Central bankers should be less fearful of printing money during an economic downturn to spur demand, Adair Turner, chairman of the U.K.’s Financial Services Authority, said in London today.
In an economy where people are more concerned about paying off debt rather than investing, central bankers “may need to be a little bit more relaxed about the creation” of “irredeemable fiat base money,” Turner said, according to prepared remarks.
“The potential benefits of paper money creation should not be ignored” in their ability to stimulate a recovery, said Turner, a former candidate for governor of the Bank of England.
Mark Carney, who beat out Turner for the BOE post, said last month that there was room for more monetary stimulus around the world if needed to “achieve escape velocity” from current economic slumps. The Bank of England has left its key interest rate at 0.5 percent for almost four years and bought 375 billion pounds of bonds through quantitative easing even though inflation has been above its target over the period.
Turner said that increasing money supply through commercial bank lending “can be a major driver of financial instability.” Bank leverage, a measure of a lender’s debt to equity ratio, should be strictly controlled, he said.
“Banks are different,” Turner said. “The arguments for free markets, strong in other sectors of the economy, do not apply.”