Mark Carney on Central Banking and Shared Values (Ep. 123 — BONUS)

How shared objectives can flip risks into value creation.

As a Canadian economist who once served as the Governor of the Bank of England, Mark Carney has had many occasions to reflect on the importance of values. Whether it’s ingratiating himself as a public servant in a foreign country, managing a central bank, or addressing climate change, he’s seen the power of shared objectives and the importance of value alignment in addressing critical and complex problems. As the global economy attempts to recover from the COVID-19 pandemic, Carney has published these lessons in a new book, Values: Building a Better World for All.

In this special bonus episode, Mark joined Tyler to discuss why he went into economics instead of marine biology, the temperamental differences between ice hockey goalies and central bankers, why it’s important that central bankers plan for failure, what he learned from his father’s work with indigenous Canadians, how growing up near Alberta’s tar sands made him understand the power of the market, the biggest misconception people have about Goldman Sachs, how he established trust as a public servant in a foreign country, his advice for public speaking, why he prefers to speak early during large meetings, the validity of liquidity trap theories, the changes he’d make to the federal reserve governance structure, the greatest challenge of running a central bank, potential regulatory strategies for central bank digital currencies, how decentralized finance (DeFi) should be regulated, how central banks should address potential risks caused by climate change, what went wrong with Canada’s response to COVID-19, why there seems to be little populism in Canada, the future of the Toronto Raptors, where to find the best food in Canada, the best Clash album, the causes of the UK productivity slowdown, the most surprising thing he learned while writing his new book, his predictions for the future global economy post- COVID, and more.

Watch the full conversation

Recorded May 21st, 2021

Read the full transcript

TYLER COWEN: Hello, everyone, and welcome back to Conversations with Tyler. Today I’m chatting with Mark Carney. Mark has a new book out, new and excellent. It’s called Value(s): Building a Better World for All. Mark is best known for having run the Bank of Canada, having been head of the Bank of England. He has done much more than that, and he will do much more yet. Mark, welcome.

MARK CARNEY: Thanks for having me, Tyler. It’s a great pleasure.

On the Mark Carney production function

COWEN: I’d like to start with what I call the Mark Carney production function. Now, why didn’t you become a marine biologist?

CARNEY: Wow, that’s good research. Partly growing up on the Prairies, number one. You know what? It was only once I got to college that I started to give up that because I went to Harvard, so at least I’d got to the coast by that point, but I got hooked by economics and then followed through with that. Something better came up.

COWEN: What about economics is more satisfying?

COWEN: I wanted to try to understand how the world works, and in many respects it’s the only discipline, at least from my vantage point, that gave me the prospect of doing that both on a micro level and on a macro level — although I slightly feel we’re better at micro than macro.

COWEN: Now, if I understand correctly, you were backup goalie on Harvard’s ice hockey team, and goalies deliberately try to put themselves in front of a moving, hard piece of rubber that can be going as fast as a hundred miles an hour. Are most goalies a little crazy?

CARNEY: Funnily enough . . . you could say that, although my position on it was always that you’re the one person on the ice that’s facing outwards at danger. If you’re a defenseman or a forward or some, you can get hit from behind, you can get hit from the side, lots of bad things can happen to you. Whereas you’re a goalie, at least you’re facing your opponent all the time, or at least you should be.

COWEN: In what way is it different temperamentally than being a central banker, if any?

CARNEY: Great question. You cannot be as anticipatory as a central banker. You’re building up muscle memory so that, particularly at the higher levels, that you realize what you’ve done after the fact you’ve done it. You move before you tell your body to move. As a central banker, obviously, what you need to do is anticipate where the economy is going and react in advance.

COWEN: If you meet someone who possibly is an eligible candidate to be a central banker, do you think you can tell how good of a central banker they will be, if you know them a bit?

CARNEY: If you know them a bit, yes. I think particularly for the higher levels of central banking, where you’re trying to combine analytic rigor and synthesizing that into an ability to communicate, which is often the toughest thing.

COWEN: Now, your book is about values. What would be the nonobvious value you look for in other potential central bankers?

CARNEY: Humility.

COWEN: Humility?

CARNEY: I think that would be the biggest one. It took me a while to build up that value, full disclosure, but it’s incredibly important. If I may, I try to draw out why that value is relevant. One of the lessons, at least for me over the years as a central banker, as a policymaker, is you have to plan for failure. Don’t always tell yourself you’ve got things sorted and that you can withstand the failure. Plan for the failure and think of “What would I wish I had done once that failure happens?” and think about whether you should do it in advance.

COWEN: Your father’s job, he worked on the affairs of native Canadians for some time. What did you learn from him or from that experience of what he did?

CARNEY: I learned — and I see this more clearly now — I learned just how long the tail of damage, how that passes through generations. It’s not just the generation that is affected initially, but it can have a life, and how hard it is to break that cycle.

COWEN: It’s almost a bit like macroeconomic persistence of unemployment, but squared or cubed or all the more so.

CARNEY: It is like that. It’s also like — this is an imperfect analogy, but I enjoyed your conversation with Ben Friedman the other day, or a few months ago, I guess. His point about living on values — in his case, it was Presbyterian values — things can pass through both positively and negatively across generations. You need bigger efforts either to reinforce them or to turn them the other way.

COWEN: You grew up in Northwest Territories and also Alberta, so western Canada. How do you think that’s shaped your perspective on economies?

CARNEY: Well, the big thing I took from my time in Alberta is just, I mean, it made me a market believer because I’ll give you an example. I was born just north of what was then known as the tar sands, now known as the oil sands, this huge deposit of oil which was virtually impossible to get out of the ground, economically. It was sitting there literally on the surface, but to separate it from the sand was difficult. Very quickly over the course of as I was growing up, by the time I was an adult, the issue had been cracked. The ability to innovate and make a profit out of an opportunity.

COWEN: Your PhD thesis was called The Dynamic Advantage of Competition. Writing that thesis, what did you learn, not about the topic but about yourself?

CARNEY: I learned that I exhausted my capacity and desire to do game theory. In the end, the models were game theoretic. The explanations were rooted in case studies and some econometrics, but the models were formulized from a game theory perspective. I also learned that I wanted to do policy at some point as well.

COWEN: What’s the biggest misconception people have about Goldman Sachs?

CARNEY: That it’s everyone out for themselves.

COWEN: How is it?

CARNEY: When I was there, and I was there for 13 years in total, one of the biggest lessons I took from that place was teamwork, and I’ll give you an example. It didn’t matter who you were; if you needed to get ahold of somebody in the organization, they would be back to you, certainly within 24 hours. They might be on the other side of the world, and that went from the CEO. Once when I was at the most junior level, I needed to speak to the CEO, Bob Rubin, and he didn’t know me, but he got back to me because I wouldn’t have left him a message if it wasn’t important. And that’s a lesson I’ve carried through.

COWEN: Now, it seems to me that a lot of people trust you. Even British people trust you, trusted you with their central bank. That’s a skill. What else is it that you did to learn that skill? Obviously you’ve decided to be trustworthy, but what else is in there?

CARNEY: I think part of it is admitting when things go wrong or when you’ve learned new information and you’ve changed your view, which is difficult to do. Maybe that’s another aspect of humility. Part of it is competence. I think it’s hard to fully be trusted unless you’re successful, you make more right decisions than not. And then we can debate how much of that is the product of luck in the end, but a combination of those things.

Last thing, to be trusted, you need to feel someone’s on your side, that you’re aligned with the people you’re serving. As a public servant, as a central banker, you should be able to accomplish that, but it’s important to establish that.

COWEN: If someone comes up to you younger, and they say, “I would like to learn how to give good speeches. How did you learn how to give good speeches?” What do you study? Which speakers? Do you go to YouTube? What do you do?

CARNEY: I didn’t have YouTube when I was — it wasn’t widely available when I was learning how to give speeches. One thing I would say is that you need to go over them multiple times. You need to give the speech in order to understand how — practice giving the speech, and then that reveals things that you can pull in or sentences which are too complicated, that which won’t be well understood. Have stories, have things that illustrate your deeper point.

I, as a central banker — and maybe you’re asking a general question, but as a central banker, put the substance as much as possible into footnotes, so you’re well grounded in terms of your argument but it’s not cluttering the argument and losing your audience.

I think the last point I’d make, and hopefully this isn’t the case on this conversation, but if you lose your audience, you’ve lost them. You don’t get them back while you’re giving the speech, and so it’s crucial to keep the pacing and the insights spread so that you’re retaining your audience.

COWEN: Who as a speaker has influenced you?

CARNEY: I think Gordon Brown, who I had occasion to see on a number of occasions through the G7, G20 when I was a deputy governor, in terms of policymakers. He is a technocrat that was a politician. He had an ability to turn on his political voice and inspire in a way that both told you that he knew what he was talking about but really helped to inspire you.

COWEN: If you’re speaking in a meeting as the central bank president, do you prefer to speak first or speak last?

CARNEY: I prefer — I tend to speak early. Yes, I tend to speak early. I’m not sure that’s always the best strategy, but I tend to speak early. I will say, one thing that’s happened over the years at places like the G20, I noticed, is the prevalence of social media and devices. The audience drifts away over time, even at the G20, even on a discussion of the global economy.

COWEN: Maybe especially on the discussion of the global economy.

CARNEY: Well, maybe especially in discussion of the global economy. I will say — and I’ve mentioned it in the book — that it was the discussion in Riyadh in February [2020] on COVID which was one time that you saw everyone’s head snap up from their iPads and pay attention, because it was the moment the pin dropped for the vast majority that we were in big trouble.

On the liquidity trap

COWEN: Let’s move to the thrilling central banking topic of the liquidity trap. What I observe in my own country is that for over a decade, we have rates of price inflation really very close to 1.8 percent, close to 2 percent. The liquidity trap in its essence claims the central bank can’t control the price level; maybe the price level is indeterminate. My view is simply the liquidity trap theories are wrong, but what’s your view?

CARNEY: My view has been that there is a liquidity trap, or there can be a liquidity trap. I guess I wouldn’t fully subscribe that there can’t be.

COWEN: I would say wasn’t.

CARNEY: Ah, but there wasn’t. I think you’re absolutely right on that, there wasn’t. It is revealed that there wasn’t a liquidity trap. Further, for a large portion of that period, it was not that fiscal policy was providing the support, so it wasn’t the substitute for monetary policy. I think the innovation that was done on the monetary policy side helped ensure that the Fed — it didn’t quite get to its dual mandate, but it got pretty close. In the end, actually, by 2019 it certainly was there, in my judgment, at its dual mandate. That showed the ability to innovate in terms of policy tools and provide that, at the cost of some other risks that built up, of course.

COWEN: What’s the model you use for thinking about why the liquidity trap may not have applied? Because as you well know, interest was being paid on reserves. It wasn’t identically equal to the T-bill rate, but it was very close. T-bill markets are extremely liquid. Why are bank reserves and T-bills sufficiently different assets to give monetary policy traction?

CARNEY: Well, of course, bank reserves exist for settlement between banks. Bank reserves are not liabilities that the commercial bank can actually act on and lend out. Furthermore, of course, with quantitative easing, banks were in effect forced to carry these reserves, blessed with these extra reserves in order for the central bank, the Fed in this instance, to buy bonds.

The reason the liquidity trap has not existed particularly in the United States, and UK as well, has been because financial conditions have been easier than they otherwise would be because of asset purchases and other measures that have been put in place. What I would argue — sorry, Tyler — is that there comes a point, even with those where — for example, I would say that Japan very close in fact has been in a liquidity trap.

COWEN: As you know, right now, we Americans are all debating as to whether the measured higher rate of price inflation will simply be transitory. Other than market prices, which is obvious, what are the indicators we should be looking at more closely that are perhaps a little underrated?

CARNEY: Underrated. First thing, let me tell you what I would go to first. I would look to the labor market, adjust for compositional effects. In other words, to what extent is wage inflation being driven by more high-wage jobs being created than lower-wage jobs? Look for a broad suite of labor market indicators, including participation rates, hourly earnings, cut across various different segments. What is developing, though, is it’s becoming obvious that input costs are moving more rapidly than one would have expected — at least, I would have expected. Part of that is a product of supply bottlenecks, as well.

I’ll go . . . That tells us something about, potentially, supply capacity in the economy. If I go back to what I just said on the labor market, because I didn’t quite finish the thought, is that — something I shouldn’t do in a speech, by the way, but I didn’t quite finish the thought, which is that one would expect that the natural rate of unemployment has gone up as a consequence of a relatively large proportion of the population being effectively out of work.

One’s looking for the risk here, is that as the economy gets back to the level it was before, the supply in the economy is not going to get back to the level it was before, or at least not quickly. And so those price pressures will come through more quickly. And we’re seeing some early indicators. We’re seeing some indicators, I would say, that’s consistent with that.

On central banks

COWEN: Let’s say we put you in charge of our central bank, the Fed. How would you change governance? Not monetary policy, not regulation, but the actual structure of the Federal Reserve System?

CARNEY: That is a really tricky one. There’s path dependence in all regulatory frameworks in central banks. The rotating regional Fed chair — I understand why the regional Feds exist, but the rotating chair system, I probably would not have that.

I would have a clearer obligation on the Federal Reserve to identify and use its tools to address financial stability risks. Ultimately, that’s housed in something called the FSOC chaired by the Treasury secretary, but I would have the Fed more on the hook. I think they’d be happy with this for identifying what can go wrong and what should be done about it. I’m not saying add powers to them in order for that to be the case.

What we would like to see — look, I thought the system — and I’m a prisoner of my past, but the system in the UK, where there was quite a rigorous independence of the committee members on what’s called the Monetary Policy Committee, the equivalent of the FOMC, and they felt individual responsibility, they definitely would vote in different ways than the governor.

They didn’t feel the need to have a consensus that was consistent with what the governor thought because they were individually on the hook for their votes and knew how people had voted. And that led to quite robust discussions, in a healthy way, about the outlook for the economy. The Fed has elements of that, but it also — and sorry, I’ll finish on this topic, which is, it has a tradition or a convention that is more consensus based than we had in the UK.

COWEN: Thinking of central banks just as autonomous institutions, putting aside monetary policy, putting aside regulation, just running them — what’s the greatest challenge?

CARNEY: They’re very hierarchical institutions, historically have been, and the older they are, the more hierarchical they are. The greatest challenge is to — well, you have a formal structure for who makes the decision, whether the committee or the individual. The greatest challenge is to empower people below to say what they think and to be clear and to act as if they are making the decision. They give clear advice as opposed to classic “on the one hand, on the other hand” type advice. And we tried various ways to make that happen at the Bank of England, I think with some success. I’m sure they’re doing it much better after I left.

COWEN: Should boards of governors of central banks, in essence, have COOs so they don’t have to actually run the central bank?

CARNEY: Absolutely. We did have that at the Bank of England.

COWEN: How should central bankers treat off-balance-sheet risk differently, if at all? Easy question.

CARNEY: Off-balance-sheet risk of private financial institutions, you mean?

COWEN: Of course, yes.

CARNEY: Okay. They should — and we started to take steps in this way, something called step-in risks. The assumption is that the off-balance-sheet risk, there will be either a moral or some other quasi-legal responsibility for the connected institution to assume those risks. You should always assume that those risks collapse back on the central balance sheet.

Just as, if you recall, the SIVs in 2008 collapsed back on the balance sheets of major institutions like Citibank, for example, and Merrill Lynch, and all of a sudden balance sheets that looked relatively healthy looked awful because they’re substantially higher-risk assets. Of course, the assets that were off balance sheet were off balance sheet because they weren’t that high quality.

COWEN: Now, this — yourself through Stanley Fischer — as you know, there’s a trend of recruiting central bankers from other countries. So far, it seems it’s worked quite well. But what are the limits of this process of recruiting leaders in government from abroad? You wouldn’t name someone to run the Department of Defense who is from another country, right?


COWEN: What’s the margin where that doesn’t work anymore?

CARNEY: Well, candidly, I think it was a relatively unique set of circumstances when I was put in place. The UK had had a very bad financial crisis. We had a new central bank, in other words; the powers had been tripled, it had been doubled in size. There’s an opportunity to bring an outsider in, in order to help try to make that work. I don’t know. I’m a little hard pressed to see the set of circumstances where it would be immediately obvious to bring an outsider back in again.

My answer is there have been examples. The governor of the Bank of Ireland, for example, is a third example: Gabriel Makhlouf, head president. But it’s very much the exception as opposed to the rule. It relies heavily on the technocratic nature of the role.

COWEN: Are there classes of decisions where such a head should recuse himself or herself, or would just feel hesitant — very risky decisions or extending foreign lines of credit, which the Fed of course has done a lot, or exchange rate policy?

CARNEY: No. I think if you take these roles, you have to be able to take every decision no matter how small or how large. I never felt any circumstance where either I didn’t have adequate information or, God forbid, that I was somehow conflicted in my loyalties that it would have influenced the decision.

On digital currencies

COWEN: Topic of the day is central bank digital currencies, as you know. Jay Powell spoke about that just the other day. If we move to some form of a central bank digital currency, how do we avoid or limit disintermediation as people pull their assets out of commercial banks and go directly through the central bank?

CARNEY: Well, there’s a couple of ways. I think the most likely route that this is — and I’ll come to an issue with it — is that there are two tiers to the central bank digital currency. The digital currency is as much a wholesaler — it’s principally a wholesale digital currency. What faces you and I and those listening is some form of wallet we have a relationship with, whether it’s a commercial bank or an emerging tech company or a fintech company that is through the wallet.

That’s how we access currency. Now as you know, but it bears repeating, most of that currency, most of that money will have been created by the private financial system itself. Very little of it actually is the digital currency.

One of the decision points is whether we as citizens have a right to access the ultimate safe asset, or at least a portion of our earnings in the ultimate safe asset. In one model, the safest model, the one that doesn’t avoid the question — it solves the question that you very rightly put on the table — the digital currency is only at the wholesale level. It’s the top tier between institutions, not at the customer-facing, the retail-facing level.

COWEN: As you know, there’s the Modigliani-Miller theorem. Maybe I, Tyler Cowen, can’t legally access the digital currency, but an intermediary will give me an equivalent service, if only through crypto. There can be a private layer that in essence gives me that access.

CARNEY: There will be a private layer . . . The extreme version of that is private stablecoins, in which a form of crypto which is backed with — could be the central bank digital currency or Treasury bills and some other safe assets that mimic it. That’s possible. It doesn’t in and of itself, since it’s a private layer, isn’t of itself fully resilient.

I use the example in the book of, effectively, the Bank of Amsterdam, which lasted almost a century — well, more than a century — was a form of stablecoin. They were offering the bank bills supposedly fully backed by the gold that people had deposited. Now, over time, they gradually ran a mismatch. That’s the danger with that structure if that becomes the core structure.

Tyler, sorry, I didn’t quite finish my point earlier. I gave you one model which keeps the central bank digital currency at the top layer, the wholesale. I think there is a very legitimate argument of citizens and others to say, “Well, actually, today I can carry around cash. I have access to the ultimate safe asset. If we’re only going to be in a digital world, I should have a right to that safe asset as well.”

I think at this stage, at least for the limits of my imagination, the only way I can see directly around your issue is to limit the portion of my assets that I can hold in cash — sorry, central bank digital currency in this example — because otherwise, that instantaneous run risk very much does exist. You collapse the private money into public money in times of stress, so it is a real issue.

COWEN: If it’s wholesale only, the digital currency, or if my participation is limited, those are like limits on capital flows. Will the digital currency sell at a different price than say the dollar, the euro, the regular currency?

CARNEY: It should not because money will be indistinguishable between the private money that’s created, just as it is today between central bank reserves and cash.

COWEN: But they do different things. Cash and the digital currency, they do different things. There’s a capital flow restriction on funds in and out from one to the other. It would seem you’d end up with separation of the unit of account, and you’d have two media of exchange, two currencies. I don’t mind this scenario.

CARNEY: We don’t want to have separation either. Exactly.

COWEN: I like exotic.

CARNEY: Exactly. In the wholesale example, I can’t reach up to that level. I can’t. Now, you can say in the wholesale market then you could, and stress there would be a premium for that, which I suppose is a possibility. In hybrid models, there’s some retail and the bulk of it is private, there is a — I don’t envision — I’m sorry, I guess I left out an important point. I don’t envision the central bank digital currency paying a return.

I’m not one who says, “Let’s have a central bank digital currency so we can have wildly negative interest rates, so we can add another tool to the toolbox.” That exchange ratio — my term, but I think it’s the same concept — ends up showing up in what the deposit rate is at the financial institution as it does today.

COWEN: How should we regulate decentralized finance, DeFi as they call it?

CARNEY: Another great question. I think the first thing is recognizing that that is a real possibility, that we will have a world which is a combination of centralized and decentralized finance, that there is potential value. I hedge it a bit because I can see the potential, but I haven’t really seen it at scale being applied in so-called native currencies that exist and facilitate decentralized finance and the smart contracts that are part of that.

There’s a couple of obvious things we have to do in terms of regulation. Going in and out of decentralized finance, which is classic Know Your Customer, anti–money laundering, counterterrorist financing, those boundaries between the two. The resilience of the institutions that operate within decentralized finance. Thirdly, the nature of the crypto asset that’s used as the, quote, “native currency” and its resilience, its supply algorithm, whether or not it’s backed, whether or not it is itself a stablecoin. If it is a stablecoin, who oversees the nature of that stablecoin.

There are some that had represented — as you probably know, I’m sure — that they were fully backed by cash, and it turns out that they’re very much not. There’s a conduct, anti–money laundering, Know Your Customer element going in and out of DeFi, and then there’s the resilience of the DeFi segment itself.

COWEN: As you know, there are truly anonymous forms of crypto, whether we like it or not. How many degrees of freedom do we really have in regulating non-anonymous crypto given that people have the option of switching into anonymous crypto?

CARNEY: We can only regulate them as it comes into the formal financial system, but we certainly can regulate anybody who is in the formal financial system and how they dock into that system, a crypto exchange. I’ve long been saying that crypto exchanges should be regulated as other exchanges are and should be subject to the same quality standards and Know Your Customer standards and others.

I think the best crypto exchanges absolutely agree with that. Private financial institutions and their interactions between — ultimately, it is interesting how essential much of crypto — that crypto for a decentralized system ultimately needs to come back into the centralized system in order to be a true medium of exchange. Those who have been taking ransomware in crypto likely will ultimately come back into the formal financial system at some point. That’s where the regulation has to catch.

COWEN: If I look at IPCC estimates of the costs of climate change, I see talk of a base case of maybe 5 percent to 6 percent of global GDP, possible risks of up to 20 or maybe 30 percent of GDP. All this you discussed in your book, of course. Given that wide range of estimates, which perhaps will get wider yet, what can central banks usefully do with this information, given that they’re not really special adjudicators of wisdom about climate change?

CARNEY: That’s right. We’re not special adjudicators of wisdom about climate change. There’s a couple of things we can do, and of course, there’s a difference between the flow estimate, the GDP estimates — and I’d center it, and I do in the book, more around 25 percent of GDP. That’s a level effect further out, and we can debate that. But also, there’s the asset price effect. This is a critical element, whether it’s commercial real estate or value of fossil-fuel assets or other investments and/or loans that banks themselves and investment pools have.

What can central banks do? First thing is to take a look at the risk profile associated with climate change. Most of the risk in the course of, let’s say, the next decade, 15 years, relates to what’s called transition risk. Yes, there is risk for certain activities because of increase of extreme weather events and the knock-on effects of that. That’s absolutely there, but most of the risk . . .

And I’ll give you an example. If you’re lending or investing in the European auto industry now, you probably want to take into account that you can’t sell an internal combustion engine vehicle in Europe after 2030. That is a regulation. That is transition risk. The question that central banks can do with financial institutions is working through with them the extent to which they’ve assessed, those financial institutions have assessed these types of risk, and then those private financial institutions make the judgments about which ones are worth bearing.

Just to be clear, some of the biggest risks in the system are that, if I can put it this way, we do what we say. In other words, whether it’s through private innovation, public regulation, some combination of the two that we move to an economy that is lower carbon and more consistent with the overall objective of 130 countries, which is one-and-a-half-degree temperature increase.

COWEN: Twenty-five percent of global GDP seems very, very high to me. As central bankers, we look at market prices. Most insurance companies are not insolvent. That’s a forward-looking market price. Coastal property, the prices of some of it are down, but not radically so. Obama bought a house at Martha’s Vineyard. No one said that was a huge mistake. If the actual costs are 5, 6 percent of GDP, maybe that’s a year and a half’s global growth, which is still highly significant.

But a lot of it happens slowly. It’s predicted. It’s signaled by market prices in advance. If the central bank just went about doing its old ordinary business and did a good job, what exactly is going to go wrong that makes it necessary to extend their mandate to climate change?

CARNEY: A couple of things. Three things, and you added a third at the end. First is, having been a regulator of the insurance industry, I can tell you, and particularly the property and casualty and the reinsurance industry, they think this is a big risk. In fact, if you were the regulator of Lloyd’s of London, one of the biggest reinsurers in the world, it’s number one, number two in terms of their risk.

The reason why Lloyd’s does well — it has some years better than others — and these big P&C companies is because they write relatively short-term contracts, and they reprice. They reprice coverage and they reprice risk. They’re following the impact of climate change on the physical risk, and they’re able to react to it because they’re not writing a whole ton of 30-year catastrophe risk in their books. They write some, but they don’t write — that’s not at the core. That’s the first point.

Second point is that — and it goes to your last point, which is that some central banks have this responsibility because of whom they oversee. Some central banks, Bank of Canada, for example, it’s a monetary institute, for lack of a better word. Its job is price stability largely. It does a bit of analysis on the financial stability side, a bit on payments, but it’s largely price stability.

If you oversee major financial institutions and there is large prospective risk, clearly in insurance, potentially in banking because of the transition risk I was talking about a moment ago — and just give an example, this week, the week we’re talking, the IAA has come out with their forecasts for, or their scenarios, I should say, for what’s necessary in order to achieve one and a half degrees.

The orders of magnitude of stranded assets of known reserves in energy are three-quarters of coal, proven reserves; half of gas; and more than a third of oil. You have to think about, as a bank or as an investor, “Well, am I exposed to the bit that gets produced or the bit that won’t get produced if we’re in this scenario, or do I think we won’t end up in this scenario and it’ll all get produced and the real risk will be on the physical side?”

Just to wrap up, some central banks have that direct responsibility. Bank of England absolutely, clearly did as the insurance regulator, but also the financial stability, the macroprudential regulator. Others don’t because they only do monetary policy, and many are somewhere in between.

I would say — I said that was going to be the last point; I’ll make one other — that we have 90 central banks from around the world that cover 85 percent of global GDP, which is part of the central bank group, self-selected into that group that is looking at these risks and how to make sure the system is resilient, because to loop back to something else we were talking about earlier, we need to plan for failure. We need to make sure the system is resilient for these type of risks so that the financial system is not part of the problem and it can help support things going forward.

COWEN: Given that climate change is such a highly politicized topic, do we endanger the independence of central banks by giving them a climate change mandate?

CARNEY: It depends — that presumes that there is a new mandate and the nature in which it’s given. What has happened in the UK is that the chancellor — and this is the way the system works in the UK is, for the Monetary Policy Committee, the Financial Stability Committee and then the regulatory committee, the one that oversees just the microprudential health of banks and insurers, the government has clearly said, “Your responsibility includes taking into account climate change risk,” each of those committees.

That is a direction. That is democratic accountability. It’s consistent with the law. It’s consistent with the set of risks, the law that governs the central bank, but it is not the central bank reading into its mandate a new responsibility. There’s a difference between given something or directed to do something, again, consistent with the legal framework, and having the central bank appropriate that responsibility, which is not the case in the UK.

On living in Canada

COWEN: As we’re talking in mid-May, Canada is doing a wonderful job catching up with vaccinating Canadians. That’s great. But if we think of the very slow initial procurement and the pretty slow initial rollout, is that telling us something about problems with state capacity in Canada, which we typically think of as a very well-governed nation, but is there anything we’re learning there?

CARNEY: Absolutely. I think you put it well. Three things. One is, there’s a problem with state capacity in advance. We had inadequate vaccine production capacity. We didn’t have any; that’s the bottom line. We had inadequate supplies of PPE and arguably inadequate capacity in our healthcare system. As you well know, the less the capacity in your healthcare system, the riskier it gets, even small increases in infections.

All of that was in advance. Secondly, in terms of — the track-and-trace system put in place in Canada is not really operable. It’s there in theory, but it is not an effective part of the pandemic response. Then thirdly, the vaccine rollout has been slow relative to the US and the UK. Now it is catching up. It’s very much catching up.

COWEN: Why did those go wrong? What’s the general problem or reconsideration about Canadian government? A lot of people think you’re better governed than a lot of places.

CARNEY: Well, we are better governed. [laughs]

COWEN: Then why it didn’t work?

CARNEY: We are better governed than a lot of places. I think that in the case of systemic risk, we’re talking about another systemic risk around pandemics. There was an absence of clear responsibility, who’s responsible for it, and empowering those who’s responsible still. There’s a lot of finger-pointing between the federal government and the provincial governments.

Some of it is a question of responsibility across jurisdictions as opposed to taking full ownership of the issue and saying that we are jointly responsible for Canadians’ health in the middle of a pandemic, and we will jointly work together and share the positives and the negatives of the outcomes for Canadians — because after all, I’m talking to you from Ottawa. I don’t view myself as Ottawan and Ontarian; I view myself as a Canadian first and foremost, and I expect my governments to deliver for me.

COWEN: Why is Ottawa such a nice and interesting city and yet so cheap?

CARNEY: [laughs]

COWEN: Serious question.

CARNEY: It’s cold in the winter.

COWEN: The whole of Canada is cold, right?

CARNEY: Well, it’s not as cold. This is the second-coldest capital in the world after Ulaanbaatar. It’s not as cheap as it used to be, but it is certainly value for money, yes. I don’t have a good answer for that.

COWEN: Why is there so little populism in Canada? You have plenty of immigrants, right? Arguably, in Ontario, you’ve had some local populism, but nationally it doesn’t seem to have taken off.

CARNEY: Well, I think it’s a good observation. It’s partly, populism, the way I think of it is, it moves into an “us versus them, the people versus the elite” type approach. Part of what determines populism, in my way of thinking, is how much do people believe that there is equality of opportunity or an ability to move through the system? How much should people believe that there is equal access? A couple of things that underscore that in Canada: universal healthcare. Virtually everybody sends their kids to the state education system, so you have universal on that.

One of the things which has slowed our response, and actually on the pandemic, is application of that universality, for example, for vaccines and universality for lockdowns and other requirements in a way that meets equality but is not as effective as it could be on a risk-management basis. Give you an example: it would make more sense to go and vaccinate the teachers and vaccinate those who are working in meatpacking plants and Amazon warehouse and other hot spots for the disease, but that’s not the approach.

The approach has been very rigorously equal working down through age cohorts. I think that has its downsides, but it reinforces “We’re all in this together” and therefore weighs against the populism possibilities.

COWEN: Are the Toronto Raptors doomed to be, on average, a subpar NBA team due to higher taxes?

CARNEY: Well, they —

COWEN: Fiscal policy question, right?

CARNEY: Fantastic question. No, short answer. Wildly popular, and they were able to gross up second from a basketball competitiveness perspective. We’re pleased to see the Biden tax proposals and the effects coming in this direction. I think the track record does indicate an NBA championship, and getting close last time is so far so good.

COWEN: Where’s the best food in Canada?

CARNEY: For me, Vancouver.

COWEN: Chinese or nouvelle or what?

CARNEY: Everything, because of the range. Fantastic Indian nouvelle, absolutely amazing Japanese izakaya type — and part of it is, my parents are originally from that area, not Vancouver itself. So, I have nice associations with it.

COWEN: What’s your favorite movie and why?

CARNEY: My favorite movie was Gallipoli, oddly, which is an Australian movie, Peter Weir. It’s about World War I and the attack on the Dardanelles. I just thought it was a brilliant film, and the sense of foreboding that comes with it, and beautifully shot. I don’t know, it’s always stuck with me.

COWEN: To refer back to the theme of your book, how does that stem from your values?

CARNEY: There’s a couple of things in that. One is, the main characters, who are — actually, one of them is Mel Gibson, but they basically have to sacrifice themselves for the group. That sense of solidarity, that is part and parcel of that and a big component of the book.

COWEN: What’s your favorite O. Henry story?

CARNEY: “The [Gift of the] Magi.”


CARNEY: Because it has a — which I use for two reasons. One, I liked it as a child, the irony of the — Della cuts her hair in order to buy Jim a watch chain, and Jim sells his watch in order to give her a hair comb. I like the irony of it. I did like O. Henry a lot, actually, as a kid.

Then stumbling across this Joel Waldfogel article and him saying that this is — well, actually, it wasn’t — he didn’t use that as an example; I’m using it as a counterexample to him. But there’s a paper in the AER which is about the deadweight loss of gift-giving at Christmas because I can’t perfectly — even with all these questions, you won’t be able to perfectly anticipate what I want next year for Christmas.

COWEN: The story is about the primacy of values, right?

CARNEY: Absolutely. The fact that they were willing to sacrifice that which was most dear in order for their beloved to get a present at Christmas demonstrated their love for each other more than hanging on to that which they cared most about.

COWEN: Alice Munro or Margaret Atwood?

CARNEY: Margaret Atwood. I’ve read more.

COWEN: What’s the best Clash album?

CARNEY: Fantastic question. London Calling, and one of my best memories — I was very fortunate; they came to Edmonton when I was in 12th grade in high school. I went to the concert and that was fantastic, yes.

COWEN: I also saw them, I think in what would have been 12th grade had I been in school that year. But London Calling is too commercial for me. I much prefer the Green album, like “Career Opportunities,” “Janie Jones.”

CARNEY: Well, “I Fought the Law” was the best song at the concert. I have to say, they had got to Combat Rock by this time, which was relative — [laughs] Combat Rock was more commercial, I thought, than London Calling, although they threw it all out the door with Sandinista!

COWEN: Why was there such a big productivity slowdown in the United Kingdom, if indeed you accept that premise?

CARNEY: The productivity slowdown, you mean in the last decade?

COWEN: More than a decade, but again, people dispute exactly the nature of the facts here.

CARNEY: Okay. I think there’s a few factors. I do think, broad brush — and I’ll give you four explanations. First is, a bigger aftermath of the financial crisis than in many jurisdictions, just access to capital and the starving of investment that came from that.

Relatedly, from a statistical perspective, quite a lot of the productivity — as much as a third of the productivity in the run-up to the crisis — came from financial services, at least as productivity was measured. Basically, lending, the lending spread — I’m simplifying — counted as productivity. If you were in a credit boom, you were getting productivity. That’s one aspect.

Second aspect is a managerial explanation that my colleague Andy Haldane did a lot of work on and has written extensively on, which is that there’s a longer tail of — if you look at productivity on a firm basis, the tails have lengthened and fattened. There’s less of a diffusion of productivity and, obviously, economies of scope and scale that are also concentrated in those larger firms.

Then the third thing — and there’s different views on this; I think the numbers are pretty clear — is from 2016 to 2020, from the Brexit referendum until Brexit, a period of pretty intense uncertainty and basically a flatlining of investment over that period. It’s hard to grow productivity as fast if you’re not investing.

On Brexit

COWEN: Now, you’ve been a well-known critic of Brexit, and I was myself pro-Remain. But when you watch the handling of the pandemic, especially the vaccines, the EU doing such a bad job on procurement, do you have second thoughts and think, as I do, maybe Brexit wasn’t so terrible after all?

CARNEY: Two things. One, my job, again, was to plan for a difficult outcome, and so, we had to make sure that the financial system was ready in case there was a no-deal Brexit or a very disruptive Brexit. In the end, we didn’t have that, but we put the financial system in a position so they could withstand that.

A lot of what we said and did was interpreted — as one of my colleagues said, we’ve been called at the Bank of England “merchants of doom,” which he took as a compliment because our job was to plan for that failure. That’s the first thing. We put the system in a stronger position so that the financial system at least could be part of the solution as we came out.

In terms of the pandemic, I think it is clear that the UK had its issues — we’ve all had our issues — but it has handled it better than the EU, and that elements of the EU’s approach have been actively counterproductive. In that respect, yes, it has been better.

COWEN: As you know, the British pound has bounced back entirely. There was a plunge right after the referendum, which was truly a surprise to the markets, but now the pound is back. Doesn’t that mean, in essence, there weren’t really macro costs to Brexit? It just looked that way for a short while?

CARNEY: Well, I’m not sure. If you look at broader asset prices, there has been some recovery in UK equities and other assets, but I would be hard pressed to say that they followed the trajectory that they would have if this hadn’t happened. That’s not to say that — these are all relative. And so, it matters what the UK does with Brexit, and there’s talk of new trade deals and using more and more of this flexibility that they’ve gained from the consequence. And so, that can lead to growth as well.

COWEN: If Scotland and Northern Ireland were to leave the United Kingdom, would that make being the central banker of England alone harder or easier?

CARNEY: It’s not a desirable outcome.

COWEN: No, I agree it’s bad, but Northern Ireland doesn’t look to me like an optimal currency area with the rest of the UK. Scotland does.

CARNEY: Yes, Scotland is more of an optimal currency area. And certainly, I think the challenges, which were a little underestimated by some, of Scotland leaving the UK and losing the fiscal stabilizer that came naturally as being part of the United Kingdom, that was underestimated.

On the margin, would it make it easier? Yes, the honest answer, and since this is Marginal Revolution, yes. On the margin, it would be, so yes. But it would be harder for Scotland, the mix, I think.

COWEN: To be clear, neither of us favor Scotland leaving, but if they did leave, should they choose the British pound, the euro, or a new currency of their own?

CARNEY: I think the logic of the governing party in Scotland is that they would likely — they’re a little hedged on this, but part of the purpose of leaving — there are other motivations, but a part of the economic purpose would be to be part of the European Union. If they were part of the European Union, they would have to at least agree to be on a path to choosing the euro. There’s a challenge of retaining the pound and losing the integration of the financial system. It’s one of the financial risks there.

The question is, would they have a time path so that they could move directly from sterling to euro? It’s a big, big issue, I don’t pretend to have the answer. I would think it would be more likely to choose the euro. Certainly, for Northern Island, if it were to leave — and we’re deeply into speculation here — it’s almost certain it would be the Euro.

COWEN: Would Scotland have a problem of oversized banks relative to GDP of an independent Scotland, and what should they do about that?

CARNEY: It is possible to redomicile those banks. One of the challenges — and the short answer is, it’s an addressable issue, with sufficient time to address it. One of the challenges with the last referendum is the timetable. Withdrawal was on the order of magnitude of 18 months. That was not sufficient time to do it.

COWEN: What should Switzerland do about having had banks that are quite large relative to GDP? They’re not in the EU in the typical way, as you know.

CARNEY: No, what Switzerland has done is a couple of things. One, it’s made those banks less likely to fail by running higher capital requirements and higher liquidity than even the new standards.

Secondly, been pretty rigorous — and one of my responsibilities at Bank of England was working with them, because they had big UK operations, in terms of putting in place what are called living wills, so an ability to unwind aspects of those banks if they hit the rocks, separate out the domestic banking assets of those banks so that retail banking continues on, and the hit is seen largely in the wholesale side.

COWEN: As an Irish citizen, what should the Irish government have done in 2008? Irish austerity is much criticized, but it does seem they ran out of money. What could they have done better?

CARNEY: They ran out of money; what could they have done better? I think, broadly, they handled a terrible situation well. We worked closely with, funnily enough — well, not funny, but Canada and Ireland are in the same constituency in the IMF, and we worked closely with them during the crisis, including with determining how and when to support their financial institutions.

And how that support ranked in terms of the overall — it sounds like an esoteric point, but it’s an important point in terms of the overall debts of the country — that, in other words, that support was junior as opposed to pari passu and, I think that contributed to their recovery.

COWEN: Now, as you know, Mario Draghi, who was a central banker — he’s now running Italy for at least some while. He’s put forward a plan to have a very aggressive fiscal policy, spending about 200 billion dollars, euros, whatever.

From my great distance, it seems to me Italy’s problem is not mainly one of demand. It’s been running on for 25 years. It’s a real problem often resulting from local or even municipal rigidities. If that’s the case, why would spending 200 billion, when debt levels are quite high already, why would that help? What do you think?

CARNEY: First thing, obviously, I can’t speak for Prime Minister Draghi [laughs], but I get used to saying that. I would think that he would agree with much of your premise, and I’ll make the following observations.

First thing, Italy, the level of GDP is the same as it was in 1999. It’s an absolutely astonishing figure. We’ve had a COVID shock and everything, but there was just so — and whereas Germany is 25, 27 percent above today, even before they get the COVID recovery. That is fundamentally your point. It’s a question of supply capacity, ultimately, productivity given weak population growth, where productivity has not gone in Italy.

Part of that is absolutely the regulatory aspect. One famous example, a very important example is around bankruptcy laws in Italy. It just takes a very long time to unwind a business and prosecute bankruptcy. Then, of course, you don’t want to lend if it takes a long time to do that or start a business if it does. There’s a series of those types of reforms that are necessary.

That said, most of that 200 billion is around infrastructure, around measures to improve the supply side of the economy. I think the prime minister would absolutely agree we need these other reforms on the regulatory side and the way business operates in Italy, but at the same time, bridges need to be built. There’s a grid that needs to be greened.

There were a series of opportunities — for example, we talked earlier about climate change, and Italy is one of the jurisdictions that has huge opportunities in the hydrogen economy, actually. And there’s ways for them to kick-start that, which would provide an export engine.

COWEN: To return to your new book, Value(s), which was the hardest part of it to write?

CARNEY: The hardest part was going through the history of value theory and trying to condense that and whether I got that right. I mean, you’re condensing the canonists to a couple of paragraphs, the physiocrats, and then trying to draw the distinction — I mean, the distinction between objective value and subjective value, as you know, is straightforward to draw, but to try to give a fair representation of that.

COWEN: What was the most surprising thing you learned writing the book that you hadn’t known before you started?

CARNEY: The most surprising thing that came to me as I was writing, but this was also in real time in the world, was this point about moving from a tradeoff approach on a big issue — the flattening of values, is what I talk about, to a hierarchy — just how powerful that can be in terms of market dynamics and investment. Something I believe, but I didn’t think I would necessarily see.

What I’m talking about is that, over the course of the time of writing that book — it started before and it’s really accelerated after — is that the world has been moving more and more towards saying, “Let’s deal with climate change. Let’s anchor this on net zero, and then let’s figure out how to get there.” In that process, we talked a lot about the risks around climate change, but one of the core points in the book is that you can flip that risk into value creation if there’s a shared objective, the shared objective around net zero. That’s what we’re seeing today in financial markets and in the real economy.

It surprised me that I had that thought with me, but I thought I would spend more time in the book about the values that are necessary for markets to function well, as opposed to this other point, which has the bigger real-world impact, which is, if you have a hierarchy of value, if you have a clear objective — and those don’t come along every day, but a clear social objective like sustainability, net zero said another way — just the power of the market that is starting to be unleashed as a consequence.

COWEN: What did you most learn about yourself writing the book?

CARNEY: [Pauses] Sorry to hesitate. I learned that there’s a lot that I didn’t know, number one. And in reinforcing that — and it sounds trite, but just reinforcing this point on humility and where that is valuable. It’s not just about knowing that things can fail, but also recognizing that you need to combine that with ambition in order to move things forward.

COWEN: Last question. You wake up each morning. Surely you still think about central banking. What for you is the open question about central banking, where you don’t know the answer, that you think about the most?

CARNEY: I gave a speech at Jackson Hole on this issue, and I started — which is the future of the international monetary system and how we adjust the international monetary system.

I’ll say parenthetically that we’re potentially headed to another example of where the structure of the system is going to cause big problems for the global economy. Because it’s quite realistic, sadly, that we’re going to have a fairly divergent recovery with a number of emerging, developing economies really lagging because of COVID — not vaccinated, limited policy space, and the knock-on effects, while major advanced economies move forward. That’s a world where rates rise and the US dollar strengthens and you get this asymmetry, and the challenge of the way our system works bears down on these economies. I think about that a lot.

I gave a speech at Jackson Hole on this, and I started it by saying, Ben Bernanke’s last speech to central bankers — it was in Basel central bank club — he said, “The one thing I can’t figure out” — he didn’t quite put it — he’s a modest person, but he basically said, “is what to do about the international monetary system. It’s a big problem.” Then five years passed, and then I gave this speech and I said, “Well, this is the one thing I can’t figure out. I’m going to describe the problem. I’ll give a half-hearted attempt to try to fix it.” I continue to think about how we can adjust that.

Last point, Tyler, is that I think that there is something in the move to digital, the move towards digital currencies, how that shapes out, that could help with this. It won’t necessarily do so, but it’s in my mind that in past times, when there had been a shift in reserve assets, when there had been a rebalancing, it starts first with means of payment. Dollars started to take over from sterling as means of payment, that helped accelerate a shift, and that’s how we organize the payment system.

If we organize it as opposed to we just let it happen organically, there’s a potential for some rebalancing. I underscore potential. I’m not as convinced we’ll get it.

COWEN: Again, everyone, Mark Carney’s new book is Value(s): Building a Better World for All. Mark Carney, thank you very much.

CARNEY: Thank you, Tyler. It’s a great pleasure.

Photo credit: Toby Madden