In a speech last night at the Mansion House, Turner was openly critical of the Bank of England’s quantitative easing programme, saying that the policy is out of steam and increasingly ineffective and calling for ‘innovative and unconventional policies’ to get growth going again.
Hmm. Could this high-profile new stance have anything to do with the facts that the FSA is about to be wound up and that Turner is the leading external candidate to take over from Mervyn King as governor of the Bank of England? Members of the audience could certainly be forgiven for thinking that the former McKinsey consultant and vice-chairman of Merrill Lynch Europe was making a not-so-veiled pitch for the governor’s job.
Exactly what these wizard new wheezes might be he did not elucidate, but the received wisdom is that he is probably referring to some form of ‘Helicopter money’. Turner is known to favour a version of this extreme form of intervention that amounts to telling the Treasury that it won’t have to pay back some or all of the £375bn of government debts which the Bank acquired as a result of QE. Some of that debt is due for repayment next year, and rolling it over on a zero interest basis would amount to the Bank writing it off. So much for moral hazard - try suggesting that approach with your mortgage provider and if all you get is laughed out of court you’ll have got off lightly.
Turner’s basic premise is that the law of unintended consequences is hard at work among us, and that the pace at which consumers, corporations and banks in particular are being encouraged to pay down debt and recapitalise is actually causing more harm than good. Sucking all the money that could be used for spending and investment out of the economy and killing the prospects for growth before they even get started, in effect.
Now he may well have a point there, it is certainly proving a lot more arduous to get out of debt than it was to get into it. But the key question is whether there is really anything that can be done about it that doesn’t run the risk of making things worse. Never mind that Turner’s plan amounts to direct funding of government spending by the Bank which is enough to make many economist’s stomach turn - would it work?
Well, that depends what you mean. It would encourage government spending, as free credit tends not to be turned down either by governments or private individuals. That might be a good thing is modest sums were spent wisely on infrastructure and the like - but as the scheme would also remove the immediate negative consequences of bad spending that is arguably much less likely to happen. Whether in the long term that would lead to greater debt repayments or just greater debt is a nicely-balanced point.
What can be said about helicopter money with some certainty is that it undermines the currency and is extremely inflationary. That may not matter so much now but if the policy does work and growth is stimulated, the underlying inflation inherent in the system would probably at least cancel out the benefit.
So, take your pick. A long slow decade or so of painful de-leveraging, or a big stimulus now with the very great risk of an inflationary bubble if it works. Still, the government would probably be very happy with a bit (or even a lot) of inflation - arguably its best chance of getting the debt burden down, even if it’s a disaster for the rest of us. So as public job applications go, Turner’s was actually pretty well pitched.