Debt reduction could hit growth for years, says Lord Turner

Lord Turner said reducing private, business and government debt following the financial crisis could impact economic growth for many years.

It was his final Mansion House speech after four years heading the FSA.

He is seen as one of the leading candidates to take over as the next governor of the Bank of England.

Lord Turner also questioned the continuing effectiveness of Bank of England stimulus.

The Bank of England had no choice but to pump money into the economy through its programme of quantitative easing (QE), he said, but questioned whether the policy may be becoming less effective.

“QE alone may be subject to declining marginal impact,” he said.

He called for “a willingness to employ still more innovative and unconventional policies”.

Lord Turner also questioned the continuing effectiveness of Bank of England stimulus.

The Bank of England had no choice but to pump money into the economy through its programme of quantitative easing (QE), he said, but questioned whether the policy may be becoming less effective.

“QE alone may be subject to declining marginal impact,” he said.

He called for “a willingness to employ still more innovative and unconventional policies”.

The financial crisis of 2008 was “not a bolt from the blue,” he said.

“It arose from poor supervision, from bad rules and structures, from dangerous cultures – and the errors were made by regulators, economists, central bankers and public policy makers, as well as bankers themselves.”

He said the amount of capital held by banks as a buffer to protect against any potential crisis was a “small fraction of safe levels”.

Lord Turner said much good work had been done to correct these mistakes, but much more needed to be done.

He pointed to new global banking standards, known as Basel lll, which would ensure a far safer banking system, and in the UK to the new regulatory framework to replace the FSA.

He also said “there are increasing signs that many banking industry leaders recognise the need for major change”. Some observers have questioned whether the industry has learned lessons from the crisis, arguing that too many bankers have returned to business as usual.