Mervyn A. King, the outgoing governor of the Bank of England, expressed confidence in his successor and discussed economic challenges facing Britain and the United States in their approaches to monetary policy and financial regulation in a speech Monday at the Economic Club of New York.
Mr. King punted, however, on a question about how America’s severe fiscal budget tightening scheduled for the end of the year might affect Britain.
“I have great confidence that one way or another,” the United States will avoid going over the so-called fiscal-cliff, he said, if doing so means just barely hanging on by the country’s “fingertips.” That was a reference to early next year when trillions of dollars in tax increases and automatic spending cuts begin to go into effect.
He did express concern at one point about the need to rebalance trade around the globe, as consumer-driven economies like the United States and Britain continue to run large trade deficits while export-driven countries like China run large surpluses.
“We haven’t found a solution to this,” he said, calling the pressures on deficit countries “inexorable.”
He said he feared that “in 2013 what we will see is growth in actively managed exchange rates” as an alternative to letting the market decide how much currencies are worth. Letting the market decide exchange rates would eventually make goods from trade-surplus economies like China more expensive and those from trade-deficit countries like the United States cheaper, which would help to rebalance global trade.
The tension between short-term and long-term policy goals, Mr. King said, is one of the challenges for other postcrisis policies, like forcing banks to recapitalize or encouraging the government to whittle down its debt.
“What seems to be the right thing to do in the short term is absolutely the opposite of what we need to do in the long term,” he said.
The Bank of England is Britain’s counterpart to the Federal Reserve and, as in the United States, the British central bank has been providing monetary stimulus to offset fiscal austerity measures pushed through the legislature.
Britain has had disappointing economic growth in the last two years, a fact that Mr. King also attributed to rising energy and commodity prices, which are holding back consumer spending, and the euro zone’s debt crisis.
“A black cloud of uncertainty has drifted across the channel,” he said, and it has diminished what might otherwise have been a stronger recovery in investment spending.
The Bank of England has engaged in three main policy initiatives to combat these drags on the economy: large-scale asset purchases, along the lines of what the Federal Reserve has pursued; a special program that rewards banks for lending by reducing their interest rates, called the “funding for lending scheme”; and designing new regulations intended to improve the health of the banking sector, like requiring greater capitalization.
Asked whether the Bank of England would consider providing more explicit guidance about when it might eventually raise interest rates — as the Fed has done — Mr. King said, “We don’t think we have a crystal ball” about such decisions and so had no plans to provide a time frame.
Last month, the British government announced that Mr. King’s successor would be Mark J. Carney, the head of the Canadian central bank. Mr. Carney, who takes over in July, will be the first non-Briton to hold the position.
“I think he’ll do a great job, and they won’t miss me at all,” Mr. King said.
A major challenge for policy makers, he said, was to “defend the market economy in the face of concerns among so many who suffered during the financial crisis,” particularly those who did not benefit from the boom before the crisis and are still extremely angry today.
“We need to support the legitimacy of the market economy,” he said.
Article source: http://www.nytimes.com/2012/12/11/business/britains-central-banker-confident-over-us-budget-talks.html?partner=rss&emc=rss
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