RETURN to 1950s-style credit controls or face a credit-fuelled global collapse, was the stark warning given by the former stock market regulator, Jonathan Turner yesterday.
Turner, giving a lecture in Frankfurt, said that he believed that current reforms are inadequate and that a reliance on ultralow interests rates, quantitative easing and mortgage subsidies are recreating the conditions that ‘got us in to this mess in the first place’.
Turner further warned if action is not taken in those three areas, interest rates, quantitative easing and mortgage subsidies, that a second meltdown will take place.
Turner was the chair of the Financial Services Authority (FSA) at the time of the 2007 global financial collapse, where banks like Northern Rock and Royal Bank of Scotland faced bankruptcy only to be bailed out to the tune of £1.2tn by the tax payers.
However, last Friday the Head of the Bank of England, Mark Carney said that he was ‘in no rush to end the quantitative easing programme’, and the Monetary Policy Committee kept the interest rates at the historic low of 0.5 per cent.
Meanwhile the Tory coalition government is stubbornly sticking to their ‘help to buy’ scheme despite growing fears that it is fuelling a housing bubble which will inevitably burst.
The ‘help to buy’ scheme enables people to buy a home of up to £600,000 with a deposit of just 5% of the value of the home, as the government guarantees up to 20% of the mortgage.
In his lecture Turner said: ‘We seem to need credit growth faster than GDP growth to achieve an optimally growing economy, but that leads inevitably to crisis and post-crisis recession.’
Attacking what he calls the ‘pre-crisis orthodoxy’, Turner said that it is a myth that credit is mainly extended to finance new business investment.
He said: ‘In fact most credit in advanced economies does not serve this function, but finances either household consumption or the purchase of already existing assets, and in particular the purchase of real estate and the irreproducible land on which it sits.’
A study called ‘maxed-out’ described a personal debt ‘time-bomb’ with the average household debt soaring to £43,000 and total personal debt reaching £1.43 trillion.
Turner went on to outline measures he believes will clamp down on ‘credit booms’ including:
l Imposing maximum loan-to-value or loan-to-income ratios, perhaps constantly.
l Taking on payday lenders such as Wonga by ‘constraining the supply or at least the aggressive marketing of very high interest rate consumer lending.’
He argued that policy in the build-up to the crash had been based on the belief that control of inflation by central banks and light-touch regulation were all that was needed for economic success.
He said: ‘That was a major intellectual mistake. What I am suggesting takes us back to before those assumptions were in place, and what’s wrong with that?
‘The 1950s and 1960s were a golden age of steady growth without crises.’
