Pundits Ponder Bailey's Bailiwick

Friday morning, investors received the answer to one of the (supposedly) most crucial questions surrounding Brexit: Yes, Mark Carney will extend his term as BoE Governor past January 31, ensuring only one major exit happens that day. Oh, and he also now has an official replacement: Andrew Bailey, who starts March 16. Most coverage describes Bailey as a 30-year BoE vet and former Deputy Governor, and that is all true. He is described as a “safe pair of hands” who is ok with Brexit, which may end the occasional antagonism that bubbled up between the government and the BoE under Carney, who opposed leaving the EU. Fine enough. But we think there is another, more interesting angle for investors. Like many of his fellow global central banking bigwigs, Bailey lacks banking experience, which we think is sub-optimal for one with so much influence over the factors that drive bank lending and profitability. He also, like new ECB President Christine Lagarde, lacks monetary policy experience, which highlights central banks’ increased political and regulatory focus—and may make for some weird policy decisions at times.

The whole “30 years at the BoE” summary is a bit oversimplified. As he ascended through the ranks, he focused increasingly on failing banks. He headed up the BoE’s unit in charge of resolving lenders during and after the financial crisis a decade ago. (For those wondering, “resolved” banks are wound down, so no, we can’t call him Bailout Bailey.) In 2013, he was tapped to head the country’s new Prudential Regulation Authority (PRA)—the main financial regulator, which operated within the BoE. That is also when he became Deputy Governor, and his position focused entirely on regulation. He was never on the Monetary Policy Committee (MPC), which sets interest rates and manages quantitative easing (QE). He was on the Financial Policy Committee (FPC), in charge of things like capital requirements. For the last three years, he headed the Financial Conduct Authority (FCA), the country’s financial services and investment regulatory body.

This last bit of his resume is the focus of most of the criticism of his appointment—which, we should note, isn’t widespread. Some high-profile fund collapses and investment frauds occurred while Bailey helmed the FCA, leading some to question whether he is a tough enough overseer to head the BoE. We won’t weigh in on that debate, but we think it speaks volumes on how the BoE has morphed over time. In the old days, it simply set monetary policy. But after the crisis, politicians decided it was best to abolish the old regulator and put the BoE in charge. The MPC would still focus on its titular remit, but it would be joined by that alphabet soup of in-house regulatory agencies and committees. The BoE Governor would therefore be in charge of monetary policy and regulation, as they would chair the MPC and FPC. Carney was the first to take on this expanded role.

As the outgoing Canadian central bank chief, Carney entered the BoE with monetary policy experience. Most of the people presumed to be on Chancellor of the Exchequer Sajid Javid’s shortlist also had monetary policy or banking experience. Bailey was a surprise pick, and the choice suggests politicians see the regulatory aspects of the role as increasingly more important. This echoes Lagarde’s appointment. As head of the IMF, she functioned largely as a global financial diplomat, helping negotiate bailouts for Greece and Argentina. As French Finance Minister before that, she was, well, a politician. The ECB has taken on more of a regulatory and political role since the eurozone crisis, and her appointment seemed to us like tying a bow on that evolution. Now the UK government has done the same.

What this means for monetary policy isn’t clear. For all we know, Bailey has spent oodles of his spare time studying banks’ business models and what drives lending. As the failing bank resolver-in-chief, he certainly would have gotten a very good look at banks’ inner workings. Execs of failing banks may have walked him through why QE wasn’t helping them. You never know! He could be a savant! Or, he could do what many suspect Lagarde will, and delegate the finer points of monetary policy direction to a trusted, experienced lieutenant. They and some potentially crack staff could do the heavy lifting for him and present their recommendations to the MPC. Only time will tell.

On the bright side, everyone seems to agree his monetary policy preferences are a question mark. No one thinks it is at all possible to predict what he will do with interest rates and QE. Pundits are quick to point out that the views of the governor don’t matter much when the nine-member MPC votes on all policy decisions. We find all of this refreshing! It seems like the first step away from rockstar central bankers, for whom the steel blue-eyed Carney was the poster boy. If Bailey’s appointment is the first step toward central banks being boring again and getting less attention, so much the better. We were all better off in the days before pundits diagrammed every central banker’s sentence and read into every last facial expression. It created the false notion that central banks were the most important economic driver. Some even wrongly hyped monetary policy as a critical stock market driver above and beyond economic trends, which is just a bridge too far. Interest rates affect the economy, and the markets price that in. But interest rates have no pre-set relationship with stocks, which have no preference between “tight” and “easy” money.

So, Mr. Bailey, welcome to the fold, and please keep it boring.