Lord Turner: All we're doing is repeating the same mistakes
The former chairman of the Financial Services Authority tells Ben Chu that radical policies are still needed to overcome the dire legacy of the financial crisis
Unusually, Adair Turner has had some time on his hands. The tall, silver-haired intellectual has been in the public eye for donkey's years. After a decade at McKinsey in the 1980s, he graduated to director general of the CBI. Then, under the last Labour government, he became a kind of technocrat-in-chief, chairing both the Pensions Commission and the Committee on Climate Change. In 2008 he ascended to chair of the Financial Services Authority, around the same time as Lehman Brothers went bankrupt and the financial crisis went nuclear.
But his tenure at the FSA came to an end last summer when the regulator was abolished and its powers handed to the Bank of England. He was then beaten to the vacant Governorship of the Bank by the Canadian Mark Carney, leaving him outside policymaking circles for the first time in a decade.
The cerebral Lord Turner has, characteristically, filled the time with thought, delivering a series of weighty lectures on the deep roots of the financial crisis, the current state of the global economy and the social purpose of finance.
The essence of his analysis, which will be published as a book in the autumn, is that an unprecedented build-up of private debt in America and Europe was the chief cause not only of the global financial meltdown but also of the protracted weakness of high-income economies ever since.
So far, so familiar, one might say. But Lord Turner's next step is to conclude that high debt levels relative to GDP, beyond a certain point, tend to result in financial instability. And this implies central banks and governments are now pursuing the wrong policies by encouraging reflation through more private sector borrowing.
Lord Turner tries to downplay the awkward fact that his ertswhile colleagues are (in his eyes) getting it wrong when we meet in his luxurious Mayfair office, which he shares with a wealthy fund manager acquaintance. But he doesn't deny it.
"If, broadly speaking, one is in the debt overhang view [of the crisis] camp one is then worried that having first created too much debt we really don't know how to get rid of it. If ultra-low interest rates are the only way we know out, we will repeat the problems," he says.
When I suggest that his radical proposed solution – monetising part of the debts that governments have accumulated – remains the ultimate taboo for politicians and central bankers he smiles. "I think I've ended up as a specialist in taking taboos and breaking them," he says.
He's got a point. As chair of the FSA in 2009 Lord Turner scandalised sections of the City of London by labelling some of its activities as "socially useless". He also caught considerable flak from the same direction for saying positive things about a "Tobin" tax on financial transactions, something which is anathema to financiers.
Today he doesn't resile in the least from those positions. He points out that his view on the uselessness of many financial innovations, such as collateralised debt obligations, has become conventional wisdom. And he believes the case for financial transaction taxes has been fortified by the boom in high-frequency equity trading. "I can see no explanation of why it is socially valuable," he says. "If it is a pointless activity why wouldn't we mildly tax it through a transaction tax?"
As well as pushing for public debt monetisation, he's an advocate of more progressive taxation. In Lord Turner's view, rising inequality was one of the main factors in the build-up of household debt in the pre-crisis years, and the best way to stop a recurrence is to redistribute income.
"I'm not necessarily against a 50p top rate [of income tax]," he says. "There are enough people who, although they personally will pay it, will accept that 50p is fair and OK". He stresses, however, that rushing to a French-style 70 per cent top rate of tax would be "silly". And while he's in favour of a more progressive council tax he's sceptical of an entirely new mansion tax. " Let's shift it in a somewhat more progressive direction but don't roar around all over the place," is his advice to policymakers.
It's an overall message that sits relatively comfortably with the economic policies of Ed Miliband's Labour Party. So is he still looking for work in public policy, possibly after the next election?
Lord Turner points out that he is only 58 and plans to carry on working until he is 75. "I absolutely loved doing the FSA job. It was fascinating; it was important," he says.
"Maybe at some stage in that 15 years there'll be another job like that again. But if there isn't, I'll do intellectual things and business things. I have a very nice life. It's a very fortunate life, so we'll see what happens." That sounds like a yes, then, from the technocrat-in-chief.
Regrets: He's had a few...
Does Lord Turner harbour any regrets about the way the government and regulators handled the fallout from the UK banking meltdown?
He says in retrospect he would have pushed for a larger public recapitalisation of the Royal Bank of Scotland and admits that the state-blessed shotgun marriage of Lloyds and HBOS was a mistake. "If I could roll it back and know what I know now I would not have done the HBOS merger. I would have nationalised HBOS," he concedes. "I think Lloyds was, in the scheme of things, a relatively clean bank compared with HBOS. When the merger went ahead we did not understand how bad the commercial real estate losses in HBOS were going to be."
However, he notes that UK residential mortgage-backed securities have not performed anywhere near as badly as regulators' official projections during the nadir of the crisis.
Lord Turner says he had an inkling these calculations were wrong at the time. He recalls thinking: "Hmm, I rather wish I wasn't limited by insider trading here as I think these things are going to pay off!"
It's quite an image: the ramrod-straight regulator seizing an ethically dubious profit opportunity in the manner of a rate-rigging trader. Of course, Lord Turner did no such thing.
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