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Debt reduction could hit growth for years, says Lord Turner Debt reduction could hit growth for years, says Lord Turner
(35 minutes later)
Reducing private, business and government debt post the financial crisis could impact economic growth for many years, the head of the Financial Services Authority (FSA) has said.Reducing private, business and government debt post the financial crisis could impact economic growth for many years, the head of the Financial Services Authority (FSA) has said.
Lord Turner also questioned the continuing effectiveness of Bank of England stimulus.Lord Turner also questioned the continuing effectiveness of Bank of England stimulus.
He said more "innovative and unconventional" policies were needed.He said more "innovative and unconventional" policies were needed.
Lord Turner is seen as one of the leading candidates to take over as the next governor of the Bank.Lord Turner is seen as one of the leading candidates to take over as the next governor of the Bank.
'Safe levels''Safe levels'
In his final Mansion House speech after four years as head of the UK's financial watchdog, which will be split up next year, Lord Turner said the financial crisis of 2008 was "not a bolt from the blue".In his final Mansion House speech after four years as head of the UK's financial watchdog, which will be split up next year, Lord Turner said the financial crisis of 2008 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."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.
He said the amount of capital held by banks as a buffer to protect against any potential crisis was a "small fraction of safe levels".He said the amount of capital held by banks as a buffer to protect against any potential crisis was a "small fraction of safe levels".
Lord Turner said much good work had been done to correct these mistakes, but much more needed to be done.Lord Turner said much good work had been done to correct these mistakes, but much more needed to be done.
He pointed to new global banking standards, known as Basel lll, which would ensure a far safer banking system, and in the UK to the new regulatory framework to replace the FSA.He pointed to new global banking standards, known as Basel lll, which would ensure a far safer banking system, and in the UK to the new regulatory framework to replace the FSA.
He also said "there are increasing signs that many banking industry leaders recognise the need for major change". Some observers have questioned whether the industry has learned lessons from the crisis, arguing that too many bankers have returned to business as usual.He also said "there are increasing signs that many banking industry leaders recognise the need for major change". Some observers have questioned whether the industry has learned lessons from the crisis, arguing that too many bankers have returned to business as usual.
'Marginal impact''Marginal impact'
The FSA chief warned of the impact of government spending cuts and households paying down debt, particularly given there was limited room for the central bank to further reduce interest rates, which already stand at a record low of 0.5%.The FSA chief warned of the impact of government spending cuts and households paying down debt, particularly given there was limited room for the central bank to further reduce interest rates, which already stand at a record low of 0.5%.
"If we do not carefully design policy in response, the deflationary impact on economic growth could extend for many years ahead," he said."If we do not carefully design policy in response, the deflationary impact on economic growth could extend for many years ahead," he said.
He argued the Bank of England had no choice but to pump money into the economy through its programme of quantitative easing (QE), but questioned whether the policy may be becoming less effective.He argued the Bank of England had no choice but to pump money into the economy through its programme of quantitative easing (QE), but questioned whether the policy may be becoming less effective.
"QE alone may be subject to declining marginal impact," he said."QE alone may be subject to declining marginal impact," he said.
The coalition has made reducing the UK's debt levels its main economic priority. To this end, it has implemented a wide range of spending cuts, designed to save money and restore confidence in the UK economy among international investors.The coalition has made reducing the UK's debt levels its main economic priority. To this end, it has implemented a wide range of spending cuts, designed to save money and restore confidence in the UK economy among international investors.
Critics argue that these cuts have simply served to push the UK into a deeper recession - the economy has returned to recession having contracted for the past three quarters.Critics argue that these cuts have simply served to push the UK into a deeper recession - the economy has returned to recession having contracted for the past three quarters.
Away from the UK, Lord Turner said the eurozone must forge closer ties if it is to survive the current debt crisis.Away from the UK, Lord Turner said the eurozone must forge closer ties if it is to survive the current debt crisis.
He said banks must be supervised centrally by the European Central Bank, eurozone governments must begin issuing some sort of common debt, often referred to as eurobonds, and move towards common taxation and spending policies.He said banks must be supervised centrally by the European Central Bank, eurozone governments must begin issuing some sort of common debt, often referred to as eurobonds, and move towards common taxation and spending policies.
Some eurozone governments are opposed to some of these measures, not least Germany, which is against any kind of common debt issuance.Some eurozone governments are opposed to some of these measures, not least Germany, which is against any kind of common debt issuance.
He also raised the politically sensitive issue of the eurozone breaking up.He also raised the politically sensitive issue of the eurozone breaking up.
"[The UK] has an enormous national self-interest in the eurozone either taking the steps required to succeed, or, if that is politically unattainable, dissolving in a controlled rather than chaotic fashion.""[The UK] has an enormous national self-interest in the eurozone either taking the steps required to succeed, or, if that is politically unattainable, dissolving in a controlled rather than chaotic fashion."