Students of British history will recall the story of Thomas a’Becket, the 12th century prelate who was handpicked by Henry II to become Archbishop of Canterbury because of his loyalty to the Crown. Within months of his appointment, a’Becket turned against the King in the numerous conflicts between church and state. As a result, a’Becket was murdered at the altar of Canterbury Cathedral in 1170, after four of Henry’s henchmen heard their royal master mutter in irritation: “Will no one rid me of this turbulent priest?” Archbishops do not have much political clout these days, but comparable spiritual importance now attaches to central bankers. And a central banker who suddenly seems reminiscent of Thomas a’Becket is Mark Carney, the recently appointed governor of the Bank of England.
When George Osborne, the British chancellor of the Exchequer (finance minister), delivered his Autumn Statement on Britain’s economic and fiscal prospects this week, he intended it as a “soft launch” for the Tory-Liberal government’s campaign for re-election in May 2015. The big set-piece speech offered Osborne an ideal opportunity to boast about the British economy’s sudden improvement this year and to announce some populist measures, such as a “voluntary” price-control regime for energy utilities, that were carefully designed to wrong-foot the Labour opposition. Osborne’s speech marked the start of a long political campaign designed to create a Pavlovian association in voters’ minds between government policies, rising house prices and the economic recovery. If this campaign is successful it will virtually guarantee election victory for the Tory-Liberal coalition — and it could even make an outright majority for the Tories conceivable in 2015.
Last week, however, the plan for a mutually-reinforcing cycle of rising house prices, strengthening consumer confidence, accelerating economic activity and improving Tory fortunes suddenly came under threat from the most unexpected quarter. Mark Carney was hand-picked this year by Osborne and was imported all the way from Canada because he seemed to offer less resistance than any plausible British candidate to the Tory plan for a pre-election economic recovery powered by rising property prices and re-leveraging by homeowners.
If Mervyn King were still governor, it is inconceivable that Osborne could have launched the audacious guarantee scheme for highly leveraged mortgages that has been one of the main driving forces for this year’s dramatic housing recovery (the other being the flow of money into London property from southern Europe, Russia and China). Last Thursday, however, Carney suddenly changed his tune, unexpectedly announcing that “we don’t want a housing market driven by deterioration in bank balance sheets and underwriting standards.” That, of course, was exactly the purpose of Osborne’s Help to Buy scheme, announced in the March Budget and accelerated in October, with its guarantees for mortgages of up to $1 million with leverage ratios as high as twenty-to-one. In response to Carney’s broadside, Osborne made his dissatisfaction clear: “The market for higher loan-to-value mortgages remains very restricted by historical standards…and this is a significant barrier to first-time buyers.”
The most important question now for Britain’s political and economic outlook is whether this week’s rhetorical divergence is a blip in the cooperation between Osborne and Carney or a harbinger of much bigger clashes over the government’s effort to stoke a pre-election property and mortgage boom.