Turner reveals BoE leadership ambitions

Lord Adair Turner, Chairman of the FSA

Lord Turner, chairman of the Financial Services Authority, has launched his manifesto to become governor of the Bank of England in a speech warning of the impotence of traditional monetary policy and the threat of global deflation.

Without declaring his candidacy, Britain’s top financial regulator ranged over the territory that will define the BoE governor’s job when it falls vacant next July and far outside his current brief as a financial regulator.

    The speech came at a moment when the publication of his private admonishments of Barclays’ management has raised his public profile and his image as someone strict with wayward banks, simultaneously denting the image of the longstanding favourite for governor, Paul Tucker, current BoE deputy governor.

    Speaking to a business audience in Manchester on Thursday evening, Lord Turner showed his radical thinking, willingness to challenge some of the long-held policy positions inside the BoE and desire to place more of the bank’s levers of power inside its main policy making committees.

    Laying out his thinking, Lord Turner slayed two positions traditionally defended by BoE officials. The first was the bank’s reliance, along with almost all economic policy makers, on a flawed consensus “which believed that achieving low and stable current inflation was sufficient to ensure economic and financial stability”.

    With little regard for Sir Mervyn King’s sensitivity and record as governor over this period, he criticised “the severe faults of that consensus, which led us into financial and economic calamity”.

    Second, he said that the tools available to the bank’s Monetary Policy Committee – interest rates and QE – had become impotent in a world where banks were unwilling or unable to pass on monetary policy easing to households and companies.

    “There are some dangers that QE, if the only policy deployed, might suffer from diminishing returns, with the economy facing a liquidity trap in which replacing private sector holdings of bonds with private sector holdings of money has little impact on behaviour and thus on demand,” Lord Turner said.

    Neither of the other leading candidates to become governor, Paul Tucker, current deputy governor for financial stability, and Gus O’Donnell, former cabinet secretary, have yet expressed their views as clearly.

    Lord Turner welcomed the new Funding for Lending Scheme aimed at giving banks cheap money and an incentive to lend it on as an example of the kind of new policy the MPC and Financial Policy Committee should consider in future.

    Currently, such ideas are decided on by the governor and other senior BoE staff without the scrutiny of the policy making committees, which include external members, to reduce the chances of group think.

    But Lord Turner is worried that the new schemes are not sufficient and that even more radical policies to boost growth and prevent deflation might soon be needed.

    “Faced with the risk of continued deflation, we need to think creatively about the combination of policy measures which will both aid economic recovery and help create a more stable future system,” he said.

    “The package of measures announced over the last three weeks reflects the integrated approach required: but it is possible that further creative policy combinations will be needed as we observe the impact of these measures and learn more about the challenges of the deleveraging process.”

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