Friday, October 12, 2012

Adair Turner says QE not enough to get economy growing

In his 2012 Mansion House speech, Adair Turner joined Paul Volcker (here) saying that QE is not going to fix the problems with the economy and get the economy growing again.
Britain's £375bn money printing programme has run out of steam and new ways must be found to stimulate the economy, according to Lord Turner, one of the leading candidates for the Bank of England governorship....
Lord Turner said printing more money would have a “declining marginal impact” and threatened the stability of the economy.
Lord Turner warned that quantitative easing had left Britain 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”. ...
Lord Turner said the central bank needed to change tack and consider “more innovative and unconventional policies” to get economic growth going.
Citing the example of Japan’s decades long economic malaise, Lord Turner warned that if the UK’s response to the crisis was wrong the economy could be blighted by slow growth “for many years ahead”. 
Regular readers know that the right way to respond to the crisis and get the economy going again is to adopt the Swedish Model with ultra transparency.

Under the Swedish Model, the banks will recognize upfront all the losses on the excess debt currently being hidden on and off their balance sheets.

By recognizing the losses, the banks will lift the debt service burden off of the real economy and society.  This will allow growth to return to the real economy (check out how Iceland's economy has responded to its banks absorbing the losses related to a much more severe financial crisis).

Requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details allows market participants to both confirm the banks recognized all of their losses and to exert discipline on the banks to restrain their future risk taking.

In an apparent reference to the IMF’s u-turn this week on government austerity programmes, Lord Turner mocked the body’s “confident assertion” before the crisis that innovation in the financial system had “helped make the banking and overall financial system more resilient”. 
“That assumption turned out to be profoundly wrong and dangerous, a major intellectual failure,” he said.
As Yves Smith said on Naked Capitalism, nobody on Wall Street was paid to create low margin, transparent products.

Financial innovation was all about bringing opacity to the financial system.
Lord Turner also had harsh words for the FSA’s own conduct in the years leading up to the crisis and said the regulator had “made huge mistakes” 
“The rules on bank capital and liquidity were woefully deficient - an entire global banking system allowed to run with equity capital resources and liquidity buffers which we now believe were a small fraction of safe levels,” he said.
Like the other global financial regulators, FSA made huge mistakes.  At the very top of the list is not ensuring that market participants had access to all the useful, relevant information they needed in an appropriate, timely manner so they could independently assess the banks and the products they were selling.

Had the banks provided ultra transparency, market participants, including the banks themselves, could have exerted discipline so that the banks did not take risk beyond the capacity of their capital to absorb.

Even now, all of the proposed changes in regulation of the banks are focused on substituting complex rules and regulatory oversight for transparency.  The combination of complex rules and regulatory oversight will do little to make the financial system safer and absolutely nothing to get the economy growing again.

By contrast, transparency will both make the financial system safer (it worked brilliantly for 70+ years until the regulators let the bankers reintroduce opacity) and, because it forces adoption of the Swedish Model, gets the economy growing again.

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