The head of the Financial Services Authority (FSA), Lord Adair Turner has called for radical and innovative new policies to kick start the UK economy.
On what is being seen as a pitch for the top job at the Bank of England, Turner said in a speech at Mansion House that reducing public sector, private sector and business debt could have serious repercussions on inflation and impact on economic growth for years to come.
=He tried to distance himself from the causes of the financial crisis by pointing out that he was appointed to his current position at the FSA on the 20th September 2008, a week after the collapse of Lehman Brothers that sent shockwaves across the financial world.
Lord Turner had this to say about the timing of his appointment. "It felt like being appointed captain of the Titanic after we'd hit the iceberg but before we'd actually sunk."
He said that because the Bank of England base rate is already at a record low of 0.50 per cent, there is very little scope to lower interest rates further and that this could lead to deflation.
Lord Turner said: "If we do not carefully design policy in response, the deflationary impact on economic growth could extend for many years ahead.”
On the central bank’s policy of quantitative easing (QE), Lord Turner echoed the comments of one of his main rivals for the top job at the Bank of England by saying that although the bank had little choice but to follow the policy, it may now be losing some of its effectiveness.
Last month, Mr Tucker said: "We still think QE works, even if in some respects it does not have the same bite it used to have."
Mr Tucker was conspicuous by his absence at last night’s speech despite receiving an invitation. Commentators have suggested that he did not want to meet head on with his main rival for the job.
Commenting on the origins of the financial crisis, Lord Turner said that it was "not a bolt from the blue."
"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 said.
He added: "In retrospect, it was a fool's paradise – the band playing oblivious to the dangers ahead. A lot of apparently very clever people got it very wrong and the ordinary citizen suffered. We have to do better in future."
He said that banks had in place just a "small fraction of safe levels" of capital required to act as an effective buffer to protect against any potential crisis.
On the euro debt crisis, Lord Turner said that if the eurozone is unable to save itself, then procedures need to be put in place to allow the euro to dissolve itself in a "controlled rather than chaotic fashion".
He said that eurozone governments need to move towards common tax and spending policies and that the European Central Bank need to begin issuing some form of common debt, a move that Germany, the biggest eurozone economy is against.
"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."
Lord Turner admitted that he was wrong to support the UK becoming part of the euro a decade ago and was ready to learn from his past mistakes.
He called for bankers to learn the lessons from the past mistakes that helped to cause the financial crisis and not return to business as usual.
He said: "There are increasing signs that many banking industry leaders recognise the need for major change".
Looking towards the future and hinting at what he might do if new initiatives such as the Funding for Lending Scheme (FLS) proved ineffective, he said: "We need to be ready if these measures prove insufficient to consider further policy innovations and further integration towards different aspects of policy, to overcome the powerful economic headwinds created by deleveraging across the developed world economies."