BREAKINGVIEWS-Turner-like monetary ideas could spur next crunch


(The author is a Reuters Breakingviews columnist. The opinionsexpressed are his own)

By Ian Campbell

LONDON, Oct 12 (Reuters Breakingviews) - Adair Turner seemsto be offering to pilot the monetary helicopter as he raises hisprofile in the race to be Bank of England governor. The chairmanof the Financial Services Authority says "still more innovativeand unconventional" policies may be needed to combat the forcesof deleveraging and deflation. Quite what Turner meant was leftunclear. More radical monetary policy is always possible. Butpowerful medicine is also dangerous.

Turner is tapping into well-established current fears. TheBank of England has printed a colossal 375 billion pounds -equivalent to about a quarter of annual UK GDP - and bought,almost exclusively, UK government bonds. Yet the economy isstill growing only weakly.

Perhaps the BoE should do more? It could, for example, likeits American cousin, expand the range of assets it buys. TheU.S. Federal Reserve's third round of quantitative easingploughs $40 billion per month into mortgage-backed securities.That reduces mortgage interest rates, reduces consumers'debt-service costs, and frees them to spend more. But themedicine has its risks. The U.S. and global crisis began withhouse price inflation stoked by excessive private lending. Nowthe danger is that the seeds of the next boom-bust asset pricecycle begin to be sown.

Even bolder measures could be employed to counter powerfuldeflationary forces. Most radically of all the BoE could, incooperation with the government, turn the government debt it hasbought for monetary purposes into fiscal financing. This mightbe an appropriate remedy in extreme deflationary circumstances.But it might, as in the past, also prove more irresponsible thaninnovative. High or hyper-inflation could be fuelled.

And deflation is not the problem at present. Inflation isrunning at 2.5 percent in the UK, eroding earnings that arerising considerably less fast. This week Martin Weale, a memberof the bank's monetary policy committee, expressed doubt that"substantial extra support for the economy would be compatiblewith the inflation target."

The problem is slow recovery. How far should monetary policygo to try to make it faster? Turner referred to the "fool'sparadise" of the recent past when credit creation risks wereignored. The risk is that new policy shots at paradise prove thefoolish source of the next crisis.

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- Adair Turner, chairman of the Financial Services Authorityand a candidate to be the next governor of the Bank of England,said that Britain must be ready to adopt more unconventionalmeasures so that deleveraging and the euro zone crisis don'tcrimp economic growth for years.

- "Quantitative easing alone may be subject to decliningmarginal impact," Turner said on Oct. 11. He said that "optimalpolicy also needs to include a willingness to employ still moreinnovative and unconventional policies."

- Martin Weale, a member of the Bank of England's monetarypolicy committee, earlier said that he was "concerned about thestickiness of inflation" and that it was "not self-evident" that"substantial extra support for the economy would be compatiblewith the inflation target."

- Reuters: UK FSA's Turner says economy may need moreradical steps

- For previous columns by the author, Reuters customers canclick on

(Editing by Robert Cole and David Evans)