FSA's Turner says economy may need more radical steps

LONDON Thu Oct 11, 2012 9:35pm BST

The chairman of the Financial Services Authority, Adair Turner, leaves Downing Street in central London May 28, 2012. REUTERS/Neil Hall

The chairman of the Financial Services Authority, Adair Turner, leaves Downing Street in central London May 28, 2012.

Credit: Reuters/Neil Hall

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LONDON (Reuters) - Britain must be ready to adopt more unconventional measures so that debt cutting and the euro zone crisis don't crimp economic growth for years, Financial Services Authority Chairman Adair Turner said.

Turner, who has applied to be the next governor of the Bank of England from July 2013, strayed beyond his remit in a speech to financial leaders to show his willingness to embrace radical thinking to boost the recession-hit economy.

Policymakers face a tough trade-off between forcing banks to be better capitalised and ensuring the economy has enough credit. But this job has been made even harder by the euro zone crisis and the need for governments to cut debt.

The Bank's new risk watchdog, the Financial Policy Committee, of which Turner is a member, has been trying to reach a consensus on this issue.

"We have to find creative ways forward which as best possible both increase resilience and support lending and as a result, maintain nominal demand," Turner told an audience at the Mansion House in the heart of London's historic financial district.

Britain has already put together a package of measures in a bid to kick-start the economy, such as buying government bonds to inject cash into the economy, and giving banks incentives to lend money to businesses.

Turner said the benefit of quantitative easing, which many economists expect will be extended next month, may already be waning. On the other hand, more interest rate cuts may not have much impact given that rates are already close to zero, he said.

Yet without carefully designed policy responses, the deflationary impact on growth that the banks necessary deleveraging has could hurt the economy for many years ahead.

"So optimal policy also needs to include a willingness to employ still more innovative and unconventional policies," Turner said.

FOOL'S PARADISE

It was Turner's last FSA speech in the Mansion House, a stone's throw from the Bank, before the watchdog is scrapped early next year to make way for a new system of supervision divided between the central bank and a new standalone Financial Conduct Authority.

The aim is to plug supervisory holes opened up by the 2007-09 financial crisis that caught the FSA unawares, leaving taxpayers to bail out Northern Rock and buy most of Royal Bank of Scotland.

The FSA is one of the few watchdogs in the world to have formally accepted blame for pre-crisis supervisory failings that focused on "light touch" rules to keep London competitive with New York and other rival financial centres.

Such policies were based on "intellectual failure".

"In retrospect, it was a fool's paradise - the band playing on, oblivious to the dangers ahead," Turner said.

He had a baptism of fire, becoming chairman of the FSA just five days after U.S. bank Lehman Brothers crashed in September 2008, leading to a global market meltdown.

But as regulator he has been a hardliner, forcing UK banks to build up capital and liquidity reserves far ahead of new global requirements, though now making a partial U-turn as Britain's economy remains in the doldrums.

He said leaders of banks, whose high bonuses and mis-selling scandals have angered the public, are showing increasing signs of a cultural change.

Turner and King teamed up to oust Bob Diamond from his job as chief executive of Barclays in July after the bank was fined a record amount for rigging the Libor interest rate benchmark.

Turner faces competition for the top job at the Bank from its deputy governor, Paul Tucker, the bank's former chief economist, John Vickers, and others. Chancellor George Osborne is expected to announce his choice for the job in early December.

(Additional reporting by Sven Egenter; Editing by Hugh Lawson)

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Comments (1)
rhurroar wrote:
If we are to avoid a re-occurrence on the banking and sovereign crisis undermining world growth, what better time to ask whether our collective interest are better served by an economic landscape that includes government as a direct but limited participant in the financial market?

Taking stock of the reach and the role of government in the economy, we must not draw from back from rigorous analysis of established platforms in seeking to determine if the financial system as currently constituted is best placed to execute the role of driving economic growth.

Central to any such analysis must be the fact government is by and large dependent on a healthy economy to fund its expenditure. The linkage and risk to growth of this dependency is evident in this latest manifestation of economic weakness and declining growth, as the finances of national governments, in some cases already impaired as a result of prior economic downturns, lax budgetary discipline, or a combination of both, fall further and further into deficit and debt, reducing their capacity to influence or utilise monetary corrective measures, both adding to and prolonging the downturn.

The fix to this unintended, but inbuilt weakness and risk to economic well-being will require in the first instant an alternate that reduces the dependency of government on taxation to fund expenditure: and an unwavering commitment by government to fiscal (budgetary) accountability and discipline, thereby mitigating / removing government as a future threat to growth.

Consider then that government as a lender –specifically a mortgage lender-is positive in three major aspects: the public gain as the cost of debt is reduced increasing housing affordability and disposable income; the government gains as revenue increases, reducing the need for borrowings, reducing / eliminating deficits and reducing debt to GDP ratios; finally the capital markets at a stroke enjoys a massive boost, as a mountain of liquidity is directed to the corporate bond and equity markets, both deepening and widening the pool and sources of funding for small and corporate business investment.

Now is the time for our elected representatives to look at expanding the role of government to incorporate a direct financial presence. A successful determination may lead to government providing access to home mortgages at 4% return over 25 years, facilitating a housing recovery, reviving economic growth and putting the jobless back to work. What better signal to the market, of a strategy and method to exit the crisis, than government in receipt of a continuing revenue stream, outside of taxation to fund future expenditure, and so energise the private sector to get on with the business of growing the economy, confident in the outlook of the treatment for business profits.

How soon we exit the current financial crisis is up for grabs, of one thing we can be certain. We must look to strengthen the financial system, ensuring the system is better positioned to serve the needs and interest of the public, government, and small and corporate business, all at one and the same time.

Oct 11, 2012 2:00am BST  --  Report as abuse
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