Epoch Times: But this whole scheme doesn’t work.
Mr. Turner: Easy credit and housing markets are a very interesting paradox. Easy credit is good for the person who doesn’t own a house, because they get to borrow money for the house.
Lots of easy credit is terrible for the person who doesn’t yet own a house because it pushes up the price of houses to a level where they can only afford it by taking on levels of debt which are a threat to their sustainability.
In the United Kingdom, up until about 1998 we had an increasing level of house ownership, which a lot of people assumed was being driven by easy mortgages supply. Then from about 2000 the level of house ownership begins to go down because 25- and 30-year-olds can no longer afford the deposits.
The price has been driven really high precisely by the easy credit, which was meant to allow them into the system.
Epoch Times: So how do we get rid of excess credit and shrink the banking system down to size again?
Mr.Turner: There are two ways essentially to control a bank balance sheet, two regulatory levers. One is how much capital, on the liability side of their bank balance sheet they have to have as a percentage of total assets or liabilities.
The other, how many liquid reserve assets they have to hold on the asset side of their balance sheet. In subtly different ways these both constrain the growth of bank credit.
On the capital side, I would like to see much higher capital ratios but I would have to develop those slowly. If I simply walked in tomorrow and I said, “Right, you’ve all got to have capital ratios of 20 percent not 10 percent; you can only be leveraged 5 to 1 not 10 to 1,” the immediate impact of that would be the banks ceasing lending in an attempt to raise their capital ratios and there would be a credit crunch.
Once you’ve got a level of debt in the economy you can’t switch off the new debt supply just like that. You’ve got to slowly migrate out of that situation.
You could have a process where you say, “You’ve got to get to a much higher capital ratio quickly. I’m not going to let you do that by shrinking your balance sheet. You’ve got to do that by issuing new shares. If you can get that new equity issue from the private market, very well, if you can’t, the government will subscribe that equity, which you may not want, and I’ll make sure that we get that higher equity without producing a credit crunch.”
On the reserve asset side, which basically says we’ve got to control what’s called the banking multiplier, that’s the relationship between the monetary base and the credit money. We couldn’t suddenly put it up to a 20 percent ratio [now around 7 percent], but gradually increase it to 15 percent.
At the point where you’ve got enough stimulus and you don’t want more, you make those reserves mandatory, so they can’t say, “Oh you’ve given me a whole load of reserves. In year one, I didn’t do much more than hold them. In year two, I suddenly expand my balance sheet.”
Epoch Times: You are a proponent of so called “helicopter money,” permanently printing money and giving it directly to the people without putting the tax payer on the hook.
Mr. Turner: We’ve created a lot of new monetary base with the quantitative easing, so what we could do is accept that the new monetary base is permanent, which is helicopter money that is never going to have to be repaid. This removes some of the constraints on the government’s fiscal position.
It can literally be a direct funding of government. … There are a variety of ways to do it. It can be the government debt finances an increased fiscal deficit at the end of which the banks have a whole load of government bonds on their balance sheet.
The central bank buys the bonds from the banks and does an accounting exercise on the asset-side to turn them into an irredeemable, zero interest asset from the government.
When you make quantitative easing permanent it ceases to be a liquidity exercise and becomes a mechanism for allowing governments to run fiscal deficits which do not create a future debt servicing liability.
And the money goes to the people directly. But because with fractional reserve banking the worry is that you think you want to do a $100 billion stimulus. So you do a $100 billion stimulus, but unless you take a controlling mechanism through reserve asset ratio, the banks could subsequently turn what you wanted to be $100 billion stimulus into a $500 billion stimulus.
Epoch Times: This process would violate virtually all central bank statutes ever written.
Mr. Turner: All these helicopter money exercises require us to break a taboo. We have put in place a set of constraints which are precisely designed to prevent governments believing they have a free source of money.
My resolution of that is to authorize the independent central bank to say how much of this helicopter money you can do. So I wouldn’t write a central bank constitution that says you must never fund government expenditure.
I would write a constitution that says the government cannot force you to fund its expenditure and you, the monetary policy committee of the central bank, must make a decision about how much monetary finance is appropriate given the inflation target which we have asked you to follow.
Epoch Times: And we need two inflation targets.
Mr. Turner: I don’t think one is sufficient. We also need another set of measure to control the bank’s creation of credit which has nothing to do with [consumer price] inflation because a lot of credit doesn’t produce current goods and services inflation. It produce’s asset price inflation, so you need to control that as well.
In pursuit of the consumer price inflation target, I would give the central bank the authority to say, “We have thought about how we’re going to get back to target—the most efficient way to do it would be to do a certain amount of money-financed deficits.”
In 2009 I would have given to the Bank of England the authority to say “We’re not going to do 375 billion pound reversible quantitative easing which we think somehow gets to the real economy through asset price increases. We are going to authorize 35 billion pounds of direct expenditure for the government funded by permanent central bank money creation.”
Then as the government, they would consider how that 35 billion pounds was going to be used. Is it done as a tax cut, is it done as a new public investment, public expenditure, etc.? You can’t have the central bank make the decision. Is this regressive or progressive?
Those are essentially political decisions. But I think you can separate the decision about the amount, which would reside with the central bank, from the decision about how specifically to deliver the boost, which can be made by the government.