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MENAFN - Kuwait News Agency (KUNA) - 13/10/2012

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(MENAFN - Kuwait News Agency (KUNA)) The chairman of the UK Financial Services Authority (FSA) Adair Turner has suggested that it may be time for more unconventional policies to revive Britain's stagnant economy as he questioned the continuing effectiveness of Bank of England stimulus.

Lord Turner said in his final Mansion House speech here, late on Thursday, after four years heading the FSA that reducing private, business and government debt following the financial crisis could impact economic growth for many years.

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 added.

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.

The FSA chief warned of the impact of government spending cuts and households paying down debt, particularly given there was limited room for the central bank to further reduce interest rates, which already stand at a record low of 0.5%.

"If we do not carefully design policy in response, the deflationary impact on economic growth could extend for many years ahead," he said.

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

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

The coalition government has made reducing the UK's debt levels its main economic priority. To this end, it has implemented a wide range of spending cuts, designed to save money and restore confidence in the UK economy among international investors.

Critics argue that these cuts have simply served to push the UK into a deeper recession - the economy has returned to recession having contracted for the past three quarters.

Lord Turner is one of the frontrunners to succeed Sir Mervyn King as Bank of England Governor, going up against the likes of current deputy governor Paul Tucker for the key role.

The choice of the next governor is viewed as the most important decision the Chancellor of the Exchequer George Osborne and Prime Minister David Cameron will make before the next general election.

Away from the UK, Lord Turner said the Eurozone must forge closer ties if it is to survive the current debt crisis.

He said banks must be supervised centrally by the European Central Bank, Eurozone governments must begin issuing some sort of common debt, often referred to as eurobonds, and move towards common taxation and spending policies.

Some Eurozone governments are opposed to some of these measures, not least Germany, which is against any kind of common debt issuance.

He also raised the politically sensitive issue of the Eurozone breaking up.
"The UK has an enormous national self-interest in the Eurozone either taking the steps required to succeed, or, if that is politically unattainable, dissolving in a controlled rather than chaotic fashion."

 






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