Today Lord Turner will give a speech on monetary policy and it is considered important enough for the Financial Times economics editor Chris Giles to interview him on the subject. If we move towards the end of the discussion we get this.
Chris Giles: There will be some people who think that, by taking it out of the box, you’re just a very bad man and a very dangerous man.
Lord Turner: A very dangerous man.
Firstly we need to clear the air a bit as Lord Turner comes with quite a lot of past baggage. He was a prime advocate of the UK joining the Euro and I still shudder to think what would have happened to the UK housing market if our interest-rates had been set to suit Germany! We get a clear guide I think from what has happened in Ireland and Spain where extreme boom has led to extreme bust. Also he became chairman of the Financial Services Authority in 2008 and the Libor scandal was on his watch and we see that nothing was done about it when the evidence was clear and it looks much more likely that things were hushed up instead.
So he has been dangerous on at least two fronts but these are not the ones meant! You might already be wondering why he is listened too with such a track record but for our so-called elite failure appears not to be a barrier at all. Indeed when I reviewed a speech of his on October 12th last year he was confessing to his part in yet another error.
For the last year, the FPC has been struggling with a trade-off – and I suspect our communication might have been clearer if we had been more explicit about how difficult that trade off is.
Oh and “struggling for a trade-off” is defined in my financial lexicon as doing things which are mutually exclusive at the same time.
So it is monetary policy where Lord Turner is dangerous?
Yes it is this area where he fears such a title and if we go back to October 12th we had in fact seen him set out his stall on this.
So optimal policy also needs to include a willingness to employ still more innovative and unconventional policies
Those who have followed my updates on the collapse of the Irish banking system may already have a chill going up their spine at the use of the word innovate,which in practice meant more and more problems were created. Also for those in the central banking world what they call “unconventional” has become the convention.
He sets out his stall
Whilst he tries to smokescreen this element we are told Lord Turner’s philosphy here.
the management of the pace of increase of aggregate nominal demand
You see he thinks that a “manager” can press a few buttons and twiddle a few knobs and hey presto we will be better off. Of course the manager he has in mind is himself! At which point I would refer you to his ominous and poor track record above. He would be more likely to be like the beginning of the Simpsons where Homer Simpson sits in front of the buttons at the nuclear power station and presses the wrong one.
He spends a bit of time denying this in his interview a bit like Mervyn King who also often contradicts himself. But like Arnie it is soon back.
Fundamentally, I think the framework we have to have is that there are a number of levers, monetary policy, fiscal, etc, which can implement aggregate nominal demand.
Yet another Lord Turner mistake
And I think there’s the insight that almost nobody, and certainly not myself, was quick enough to understand in the middle of the crisis in 2008 and early 2009.
Still catching up four or five years later is okay is it not? After all it is not as if he is a compulsive level puller and knob twister based on self-confessed mistakes…Oh wait a minute! Also “almost nobody” goes into my financial lexicon as you will find arguments on here about bank reform from my early blogging days and on the other side of the argument economists like Richard Koo were discussing deleveraging too.
Lord Turner presses on regardless
there may be a big potential at the moment, and I think the Federal Reserve definitely believes this, to stimulate growth without an inflation effect.
Readers in the UK may already have rising blood pressure at this point after 37 months of above target inflation. Never fear the next discussion is of a higher inflation target which Lord Turner tries to appear tough by rejecting,after of course giving it the oxygen of publicity one more time. But then we get to a suggestion which is very popular these days amongst central bankers.
how do central banks pre-commit, believably pre-commit to a future path of interest rates, which establishes expectations today compatible with medium-term inflation
Believe it or believe it not this theory argues that as long as a central bank promises to be tough in the future it can be as loose as it likes now with monetary policy! The fact that it makes them look like alcoholics or junkies does not seem to stop them. They are always about to stop tomorrow! Indeed Lord Turner calls it an offshoot of rational expectations theory when any belief in this looks purely irrational to me.
Indeed a familiar refrain then breaks out.
I think that can take one to an area of should one allow for nominal GDP growth up to some level
How would he do this?
The emphasis here is mine.
Well, they’re never maxed out. In terms of their impact on aggregate nominal demand, they’re never maxed out if you are willing to go to overt money finance
Ah so we finally get there! Also we get a hint as to how far he would be willing to go
So you’re certainly right that I have concerns that the package of measures, which are monetary, macro-pru, credit easing, are subject to declining marginal returns.
So we are into a category which I have satirised and explained as “More,More,More” these past three years of blogging. These policies are promised to work but when they do not-look at the UK’s enormous monetary stimulus but lack of growth in response- it is always because they did not do enough rather than them being wrong. It is odd that the concept of being wrong does not seem to occur to someone who has been wrong as often as Lord Turner has.
The taboo itself
After a very confused section where Lord Turner keeps tripping over his support for QE we get to the heart of the matter.
Is it desperately dangerous because every pound of money financed turns into inflation? Absolutely definitively not.
Also we see that he thinks it equivalent to other policies in its effect.
There is no inherent reason why it produces a less favourable division between inflation and real output than any other.
Actually we can review that in terms of his words earlier in the interview.
there is a real danger that, in pursuit of that, you’d be going to four, five, 6 per cent inflation and that you would end up creating medium- and long-term inflation
All roads lead to inflation? Well in Lord Turner’s world they seem to. But fear not.
And it clearly doesn’t produce hyperinflation because it is clearly quantity dependent
Glad that’s clear Adair!
Let me open by saying that if we look through the somewhat confused fog of this interview we see that two elements do exist and are options. For example monetary policy can always be eased should you choose and so there is no “maxxed out” and direct monetary financing often called printing money where the central bank in effect finances government deficits is also a policy option. Indeed in an extreme of a deflationary and disinflationary collapse it may even be the only option left. I have pointed out before that perhaps the nearest we have to that right now is Japan although we have the issue there of why the existing stimuli have failed.
However we then get to the problem that is Lord Turner. You see he is a levers,knobs and stimulus man which if we apply the rational expectations he hopes for means logically that he will fail.Ooops! His credibility in terms of tightening policy later may have the support of what Brian Clough famously called a “class of one” in other circumstances. I am sure that many of you reading this will have spotted that the plans he is trying to push are just another form of can kicking. You may also spot that his support of QE admits now to “diminishing returns” but he is unable to connect what I think is the fundamental problem facing UK economic policy and here it is.
In the UK, over the last 3.5 years, since the trough of 2009, about 80 per cent of the increase in nominal GDP has been expressed in a price form
In many ways he has just given the best critique of his own past and indeed present views. Oh perhaps someone might give him a nudge to point out that the calculation of the GDP deflator was changed as his section here looks at best rather ill-informed.
As for his record well here is Depeche Mode on the subject.
I reached the wrong ends by the wrong means
It was the wrong plan In the wrong hands
The wrong theory for the wrong man
The wrong eyes on the wrong prize
The wrong questions with the wrong replies