Carney, Mark

Mark Carney (1965-) is a Canadian banker who in 2013 became the 120th Governor of the Bank of England. He is the first non-Briton to hold that position. Prior to this appointment, Carney served (from 2008 through 2013) as the eighth Governor of the Bank of Canada. His actions during the 2008-09 global financial crisis are widely believed to have helped Canada avoid its most severe consequences.

Carney was educated in economics at the Universities of Harvard and Oxford. He worked for 13 years for Goldman Sachs in several locations and capacities, including managing director for investment banking. In 2003, he began a career in public service in Canada. He was appointed as a Deputy Governor of the Bank of Canada in 2003, and then seconded by the Canadian Department of Finance (in 2004) to serve as Senior Associate Deputy Minister. In that position he handled several delicate files, including income trusts (flow-through investment vehicles designed to avoid corporate taxes) and the 2007 freeze in Canada's asset-backed commercial paper market. He was appointed Governor of the Bank of Canada, replacing the retiring David Dodge, beginning in February 2008.

Debt crisis

A debt crisis occurs when a nation-state is unable to meet its sovereign debt service obligations. A variety of operational definitions in the empirical literature relate in one way or another to indicators of debt-servicing difficulties: missed interest payments, missed principal payments, widening sovereign debt interest rate spreads and the like (see Pescatori and Sy, 2004). Notably, the label of a "debt crisis" is often affixed before any outright debt default occurs, and, as such, the crisis represents as much a crisis of confidence as any threat of actual default.

Although debt crises have a long history (see Eichengreen and Lindert, 1989), it was the experience of several global South countries in the 1980s that captured the attention of the contemporary international financial community. Informed by neoclassical eco- nomic theory, analyses of these crises assumed macroeconomic imbalances were due to inadequate market discipline creating fiscal deficits that caused the crises. The con- sensus opinion on a resolution saw country after country forced to "liberalize", "pri- vatize", "deregulate", and generally cut public spending as conditions of the bailout packages. The result was "a dramatic global episode that had profound and lasting effects on international financial flow patterns [. . .] and developing country economic policy" (Barrett, 1999, p. 185). The considerable human costs, social dislocation and rising income inequality resulting from the forced structural adjustments compounded the considerable resource costs of the crises to people and nations least able to pay (see George, 1989).

Debt deflation

First identified by Fisher (1933) as the cause of the Great Depression in the 1930s, debt deflation is a cumulative process of declining output and prices set in train by an excessive level of private debt coinciding with low rates of inflation.

Fisher (ibid., p. 339) emphasized the importance of disequilibrium in this process, noting that even if we assume that economic variables tend towards equilibrium, "[n]ew disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium".

Given the starting positions of a higher than equilibrium level of debt and a lower than equilibrium inflation rate, debtors are forced to undertake distress sales at reduced prices, which causes both deflation and a fall in the amount of money in circulation as debts are paid off. The reduction in debt is less than the fall in nominal GDP, leading to an increase in the real debt burden even though nominal debt levels fall - a situation that Fisher (ibid., p. 344, italics in original) described as "the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe."

First and Second Banks of the United States

The United States is unique among Western industrializing nations in that it had no central banking institution during its initial period of sustained economic growth (1840- 1910). It experimented with a form of central banking in its first 50 years of nationhood, but ultimately turned away from central banking in favour of a divorce between the central State and the banks and direct monetary stabilization by the Treasury.

Between 1790 and 1840, the US federal government chartered two banks, both called at the time the Bank of the United States, but subsequently differentiated, for the con- venience of history, as the First and Second Banks of the United States. Both institu- tions were commercial banks chartered to address problems in public finance; both were the largest banks in the country and the only ones allowed to operate a national branch network; and both encountered political opposition to their charter renewal and closed after operating for 20 years. The First and Second Banks carved out a distinct niche in the US monetary system, supplying larger-denomination notes and drafts that circulated throughout the national economy and were regarded as equivalent to specie (gold and silver coins), the ultimate reserve and settlement asset at the time.

European Central Bank

The European Central Bank (ECB) was designed to be the monetary policy bridge from which the euro - the leading symbol of European unity and supposed guarantor of just that - is controlled. The ECB and the European System of Central Banks (ESCB) were established in Frankfurt am Main, Germany, in June 1998 in accordance with the "Maastricht Treaty" on European Union (EU). The ESCB comprises the newly founded ECB and the pre-existing national central banks (NCBs) of all EU member countries (currently 27). The subset of EU member countries that have actually adopted Europe's "single" currency (currently 18) together with the ECB form the Eurosystem, which is governed by the decision-making bodies of the ECB.

While still young, the ECB is a peculiar central bank both by its statutory set-up and actual policy practices. Modelled after the Deutsche Bundesbank, the ECB has tried hard to emulate the "stability-oriented" policy approach and successes of its German archetype and original inspiration - which itself became part of the Eurosystem with the euro changeover and is supposedly subservient to its new European master today. Accordingly, its mind-set and policy approach features a peculiar asymmetry: the ECB is quick to hike in view of perceived inflation risks but reluctant to ease in support of the economy.

Financial instability hypothesis

The "financial instability hypothesis" is the term given by the American economist Hyman P. Minsky to his theory explaining why capitalist market economies are prone to instability. The theory integrates macroeconomic analysis with an original microeco- nomic view of how capitalist firms operate. Financial fragility refers to the build-up of debt that precedes the breakdown in economic activity, in a market capitalist economy with a sophisticated debt-based financial system. The crisis then bequeaths a legacy of unsustainable debt to succeeding periods until a boom revives expenditure and sales revenue sufficiently to make the debt burden manageable, whereupon the cyclical build- up of debt resumes.

Exchange-rate interventions

Exchange-rate interventions, also referred to as foreign exchange (forex) interventions, are operations by the central bank performed in the foreign currency market(s) with the aim of affecting (or "managing") the exchange rate of the national currency. By defini- tion, such transactions consist in purchases or sales of assets denominated in foreign currency and are undertaken continuously under fixed (or pegged) exchange-rate regimes to maintain the peg at the announced level. Yet forex interventions may also frequently occur under flexible (or floating) exchange-rate arrangements, to smooth out potentially abrupt exchange-rate adjustment especially when forex volatility is higher than usual.