Lord Turner: print new money to boost the global economy

Lord Adair Turner has never been afraid to court controversy. The former UK finance industry regulator’s views on what caused the 2008 economic crash and how to avoid a repeat have been challenged by some of his peers. 

He jokes that some central bankers “refuse to look him in the eye” for breaking the ultimate monetary taboo: calling for central banks to directly finance government deficits.    
When speaking at London Business School, Lord Turner said that overt money finance or ’helicopter money’ – where central banks print new money to finance tax cuts and public expenditure increases, or directly distribute it to households or businesses – could strengthen struggling economies. He believes increased public expenditure on infrastructure investment would directly boost employment, while distributing free cash fuels private spending on everything from cars, clothes and electronic goods to eating out or going to the cinema. 

“There is a dangerous pessimism that suggests that the public authorities can’t do anything to prevent deflation,” Lord Turner says. “If you believe the problem is a deficiency of nominal demand, there is always something you can do – introduce overt monetary finance of increased fiscal deficits. 

“Milton Friedman [US economist] argued in 1948 that you should have monetary finance of fiscal deficits not only in emergency situations, but all the time. He said that under a coherent framework, government expenditure would be financed exclusively by tax revenues through the creation of money. He believed that the chief function of the monetary authority should be to create money to meet government deficits.” 

Lord Turner, who analyses the 2008 financial crash in his book Between Debt and the Devil: Money, Credit and Fixing Global Finance, uses comments made by US economist Ben Bernanke in 2003 to support his view. Bernanke said at the time that overt money finance could help revive the Japanese economy following a decade long slump. After the 1980s boom and subsequent property crash, the nation’s economic growth slowed in the 1990s. Overleveraged companies stopped borrowing, leading to a fall in private investment and a depressed economy.  

Japan’s policymakers invested billions of yen in infrastructure projects, cut taxes and introduced quantitative easing to revive the ailing economy. The government also issued shopping vouchers to 35 million voters to encourage spending, but to no avail. Despite the nation’s interest rate being near zero, the Japanese economy continued to flag between 1991 and 2001. Since then, the country has experienced slow growth and a gradual price deflation. 

Educated view

His opinions may be unpopular with some, but Lord Turner has the kudos and credibility to make people take note. From 2008 to March 2013, he was chairman of the UK Financial Services Authority (FSA) – which was replaced by the Financial Conduct Authority on 1 April 2013 – following roles as partner and vice chairman at McKinsey and Merrill Lynch respectively. Other previous roles include director general of the Confederation of British Industry and non-executive director of Standard Chartered Bank, Siemens UK and United Media Business. Today, Lord Turner is chairman of the governing body at the Institute of Economic Thinking and a non-executive director of Prudential. 

Lord Turner’s appointment as chairman of the FSA in September 2008 came at a critical time for the global economy. Just five days before he joined, Lehman Brothers went bust amid the onset of a financial crisis that still hangs like a gloomy cloud over many markets. 

“It was like becoming captain of the Titanic after you’d hit the iceberg, but before the ship had actually sunk,” he says about the economic downturn coinciding with his arrival at the FSA. “The autumn of 2008 was taken up with dealing with the financial crisis and working out how to stabilise the UK financial system. By early 2009, we were looking at how to create a more stable system for the future.”

From 2008 to 2013, Lord Turner was also chairman of the International Financial Stability Board’s major policy committee, set up to agree new capital, liquidity and resolution requirements for the global banking industry. At the time of his appointment, governments and policymakers expected a swifter, more pronounced global recovery in the post-crisis years.  

“If you look at the International Monetary Fund (IMF), Bank of England or European Central Bank forecasts, none of them anticipated how slow and difficult this recovery would be,” he says. “And nobody expected eight years on from the crash that we’d be stuck with interest rates in the UK and US at close to 0%, and below zero in the Eurozone.”

Global markets are still suffering as the latest figures show. The Eurozone economy grew by just 0.3% in the third quarter of 2015, down from 0.4% three months earlier, while the UK interest rate has been at a record low of 0.5% since March 2009. 

Moreover, the IMF has consistently revised down its forecasts for global growth in line with the slow pace of recovery. When updating its latest World Economic Outlook in January 2016, the IMF said global growth would be 0.2% lower in 2016 (3.4%) and 2017 (3.7%) compared with forecasts made three months earlier.   

“Even though we are beginning to see a slow return to growth in the US – and more slowly in the UK and Eurozone – we have to recognise what an extraordinary and unanticipated setback this has been, given that we thought capitalism and the market economy would deliver decade after decade of improvements in GDP per capita,” Lord Turner says. 

Tough road ahead

Nations saddled with huge debts and the prospect of low to non-existent growth face an uncertain future, according to Lord Turner. “Having got into too much debt, we seem to face a nasty, unavoidable choice: we’ll either be stuck for years with sustained low growth, low inflation and low interest rates but debt burdens that never decline, or, we’ll have to carry out large-scale debt write-offs,” he says.  

But Lord Turner says there is another option: overt monetary finance. He believes introducing ‘helicopter money’ is preferable to the riskier alternatives, despite critics claiming it could lead to excessive inflation. Nevertheless, for overt monetary finance to work, politicians would need to treat it as an emergency measure to stimulate the economy rather than a licence to print money.

“The crucial question is whether we can construct credible constraints of rules and institutional responsibilities, which will ensure that politicians do not create money and purchasing power in excessive quantities, nor allocate the new purchasing power created in inefficient and politically biased ways,” Lord Turner says.      

For governments with huge debts, cutting the deficit is the first priority. But they should also introduce policies that prevent banks from lending too much in future, according to Lord Turner. “We need bank capital ratios of 25% rather than 10%, much stronger counter-cyclical capital requirements, higher risk weights for some  categories of lending, particularly real estate, and loan-to-value and loan-to-income limits. 

“What we shouldn’t do is let banks set their own risk weights for different categories of lending. It’s a radically different approach than we followed before the crisis , but look where the previous approach got us – stuck with low growth, inflation below target and  0% interest rates year after year.” 

Central bankers may challenge his call for them to directly finance government deficits, but Lord Turner has no qualms about offering a contrarian view. Will he continue to challenge the status quo, break taboos and provoke debate about macroeconomic policy? Most likely, if his track record is anything to go by.