By Richard Johnstone | 12 October 2012
Moves by the government and businesses to pay down debts and reduce borrowing could hit economic growth for ‘years’ without effective policy responses, the chair of the Financial Services Authority has warned.
In a speech at the City Banquet at the Mansion House last night, Lord (Adair) Turner said ‘post-crisis deleveraging’ across both the public and private sectors was ‘very, very difficult to manage’.
‘In the aftermath of an excess leverage boom, attempts to deleverage – to restore private sector balance sheets, to pay down mortgages, to avoid new debt commitments – themselves depress spending and economic activity, making it more difficult actually to reduce leverage levels,’ he said.
‘If we do not carefully design policy in response, the deflationary impact on economic growth could extend for many years ahead. As the IMF noted this week, when it published its latest downward revisions of global growth projections, “risks of recession in the advanced economies are alarmingly high”.’
Recent recessions after the initial crisis had ‘played havoc with public finances’ in countries including the UK, Turner added, and will lead to increasing fiscal deficits. This would mean that ‘for many years after the crisis, overall economy leverage doesn’t reduce at all, but simply shifts from the private to public sector’.
Turner also highlighted that policy responses to the financial crisis had included ‘unconventional monetary policies’, such as quantitative easing by the Bank of England.
He backed the scheme, where the Bank buys up government bonds, saying it had ‘produced a path of real output growth and inflation slightly higher than would otherwise have occurred’.
However, this might ‘be subject to declining marginal impact’, and he urged both the Bank of England and government to be prepared to take further action. ‘Optimal policy also needs to include a willingness to employ still more innovative and unconventional policies, and to consider the combined impact of multiple policy levers – monetary policy, Bank of England liquidity insurance, prudential regulation and direct support to real economy lending – which we used either to consider quite separately, or else avoid entirely.’
The speech is likely to be the last given by the head of the FSA to the annual banquet, as the government’s Financial Services Bill will abolish the body and transfer its regulatory powers to the Bank of England.
Turner said there were ‘two major intellectual and policy failures’ behind the financial crisis, which led to the government having to bail out banks. Requirements for banks to hold a certain amount of capital in reserve for losses were ‘woefully deficient’, an the structure of the UK regulatory system was wrong.
‘The crisis was not a bolt from the blue. It arose from poor supervision, from bad rules and structures, from dangerous cultures – and the errors were made by regulators, economists, central bankers and public policy makers, as well as bankers themselves,’ he said.
‘A lot of apparently very clever people got it very wrong, and the ordinary citizen suffered. We have to do better in future.’
• The government has today published the draft Banking Reform Bill, which will implement the recommendations of the Independent Commission on Banking, chaired by Sir John Vickers, to reform the sector.
It is expected that all legislation introducing the changes will be in place by the end of this Parliament, with banks required to comply with all aspects of the ICB's recommendations from 2019.
Launching the Bill, financial secretary to the Treasury Greg Clark said: ‘We want to ensure that taxpayers are protected whilst retaining our status as a global financial centre.’
Moves by the government and businesses to pay down debts and reduce borrowing could hit economic growth for ‘years’ without effective policy responses, the chair of the Financial Services Authority has warned.
In a speech at the City Banquet at the Mansion House last night, Lord (Adair) Turner said ‘post-crisis deleveraging’ across both the public and private sectors was ‘very, very difficult to manage’.
‘In the aftermath of an excess leverage boom, attempts to deleverage – to restore private sector balance sheets, to pay down mortgages, to avoid new debt commitments – themselves depress spending and economic activity, making it more difficult actually to reduce leverage levels,’ he said.
‘If we do not carefully design policy in response, the deflationary impact on economic growth could extend for many years ahead. As the IMF noted this week, when it published its latest downward revisions of global growth projections, “risks of recession in the advanced economies are alarmingly high”.’
Recent recessions after the initial crisis had ‘played havoc with public finances’ in countries including the UK, Turner added, and will lead to increasing fiscal deficits. This would mean that ‘for many years after the crisis, overall economy leverage doesn’t reduce at all, but simply shifts from the private to public sector’.
Turner also highlighted that policy responses to the financial crisis had included ‘unconventional monetary policies’, such as quantitative easing by the Bank of England.
He backed the scheme, where the Bank buys up government bonds, saying it had ‘produced a path of real output growth and inflation slightly higher than would otherwise have occurred’.
However, this might ‘be subject to declining marginal impact’, and he urged both the Bank of England and government to be prepared to take further action. ‘Optimal policy also needs to include a willingness to employ still more innovative and unconventional policies, and to consider the combined impact of multiple policy levers – monetary policy, Bank of England liquidity insurance, prudential regulation and direct support to real economy lending – which we used either to consider quite separately, or else avoid entirely.’
The speech is likely to be the last given by the head of the FSA to the annual banquet, as the government’s Financial Services Bill will abolish the body and transfer its regulatory powers to the Bank of England.
Turner said there were ‘two major intellectual and policy failures’ behind the financial crisis, which led to the government having to bail out banks. Requirements for banks to hold a certain amount of capital in reserve for losses were ‘woefully deficient’, an the structure of the UK regulatory system was wrong.
‘The crisis was not a bolt from the blue. It arose from poor supervision, from bad rules and structures, from dangerous cultures – and the errors were made by regulators, economists, central bankers and public policy makers, as well as bankers themselves,’ he said.
‘A lot of apparently very clever people got it very wrong, and the ordinary citizen suffered. We have to do better in future.’
• The government has today published the draft Banking Reform Bill, which will implement the recommendations of the Independent Commission on Banking, chaired by Sir John Vickers, to reform the sector.
It is expected that all legislation introducing the changes will be in place by the end of this Parliament, with banks required to comply with all aspects of the ICB's recommendations from 2019.
Launching the Bill, financial secretary to the Treasury Greg Clark said: ‘We want to ensure that taxpayers are protected whilst retaining our status as a global financial centre.’
