Mark Carney, the former head of the Bank of Canada who has just taken over as governor of the Bank of England, presided Thursday over his first monthly meeting of Britain’s Monetary Policy Committee (MPC). The meeting produced no change in monetary policy, yet Carney is already being hailed as Britain’s economic savior. The BBC even paid him the greatest compliment that any middle-aged white male could wish for, when it compared his appearance and hairstyle to George Clooney’s. Carney may continue basking in this adulation because he is lucky enough to be in the right place at the right time.
He has arrived at the BoE at the precise moment when the economic figures have started to suggest that the British economy is pulling out of its longest and deepest recession on record. One of the main reasons for this turnaround has been a sudden pickup in housing prices and mortgage lending, the traditional driving forces of the British economy. This improvement, in turn, has reflected a bold new government-backed borrowing program, whereby the British Treasury is guaranteeing up to £600,000 of new mortgage debt for anyone who can put up 5 percent of equity into buying a home. While this audacious policy attracted surprisingly little attention in the media when George Osborne announced it in his March budget, British homeowners and bankers were quick to catch on. As a result, house prices are rising rapidly across Britain, mortgage lending has rebounded to its highest level since the Lehman crisis and homebuilders’ shares have almost doubled. And all this is before the government incentives are expanded from newly-built houses to secondhand properties and remortgages in January 2014. For the moment, house prices are being bid up by cash-rich buyers who are front-running the government subsidies, in the confident expectation that a full-scale property boom will begin in 2014.
Given the powerful response to the government’s mortgage subsidies, the additional quantitative easing that was widely expected from Mark Carney’s “monetary activism” may no longer be required. It may be enough for the BoE to provide commercial banks with liquidity to finance the government’s planned credit expansion and to keep short-term rates near zero. Instead of trying to persuade the hawks on the MPC who repeatedly thwarted his predecessor Mervyn King’s requests for more QE, Carney may succeed in reviving the British economy simply by making a few speeches — the “forward guidance” he used in Canada to convince investors that interest rates would stay near zero for several years ahead.
But what will the impact be on the British economy if Carney and Osborne manage to generate a property and mortgage boom? Refloating the economy on a wave of property appreciation and mortgage borrowing would return Britain to the debt-driven, consumer-led growth of the pre-Lehman period. It would mean abandoning the “structural rebalancing” from consumption and services to exports and manufacturing that Mervyn King believed was essential to Britain’s economic rehabilitation. But King’s views are no longer relevant — and his record of economic management suggests that a degree of skepticism about his analysis may be in order.
Britain’s economic history suggests that the conventional wisdom about the benefits of rebalancing from services to manufacturing may simply be wrong. In the five years of attempted rebalancing since the financial crisis started in 2008, Britain’s economic performance has been abysmal. GDP has lagged behind every G7 country apart from Italy. GDP per capita, the broadest measure of living standards and productivity, has done even worse, falling by 6.7 percent from its 2008 peak, with no evidence of recovery since 2010. The industrial production record has been just as bad. Despite the official efforts to promote manufacturing and the big devaluation of the pound after 2008, industrial production has been even weaker in Britain than in France — down by 13.6 percent since its peak in May 2007, compared with 13.5 percent in France.