FSA chief calls for central banks to finance government deficits

 

Central banks should be prepared to break the ultimate monetary taboo and directly finance government's deficits, the chairman of the Financial Services Authority, Lord Turner, suggested in a speech last night.

Lord Turner said “overt money finance” (OMF) of fiscal deficits, which has long been associated with the curse of hyperinflation, could be a “useful medicine” and “should not be excluded from consideration” by policymakers as they grapple with protracted recessions and feeble growth. “There can be extreme circumstances in which it is an appropriate policy” he said.

Lord Turner, who was an unsuccessful candidate to replace Sir Mervyn King as Bank of England Governor, argued that many economies have been suffering from a collapse of aggregate nominal demand (or spending) since the 2008 financial crisis and that the conventional tools of monetary policy had failed to facilitate durable recoveries. He went on to say that monetary financing of deficits might be needed to restore growth and to bring down unemployment. “We should consider whether there are specific circumstances in which it could play a role and/or needs to pay a role” he said.

Speaking at the Cass Business School in London, Lord Turner rejected the notion that policymakers are powerless in the face of weak growth. ”Governments and central banks together never run out of ammunition to create nominal demand” he said. “Overt permanent money finance can always achieve that and is the only policy lever certain to do so”.

Lord Turner conceded there were “good reasons” to fear that deficit financing could prove inflationary. But he stressed that failing to debate the merits of such a policy was unwise because desperate politicians might otherwise resort to such a policy in an uncontrolled manner. “If we do not debate in advance how we might deploy OMF in extreme circumstances, while maintaining tight disciplines of rules and independent authorities which are required to guard against inflationary risks we will increase the danger that we eventually use this option in an undisciplined and dangerously inflationary fashion” he said.

Lord Turner added that in controlled doses, deficit financing could be beneficial. “Strong disciplines and rules are…essential to ensure that excessive use does not turn [deficit financing] from a useful medicine to a dangerous poison” he said.

Lord Turner, who was appointed chairman of the FSA in September 2008, shortly before the collapse of Lehman Brothers, pointed out that distinguished and diverse economists including John Maynard Keynes, Milton Friedman and Ben Bernanke had, at various times, made the case for central bank financing of government deficits.

Some economists have argued that the problems of the UK economy relate to a lack of capacity to grow, rather than an absence of demand. Lord Turner said that people should be open to the possibility that this diagnosis was true be added that this was an argument against any sort of stimulus at all.

PROMOTED VIDEO
Arts and Entertainment
tv
Sport
Ojo Onaolapo celebrates winning the bronze medal
commonwealth games
Arts and Entertainment
Rock band Led Zeppelin in the early 1970s
musicLed Zeppelin to release alternative Stairway To Heaven after 43 years
Arts and Entertainment
Tracey Emin's 'My Bed' is returning to the Tate more than 15 years after it first caused shockwaves at the gallery
artTracey Emin's bed returns to the Tate after record sale
Environment
Neil Young performing at Hyde Park, London, earlier this month
environment
News
i100
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
Prince Harry is clearing enjoying the Commonwealth Games judging by this photo
people(a real one this time)
Sport
Lionel Messi looks on at the end of the final
football
Extras
indybest
News
Richard Norris in GQ
mediaGQ features photo shoot with man who underwent full face transplant
News
Gardai wait for the naked man, who had gone for a skinny dip in Belfast Lough
newsTwo skinny dippers threatened with inclusion on sex offenders’ register as naturists criminalised
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Graduate / Trainee Recruitment Consultant - IT

£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

HR Business Partner - Banking Finance - Brentwood - £45K

£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

PA / Team Secretary - Wimbledon

£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

Day In a Page

The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
Countries that don’t survey their tigers risk losing them altogether

Countries that don’t survey their tigers risk losing them

Jonathon Porritt sounds the alarm
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz
A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on