New Blood At The Bank Of England: Good Show!

by: John M. Mason

Mark Carney, governor of the Bank of Canada, is the newly appointed governor of the Bank of England. I believe that he is a very good choice.

There are two items on his resume that particularly stand out to me. First, he has experience internationally. Second, he has worked in the private sector.

Mark Carney has worked in international financial markets in several countries first as an employee of Goldman Sachs and then as the governor of the Bank of Canada. Obviously, working for Goldman Sachs (NYSE:GS) indicates that he has had experience in the private sector. And, he has a record of success in these endeavors.

To me, the first of these qualifications is very important. I believe very strongly, along with Paul Volcker, that "a nation's exchange rate is the single most important price in its economy." (This from the book "Changing Fortunes: The World's Money and the Threat to American Leadership," by Paul Volcker and Toyoo Gyohten, Times Books, page 232.)

It seems as if the leaders of central banks that do not have a background in the international sphere before assuming their leadership position at a central bank seem to have no concept of the importance of the "nation's exchange rate." Oh, they may "talk the talk" of a strong currency, but they do not "walk the walk"!

Paul Volcker did have experience in international financial markets before becoming chairman of the Board of Governors of the Federal Reserve System. (See the excellent biography of Volcker by William Silber, "Volcker: The Triumph of Persistence", Bloomsbury Press, and my review of the book.) Likewise, William McChesney Martin had real experience in working in the international sphere, which included being the head of the Export-Import Bank. (See "Chairman of the Fed: William McChesney Martin, Jr. and the Creation of the American Financial System," by Robert Bremner, Yale University Press.)

Fed chairmen that did not have real international financial experience before assuming the chairmanship were Arthur Burns, Allan Greenspan, and Ben Bernanke. Bill Miller did not have any experience in finance or banking at all!

Furthermore, Paul Volcker and Bill Martin had experience in the private sector before becoming Fed chairmen. Martin worked at the brokerage firm A. G. Edwards and Son and became a full partner. He also held a seat on the New York Stock Exchange and then was a member of the board of governors of the exchange. Volcker had two terms at the Chase Manhattan Bank.

Allan Greenspan had private sector experience running his Townsend-Greenspan & Co., an economic consulting firm, and did work in equity research at Brown, Brothers, Harriman, an investment bank. Arthur Burns and Ben Bernanke were academically based research economists. Bill Miller was Chairman and Chief Executive Officer of Textron, Inc. Textron is an industrial conglomerate that manufactures, among other things, aircraft.

Mark Carney, like Volcker and Martin, has had success in running things in the private sector. I believe that this is very important because the head of a central bank must understand financial markets and I am not convinced that one can fully understand financial markets without having participated in them.

It appears as if one must really work with and in international financial markets to really understand how important the "nation's exchange rate" really is. Bill Martin and Paul Volcker, both faced strong challenges from the political sphere as they supported the strength of the dollar. Bill Martin had to deal with President Lyndon Johnson and the battles were quite fierce. Volcker faced the challenge of Presidents Jimmy Carter and Ronald Reagan who worried about how Volcker's policies would stifle economic growth. Fortunately, Martin and Volcker , drawing on their experience in these markets, were able to hold out some pretty strong presidents.

Unfortunately, it seems that those that just have an "academic" appreciation of foreign exchange markets tend to underplay the importance of the price of the nation's currency. These individuals all seem to be able to "talk" about a strong currency, but when it comes to acting on this "talk" they tend to move onto other issues very quickly. Volcker and Martin protected the dollar. The value of the dollar has declined, fairly dramatically, during the time that Burns, Miller, Greenspan, and Bernanke have been chairman. Further decline is to be expected.

Mark Carney has plenty of challenges facing him in becoming the governor of the Bank of England, particularly from the political side, but he has his real world experience to support him. However, he also faces slow economic growth, restructuring the financial system, restructuring the internal organization of the Bank, and the challenges facing London as the important world financial center it is. Enough for anyone's menu.

The financial world is moving on. Mark Carney is going to be a part of that change. Mario Draghi, president of the European Central Bank, is also a part of that change.

It appears that in the next year or so there will be a new chairman of the Board of Governors of the Federal Reserve System and that person will be a part of the change. We can only hope that this new appointment will be as strong a one as is the appointment of Mr. Carney, having both experience in international financial markets and experience in the private sector.

I believe that the financial markets will respond positively to the appointment of Mr. Carney. Although he won't take over the position until June 2013, the strong move on the part of George Osborne, chancellor of the Exchequer in Great Britain, sends a message to the markets. This message includes the point that the British government believes in a strong pound and will do what is necessary to support it.

This is the kind of message a government needs to send to the financial markets in order to attain a level of credibility for the nation. Now we have the talk and a strong symbol. I fully expect that this talk will be consistent the actions to follow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.