Lord Turner HARDtalk

Welcome to HARDtalk, with me, Stephen Sackur.

Wouldn't it be reassuring if we could put all of the blame for the

financial crash of 2008 on those greedy bankers? Rooting out their

excesses would ensure no repeat performance. What if the crisis was

much deeper and more structural? My guest today, Adair Turner,

Lord Turner, is a doyen of the UK economic establishment who has

concluded that Western economies His solution, printing money to

stimulate growth, without adding to the debt pile is contrarian, but is

it credible? You have had a lot of time to think

about what happened in 2008 and what it says about our capitalist system.

You seem to be saying today that we've got it wrong. I blaming the

bankers, blaming their irresponsible behaviour, we are not understanding

what really happened. Well, the problem of bankers who did

irresponsible things is part of the story. And the problem of regulators

who said far too low capital liquid standards is also part of the

problem. I took over in September 2008. I wasn't one of them until

after Lever Brothers collapsed. I can be a little free of guilt for

that problem. I would have made the same mistakes if I had been dead --

Lehman Brothers. If you want to step back and said, why did the crisis of

2008 occurred and more importantly, why has recovery from it been so

difficult? Concentrate on this fact, in 1950 private debt,

companies and households together, as a percentage of GDP across all

advanced economies was 50%. By 2007 it was 170%. It grew pretty much

every year from 1950 to 2007 at an accelerating pace after about 1990.

It is the debt overhang, the huge level of debt, private debt to start

with in particular, subsequently shifting to public debt, which I

think explains why, seven years after the crisis of 2008 we are

still struggling with low growth and low inflation. Underpinning that

analysis is an assumption that all debt is a bad thing. Surely one of

the things we learned in 2008 is that there is bad debt, debt that is

irresponsibly, money that is irresponsibly lent that cannot be

repaid, the House of Cards, frankly, but surely there is good debt which

drives investment and allows capitalist economies to grow. Why

lump all that together? I am not lumping it together. Let me be

clear, I am not taking the Islamic point of view which says we should

not have debt contracts. What I am saying is you can have too much and

too little debt. You are right that there is a good story and economic

theory in economic history that says you need debt contracts and Equity

contracts in order to fund capital investment. It allows economies to

grow! But if you look at the amount of lending done by the banking

systems in the advanced economies, only about 15% of it finds that

capital investment that we all talk about. The rest funds either

consumption or it funds essentially a competition between people for the

ownership of assets that already exist, in particular for real estate

assets, and that is a hugely important fact, which was largely

ignored by policymakers before the crisis. Yes and to an extent it is

being ignored today. Your message is controversial. You are saying that

today banks are too free to lend and they have to be constrained much

more by public policy makers. In the end, they need to lend less money.

Isn't that what you are saying? Yes. We need a less high level of

leverage. Leverage is debt related to income. Debt related to national

income. (CROSSTALK). I am stunned. You are the man who not long ago

represented the employers and businesses of Britain including

small and medium-sized businesses. How do you think an owner of a

business would feel listening to you, Lord Turner, saying that banks

could lend less and that small and medium businesses who want to grow

should not be able to get access to bank lending. SMEs should access

bank lending but that is a small part of what the banking system is

doing, not only in the UK, but in other countries of the world. The

majority of what they are doing is lending money to residential

mortgages or for commercial real estate investment. Such as buy to

let. Let's be clear, the rapidly growing area of credit growth in the

UK at the moment is buy-to-let investment. You have beef with

people borrowing money with banks to buy property. And frankly, for any

politician listening to you and your demand that they do more to stop the

bank lending so much money to property investors, politicians

would say, are you mad? This is a fundamental right in Britain for

people to extend themselves and buy a house. If you do that you kiss

goodbye to your political career. You are right that we have seen easy

credit as being a way to get more owner occupation. Here is the

paradox. Beyond a certain point, the easier the credit, the worse it is

for owner occupation. UK owner occupation, what percentage of

housing stock is owned by people who live in it, the sort of iconic

family living in their house? It begins to fall from 1998 onwards.

The average age at which a first-time buyer can buy a house

begins to go up from that time, which is partly because there is so

much easy credit that buy-to-let investors, who already have wealth,

are in a better position to borrow the money and buy up the housing

stock than owner occupation. I know it is paradoxical and difficult to

grasp because it feels counterintuitive, but beyond a level

it is bad for owner occupation. What is interesting about this

conversation is, I have called you and doyen of the economic

establishment, you are well-known in the US, you are widely respected a

player in the system and yet you seem to be saying that the way the

system is working today, seven years after the meltdown of 2008, is still

deeply dysfunctional, and banks are still at the heart of the problem.

Oh, I think it is deeply dysfunctional. I think we have a

system that produces too much debt. Now, at you're suggesting that a

little bit, you know, incompatible with the market economy.

(CROSSTALK). If you go back to the 1930s, some of the most free-market

economist either have ever been, Henry Symons, founding father of

Chicago free market economy is, proposed the abolition of bank

because he believes they were what blew up the economy -- economics. I

am not doing anything like that but I do think we have a system which,

left to itself, will create as I call it too much of the wrong sort

of debt, and will eventually put us in the problem we have been stuck

for the last several years. Like despite your credentials as a

capitalist you want the state, government policymakers to intervene

and curtail the ability of banks to operate -- despite your credentials.

In the credit market place. Yes. The provision of credit is different to

the provision to hotels, all cars or hotels or washing machines -- or. In

those sectors of the economy we really don't know a better solution

than, leave it to the free market and the consumer will choose. But

actually, money and credit is different. It is not a product that

we want to consume in and of itself. It is not a product where you have a

point of view in the same way that you have a view about which

restaurant you want to go to. It is something with a set of complicated

and hard to understand macroeconomic implications and we do need to

manage that far more tightly and aggressively than we did in the

past. It is the fundamental reason why seven years after 2008 the

growth rate across the advanced economies have been so poor. So,

you're putting forward the notion that has to be much tighter control

of banks, in a sense a greater conservatism about lending, and yet

the other part of your argument that you've developed in the last couple

of months or so it is that you believed the best way to stimulate

flagging capitalist economies is to do something which many people

watching and listening will regard as the height of irresponsibility,

and that is simply to create new money, whether by the printing

presses or Alec on it we come at you're saying government should

create vast reservoirs of new cash and dump it on the populous -- or at

electronic leave. I am proposing what that famous socialist Milton

Friedman proposed, because of a clearer statement of the theory

which says if you are in a deep deflationary trap, the only certain

way to get out of it is for the government to create money and spend

it, was Milton Friedman. That should be a pause for thought. That was in

1969. He also said it in 1948. Here we sit in 2015. I don't know about

you but I have been to Zimbabwe in the recent past and I have seen a

government that has printed money ad nauseam and you know what happens? A

wheelbarrow to buy a loaf of bread. That is why I argue clearly in my

new book that we have to locate the decisions on how much of this money

you can spend within an inflation targeting central bank. I would not

leave it for the government to decide how much. I would have a

central bank which is trusted to pursue an inflation target able to

say the better way to stimulate demand now would not be to cut the

interest rate into negative territory. Let's be clear what we've

done because we don't have this tool. We've cut interest rates in

some countries into negative territory in order to try to

stimulate the economy. That is very dangerous. It has worked. If we take

the US as the ultimate capitalist economy, it has worked. They have

used trillions of quantitative easing, with interest rates at

pretty much zero for an awful long time, and they have seen the economy

grow fairly well over the last couple of years to a point where

they can now consider raising rates. And they have got great employment

figures. Their economies humming along. Not fantastic. (CROSSTALK).

It does not have great employment figures. It has good unemployment

figures because of people have left the labour force entirely.

Employment as a percentage of the working population is well below

where it was before the crisis. What I will entirely except is, if you

keep interest rates low enough for long enough, you will eventually get

the economy going again. But you will only do it in a way which

creates very sick of it in inequality because it works through

stimulating the growth of equity prices which is good for the owners

of wealth. And ultimately in only really works by rescue me late in

the thing that got us into this mess in the first place --

re-stimulating. -- re-stimulating. If you try to read stimulate the

economy by relying on low interest rates, you are curing a hangover

with a stiff drink -- re-stimulating. Not long ago Ben

Bernanke was here and he said the most effective way of reviving the

economy would not have been quantitive easing but giving $1000

$5,000 to every citizen in the US because that way you would really

stimulate the real and immediately. He said it was ridiculous and that

no one believes it any more. It turns out that you do. Well I

believe what Ben Bernanke believed in 2003 because he specifically in

relation to Japan, very specifically said that what Japan should do was a

tax cut or a public expenditure increase over the financed by a

permanent increase in the central bank balance sheet -- overtly.

That's why he was called helicopter Ben at the time. He talks about this

in his book. He was so shocked by the fact that he was then bombarded

as being irresponsible that he shut up about it later. But I think he

was right. And I think if we had considered using direct fiscal

stimulus funded with permanent money we would have got out of this low

inflation faster and with less long-term risk. I think the way that

we've done it has actually been harmful for the long-term stability

of the global economy. You seem to be suggesting that the generation of

central bankers today, I am thinking in this country of Mark Carney, that

they are wrong. Mark Carney addressed this notion of, well, that

it was people's quantitative easing, because of the Labour Party

is pushing that, but it is another way to put cash in the economy, he

said it would imperil price stability, it would hit the poor and

elderly hardest. You seem out of sync with orthodoxy. (CROSSTALK). I

think he is wrong. When you decide to take a position

against it, you say things like that. But I think that he would

accept if you had a mechanism to make sure you do it in a moderate

and appropriate amount there was no way it would produce excessive

inflation. There is no theory whatsoever that says that in

technical terms it is impossible. It is absolutely technically possible

to do a moderate amount of the money finance, as I call it. The whole

issue is whether you believe the political risks are too big. Weather

once deliberately bitter brew, do you think we are bound to go to

excess. Do you think that is the crux of the matter. Yes or no? Do

you think you would have done it if you had, as you wanted, got the job

of governor of the Bank of England? Would you have pushed this policy?

If I had been governor of the Bank of England in 2009 and if it had

been agreed by the government that was part of our remit, because

central banks can only work within the legal framework defined in

advance, I think it might be better us in 2009 to do a moderate

additional stimulus finance rather than... What about in 2013, when our

economy was still growing slowly? Made in 2013 but I would not do it

now. You would have had a massive row with George Osborne, the

Chancellor. Let me be clear. If you become the central bank governor,

you have to accept the rules of the game as they are defined at the

moment. If I had believed at that stage we should have changed that, I

would have suggested that privately to George Osborne. Publicly... Maybe

figure that out and that is why he did not give you the job. Publicly,

I would have stuck to the script. That is what you have to do. I

wonder if that in retrospect is why you did not get the job. Because

Osborne feared you were too radical. I would have done it privately but I

think it is probably the case that the fact that I am willing to take

ideas to the logical conclusion makes people believe that I'm not,

as it were, sound in that respect. However, I do think there is a major

difference here. There is a difference between what you have to

do when you have been given a job within the constraints you have at

the moment and what you have to say about it. There are a few other

things I need to get into. One thing that interests me a great deal, and

it is extending from our conversation about how to stimulate

growth in a capitalist economy, is your... You are very interested

these days is talking about inequality. Alongside economists

like Thomas spaghetti and others. Your message seems to be that the

amount of debt in the Western economies is directly related to

growing inequality. I don't understand why that is. I think

there are a number of reasons why we have too much debt but one of them,

and it is a reasonable hypothesis put forward by the Reserve Bank

governor of India, who wrote a brilliant book five years ago, he

says it works in this way: As inequality increases, you get a grip

of people that the rich end of the income distribution there have,

bluntly, so much money that they are not going to spend it all. In

Economist technical terms, they have a high marginal propensity to save

and a low marginal propensity to consume. That means you have too

much savings relative to investment. Unless that savings is

picked up by the financial system and led to middle income and

low-income earners, who are trying to make up for the fact that they

are not doing very well, that their real wages are not going up the pace

they use to expect them to do, or in the US case, the bottom quarter of

the population have received no real wage increase in 25 years. The

system only balances with a flow of debt, which increases the leveraged

ratios, which for a period of time looks fine because the people who

are borrowing the money saved the wages are not going out and leave

the house prices going up, but when that ceases to occur, they are left

with an repayable mortgages as well. And here is the twist. When

that occurs, that gives a further increased inequality because the

downswing of the cycle, it is the people who have the least equity and

their houses are the people who are repossessed, whereas better off

people are still in the game, next time around. In a word, you are

saying that the way our economies are organised today, not looking

back a few years but even today in the US, the UK and other capitalist

economies, they are still driven by a system which exacerbates

inequality. That is, the inequalities we see are continuing

to grow. I think they are continuing to grow and I think that is creating

more debt. Look at the Office for Budget Responsibility report in the

UK as to how we will grow over the next five years. They say we will

only grow over the next five years if the small decrease in our

household debt as a percentage of income is entirely reversed so that

by 2020 we will have a higher level of debt than we had in 2007. The

cake. Let us get away from straightforward economic management.

Let us talk about things relevant to any economy going forward. One of

them is Paris and the global climate change conference and the commitment

to taking really dramatic measures to ensure that the global

temperature rise is limited to, they hope, 1.5 degrees. That is going to

require fundamental changes. Do you think that, for example, the

government in the UK understands that? Are the signs that there are

specific policy measures that match that ambition? In the UK, we have

the Climate Change Act, which commits us to an 80% reduction below

1990 levels by 2050. But that is out to 2050. I'm talking about what we

are doing today. Withdrawing subsidies for renewable energy

sources, the withdrawal of investment funds from carbon capture

and storage. Looking at specific measures which might make one

question whether this government is serious about its rhetorical

commitments. I think that is a legitimate question. I think there

are some things that have been done which are very unfortunate. For

instance, I do not understand at all why they have removed our commitment

that by next year all residential homes should be built, new homes,

should be built on a zero carbon basis and that by 2019 all

commercial property. I think that was a completely sensible policy and

unfortunate to have been removed. Subsidies for renewables? They

subsidies for renewables in relation to solar did need reducing because

they were being unexpectedly and unintentionally too generous. And

investment in carbon capture? And I think that was unfortunate as well.

I think there is a disconnect between some of the UK specific

policies. The crucial test. For climate change commission chief in

2012. Here is a crucial thing coming up. The climate change committee is

about to come up with what is called our fifth climate budget, our fifth

carbon budget, for where we have to be in 2028 to 2032. And it is

absolutely essential that the government accept the

recommendations of the climate change committee on those and that

there is no backpedalling. Do you think we have in the UK Chancellor

of the Exchequer who, frankly, in his heart does not believe that, in

his view, it is worth sacrificing short-term economic performance for

these long-term climate reduction targets? I think George Osborne and

the rest of the Treasury are somewhat less interested in this

green agenda than either the Prime Minister, who I think this heart of

hearts just wanted to occur, or the department of imaging and. I

think... I would love, as somebody who believes we have to make better

and more effective action on climate change, I wish the George Osborne

were more of a in his heart. And fundamentally, they don't think that

he is. And I come back to it that this is a big public, the problem. I

think that it is. We saw an attempt when we had the fourth carbon budget

by the Treasury to somewhat weaken our commitment. Overall, we are

still on target. What happened in the fourth carbon budget was at the

end of the day the government did decide to go ahead with it. But to

be blunt, you have correctly identified that within the

combination of the departments in the UK government and the ministers

in the UK government, it is the Treasury which is probably the one

which we have to make sure does not undermine our commitment to

achieving strong reduction in our carbon emissions. In a final point,

has the market yet factored in how much this is going to cost

businesses? Not long ago, you argue that the markets are not yet got how

dramatic this is going to be. -- you argued. I think the big issue is for

the big fossil fuel companies. This is the very simple fact that if we

are serious about limiting temperature increase to two degrees,

let alone 1.5 degrees, two thirds of all fossil fuels that we know exist

are going to have to be left in the ground. If that is the case, there

are some big fossil fuel companies which simply cannot go on assuming

that they are going to make money out of fossil fuels forever into the

future. And I don't think that it has been recognised with the

severity and seriousness that it needs to be recognised. Thank you

for joining us on the programme. Thank you.