(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Ian Campbell
LONDON, Oct 12 (Reuters Breakingviews) - Adair Turner seems to be offering to pilot the monetary helicopter as he raises his profile in the race to be Bank of England governor. The chairman of the Financial Services Authority says "still more innovative and unconventional" policies may be needed to combat the forces of deleveraging and deflation. Quite what Turner meant was left unclear. More radical monetary policy is always possible. But powerful medicine is also dangerous.
Turner is tapping into well-established current fears. The Bank 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 is still growing only weakly.
Perhaps the BoE should do more? It could, for example, like its American cousin, expand the range of assets it buys. The U.S. Federal Reserve's third round of quantitative easing ploughs $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 the medicine has its risks. The U.S. and global crisis began with house price inflation stoked by excessive private lending. Now the danger is that the seeds of the next boom-bust asset price cycle begin to be sown.
Even bolder measures could be employed to counter powerful deflationary forces. Most radically of all the BoE could, in cooperation with the government, turn the government debt it has bought for monetary purposes into fiscal financing. This might be an appropriate remedy in extreme deflationary circumstances. But it might, as in the past, also prove more irresponsible than innovative. High or hyper-inflation could be fuelled.
And deflation is not the problem at present. Inflation is running at 2.5 percent in the UK, eroding earnings that are rising considerably less fast. This week Martin Weale, a member of the bank's monetary policy committee, expressed doubt that "substantial extra support for the economy would be compatible with the inflation target."
The problem is slow recovery. How far should monetary policy go to try to make it faster? Turner referred to the "fool's paradise" of the recent past when credit creation risks were ignored. The risk is that new policy shots at paradise prove the foolish source of the next crisis.
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- Adair Turner, chairman of the Financial Services Authority and a candidate to be the next governor of the Bank of England, said that Britain must be ready to adopt more unconventional measures so that deleveraging and the euro zone crisis don't crimp economic growth for years.
- "Quantitative easing alone may be subject to declining marginal impact," Turner said on Oct. 11. He said that "optimal policy also needs to include a willingness to employ still more innovative and unconventional policies."
- Martin Weale, a member of the Bank of England's monetary policy committee, earlier said that he was "concerned about the stickiness of inflation" and that it was "not self-evident" that "substantial extra support for the economy would be compatible with the inflation target."
- Reuters: UK FSA's Turner says economy may need more radical steps
- For previous columns by the author, Reuters customers can click on
(Editing by Robert Cole and David Evans)
Keywords: BREAKINGVIEWS TURNER/