that said—and the other thing I will say is the way we think about it—so underwriting standards for mortgages, for example, in the U.K., there are limits on—portfolio limits on high loan to income, and other things. But you also have to stress the borrower 2-3 percentage point increase in their interest rates over the—and for the affordability test. There’s—I mean, there’s—so that covers you a lot in terms of the core of the system. I’m not saying it would be fun, but it means that you have some resilience put in.

RUBIN: Let me ask you one final question before we turn to everybody else. In the speech that you gave at Jackson Hole, you reflected on the role of the dollar—as a reserve currency, with respect to trade, with respect to financial transactions. As you look forward, say, over the next ten years, do you think that role of the dollar is likely to remain about the same? Do you think it’s likely to change? Do you think it should change? And is ten years the wrong period of time for that question?

CARNEY: Yeah. I think ten years—ten years is the perfect length of time for me to answer that question, so I can safely say: I think the role of the dollar is going to remain—you know, remain the same, but that is going to reinforce some of the real challenges at the heart of the system. And is going—and just to put some numbers around it, 15 percent of the global economy, ten percent of global trade, 60 percent of global trade is invoiced in dollars. Seventy to 80 percent of financial assets—various ways you can count it—are dollar based. All of that, that asymmetry works when the U.S.—when all boats are rising, or the U.S. is weak relative to the rest of the world. But when the U.S. is strong relative to the rest of the world, it puts the system in real challenges. And at present, or at least in—over the course of the last couple years—that has been one of the factors that has put us back towards this global liquidity trap.

Now, monetary history is not—it’s not easy to change the hegemon. There’s no substitute at present. So the challenge for us to—is severalfold. One is how central banks react in this. I won’t go into more detail on that. Secondly, it’s from how we regulate the financial system. I think we have a particular responsibility here—U.S. authorities, obviously, because New York, U.K. authorities because the city of London—because all of the flows to emerging economies, particularly now, are intermediated through the markets, not the banks. And most of those flows are daily liquidity to the investor, but not really underlying liquidity in terms of the underlying asset. And it’s—I’d rather have that system than not, but we need to be thinking carefully about how well that’s managed. And that is a huge coordination problem, because not—there’s no one firm that’s going to start managing this appropriately to their competitive detriment.

RUBIN: You know, it’s interesting—and I will turn it over to everybody else. But in your speech you refer to the—at least, in your view—the desirability of having a much better coordinated system, which is what Volcker used to argue for with Japan, and one thing or another, I think Fred Bergsten did too, if I remember correctly. But aren’t the politics of that very difficult in domestic economies?

CARNEY: I think—well, without question. It is unreasonable. The Fed can only take into account, to the extent it takes into account spillovers from its actions, it only can take those into account to the extent that those spill back to the U.S. through weaker conditions abroad. Without question. It is totally unreasonable. It’s a domestic mandate. It is not—it is the central—the primus inter pares of the central banks, but it is not the central bank of the world. That’s not its remit. And an apolitical institution just has to do that. It does mean that others may need to stretch their mandates in certain circumstances in order to reduce the risk of the system. By the way, that’s something the IMF is supposed to shine a light on when the circumstances, which don’t always happen. But when they do occur, and it does mean we need to be thinking about the structure of the underlying system.

And then the third thing, which is, you know, much more speculative and longer-term, but when you change the—when you move from one reserve currency to another—I mean, look, it’s a multipolar world. It would be better to have a multipolar system, is the bottom line. Multipolar systems are not sustainable in general in markets, but they are—the nature of payments is such that you can, for certain blocs of the economy, create a multipolar payment system. I mean, it’s a topic for a whole other discussion. It’s hard to get it into a soundbite. But it’s that kind of thinking that we need to be doing as the central banks and authorities, in my view.

RUBIN: Terrific. I thank you.

Now we are—would be delighted to take questions from any of the members.

Yes, ma’am. Somebody will bring you a microphone. Name, identification, and question, albeit briefly.

Q: Good morning. I’m Nili Gilbert, co-founder and portfolio manager of Matarin Capital. Thank you so much for being here today and leading us in this timely discussion.

Governor Carney, in the past you’ve spoken about a tragedy of horizons between the timeframe that’s considered in the financial markets and the timeframe of climate change, that leads to a misallocation of capital and significant risk. You’ve even spoken about a potential Minsky moment for climate in which some of the dislocations that are created by the tragedy of horizons are corrected sharply, creating significant downside risk for people in the financial markets.

I wonder whether you see any connection between the current monetary environment and this tragedy of horizons? Over time, investors have been trained to think about different kinds of illiquidity premia that would make them focus more on longer-term ideas, but in this environment of flat and inverted yield curves and negative interest rates, does monetary policy actually contribute to the tragedy of horizons and make it harder for our society to tackle climate change? And is there anything that monetary policy and central banks could do to address that? Thank you.

CARNEY: Thank you. Thank you for the question.

I think—look, the way I look at it, at least, is that people are getting used to lower discount rates and therefore on the margin, on the margin, it makes—it alleviates that issue. It brings the future a little closer to the present, first point. But the things that—but that not in way that resolves the issue. And the issue fundamentally, as you know because you’ve obviously looked at it, is an issue, one, of transition risk as opposed to actual physical risk. Now, by the way, the Bank of England, for what it’s worth, we oversee the reinsurance sector and the insurance sector. So we’re very familiar with insured losses and others from climate change. Those are physical risks. And what we’re talking about in this regard is how the system transitions.

What we have done, and what we think central banks can do, and I’ll shine a light on two things. One is we have helped catalyze the private sector, and this is led by Mike Bloomberg and a few others actually in this room, to get better disclosure of what—how companies view their carbon footprint and what they’re going to do about it. Now, the answer might be nothing, by the way, which is—that’s fine. That’s disclosure. They are taking a bet on transition that it won’t happen, or it won’t happen over a relevant time horizon. Or, it may be that they actually have a strategy and they’re going to manage these risks. Market—the market—it’s information for the market and making a judgement.

But what we’re now doing at the Bank of England, because we see the future starting to come closer—particularly because the U.K. has legislated for net zero carbon by 2050 which means there does have to be a pretty substantial reorientation of the economy, is we are now—we’re just launching—next month, we’ve announced it, but we’re launching next month a stress test of the banks in terms of their portfolios, how under various climate scenarios and climate policy scenarios—think carbon price—different carbon prices, what do their assets look like? Is there a climate Minsky moment, if you will, on the asset side there? And we’re currently in the field doing that with the insurance sector, which already does that in the U.K. because actually it’s on balance sheet. But the question is there.

So those are mechanisms that start to bring the future to the present. And I’ll finish on this in terms of—just in terms of the mindset in jurisdictions that have—I’ll call them ambitious, but really they’re COP 21-consistent climate policy objectives, and some actual climate policies with teeth—ultimately not strong enough to get to the objectives, but it’s a time path. In those jurisdictions, the financial sector increasingly—this is becoming a mainstream issue for the financial sector. So three-quarters of our banks, eleven trillion of assets—dollars of assets in the U.K.—view climate risk as a financial risk now, not a corporate social responsibility risk. And I see Barbara’s here, and you see some of the mainstream asset managers moving in that direction as well.

RUBIN: Yes, sir.

Q: My name is Peter Goldmark. I spend most of my time now advising a handful of foundations on their strategy in the area of climate change.

I’d like to keep the ten-year lens that Bob introduced in this last two questions. It’s a small handful of organizations that manage the global monetary system, and you’re at the helm of one of them. Without asking you to endorse any specific thing, I—it seems to me we’re going to need some additional tools and capacities for those organizations, looking over the next decade, that we don’t have now. And I wonder if you could lead us—help us look down that road and talk about some of the alternatives and new tools and capacities we might be discussing and debating.

CARNEY: On climate?

Q: Oh, on monetary—on global monetary policy.

CARNEY: Oh, monetary policy. OK, good.

Well, I think the—most of those are out in the public domain. So range of asset purchase programs, negative interest rates. By the way, just for the record, in the U.K., given the structure of the financial system, particularly the savings bank system—the so-called building societies in the U.K.—we do see zero as the effective lower bound on interest rates for the Bank of England. That’s not the case in some other jurisdictions, but we don’t see—at least, I don’t see negative interest rates as a tool in the U.K.

Coordination—I mean, what has been floated is, as you’re probably alluding to, coordination of monetary and fiscal policy. I think we need to be very careful about these ideas—or, implementing these ideas. It’s great for people discussing them, but about implementing these ideas, and what—and it goes back to something that Bob was talking about earlier—both in terms of anchoring inflation expectations on the upside and the downside. The operational independence of the central bank is essential, and coordination can become cooption very easily. And on top of that—and, you know, welcome the debate around these issues. But on top of that, I think quite often gets ignored that the central bank is setting itself up for a very, very large capital loss, which is ultimately a capital loss for taxpayers in these—in these circumstances. And there’s just no way to square that—square that circle. So I would—I would counsel, you know, a rigorous, objective debate, and a fair degree of caution about some of the more extreme measures.

RUBIN: You know, it’s interesting, Mark, I don’t think—maybe I’m wrong about this—I don’t think anybody anticipated negative interest rates would occur, until they did. So it’s possible you’d face the same situation.

CARNEY: In the U.K.?

RUBIN: Yeah. That if conditions get severe enough that—

CARNEY: Well, I think the—we don’t contemplate it. And I wouldn’t want to, you know, leave here and see scrolling across my screen that I was contemplating it, so.

RUBIN: (Laughs.) Fair enough. Next question. (Laughs.) I think that’s exactly—when I was the treasurer and somebody would ask me that kind of question, that’s exactly what I would have said. Which is to say, I would punt it. (Laughter.)

Yes, ma’am, in the back there.

Q: Fantastic discussion, Governor Carney. My name is Seema Mody, global markets correspondent at CNBC.

I’d like to get your thoughts—and a member of the Council, not just the media. I’d like to get your thoughts on central bank independence, a topic that certainly garners a lot of attention here in the U.S., as President Trump puts pressure on Fed chair Jay Powell ahead of the FOMC meeting next week. What are your comments on that? And how would you describe your relationship with the U.K. government, as MPs and the prime minister and every decision they make on Brexit have notable consequences on the U.K. economy and, therefore, the tools the Bank of England has to use?

CARNEY: OK. Thank you—thanks for the question. (Laughter.)

Look, I mean, I think it’s important in all these to recognize—and extremely important for we, central banks, to recognize, what—where we’re independent and where we’re not. And we receive instructions through statute and, in the case of the U.K., the interpretation of that statute is refined from time to time through an annual—what’s called a remit letter process, where both the monetary authority and us as the macroprudential and supervisory authority. So on climate, one example is the government has announced—announced last month—that they would—they will add climate considerations explicitly to the macroprudential authority and the supervisory authority, OK? So we were there anyways, because we could see the risk, but we—you know, it’s been reinforced by those who give us the powers.

On the conduct of independence, it’s—so it’s important that we—to use Jay Powell’s term—you know, we stay in our lane, and we focus on our core responsibilities. We have to react—we take government policy as given, whether that’s fiscal policy, or trade policy, or, you know, innovation policy, tax policy. And we react to the consequences of that. Without question, there—the nature of Brexit will have material implications for the U.K. economy over our policy horizons, and there are multiple. There’s sort of two-to-three year horizon for monetary policy, kind of a five-to-ten year horizon for the financial sector. And we have to take those into account.

We should be, and are, robustly challenged by the elected authorities. You know, I testify more than anyone else in the United Kingdom—to Parliament, that is, not on criminal or other things. (Laughter.) The—and that’s right. And that’s not always a comfortable experience and draws things out. But that comes—you know, that accountability comes with the independence. And I think the last thing I’ll say on it, which is that what we have recognized as central banks, and in this age where expertise is under question in some cases, that it is important, to use a phrase, also to go direct, which is go directly to people, use social media much better, and, actually, there is no substitute to going out to rooms of this size in the north of England, with, you know, different composition obviously, in the north of England, you know, in the South, in Scotland, et cetera, and having town halls, and answering questions from people—you know, business people, third sector, and families. And that can seem an inefficient way of getting the message out, but it also grounds the message in how our actions affect everyone.

RUBIN: Way in the back.

Q: Hi, Brian Peters with AIG.

I want to take a slight variation on the horizon question, which I think is nice. One of the problems we’re all facing right now is a lack of growth, a lack of demand. Well, the emerging demand over the next twenty, thirty, fifty years is going to be, at least population demographic-wise, in India and in sub-Saharan Africa. What do we have to be doing now to be able to essentially tap in and get financial flows moving in ways that could contribute to higher global growth through those two channels?

RUBIN: And do you—and, Mark, do you agree with the premise of the question?

CARNEY: Yeah. Well, I think—yes. I mean, all the—you know, all the major swings are going to be driven by the emerging economies—emerging and developing economies and global growth. You know, the whole pickup next year that we see in the global economy is driven in the emerging world. For example, we may be wrong on that. Now, I think the answer—in a word, the best thing, quote, we can do in, and in a lot of cases—you know, I’m going to take credit for something I had nothing to do with, so a generous interpretation of “we”—is financial inclusion initiatives. And that’s understated just to call financial inclusion, but things like Aadhaar, which India has pioneered, and now you really see the payback and the extensions of that.

So, you know, we all know the figures. Nine hundred to a billion people registered, then have bank accounts, then have control of their data, then have a series of applications which goaded them to give, you know, microcredit, small business loans, macro credit, because a system that has been set up which is highly, highly efficient. And it’s real time, it’s direct payments, it’s—you can identify the individual, so the AML and the CFT, and all these other. And you can build this, and they are building a system off of that which is incredibly sophisticated. It’s more sophisticated than much is in the U.K. Again, that can be rolled out through Africa. And that helps to leapfrog. And, of course, there are examples in Africa as well.

Now, what are we doing for that, aside from watching? I mean, we’re trying to watch and learn, but to the extent to which it’s happening organically I think it should be—it should be welcomed. I think on the insurance—if I keep on the insurance side, and I’ll stop on this, which is, you know, the protection gap in Africa, I’m sure you’re aware, is huge. And part of that is—a variety of causes of that. Some of it’s information. Some of it’s just the scale of, you know, the microinsurance, if I could put it that way, and, you know, the extent to which things can be—the IDF and others trying to design things where you have—it’s my term, not yours—but some basis of risk between the macro protection and the micro protection for the (formal notes ?), again, that’s something, you know, your organization could—and I think is—contributing to.

RUBIN: Just to follow up on that—oh, wow, I’ll forget my follow up. OK, next question, way in the back. Yes, ma’am. Yep.

Q: Kristina Partsinevelos, Fox Business, fellow Canadian.

Can you comment on the pound right now, where you see it going, and then what—(laughter)—got to ask it. And the U.K. economy post-Brexit, given where the pound is. Thank you.

CARNEY: Do you want the pound, Canadian dollar cross? (Laughter.) Is that where you were going with that?

RUBIN: In what timeframe?

CARNEY: Yeah, exactly. Yeah, it’s going to go up and it’s going to go down. I mean, it’s like—(laughter)—

RUBIN: I used to—I used to get asked that all the time, Mark. And I said, one thing I’m absolutely sure of: It’s going to go up and it’s going to go down. Exactly when, I’m not quite sure. (Laughter.)

CARNEY: Yeah, that’s the best—that’s the best way to look at it. The only thing—the only—look, pound, sterling volatility, as you would know, is—it’s at emerging market levels and is decoupled from other advanced economy pairs, for obvious reasons, because it matters tremendously, you know, the Brexit outcome. And so sterling vol is up. The U.K. has the highest equity risk premium if you look at U.K.-focused equities. And a variety of other indicators show that, you know, financial markets are going to move substantially in one way or another depending on the outcome of this. And that is a shorter-term judgement, I would emphasize. And we’ll see what the longer-term consequences are.

RUBIN: Yeah.

Q: Mahesh Kotecha, SCIC. We are financial advisors, mainly to Africa and financial institutions, but to others as well.

Two things that have not been discussed. One, cryptocurrency and, two, cybersecurity. I wonder if you could address what you see as the risks of those, and whether they are systemic or system—let’s say, risks for the system, or are they manageable?

CARNEY: Well, I’ll start with the second. Cybersecurity is absolutely a systemic risk. It’s one of the top issues. And a huge amount of our focus, and the focus of authorities here, is on that and will be for, you know, forever, in effect. I think the most important development in recent years has been recognizing that, you know, we do all the sorts of logical things around penetration testing, and following up, and building defenses, and information sharing, and all that. But just like with financial risk, you have to plan for failure, right? So just assume failure. I mean, your first question, I think, was assume a recession, what do you do? Ending “too big to fail” is all about don’t think about why the bank goes down, but assume a global systemic bank goes down because of huge credit losses. What do you do with it, and how do you unwind it in an orderly way? And now what we’re working through, in the U.K., with, in effect a cyber stress test, but also with U.S. authorities and hopefully with the G-7, is assume a systemic institution—which could be systemic financial market infrastructure, like a CCP, is down. What’s the recovery plan? What’s the alternative plan? And that’s probably—you know, that’s one of the most important things we’re doing.

On crypto, I do not view it as a systemic risk at present. It—in various jurisdictions, it has huge issues on consumer investor protector, anti-money laundering, counterterrorism financing, and other aspects. We don’t think it’s ready for prime time in terms of a core role in the system. And we do think it should be brought properly into the regulatory net. I still have not heard a valid argument why crypto exchange should be subject to different standards than other exchanges. And some of these crypto exchanges are—you know, leave much to be desired—(laughter)—in terms of their treatment of their—of their clients.

RUBIN: Yes, sir.

Q: Thank you. Paul Sheard from Harvard Kennedy School.

Governor, you mentioned in your remarks before the possibility in a downside scenario of releasing the capital buffers. Could you talk a little bit more about how that might actually come about? Is that a decision—would that be a decision of the monetary policy committee, the financial policy committee? And I’m particularly interested, you know, could you see any potential conflict where the monetary policy committee would like to release the buffers to provide stimulus, but the financial policy committee said: Hold on a minute, this is exactly when we need those buffers, because we are going into stress?

CARNEY: Yeah. Very good. So I’ll do this quickly. It’s a decision of the financial policy committee. So half internal members, such as myself, half external members, and people who’ve, you know, run major financial institutions in the past, academic. Don Kohn, for example, is on the financial policy committee. Anil Kashyap, who’s a professor at Chicago. So two Americans are on this committee. And so it looks at the system as a whole and makes that decision. And in general, the conflict is more like the conflict is—or, the difference of view would tend to be between that committee and a different committee which oversees the safety and soundness of individual banks, something called the PRC, which—and the link is the governor chair is all three of these committees.

And so what happens in a downturn and recession, not surprisingly, if you’re the supervisor of one financial institution, the first thing you think about is, well, I want to make sure they have enough capital, and they’re not taking too much risk, and they’re OK. But it’s a paradox of thrift. If everyone does that, it makes it worse. And so the system needs to have a certain level of capital and a certain degree of confidence at the system level, which is what the central bank’s job is in this, to say, oh, actually, you don’t need to husband all that capital. You can—the minimum you have to maintain is lower.

So you have to start with a high minimum in order to have a credible lower minimum in order to have a credible lower minimum. It has a consequence—it doesn’t mean the banks will necessarily use all that room, to be clear, because it’s a riskier environment. There’s lots of things. But it does mean that in terms of mechanically it links to their ability to pay out dividends, whether or not they come in, which has a knock-on effect in terms of their financing conditions and just the level of confidence.

To put it into perspective, U.K. banks today headed into this have tier one capital of 17 ½ percent relative to the risk-weighted assets. Headed into the financial crisis, a different world, but on apples to apples they had 4 percent. So there’s—you know, there’s room. There’s room for this.

RUBIN: Yes, ma’am. This will be our final question. And I’m going to wind up with one that hadn’t occurred to me till I was sitting here. (Laughs.)

Q: Barbara Novick with BlackRock.

Governor Carney, first of all, thank you for coming today. You’ve been very outspoken about LIBOR and the cessation of LIBOR. Can you give us the short version, what do you think is the readiness in terms of things that have already been done, and where are the gaps? Thank you.

CARNEY: OK. I think—so there’s—as you know, there’s many LIBORs and across currencies, and different degrees of preparedness, and different degrees of difficulty in terms of—in terms of adjusting them. The—I think you know this Barbara. The core message—these LIBOR panels, which ultimately are overseen by the financial conduct authority, not the Bank of England but the—you know, many responsibilities, kind of an SEC, for those who aren’t familiar, in the U.K. They’re going to end at the end of 2021. So unless you’re just going to make up LIBOR, LIBOR is going to end at the end of 2021. So work back from that in terms of getting the substitutes—whether it’s SOFR in dollars, Sonia in sterling—and the difficult—I think, you know, the ISDA protocols have made—first off, substitutes are getting in place. Liquidity—it’s a chicken and egg thing, in terms of markets, but at least what we’ve seen in the U.K. is that liquidity’s building both in cash and derivative markets for Sonia. There needs to be—the legacy contracts need to be addressed. I mean, the biggest issue is addressing the legacy contracts.

And there are some—I think this is particularly the United States—tax and accounting issues relating to that. And work is—I mean, are those some of the biggest gaps—those are some of the known gaps that are—and there’s a work plan that is addressing those, and they need to be there. But the core is it’s going to end, and therefore we need to sort this out. And if you recall, you know, Gary Gensler—if you recall? Who could forget Gary Gensler? (Laughter.)

 RUBIN: We could discuss that too, but we won’t. (Laughs.)

CARNEY: Yeah. But it was twelve years ago that we started this process, and it became clear that LIBOR was the rate that banks didn’t lend to each other, and therefore you couldn’t use it, you know, as a reference rate for two hundred trillion (dollars) of derivatives. It’s just got to stop. And it’s going to stop. And we need—the collective “we” need to sort it out.

RUBIN: Mark, let me ask you one question. And we have about one minute left, so I’ll try to—John Paulson is sitting here. Made a lot of money at one time by recognizing there was something strange going on before the ’08 crisis, OK? We have political dysfunction in the major developed economies. We have inflation, as you say, is sort of inexplicably unwilling to take off. We have low interest rates, we have fiscal conditions that are, arguably at least, in a relatively unhealthy state. Does all this suggest to you that maybe something is happening out there that’s different than—and climate change, and other things—happening out there that none of us quite see, and that will surprise us in the same way that the housing issues surprised us, or surprised virtually everybody, though not John, in ’08? (Laughter.)

CARNEY: Yeah. Well, the first thing is that the operating principle has to be, for the authorities, there will be—you know, the Rumsfeldian unknown unknowns, that they’re going to happen. So whether it’s on cyber, I—you know, don’t—I don’t have to figure out how it happens, how they get through the defenses. Just assume it happens. Assume a bank failure. Assume challenges with the CCP. And what—and assume a huge trade shock. What are you going to do about it and how do you respond? And just gaming through that. Now, of course, what actually happens will be different than those things you plan for, but the very act of preparing for those will help and, you know, some of those tools will be relevant. So I think that’s the core thing.

I do think though, that—I think the inflation process, if you look at the U.S., the U.K., Canada, directionally, it’s not that—it’s there. I mean, it’s there. It’s—I mean, we have adjusted that, as I reference, I mean, inflation’s at target. Wages are growing at 4 percent here. The Fed has seen a need to make some adjustments to policy in order to be consistent with the dual mandate but has basically been on—hitting on dual mandate as well. Bank of Canada’s there as well. So it’s easy to paint—it’s a convenient story, this. But I think it’s sometimes overplayed.

Look, finish where I started, all that said, though, you know, we have the possibility of not a big demand shock, which John saw in the housing market and that fundamental equilibrium—disequilibrium. But a really fundamental change to the way the system—the global system operates, that’s what’s in play. That’s core Council on Foreign Relations work, if you will. (Laughter.) And that is extremely hard to price. And it layers on top—Richard, could you rush out another book, please? (Laughter.) But that layers on top of a world, you know, why we have low interest rates. And that’s what’s—it’s—that’s what you can create the negative feedback loops, which is—which is quite concerning.

RUBIN: Mark, you were terrific. You’ve been a governor of two central banks. How about the chairman of the Federal Reserve board? (Laughter.)

CARNEY: It’s a little dangerous for my liking. (Laughter.)

RUBIN: Oh! If you just get a communications director, you’ll be OK. (Laughter.) Anyway, you really were terrific, Mark. Thank you for being with us. (Applause.)


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