Finding a reverse gear

The Bank of England’s Monetary Policy Report is required reading for those interested in UK macro trends and today’s report was no exception. Listening to some of the media commentary ahead of the report’s release, people might have been forgiven for believing that monetary tightening was imminent. In reality, that was never the case although the BoE did provide some guidance on the sequencing as to how the easing of the policy throttle will occur.

The economic outlook supports lifting the foot off the gas

Turning first to the details, the BoE’s macro forecast suggested that UK GDP will grow by 7¼% in 2021 and 6% in 2022, and only slow to trend (1.5%) in 2023. One implication of this is that the level of output will get back to pre-recession levels by end-2021, which is a far sharper rebound than expected a year ago. As a result the output gap is expected to be almost eliminated this year and an excess demand position is anticipated in 2022 (i.e. a positive output gap). With inflation projected to hit 4% in Q4 2021/Q1 2022, questions have been raised as to whether the current exceptionally lax monetary stance is warranted.

One member of the MPC (Michael Saunders) voted to limit gilt purchases to £850bn (it currently stands at £825bn) rather than press on to the currently mandated upper limit of £875bn. Although the idea of calling a halt before reaching the current target is unlikely to make a great difference in the grand scheme of things, it would send a signal of intent that the BoE is prepared to scale back its asset purchases as circumstances dictate. Indeed, when the MPC announced an expansion of the upper limit for gilt purchases to £875bn in November 2020, inflation was expected to peak at 2.1% in late-2021/early-2022 whilst output was not expected to get back to pre-recession levels until early-2022 (i.e. one quarter later than in August).

As the MPC minutes pointed out, the MPC “had policy guidance in place specifying that it did not intend to tighten monetary policy at least until there was clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2% inflation target sustainably.” Although “some members of the Committee judged that … the conditions were not yet met fully”, it is hard to know what more evidence they need to justify scaling back monetary easing with inflation running at twice the target rate and with the output gap set to close. It is important to stress at this point that I agree with those who believe it is perhaps too early to significantly tighten policy. But this is not to say there is a case for easing off the throttle. On the basis that the stock of assets purchased is more important for policy purposes than the flow of purchases, setting a lower limit for gilt purchases implies a very moderate reduction in the degree of planned monetary easing.

Dealing with tightening

The BoE did indicate that when the time for tightening comes, its preference is to use Bank Rate as the instrument of choice and suggested that “some modest tightening of monetary policy over the forecast period is likely to be necessary.” As the Resolution Foundation has pointed out, this has the advantage of being swift to implement and can swiftly be reversed if necessary. But the BoE also indicated that it “intends to begin to reduce the stock of purchased assets, by ceasing to reinvest maturing assets, when Bank Rate has risen to 0.5%.” This could lead to a swifter unwinding of the balance sheet than might be expected and would go a long way towards assuaging the concerns of those who believe the balance sheet is too big.

To illustrate the impact of this, we start by looking at the details of the debt stock currently held by the BoE (here). We can use this information set to determine the precise maturity date of gilts on the balance sheet and my calculations suggest that the median maturity of gilt holdings is just over eight years. Assuming that Bank Rate reaches 0.5% by end-2023 and does not fall back below this level, allowing all maturing debt to roll off will halve the balance sheet in money terms by 2034. Further assuming nominal GDP growth of around 4% per year in the longer term, gilt holdings would decline from around 40% of GDP in 2021 to 12% by 2034. The BoE may, of course, choose to reinvest a certain proportion of maturing debt, rather than letting it all run off, and the resultant stylised scenarios are shown in the chart below. It is notable that even if gilt holdings remained at £875bn over the longer-term, the GDP assumption used here would be sufficient to reduce the balance sheet relative to GDP back towards 2013 levels even in the absence of any direct action.

In addition, the Bank suggested that it would be prepared to consider selling off assets once Bank Rate reaches 1%, thus adopting an even faster rate of balance sheet reduction. In my view, for what it is worth, this may prove unnecessary given the sharp pace of reduction generated by ceasing reinvestment. It may also significantly complicate the government’s efforts to finance the deficit. After all, if the BoE is selling gilts into a market which is saturated by primary issuance, the upshot is likely to be a sharp rise in bond yields.

Whilst there clearly are some risks associated with a policy of running down the balance sheet, the BoE believes that “the impact on monetary conditions of a reduction in the stock of purchased assets, when conducted in a gradual and predictable manner and when markets are functioning normally, is likely to be smaller than that of asset purchases on average over the past.” In other words, running down the balance sheet gradually is likely to have only a modest impact on the economy. However, it is generally accepted that central bank balance sheets will not fall back to pre-2008 levels any time soon. For one thing, there has been an increase in demand for central bank reserves by the banking sector due to changes in regulation and banks’ risk management techniques which has resulted in increased demand for high quality liquid assets. For this reason, it is unlikely that the BoE will follow a policy of full disinvestment over the medium-term.

The likes of the now-departed Andy Haldane expressed concern that the BoE’s balance sheet was too big. Therefore reducing it over the medium-term is likely to diminish the criticism that the BoE is somehow engaged in deficit financing – a point Governor Andrew Bailey was keen to refute during today’s press conference. Nonetheless, balance sheet management is a policy tool which is here to stay. With downward pressure on equilibrium interest rates, as a result of population and productivity trends, the scope for using conventional interest rate policy is diminished and balance sheets will therefore remain a useful addition to the policy armoury. But just as increasing balance sheets proved to be controversial, so the process of running them down will likely prove to be a lot more difficult than currently imagined, as the 2013 US taper tantrum illustrated.

Will they, won't they?

The BoE’s Monetary Policy Committee meets next week to decide whether to cut interest rates. It is likely to be a close call. The markets currently assign a 50% probability to such an outcome (chart). Never before have we been so close to an MPC meeting with the markets so undecided, which would appear to put some questions against the policy of forward guidance by which outgoing Governor Mark Carney set so much store.

Turning first to the rate decision, I am, like the markets, unsure how the MPC will vote next Thursday. There are equally good arguments in favour of a rate cut and for rates on hold. The case for a cut is derived from dovish comments from MPC members in recent weeks and a raft of data showing that activity slowed sharply towards the end of last year. GDP in November contracted by 0.3% versus October, suggesting that Q4 GDP will struggle to register positive growth, whilst CPI inflation remains well below the 2% target with the 1.3% rate in November representing the slowest pace in three years. On the basis that if a rate cut is likely to happen at some point, now is as good a time as any.

Against that, survey data has shown a significant rebound in recent weeks with the CBI balance of industrial optimism rising from a recession-indicating -44 in October to a much more comfortable +23 in January. In addition, the flash PMI estimates on Friday showed a sharp rebound, particularly for services, with the index rising to 52.9, the highest since August. The calculation that the MPC must now make is whether this rebound is likely to translate into the hard data, or whether it represents a false dawn, in much the same way as the post EU-referendum weakness in the summer of 2016 did not herald an economic collapse. There is also a question of whether the MPC wants to bind the hands of incoming Governor Andrew Bailey who will take up the reins in March.

Whether the BoE should be cutting rates at all is another issue entirely. I have long argued that the era of low interest rates is having adverse effects on the economy, with my particular concern being the impact on savers, particularly those saving for pensions. But in his most recent speech, Carney argued “the vast majority of savers who might lose some interest income stand to gain from rising asset prices that result from monetary policy stimulus.” That does not wash I’m afraid. Most households’ wealth is held in the form of housing, and unless you can somehow realise the wealth, whilst still maintaining a roof over your head it is not going to compensate for the income foregone in our pension pots. But it does illustrate the relaxed view of many central bankers, particularly in the Anglo Saxon world, towards low interest rates. It is not necessarily a good indicator of where Carney’s sympathies will lie next week but it is evident that he is not averse to taking rates lower if necessary.

I will provide a more comprehensive retrospective of Carney’s tenure another time but whilst he has generally done a good job as Governor there are some areas where his policy prescriptions have proved more controversial than anticipated. Recall that seven years ago, when Carney was about to be installed as BoE Governor, he extolled the virtues of forward guidance as a way of reducing the kind of uncertainty that markets are experiencing today. It is designed to supplement policy options when interest rates are at the lower bound and I discussed some of the pros and cons in this post. But it is ironic that ahead of Carney’s final MPC meeting the BoE’s communications remain as opaque as ever. In my view, this raises the question as to whether the policy itself is flawed or whether it is the BoE’s execution which is the problem.

In a paper published by the BoE in 2017 the authors noted that there are two sources of uncertainty associated with forward guidance. “First, uncertainty stemming from the fact that forward guidance announcements are incomplete descriptions of state-contingent policy behavior”. Secondly, “forward guidance promises may be imperfectly credible ... There is a well-known time-inconsistency problem associated with such promises. Namely, that the central bank has an incentive, once the recovery has taken hold, to renege and tighten policy earlier than originally promised.” This in turn leads “to uncertainty about future policy and an associated reduction in the effect of the forward-guidance announcement on interest-rate expectations.”

Clearly there is no question of the BoE raising rates earlier than anticipated. Quite the opposite in fact. But arguably, the forward guidance policy is an “incomplete description of state-contingent policy behaviour.” Part of the problem stems from the fact that there are nine MPC members, each of whom may have a different view of the current state of the economy, with the result that the state-contingent policy response is likely to differ in each case. We have heard from a number of MPC members since the turn of the year. Carney suggested that “much hinges on the speed with which domestic confidence returns.” On the basis of recent evidence that is an argument to maintain policy on hold. But his colleague Gertjan Vlieghe noted that he would need to see “an imminent and significant improvement in the UK data to justify waiting a little bit longer” – a view shared by another MPC member Silvana Tenreyro. But the big question is whether the recent set of data constitutes such an improvement?

The problem markets have is that they understand the publicly communicated positions of MPC members but they have been left in the dark regarding their reaction to the most recent data. This is a result of the BoE policy which imposes a communication blackout in the 8-9 days leading up to the interest rate announcement. Whilst this policy has been imposed with the best of intentions, it does highlight one of the unsatisfactory elements of forward guidance by preventing communication when it is most needed.

As former Fed Chairman Alan Greenspan said before a Senate committee in 1987, “If I seem unduly clear to you, you must have misunderstood what I said.” More than 30 years later, and after all the efforts by central bankers to improve the way they communicate with markets, it appears that some things never change.

The limits of central banking

Prior to the great crash of 2008, investment bankers were – at least in their own minds – regarded as masters of the universe. No more. As their fancy clothes, woven from cloth so fine that the eye could not see it, were revealed to be non-existent, they were usurped by central bankers who used the muscle of zero interest rates and the power of their balance sheets to rescue the global economy from meltdown. More than a decade later and questions are increasingly being raised as to whether the tools which were deployed in 2009, and which are still in use today, are fit for purpose. Worse still, central bankers can be forgiven for wondering whether they have been hung out to dry by politicians who seem increasingly unwilling to provide the necessary degree of support to allow them to do their job effectively.

The BoE: A relative oasis of calm

The BoE finds itself in a slightly easier position than either the Fed or ECB although it has been sucked into the political fallout from Brexit, and with a new Governor set to take over from Mark Carney in just over seven months’ time, his successor may face an unenviable task in steering a post-Brexit course. One criticism that can be levelled at the BoE is that its forward guidance policy, which has often hinted at rate hikes which never materialise, may be about to miss the mark again. Indeed, recent hints that the next rate move will be upwards flies in the face of economic data, which point at below-target inflation in H2, and trends in the global monetary cycle. In common with many central banks, it has failed to create space to ease policy in the event that the economy cools. Central bankers dismissed this line of reasoning when conditions were propitious for a rate hike in 2014, and whilst Brexit has complicated the picture, it is hard to avoid the feeling that the BoE will go into the next economic slowdown with precious little ammunition.

The ECB: Taking flak from all sides

Across the channel, the ECB’s situation is even more desperate. Despite having cut the main refinancing rate to zero and the deposit rate to -0.4% whilst boosting its balance sheet to almost 40% of GDP, a meaningful economic recovery in the euro zone remains elusive and inflation continues to undershoot the ECB’s target. There are now expectations that the ECB will counter current economic conditions with even more monetary easing – a view that Mario Draghi reinforced this morning. The ECB is all that has stood between the integrity of the euro zone and disaster: It has done all the policy easing whilst governments have stood idly by without deploying any of the fiscal ammunition at their disposal. Draghi, who will leave his post as ECB President in October, deserves great credit for doing “whatever it takes” to keep the show on the road. Those who have criticised Draghi, including Bundesbank President Weidmann and various northern European politicians, should take some time to reflect on what might have happened in 2012 had the ECB not opened the taps.

However, the criticisms levelled by Weidmann at least come from someone with skin in the game. Draghi’s hints of further easing were met today by a Twitter blast from the self-styled stable genius in the White House accusing the ECB of weakening the euro against the dollar “making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.” This sends two messages: (i) Trump is a lobster short of a clambake and more seriously (ii) he threatens to open a new front in the war of economic nationalism, dragging the euro zone into a conflict which has hitherto been confined to the US and China.

The Fed: Managing in the presence of a stable genius

Imagine, therefore, what it must be like to be in Jay Powell’s shoes. The Fed has done what the textbooks recommend by taking away some of the excessive stimulus as the economy recovered. Unfortunately, Trump has determined that the Fed is the main obstacle to the ongoing US upswing and has been excoriating the FOMC for not cutting rates. Worse still, a story surfaced today suggesting that in February the White House explored the possibility of stripping Powell of his chairmanship and leaving him as a Fed governor. This is an unprecedented attack on the independence of the central bank. Not that politicians have refrained from dictating to the Fed in the past. One story, recounted by Reuters journalist Andy Bruce, recalls instructions from the White House to former Fed Chairman Paul Volcker ordering him not to raise interest rates during an election campaign. “Volcker, knowing the command was illegal, left the room without saying anything.” But the attacks on Powell are far worse – and lest we forget, he was appointed by Trump in 2018 with the endorsement that “He’s strong, he’s committed, he’s smart.”

The FOMC has recently revised down its assessment of the need for future rate hikes and it is increasingly likely that the next move will be a cut. It is not clear whether this is a direct response to the President’s attacks or whether the Fed has misread the economic outlook so badly that it feels the need to ease policy rather than tighten, as it believed necessary at the start of the year. However, to the extent that the Fed may be trying to head off further attempts by Trump to impose his own candidates on the FOMC, following the failed attempts to appoint Stephen Moore and Herman Cain, it is likely that the Fed is acceding to the pressure. Perhaps the Fed’s view is that by throwing a few small scraps in Trump’s direction, it will be better placed to maintain its independence in the longer run. But whilst it has long been evident that the Fed is not as free from political influence as it portrays, selling out in such an obvious manner could have the reverse effect by undermining its perception of independence in the market.

Dealing with the lower bound

The common themes across the central banking universe are that they are running out of tools to deal with the low-inflation world which we inhabit today, whilst also coming under much greater pressure to deliver on politicians’ objectives. With regard to instruments at the central banks’ disposal once interest rates reach the lower bound, there are essentially just three: QE, forward guidance and driving interest rates into negative territory as the ECB has done. At a recent Fed monetary policy conference (a so-called “Fed Listens Event” which deserves more in-depth coverage another time), a paper by Sims and Wu highlighted that QE is the most useful tool of the three; forward guidance depends on a central bank’s credibility (cf. the Fed’s position) and that negative rates become less effective the larger is the balance sheet (cf. the ECB’s position).

With central banks having tried all of these instruments to a greater or lesser degree, it is difficult to avoid the conclusion that we are near the end of the road with regard to monetary policy. After all, central banks have largely failed to stimulate inflation and there are serious concerns that if the floodgates are opened even further, this will serve only to store up greater problems in the future. Indeed, I have long argued that we will only know the full impact of low interest rates in the very long term once we see what our pensions are worth. What this does suggest is that much more of the burden of managing the economy will have to fall on fiscal policy in future – an issue I will deal with in my next post. The good news is that this will at least take central bankers out of the firing line and make politicians take some responsibility for what they should have been doing all along.

Markets yet to be convinced

The release of the Bank of England’s Inflation Report last week provided the usual comprehensive overview of UK economic issues. Although it makes a nice change to be looking at economics rather than politics, it did raise a number of important questions. One of the more interesting issues was the interest rate assumptions upon which the forecast was conditioned. The BoE has always made it clear that it uses current market expectations, which is perfectly acceptable, but it does raise a chicken-and-egg issue.

The problem is this: Markets currently expect only one interest rate hike of 25 bps during the BoE’s three year forecast horizon (chart). Based on this assumption, the economy grows more rapidly than the estimated rate of potential growth with the result that by 2022 the UK is projected to show a demand gap of 1% (i.e. a level of measured GDP which exceeds the economy’s potential GDP by 1%). Governor Carney made it clear that if the economy does run in line with this forecast, interest rate rises would be “more frequent than financial markets currently expect.” Naturally the headlines screamed that “UK interest rates are set to rise” but this is to ignore the fact that the market has reduced its expectations by about 50bps in the last six months. Taking Bank Rate from its current level of 0.75% to 1.5% by mid-2022, as the market was expecting in November, implies 25 bps of monetary tightening per year which is hardly going to derail the economy.

We should thus interpret Carney’s warning as an indication that he believes the markets have become too complacent – a view which is hard to disagree with – and the Bank was very clear in telling us that it is sending a message. The implication was that if the forecast is conditioned on higher interest rates, the positive demand gap would also be lower thus reducing potential inflationary pressure. However, this raises the question of whether the forecast is the BoE’s best guess of where it believes the economy is heading or whether it is merely a device to signal where interest rates are heading. If it is the former, there is an argument suggesting that the BoE should use its own interest rate assumptions in calibrating the forecast. And if the latter, why bother producing a forecast at all?

As it happens, I do not set much store by the latter possibility so I will ignore it. But the idea that central banks should communicate their future policy responses to a given set of outcomes is an attractive one. After all, the Swedish Riksbank sets out an indicative path for interest rates conditional on its economic projections. One advantage of this approach is that it does make the central bank reaction function totally explicit, and at a time when forward guidance is an important tool in the policy armoury, such transparency is helpful. But the difficulty is that the press and the markets will require a lot of education in order not to treat this as an unconditional forecast and in the case of the BoE, this might introduce more noise into the system than is warranted. Accordingly, the strategy of taking current market pricing and using this as a forecast conditioning assumption is, in my view, an acceptable compromise.

One other aspect of the BoE’s forecasts worth noting was that, despite the presence of a positive output gap and the forecast of an unemployment rate falling to 3.5% by 2022, the projected inflation pickup was minimal. Wage growth is expected at only 3¾% on a three-year horizon whilst CPI inflation is only slightly above target at 2.2%, and whilst the BoE argues that higher inflation will only show through with a lag, this nonetheless assumes a much changed relationship between unemployment and wages compared to the recent past. On my estimates, an unemployment rate of 3.5% would result in wage growth of 6% based on a Phillips curve estimated over the period 1998 to 2012. The fact that such a tight labour market results in sub-4% wage inflation is a good outcome for the BoE and implies labour will remain fairly cheap.

At the same time, the forecast also assumes that business investment growth will recover to a rate of 5.5% by 2022 – double the rate recorded between 1998 and 2007. To the extent that cheap labour and Brexit uncertainty has prompted firms to increase their labour hiring over the past couple of years at the expense of capital investment, this raises a question of whether firms will indeed simultaneously raise investment in future whilst continuing with this rapid pace of hiring. In other words, will firms cut back on labour input in order to expand output now that they are once again relying on capital investment? And if they don’t, might the unemployment rate not fall as far as the BoE expects? Moreover, if investment is picking up, surely this will raise the potential growth rate and reduce the likelihood that the demand gap will hit 1% of GDP which in turn will reduce the inflationary threat?

Obviously, there are lot of unanswered questions here and we will only know the answers ex post. But the point I am trying to get at is that there are some nagging issues about the nature of the forecast that don’t quite stack up. And it is for this reason that markets remain unconvinced of the BoE’s efforts to talk up the prospect of interest rate hikes. Forward guidance may be one of the new policy tools but it has to be used wisely. Markets will stop listening if central banks tell them they will raise interest rates but don’t follow through. Sometimes the best form of communication is direct action and if markets are taken by surprise, so be it!

The market for central bank governors

The search for a successor to BoE Governor Carney kicked off last week, ahead of his contract expiry next January, whilst jockeying for the top job at the ECB has also got underway with Mario Draghi due to stand down in November. Naturally the press has had a field day looking at the possible candidates for both positions. But less attention has been paid to the qualities necessary to be an effective central bank governor.

Over the last 30 years there has been a tendency to appoint economists to the top job. It has not always been the case, of course. Whilst former ECB President Trichet and BoE Governor Eddie George both had academic qualifications in the subject, neither would be regarded as front-line economists. But compare them to contemporaries such as Alan Greenspan, Ben Bernanke, Janet Yellen, Wim Duisenberg, Mervyn King and Draghi it is clear that a strong economics background has been viewed as an advantage. The reason for this is simple enough: Over recent years, central banks have been given a mandate to target inflation which means that they have a much closer focus on economic issues than has historically been the case.

However, I do wonder whether the unwillingness to raise interest rates – particularly in Europe – reflects the overly cautious nature of a policy-making body in which economists hold the upper hand. It was not for nothing that President Harry Truman reputedly demanded a one-handed economist in order to eliminate their tendency to say “on the one hand … but on the other.” More seriously, since the financial crisis central banks have acquired additional responsibility to manage the stability of the financial system which means that a macroeconomic background may not be the advantage that it once was.

Perhaps the most important job of any CEO, whether of a central bank or a listed company, is institution building. Mark Carney promised to be the new broom at the BoE who would bring the bank into the 21st century, getting rid of many of the arcane practices which had become institutionalised over the years and improving diversity. I am not qualified to say whether he has succeeded in this goal but we hear good things about the working environment within the central bank. More importantly, perhaps, the BoE has taken on the regulation and supervision of around 1500 financial institutions over the past six years as the responsibilities of the central bank have evolved and the head of the Prudential Regulation Authority occupies one of the most senior jobs in the BoE.

One of those touted to succeed Carney is Andrew Bailey, head of the Financial Conduct Authority, an institution independent of the BoE which is charged with ensuring that “financial markets work well so that consumers get a fair deal.” Bailey is a former BoE official who has worked in an economics function, but crucially has a very strong background in regulation. It is an indication of the extent to which the BoE’s role has changed in recent years that Bailey is even in the running for the job.

The experience of the ECB President has been rather different since Mario Draghi took over in 2011. He is – probably rightly – credited with holding the European single currency bloc together during the Greek debt crisis by promising to do “whatever it takes,” despite opposition from representatives of other member states, notably Germany. Like the BoE, the ECB has also taken on greater responsibility for the regulation of financial institutions although unlike the BoE there is no suggestion that the potential successor to Draghi will need a background in financial regulation.

Interestingly, this paper by Prachi Mishra and Ariell Reshef makes the point that the personal characteristics and experience of central bank governors does affect financial regulation. “In particular, experience in the financial sector is associated with greater financial deregulation [whilst] experience in the United Nations and in the Bank of International Settlements is associated with less deregulation.” They go on to argue that their analysis “strengthen[s] the importance of considering the background and past work experience before appointing a governor.”

This is an important point. In 2012, when the BoE was looking for a successor to Mervyn King, the Chancellor of the Exchequer cast his net far and wide. Mark Carney got the gig because the government wanted an outsider to take over a central bank which was perceived to be too close to the institutions it was meant to regulate. Moreover, he had previous experience of running a central bank. But whilst Carney has done a good job over the past six years, I still believe it wrong to think (as the Chancellor George Osborne did during the hiring process) that filling this role is akin to finding a CEO of a multinational company, whose place can be filled by anyone from an (allegedly) small pool of international talent. They are an unelected official who holds a position of key strategic importance, enjoying unprecedented powers to influence both monetary policy and the shape of the banking system. In that sense it has never been clear to me that the interests of an outsider with no experience of UK policy issues are necessarily aligned with the UK's national interest.

Contrast this with the way the ECB process works. There are, in theory, 19 candidates for the top job amongst the central bank governors of EMU members, all of whose interests are aligned with those of the euro zone. In addition, there are another five potential candidates amongst the members of the Executive Board. Admittedly there is a lot of political horse-trading involved in the selection process, but there is no need to look for an outsider who may not necessarily be up to speed with the complexities of local issues, not to mention local politics which is increasingly a problem for central bankers (I will come back to this another time).

For the record, this is absolutely not an issue of economic nationalism – it is simply to remind those making hiring decisions that just because someone has done a similar job does not necessarily make them the best candidate for a position elsewhere. Indeed, if the evidence from the private sector is anything to go by, the continuity candidate may be the best person for the job: In the private sector, “firms relying on internal CEOs have on average higher profits than external-CEO firms”. And for anyone who doubts that the search for an external candidate will necessarily be an improvement over the local options, just ask the English Football Association about their experiences with Sven-Göran Eriksson and Fabio Capello.