Friday, October 12, 2012
Turner is for turning
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

Lord Adair Turner, chairman of the Financial Services Authority and candidate for the Bank of England governorship, has done a mea culpa on his earlier advocacy of euro membership for Britain. In a speech at the Mansion House, he said:

"Ten years ago I argued in favour of the Eurozone project and for Britain’s eventual membership. As I have said before, I was wrong, failing to recognise the inherent flaws in the Eurozone’s current design. And it’s important for both individuals and institutions to recognise mistakes and learn from them.

"The crucial mistake was a failure to recognise that debt issued by a nation within a multinational currency zone is quite different from debt issued by a nation which also issues its own currency – it is inherently more susceptible to default risk, it is inherently less likely to be perceived as risk-free. As a result, in a multi national currency zone with significant debt issued at national level, bank solvency and national solvency can become linked in a potentially fatal embrace."

Turner will also have endeared himself to Sir Mervyn King (or not) with his comments on monetary policy: "Quantitative easing alone may be subject to declining marginal impact, the economy facing a liquidity trap in which replacing private sector holdings of bonds with private sector holdings of money has little impact on behaviour and thus on demand. So optimal policy also needs to include a willingness to employ still more innovative and unconventional policies, and to consider the combined impact of multiple policy levers – monetary policy, Bank of England liquidity insurance, prudential regulation and direct support to real economy lending – which we used either to consider quite separately, or else avoid entirely." The speech is here.