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Between Debt and the Devil: Money, Credit, and Fixing Global Finance
Adair Turner became chairman of Britain's Financial Services Authority just as the global financial crisis struck in 2008, and he played a leading role in redesigning global financial regulation. In this eye-opening book, he sets the record straight about what really caused the crisis. It didn't happen because banks are too big to fail--our addiction to private debt is to blame.
"Between Debt and the Devil" challenges the belief that we need credit growth to fuel economic growth, and that rising debt is okay as long as inflation remains low. In fact, most credit is not needed for economic growth--but it drives real estate booms and busts and leads to financial crisis and depression. Turner explains why public policy needs to manage the growth and allocation of credit creation, and why debt needs to be taxed as a form of economic pollution. Banks need far more capital, real estate lending must be restricted, and we need to tackle inequality and mitigate the relentless rise of real estate prices. Turner also debunks the big myth about fiat money--the erroneous notion that printing money will lead to harmful inflation. To escape the mess created by past policy errors, we sometimes need to monetize government debt and finance fiscal deficits with central-bank money.
"Between Debt and the Devil" shows why we need to reject the assumptions that private credit is essential to growth and fiat money is inevitably dangerous. Each has its advantages, and each creates risks that public policy must consciously balance.
"Between Debt and the Devil" challenges the belief that we need credit growth to fuel economic growth, and that rising debt is okay as long as inflation remains low. In fact, most credit is not needed for economic growth--but it drives real estate booms and busts and leads to financial crisis and depression. Turner explains why public policy needs to manage the growth and allocation of credit creation, and why debt needs to be taxed as a form of economic pollution. Banks need far more capital, real estate lending must be restricted, and we need to tackle inequality and mitigate the relentless rise of real estate prices. Turner also debunks the big myth about fiat money--the erroneous notion that printing money will lead to harmful inflation. To escape the mess created by past policy errors, we sometimes need to monetize government debt and finance fiscal deficits with central-bank money.
"Between Debt and the Devil" shows why we need to reject the assumptions that private credit is essential to growth and fiat money is inevitably dangerous. Each has its advantages, and each creates risks that public policy must consciously balance.
320 pages, Hardcover
First published October 27, 2015
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Displaying 1 - 30 of 38 reviews
June 18, 2020
Really great book on monetary theory from someone who saw it firsthand--he ultimately proposes a helicopter drop type of monetary policy, which now seems to be adopted by the Fed. The book is against credit and debt as a means of policy, which I generally agree with, but I think this book should be read together with Kelton's Deficit myth because both have similar antagonists yet offer really different analyses of the problem. Turner seems to suggest too much debt and Kelton seems not at all worried about the debt. That is far too simplistic, but I'd like to see the debate work itself out and I suspect that they would come out with 90% shared views as to what the wrong ideologies--I just wonder to what extent they would agree about solutions.
May 10, 2017
To simplify, Turner's central hypothesis is "too much private debt inevitably leads to financial crisis". This is nothing new if you are already broadly familiar with the topic of financial crises. Notwithstanding that, the book is still worth the read for three reasons: (1) the quality of Turner's analysis (particularly in diagnosing the problem), which showcases his experience as both a practitioner and scholar; (2) the range of ideas and empirical evidence used; and (3) Turner's relatively radical policy prescriptions, which should be at the very least thought provoking. For a newcomer to the subject, the book strings together a good amount of material to provide the reader with a rich understanding, although it can be quite an overwhelming (and if you ask me, not easily accessible) introduction.
For me, what was particularly insightful was Turner's focus on real estate. A key feature of his central hypothesis is that financial systems tend towards lending against existing real estate because it is easier (as opposed to providing capital for new productive investments, which is less standardised and requires more work on the part of the banker), but such lending is particularly destabilising. To simplify, the argument is built on two premises: (1) supply of desirable real estate is very scarce, as it tends to be concentrated on specific locations (think cities and urbanisation trends); (2) demand is essentially infinite, as the banks of today can effectively create money and purchasing power out of thin air. Collectively, this inevitably leads to a credit-asset price cycle, buoyed by irrational expectations. The bubble eventually breaks, resulting in a reversal that is deepened due to the role of credit. In particular, households and firms deleverage to amplify the impact on the economy.
Idea-wise, much of this is still relatively familiar territory, as it combines perspectives raised by, among others, Minsky (in explaining the inherent instability of a financial system, where investments eventually turn highly speculative thereby resulting in a crash), Richard Koo (in explaining the deleveraging effect during the "balance sheet recession" of Japan), and Amir Sufi and Atif Mian (specifically their book "House of Debt", in explaining why crises are typically preceded by an accumulation of household debt). Turner takes it one step further and argues the following: at the system level, the deleveraging doesn't help the economy recover. Instead, the debt simply takes a different form - specifically, private debt shifts to public debt as fiscal policy is used as a tool to compensate for the lack of demand from the private sector. This is typically followed by fiscal consolidation/austerity, which worsens the problem. As a last resort, loose monetary policy is introduced; ironically, however, this tends to work only by reigniting the same fire that burned the house down - that is, more debt. For these reasons, Turner goes as far as to say that even "good" lending against real estate (i.e. those with little credit risk to the banker) are socially harmful (because of their collectively destabilising impact on the financial system).
This is only one of several key perspectives that Turner offers in diagnosing the problem. He also explores the role of other related factors. I won't go into detail here, but these include inequality (in plain English, credit is relied upon to "keep up with the Joneses" - or maybe in this day and age, the Kardashians) and global imbalances (significant current account surpluses of one country may be financed by the build-up of private debt in another country).
For those who know the problem well enough, you may find more insights towards the end of the book. Leveraging (heh) on the diagnosis of excessive debt as the cause, Turner then reviews the array of options that have been discussed in the literature while introducing some of his own. He attempts to strike a balance between the pragmatic and theoretical, but personally, most of them belong the latter. But I don't mean that as criticism; to quote Turner himself, "The general point still stands: optimal social and economic policy can never focus simply on the ideal solution but is always dependent on the starting point." And it's important that someone with Turner's knowledge and experience is willing to explore relatively unchartered (or at least, unpopular) waters in offering ideas to the recurrent problem of financial crises.
Turner's policy recommendations are wide-ranging - he believes in having a comprehensive toolkit rather than relying on a single tool, as many central banks have in the past (i.e. reliance on the interest rate). Some are pure "ideals" that assume no practical or political constraints, while others attempt to address how we can transition from the current economic situation. I won't attempt to summarise them, but some notable ones include: (1) constraining credit creation through significantly higher capital requirements (20-25% of total assets) and a reintroduction (at least in advanced economies) of reserve requirements; (2) public policy that punishes debt (the same way pollution is taxed) while incentivising the creation of equity or hybrid contracts as an alternative means of financing (e.g. Islamic finance); (3) internationally, more balkanised financial systems (e.g. requiring the subsidiarisation of foreign-owned operations); (4) "overt money finance", where fiat money creation by the central bank is used to escape the debt overhang (e.g. Bernanke's helicopter money idea from 2003, write-off of public debt via the central bank, bank recapitalisation by the central bank).
Overall, I would strongly recommend this book to anyone with a serious interest in financial crises, particularly from a public policy perspective. I only wish the writing was a little more accessible to an average reader!
For me, what was particularly insightful was Turner's focus on real estate. A key feature of his central hypothesis is that financial systems tend towards lending against existing real estate because it is easier (as opposed to providing capital for new productive investments, which is less standardised and requires more work on the part of the banker), but such lending is particularly destabilising. To simplify, the argument is built on two premises: (1) supply of desirable real estate is very scarce, as it tends to be concentrated on specific locations (think cities and urbanisation trends); (2) demand is essentially infinite, as the banks of today can effectively create money and purchasing power out of thin air. Collectively, this inevitably leads to a credit-asset price cycle, buoyed by irrational expectations. The bubble eventually breaks, resulting in a reversal that is deepened due to the role of credit. In particular, households and firms deleverage to amplify the impact on the economy.
Idea-wise, much of this is still relatively familiar territory, as it combines perspectives raised by, among others, Minsky (in explaining the inherent instability of a financial system, where investments eventually turn highly speculative thereby resulting in a crash), Richard Koo (in explaining the deleveraging effect during the "balance sheet recession" of Japan), and Amir Sufi and Atif Mian (specifically their book "House of Debt", in explaining why crises are typically preceded by an accumulation of household debt). Turner takes it one step further and argues the following: at the system level, the deleveraging doesn't help the economy recover. Instead, the debt simply takes a different form - specifically, private debt shifts to public debt as fiscal policy is used as a tool to compensate for the lack of demand from the private sector. This is typically followed by fiscal consolidation/austerity, which worsens the problem. As a last resort, loose monetary policy is introduced; ironically, however, this tends to work only by reigniting the same fire that burned the house down - that is, more debt. For these reasons, Turner goes as far as to say that even "good" lending against real estate (i.e. those with little credit risk to the banker) are socially harmful (because of their collectively destabilising impact on the financial system).
This is only one of several key perspectives that Turner offers in diagnosing the problem. He also explores the role of other related factors. I won't go into detail here, but these include inequality (in plain English, credit is relied upon to "keep up with the Joneses" - or maybe in this day and age, the Kardashians) and global imbalances (significant current account surpluses of one country may be financed by the build-up of private debt in another country).
For those who know the problem well enough, you may find more insights towards the end of the book. Leveraging (heh) on the diagnosis of excessive debt as the cause, Turner then reviews the array of options that have been discussed in the literature while introducing some of his own. He attempts to strike a balance between the pragmatic and theoretical, but personally, most of them belong the latter. But I don't mean that as criticism; to quote Turner himself, "The general point still stands: optimal social and economic policy can never focus simply on the ideal solution but is always dependent on the starting point." And it's important that someone with Turner's knowledge and experience is willing to explore relatively unchartered (or at least, unpopular) waters in offering ideas to the recurrent problem of financial crises.
Turner's policy recommendations are wide-ranging - he believes in having a comprehensive toolkit rather than relying on a single tool, as many central banks have in the past (i.e. reliance on the interest rate). Some are pure "ideals" that assume no practical or political constraints, while others attempt to address how we can transition from the current economic situation. I won't attempt to summarise them, but some notable ones include: (1) constraining credit creation through significantly higher capital requirements (20-25% of total assets) and a reintroduction (at least in advanced economies) of reserve requirements; (2) public policy that punishes debt (the same way pollution is taxed) while incentivising the creation of equity or hybrid contracts as an alternative means of financing (e.g. Islamic finance); (3) internationally, more balkanised financial systems (e.g. requiring the subsidiarisation of foreign-owned operations); (4) "overt money finance", where fiat money creation by the central bank is used to escape the debt overhang (e.g. Bernanke's helicopter money idea from 2003, write-off of public debt via the central bank, bank recapitalisation by the central bank).
Overall, I would strongly recommend this book to anyone with a serious interest in financial crises, particularly from a public policy perspective. I only wish the writing was a little more accessible to an average reader!
November 11, 2016
The literature surrounding the Financial Crisis of 2008 comes under two categories: (i) blow-by-blow accounts of the story as it happened and (ii) books that seek to understand how it came about. It is obviously the latter that one must turn to when it comes to exploring what we need to do from now on, and Adam Turner, who ran the UK Pensions Commission until 2008 and the UK Financial Services Authority for the next six years is uniquely placed to answer the question, because he not only lived the crisis from an amazing vantage point, but was additionally tasked with keeping the system safe. That was his job!
His analysis of what happened is far from complete. He only mentions technological change in passing, for example. It is, regardless extremely well-informed and it concentrates on the stuff the author learned in his tenure at the FSA. The crisis was a credit crisis, so he chooses to concentrate on credit, while acknowledging there were other possible causes.
His recommendations, on the other hand, I find alarming.
First, the findings on credit:
1. It can make sense for a bank to extend credit which may not be socially desirable. So, for example, a loan against real estate is a super-safe loan for the bank to make because the collateral will not become worthless overnight. Even if the borrower disappears, recovery will be great. But if banks lend mainly against real estate, that’s less desirable than banks funding new productive ventures. To elaborate this point, the banking system has found it historically much simpler to lend to those seeking to invest in already existing assets. In year 1900 it was arable land (which thus hit an 80% score on Piketty’s hit list as a percent of all value) that served as the collateral for all this credit creation and in 2006 it was residential real estate in the US, the UK, Ireland and Spain that attracted all the credit creation, to the point where it still represents north of 70% of all banking assets in the UK even today, some 7 years after crisis of 2008. Real estate lending has its merits, of course, (families can smooth their spending over many years, for example) but lending to the corporate sector is a much better deal for the economy as a whole.
2. It can make sense for an individual to take on debt that may not be socially desirable. So, it might make tremendous sense for me to borrow up to the gills to finance a business venture or even to buy a property in a market that’s going up (and will completely run away from me if I wait any longer). But for society as a whole this will pose a problem when for whatever reason the economy slows down a couple years down the line. If I notice the slowdown, and to make sure I can carry on servicing my debt, I will curtail my spending by much more than if I was carrying less debt. If I am representative, if everybody’s done what I did, our collective behavior will hurt the economy as all spending stops and our actions will engender an undesirable feedback loop. Debt that makes sense for me individually can thus introduce instability for society as a whole.
3. In our world (as opposed to Economics textbooks) most “money” is really the product of debt creation by the banking system in its sundry guises. Fiat money really corresponds to a small fraction of the money supply worldwide. The rest of what we call “money” is what originally appeared in your bank account as the bank’s liability when it gave you a loan, same time the bank also registered as an asset the fact that you would one day pay that money back with interest. Supposing you used that money to build an extension for your kitchen, the money (the bank’s liability) moved from your account to the builder’s account with the bank and B&Q’s account with the bank (and its asset of course remains your loan) and the bottom line is this money did NOT originate with a saver turning up at the bank’s door saying “please keep this safe for me.” You turned up one day looking for a loan and the bank made it possible for the builder to have more money in his account with the bank and the bank made it possible for you to owe it a loan. The banking system created this money, like it created most money. The free market originates credit, bottom line.
4. The free market in lending arises from two agents fulfilling their individual needs with no immediate or automatic consideration for the greater good. Externalities of this credit creation are not costed properly at the point of credit creation. By definition, then, the free market will produce (i) more credit than is good for society and (ii) predominantly credit secured by already existing assets, rather than credit that creates growth directly. QED
5. Inequality induces more credit: the super-rich can’t possibly spend all their money. The credit system lends their money to those who must borrow to carry on spending. This is to some extent a good thing (think of the student who borrows money to attend a university, which makes him more productive and allows him to pay back society –and the lender- with his more productive labor) but it can also be catastrophic if people borrow to spend money they cannot realistically ever hope to pay back. Bottom line, though, inequality leads to more credit creation.
6. Globalization has led to more credit creation, and not in the direction you would expect. The Chinese economy on a whole, for example, has acted as a manufacturer of goods, but also as a lender to the US government, whose citizens have been importing Chinese products in their droves. It’s not the rich Americans who have been lending to the poor Chinese, but the other way round.
7. You cannot risk-manage for the entire system. Risk management tools, such as derivatives, do not reduce overall debt. All they do is shift from one entity to another who will pay for it and when. So let’s suppose I’m really good at risk management and do a bunch of contracts which mean no matter what interest rates do my business ought to be safe. And suppose absolutely every other company does the same, to its full satisfaction. Is the world any safer overall? Contrary to what Greenspan would have you think, not by a whole lot. It’s a bit like you standing up in the stadium so you can see better. By the time everybody’s standing up, we’re back to an unsatisfactory situation where on average we all see the game as well as before. Some can see it a tad better and some can see it a bit worse, but overall it’s a bit of a wash. The best possible result from all the financial wizardry is that people will be holding risks they are more comfortable with, but society overall will have to pay the same amounts in exchange for the same investment decisions and you’re really going to have to keep track of who owes what to whom as an added bonus, making any bankruptcy much more difficult to work through. Financial wizardry will not turn a house that should never have been built into a place somebody will want to live in.
8. You cannot properly measure risk and certainly not using the conventional measures such as Value-at-Risk. It’s the basic Nicholas Nassim Taleb story which says that if you look in the recent past to inform you about risk, you will be using inflated asset prices to evaluate your collateral and you will be using frothy markets to judge the chances of an investment being able to refinance itself. Stability thus breeds instability, to put it in Minsky’s words.
There are other fantastic observations about debt. For example, he notes that the legislation in all modern countries favors companies that raise debt over companies that raise equity. He also notes that you could send all the bad apples from the banking industry to jail or you could stick interest rates somewhere up in the sky and you’d still fail to get rid of the fundamental cause of the problem: Lenders and borrowers both have a strong incentive to extend / take on more debt than is socially desirable.
The author concludes, not in so many words, that if the free market produces too much debt and if we cannot collectively risk manage this debt, then the one remaining choice is to find a way to artificially regulate debt. And then he spends a big chunk of the book discussing how we should contain debt. One-by-one he examines 100% reserve banking, tax on credit intermediation, capital requirements, risk weights, haircuts on funding, constraints on usury, enforced market fragmentation etc.
And do you know what he recommends next? Debt forgiveness, in all its sundry guises, from QE to writedowns and the inflation that will come from helicopter drops.
So basically Adair Turner’s strategy is two-pronged
1. Constrain debt using a mix of all ideas out there
2. When things go wrong, forgive those who made it past the roadblocks and managed to load up anyway
I think that’s quite simply a dreadful set of recommendations. It’s not that fine a line between being practical and being hypocritical. As a blueprint for how to go forward, this strikes me as very clearly on the wrong side of that line.
Yes, yes, I know, he’s saying “forgive past excess and get serious from now on” but I come from Greece and I can tell you that’s not at all how it works. People can remember an amnesty and will hold out until the next one is granted. And this idea that we should meddle with markets first and meddle with the ensuing bankruptcy next is from outer space, as far as I’m concerned.
I’m not saying I have the answer. I don’t. But neither does Adair Turner and he seems to think it’s the linear combination of two inane concepts, which he calls the Debt and the Devil
Finally, I think somebody like Adair Turner ought to have made two observations I could not find anywhere here:
1. The repeal of Glass Steagall was all about finding massive loan books in the “bank” side of the business, valuing them using “mark to market” on decades’ worth of future Net Interest Margin based on accounting that came from the “investment banking” side of the business and paying upfront bonuses on that yet-to-be-realized Net Interest Margin from the Enron side of the business, perhaps after having bought some protection from AIG’s most profitable business unit. But, looking on the bright side, this cannot be repeated. It’s now done and it’s behind us. We’ve learnt, by trial and error.
2. Similarly, while he's right to point out that debt can be issued in socially undesirable amounts when there is no regulation because both lenders and borrowers want to do more business than is socially desirable, the true cause of overindebtedness in the crisis was the emergence of the “originate and distribute” model whereby I lend you money and then immediately stuff the receivable into a structure that I sell into the market, after having bought for money some sort of rating that absolved the buyer of any blame if it turned out I was making bad loans. The picture was not “two guys doing something that was OK for them but in a scope that’s bad for society overall” it was more like “there is a role for government, and it is to supervise securitized lending, where all incentives are totally wrong.” Again though, we’ve probably ended up exactly at that point through trial and error, as Fannie and Freddie are now government owned and represent 90% of all such loans.
So yes, I found this book terribly disappointing.
His analysis of what happened is far from complete. He only mentions technological change in passing, for example. It is, regardless extremely well-informed and it concentrates on the stuff the author learned in his tenure at the FSA. The crisis was a credit crisis, so he chooses to concentrate on credit, while acknowledging there were other possible causes.
His recommendations, on the other hand, I find alarming.
First, the findings on credit:
1. It can make sense for a bank to extend credit which may not be socially desirable. So, for example, a loan against real estate is a super-safe loan for the bank to make because the collateral will not become worthless overnight. Even if the borrower disappears, recovery will be great. But if banks lend mainly against real estate, that’s less desirable than banks funding new productive ventures. To elaborate this point, the banking system has found it historically much simpler to lend to those seeking to invest in already existing assets. In year 1900 it was arable land (which thus hit an 80% score on Piketty’s hit list as a percent of all value) that served as the collateral for all this credit creation and in 2006 it was residential real estate in the US, the UK, Ireland and Spain that attracted all the credit creation, to the point where it still represents north of 70% of all banking assets in the UK even today, some 7 years after crisis of 2008. Real estate lending has its merits, of course, (families can smooth their spending over many years, for example) but lending to the corporate sector is a much better deal for the economy as a whole.
2. It can make sense for an individual to take on debt that may not be socially desirable. So, it might make tremendous sense for me to borrow up to the gills to finance a business venture or even to buy a property in a market that’s going up (and will completely run away from me if I wait any longer). But for society as a whole this will pose a problem when for whatever reason the economy slows down a couple years down the line. If I notice the slowdown, and to make sure I can carry on servicing my debt, I will curtail my spending by much more than if I was carrying less debt. If I am representative, if everybody’s done what I did, our collective behavior will hurt the economy as all spending stops and our actions will engender an undesirable feedback loop. Debt that makes sense for me individually can thus introduce instability for society as a whole.
3. In our world (as opposed to Economics textbooks) most “money” is really the product of debt creation by the banking system in its sundry guises. Fiat money really corresponds to a small fraction of the money supply worldwide. The rest of what we call “money” is what originally appeared in your bank account as the bank’s liability when it gave you a loan, same time the bank also registered as an asset the fact that you would one day pay that money back with interest. Supposing you used that money to build an extension for your kitchen, the money (the bank’s liability) moved from your account to the builder’s account with the bank and B&Q’s account with the bank (and its asset of course remains your loan) and the bottom line is this money did NOT originate with a saver turning up at the bank’s door saying “please keep this safe for me.” You turned up one day looking for a loan and the bank made it possible for the builder to have more money in his account with the bank and the bank made it possible for you to owe it a loan. The banking system created this money, like it created most money. The free market originates credit, bottom line.
4. The free market in lending arises from two agents fulfilling their individual needs with no immediate or automatic consideration for the greater good. Externalities of this credit creation are not costed properly at the point of credit creation. By definition, then, the free market will produce (i) more credit than is good for society and (ii) predominantly credit secured by already existing assets, rather than credit that creates growth directly. QED
5. Inequality induces more credit: the super-rich can’t possibly spend all their money. The credit system lends their money to those who must borrow to carry on spending. This is to some extent a good thing (think of the student who borrows money to attend a university, which makes him more productive and allows him to pay back society –and the lender- with his more productive labor) but it can also be catastrophic if people borrow to spend money they cannot realistically ever hope to pay back. Bottom line, though, inequality leads to more credit creation.
6. Globalization has led to more credit creation, and not in the direction you would expect. The Chinese economy on a whole, for example, has acted as a manufacturer of goods, but also as a lender to the US government, whose citizens have been importing Chinese products in their droves. It’s not the rich Americans who have been lending to the poor Chinese, but the other way round.
7. You cannot risk-manage for the entire system. Risk management tools, such as derivatives, do not reduce overall debt. All they do is shift from one entity to another who will pay for it and when. So let’s suppose I’m really good at risk management and do a bunch of contracts which mean no matter what interest rates do my business ought to be safe. And suppose absolutely every other company does the same, to its full satisfaction. Is the world any safer overall? Contrary to what Greenspan would have you think, not by a whole lot. It’s a bit like you standing up in the stadium so you can see better. By the time everybody’s standing up, we’re back to an unsatisfactory situation where on average we all see the game as well as before. Some can see it a tad better and some can see it a bit worse, but overall it’s a bit of a wash. The best possible result from all the financial wizardry is that people will be holding risks they are more comfortable with, but society overall will have to pay the same amounts in exchange for the same investment decisions and you’re really going to have to keep track of who owes what to whom as an added bonus, making any bankruptcy much more difficult to work through. Financial wizardry will not turn a house that should never have been built into a place somebody will want to live in.
8. You cannot properly measure risk and certainly not using the conventional measures such as Value-at-Risk. It’s the basic Nicholas Nassim Taleb story which says that if you look in the recent past to inform you about risk, you will be using inflated asset prices to evaluate your collateral and you will be using frothy markets to judge the chances of an investment being able to refinance itself. Stability thus breeds instability, to put it in Minsky’s words.
There are other fantastic observations about debt. For example, he notes that the legislation in all modern countries favors companies that raise debt over companies that raise equity. He also notes that you could send all the bad apples from the banking industry to jail or you could stick interest rates somewhere up in the sky and you’d still fail to get rid of the fundamental cause of the problem: Lenders and borrowers both have a strong incentive to extend / take on more debt than is socially desirable.
The author concludes, not in so many words, that if the free market produces too much debt and if we cannot collectively risk manage this debt, then the one remaining choice is to find a way to artificially regulate debt. And then he spends a big chunk of the book discussing how we should contain debt. One-by-one he examines 100% reserve banking, tax on credit intermediation, capital requirements, risk weights, haircuts on funding, constraints on usury, enforced market fragmentation etc.
And do you know what he recommends next? Debt forgiveness, in all its sundry guises, from QE to writedowns and the inflation that will come from helicopter drops.
So basically Adair Turner’s strategy is two-pronged
1. Constrain debt using a mix of all ideas out there
2. When things go wrong, forgive those who made it past the roadblocks and managed to load up anyway
I think that’s quite simply a dreadful set of recommendations. It’s not that fine a line between being practical and being hypocritical. As a blueprint for how to go forward, this strikes me as very clearly on the wrong side of that line.
Yes, yes, I know, he’s saying “forgive past excess and get serious from now on” but I come from Greece and I can tell you that’s not at all how it works. People can remember an amnesty and will hold out until the next one is granted. And this idea that we should meddle with markets first and meddle with the ensuing bankruptcy next is from outer space, as far as I’m concerned.
I’m not saying I have the answer. I don’t. But neither does Adair Turner and he seems to think it’s the linear combination of two inane concepts, which he calls the Debt and the Devil
Finally, I think somebody like Adair Turner ought to have made two observations I could not find anywhere here:
1. The repeal of Glass Steagall was all about finding massive loan books in the “bank” side of the business, valuing them using “mark to market” on decades’ worth of future Net Interest Margin based on accounting that came from the “investment banking” side of the business and paying upfront bonuses on that yet-to-be-realized Net Interest Margin from the Enron side of the business, perhaps after having bought some protection from AIG’s most profitable business unit. But, looking on the bright side, this cannot be repeated. It’s now done and it’s behind us. We’ve learnt, by trial and error.
2. Similarly, while he's right to point out that debt can be issued in socially undesirable amounts when there is no regulation because both lenders and borrowers want to do more business than is socially desirable, the true cause of overindebtedness in the crisis was the emergence of the “originate and distribute” model whereby I lend you money and then immediately stuff the receivable into a structure that I sell into the market, after having bought for money some sort of rating that absolved the buyer of any blame if it turned out I was making bad loans. The picture was not “two guys doing something that was OK for them but in a scope that’s bad for society overall” it was more like “there is a role for government, and it is to supervise securitized lending, where all incentives are totally wrong.” Again though, we’ve probably ended up exactly at that point through trial and error, as Fannie and Freddie are now government owned and represent 90% of all such loans.
So yes, I found this book terribly disappointing.
August 29, 2017
Turner’s key thesis is that left to their own devices, margin funded banks inevitably over time produce excessive levels of private credit and hence debt, which is allocated inefficiently (typically to inflating real estate values rather than to increasing overall economic worth or production) leading not just to booms and busts, but to lengthy post-bust recessions due to debt overhangs. He also argues that (particularly due to issues of growing global imbalances and income inequality), the levels of nominal growth needed to keep the economy going can only really be achieved either by this route or alternately by governments and banks financing deficits by fiat money creation/printing.
Although logically structured, the book seems to keep circling around the same key point and seems repetitive – it is also extremely technical at times. It also suffers from the usual economics as a science failure that it argues B follows from A (when an argument that not B follows from A seems equally plausible).
Although logically structured, the book seems to keep circling around the same key point and seems repetitive – it is also extremely technical at times. It also suffers from the usual economics as a science failure that it argues B follows from A (when an argument that not B follows from A seems equally plausible).
October 23, 2015
By Peter Thal Larsen
Scattered throughout Adair Turner’s “Between Debt and the Devil” is a little word that rarely features in most books about finance. The word is “we”. Its repeated appearance is a reminder that Turner is not just analysing the malaise of post-crisis economic policymaking: he is campaigning to upend the consensus.
In the opening chapters of this lucid and forcefully-argued book, “we” refers to the central bankers, regulators and other policymakers who battled to save the financial system. Turner joined that crew in September 2008, when he took over as chairman of Britain’s Financial Services Authority - a position he held until the Conservative government dismembered it in 2013.
This position gave him a crash-course in the failings of pre-crisis economic and financial policy, and a high-profile perch from which to join the subsequent debate about fixing the system. Yet this is no crisis memoir. Anyone seeking late-night anecdotes about the bailout of Royal Bank of Scotland will have to look elsewhere.
Instead, Turner summarises his voyage through the intellectual foundations of modern finance. The shibboleths of pre-crisis orthodoxy are comprehensively dispatched: unfettered markets are not necessarily more efficient; increased financial activity does not always lead to improved productivity; human beings acting in their own self-interest can produce catastrophic outcomes.
Seven years after the collapse of Lehman Brothers, none of this is controversial. Yet when looking at the responses to the crisis, Turner turns more radical.
The global economy is struggling with the burden of debt imposed by the crisis and subsequent economic slowdown. Policymakers face the challenge of sweating off the hangover while avoiding another crisis.
Turner’s diagnosis is that the remedies tried so far are ineffective. Near-zero interest rates and central bank bond-buying may have helped avert a deeper slump, but only at the expense of increased inequality and more risky lending. The overall debt burden is no smaller: borrowing has just shifted from the private to the public sector.
The improvements to the financial industry are equally feeble. Yes, banks and derivatives trading are safer. Yet Turner argues that the regulations have ignored the reality that unsustainable bubbles can be fuelled by healthy lenders. The tightly constrained banks which some reformers recommend, for example banks which can only invest in government bonds, would not solve the problem. Financial markets would still find ways to make too many risky loans.
Turner has an answer. Lending needs a guiding hand. “The amount of credit created and its allocation is too important to be left to bankers; nor can it be left to free markets in securitized credit.” He makes a compelling case for reining in real estate finance. In 2007, roughly 60 percent of bank lending in developed economies was secured against property; in 1970 the figure was 35 percent. Applying ever-expanding amounts of bank-financed credit to a finite amount of real estate seems certain to lead to larger and more dangerous speculative bubbles.
The notion of authorities deciding who is eligible for loans is not as radical as it may sound. Post-war Japan and Korea - and more recently China - channelled savings into cheap loans for manufacturing and infrastructure. Of course, this approach can store up big problems. However, it’s hard for Western policymakers to argue that their private markets for credit have produced better results.
Turner’s suggestion that monetary authorities boost demand by printing money is more controversial. For modern central bankers the notion that they should finance government spending is tantamount to heresy - the “Devil” of the book’s title.
The idea actually has a reasonably respectable intellectual pedigree: Milton Friedman talked about helicopters dropping freshly-printed bank notes, while Ben Bernanke once suggested that Japan try the modern equivalent to escape its economic slump. But real-life successes are harder to find than hyperinflationary disasters like Weimar Germany and Zimbabwe. Japan might be the next experiment. Its massive government debt is increasingly owed to its central bank and could effectively be cancelled at the stroke of a pen - the equivalent of printing money.
But who will determine how much money is printed, and where it is spent? There is no technocratic answer. Ultimately, governments will decide, and they might find the temptation to splurge irresistible - consider the British Labour Party’s recent suggestion for paying for infrastructure investment with bonds that the Bank of England would buy.
In the aftermath of the crisis, Turner said some parts of finance were not “socially useful”. The phrase crops up again in this book, where it raises a broader issue: if markets are not the arbiters of sound finance, then who is? This where Turner’s repeated use of “we” becomes fuzzy: it’s not clear whether he is appealing to fellow regulators, academic economists, politicians, or the man in the street.
Nevertheless, this book raises important questions, and Turner is not pretending he has all the answers. “We face a choice of imperfections,” he writes, “and some of the imperfections are unfixable.” That is something we can all agree on.
Scattered throughout Adair Turner’s “Between Debt and the Devil” is a little word that rarely features in most books about finance. The word is “we”. Its repeated appearance is a reminder that Turner is not just analysing the malaise of post-crisis economic policymaking: he is campaigning to upend the consensus.
In the opening chapters of this lucid and forcefully-argued book, “we” refers to the central bankers, regulators and other policymakers who battled to save the financial system. Turner joined that crew in September 2008, when he took over as chairman of Britain’s Financial Services Authority - a position he held until the Conservative government dismembered it in 2013.
This position gave him a crash-course in the failings of pre-crisis economic and financial policy, and a high-profile perch from which to join the subsequent debate about fixing the system. Yet this is no crisis memoir. Anyone seeking late-night anecdotes about the bailout of Royal Bank of Scotland will have to look elsewhere.
Instead, Turner summarises his voyage through the intellectual foundations of modern finance. The shibboleths of pre-crisis orthodoxy are comprehensively dispatched: unfettered markets are not necessarily more efficient; increased financial activity does not always lead to improved productivity; human beings acting in their own self-interest can produce catastrophic outcomes.
Seven years after the collapse of Lehman Brothers, none of this is controversial. Yet when looking at the responses to the crisis, Turner turns more radical.
The global economy is struggling with the burden of debt imposed by the crisis and subsequent economic slowdown. Policymakers face the challenge of sweating off the hangover while avoiding another crisis.
Turner’s diagnosis is that the remedies tried so far are ineffective. Near-zero interest rates and central bank bond-buying may have helped avert a deeper slump, but only at the expense of increased inequality and more risky lending. The overall debt burden is no smaller: borrowing has just shifted from the private to the public sector.
The improvements to the financial industry are equally feeble. Yes, banks and derivatives trading are safer. Yet Turner argues that the regulations have ignored the reality that unsustainable bubbles can be fuelled by healthy lenders. The tightly constrained banks which some reformers recommend, for example banks which can only invest in government bonds, would not solve the problem. Financial markets would still find ways to make too many risky loans.
Turner has an answer. Lending needs a guiding hand. “The amount of credit created and its allocation is too important to be left to bankers; nor can it be left to free markets in securitized credit.” He makes a compelling case for reining in real estate finance. In 2007, roughly 60 percent of bank lending in developed economies was secured against property; in 1970 the figure was 35 percent. Applying ever-expanding amounts of bank-financed credit to a finite amount of real estate seems certain to lead to larger and more dangerous speculative bubbles.
The notion of authorities deciding who is eligible for loans is not as radical as it may sound. Post-war Japan and Korea - and more recently China - channelled savings into cheap loans for manufacturing and infrastructure. Of course, this approach can store up big problems. However, it’s hard for Western policymakers to argue that their private markets for credit have produced better results.
Turner’s suggestion that monetary authorities boost demand by printing money is more controversial. For modern central bankers the notion that they should finance government spending is tantamount to heresy - the “Devil” of the book’s title.
The idea actually has a reasonably respectable intellectual pedigree: Milton Friedman talked about helicopters dropping freshly-printed bank notes, while Ben Bernanke once suggested that Japan try the modern equivalent to escape its economic slump. But real-life successes are harder to find than hyperinflationary disasters like Weimar Germany and Zimbabwe. Japan might be the next experiment. Its massive government debt is increasingly owed to its central bank and could effectively be cancelled at the stroke of a pen - the equivalent of printing money.
But who will determine how much money is printed, and where it is spent? There is no technocratic answer. Ultimately, governments will decide, and they might find the temptation to splurge irresistible - consider the British Labour Party’s recent suggestion for paying for infrastructure investment with bonds that the Bank of England would buy.
In the aftermath of the crisis, Turner said some parts of finance were not “socially useful”. The phrase crops up again in this book, where it raises a broader issue: if markets are not the arbiters of sound finance, then who is? This where Turner’s repeated use of “we” becomes fuzzy: it’s not clear whether he is appealing to fellow regulators, academic economists, politicians, or the man in the street.
Nevertheless, this book raises important questions, and Turner is not pretending he has all the answers. “We face a choice of imperfections,” he writes, “and some of the imperfections are unfixable.” That is something we can all agree on.
May 13, 2023
The title fits since throughout Adair is trying to balance as much as possible between the need to limit excessive pvt money creation and need for limited expansion of public money creation in advanced economies, as the world grapples with a debt overhang. Effects of which are now clear compared to when book was written.
March 25, 2017
Some interesting ideas and discussions but a little biased in assessing the merits of his own ideas and my god the amount of padding and repetition! You could write this in ten pages without losing any of the content/concepts.
August 25, 2016
It's been twelve years since I read Just Capital: The Liberal Economy and I have been impatiently waiting to read his next book, this one. He is simply the most compelling writer about economic issues that I have discovered. This is perhaps because of the admirable way he combines his experience as a practitioner with his knowledge as a scholar. He makes me want to read more about economics. In this case, I want to more about the Japanese economy since 1991, more about the Irish Economy since 2008, and more about the uses and abuses of fiat money.
The gist of this book can be summarised in one of Turner's sentences: "A totally relaxed attitude to private credit creation produced the crisis; and a total prohibition on fiat money creation has made recovery weaker than it could have been. Absolute beliefs and simple rules are dangerous." Whereas I agree with the diagnosis, I am unconvinced of the cure, and suspect the potential side effects may be worse than the disease. Turner argues the main symptom of this disease is persistent 'low' growth. The disease has beset the Japanese economy since its property-debt bubble burst in 1991. The cure is the creation of fiat money to inflate the economy out of debt. This is the only way he sees for those economies affected by the property bubble that burst in 2008 to resume 'natural' growth. The Euro-zone has been particularly affected by low growth because of the steadfast refusal of the Germans to inflate the economy by money creation. How then has Eurozone member Ireland been able to return to 'high' growth since 2014? Low growth is an opportunity cost, not a real cost; Japan does not suffer from mass unemployment, starvation or political instability. It does suffer from an extraordinary high level of debt, but since this debt is domestically sourced and funded at extraordinary low interest rates, I fail to see that the disease is necessarily worse than the cure. There is a reason why the Germans are so reluctant to inflate their way out of a Euro-recession, and it's not just that they have been able to avoid debt created through exporting manufactured goods. Inflation destroyed the whole basis of the German economy in the 1920s and gave rise to Nazism and world war in the 1930s. It is not enough for Turner to cite successful creations of fiat money in the 1800s, he has to explain why it worked then and not in 1920s Germany or modern day Zimbabwe.
The last part of Turner's admirable sentence addresses my concerns: absolute rules and simple beliefs are dangerous. The belief that low growth must be tackled is a dangerous one. There are many explanations for it; rather than the debt-burden, demographic decline is the most obvious to me, this better explains why the Japanese continue to save years decades after the financial crisis. Boredom with consumer culture may be another. Even so, I still look forward to Turner's next book.
The gist of this book can be summarised in one of Turner's sentences: "A totally relaxed attitude to private credit creation produced the crisis; and a total prohibition on fiat money creation has made recovery weaker than it could have been. Absolute beliefs and simple rules are dangerous." Whereas I agree with the diagnosis, I am unconvinced of the cure, and suspect the potential side effects may be worse than the disease. Turner argues the main symptom of this disease is persistent 'low' growth. The disease has beset the Japanese economy since its property-debt bubble burst in 1991. The cure is the creation of fiat money to inflate the economy out of debt. This is the only way he sees for those economies affected by the property bubble that burst in 2008 to resume 'natural' growth. The Euro-zone has been particularly affected by low growth because of the steadfast refusal of the Germans to inflate the economy by money creation. How then has Eurozone member Ireland been able to return to 'high' growth since 2014? Low growth is an opportunity cost, not a real cost; Japan does not suffer from mass unemployment, starvation or political instability. It does suffer from an extraordinary high level of debt, but since this debt is domestically sourced and funded at extraordinary low interest rates, I fail to see that the disease is necessarily worse than the cure. There is a reason why the Germans are so reluctant to inflate their way out of a Euro-recession, and it's not just that they have been able to avoid debt created through exporting manufactured goods. Inflation destroyed the whole basis of the German economy in the 1920s and gave rise to Nazism and world war in the 1930s. It is not enough for Turner to cite successful creations of fiat money in the 1800s, he has to explain why it worked then and not in 1920s Germany or modern day Zimbabwe.
The last part of Turner's admirable sentence addresses my concerns: absolute rules and simple beliefs are dangerous. The belief that low growth must be tackled is a dangerous one. There are many explanations for it; rather than the debt-burden, demographic decline is the most obvious to me, this better explains why the Japanese continue to save years decades after the financial crisis. Boredom with consumer culture may be another. Even so, I still look forward to Turner's next book.
April 21, 2020
Turner wrote a good ex post analysis of the Great Recession of 2007-2009 with an agenda to introduce some proposals to cope with the relative state of ''secular stagnation'' prevailing in the industrialized world. Secular stagnation might be defined as a state of chronically deficient demand and low inflation bring about by high debt level and deleveraging (pp. 14-15). The author main argument to explain the world financial crisis is that financial deregulation in the industrialized countries since the 1970s and a heavy reliance on the banking sector to issue credit money in order to finance growth are the source of an unstable international financial system.
What Turner is proposing in order to reduce our reliance on credit money to finance economic growth is, bottom line, a political solution that goes beyond the mainstream economic theories of the efficient market hypothesis (EMH) and the rational expectations hypothesis (REH). The idea is to combine the introduction of new regulations limiting the issue of private credit money with a new policy allowing the Treasury of a State to issue public credit (fiat money), under strict guidelines, in order to finance a temporary deficit in the balance-of-payments. The central problem is to strike the right balance between private money (banking credit) and public money (fiat money or monetary finance) in order to bring about stable and sustainable economic growth.
For Turner, one of the great difficulty in preventing the Great Recession and navigating the post-crisis years was, and is still due to the ''failure to think deeply enough about money and credit, and the harmful taboo against monetary finance (…).'' (p. 262).
What Turner is proposing in order to reduce our reliance on credit money to finance economic growth is, bottom line, a political solution that goes beyond the mainstream economic theories of the efficient market hypothesis (EMH) and the rational expectations hypothesis (REH). The idea is to combine the introduction of new regulations limiting the issue of private credit money with a new policy allowing the Treasury of a State to issue public credit (fiat money), under strict guidelines, in order to finance a temporary deficit in the balance-of-payments. The central problem is to strike the right balance between private money (banking credit) and public money (fiat money or monetary finance) in order to bring about stable and sustainable economic growth.
For Turner, one of the great difficulty in preventing the Great Recession and navigating the post-crisis years was, and is still due to the ''failure to think deeply enough about money and credit, and the harmful taboo against monetary finance (…).'' (p. 262).
February 8, 2016
Adair Turner was the head of the UK bank regulator from 2008 to 2013. Before that he was Vice Chair of the US investment bank Merrill Lynch and a non-executive director of Standard Chartered. Outside of finance, he was head of the UK business lobby group, the CBI and before that at McKinsey.
The book devotes a lot to the pre-2008 environment, whether the Washington Consensus view or the acceptance of finance as good. Adair's main thrust is that there should be less private sector credit creation, especially if linked to real estate. He argues that the state should use quantitative tools and to rein in credit and taxes to reduce investment in already existing real estate. At the same time, the state should print money to finance stimulus programmes such as in climate change or public infrastructure. He does caution this with the experience of China at the moment.
Overall, I felt the book could have focused more the nitty gritty of regulators and the boards of investment banks in which he has much experience. So what stopped him from implementing these ideas when he worked in those types of institutions. Where does the power lie in them and so on.
The macro arguments are well made, though can be found elsewhere in books and articles written by Martin Wolf, John Kay and Larry Summers. I think a book focusing on his institutional knowledge in relation to these questions would have been much more interesting.
The book devotes a lot to the pre-2008 environment, whether the Washington Consensus view or the acceptance of finance as good. Adair's main thrust is that there should be less private sector credit creation, especially if linked to real estate. He argues that the state should use quantitative tools and to rein in credit and taxes to reduce investment in already existing real estate. At the same time, the state should print money to finance stimulus programmes such as in climate change or public infrastructure. He does caution this with the experience of China at the moment.
Overall, I felt the book could have focused more the nitty gritty of regulators and the boards of investment banks in which he has much experience. So what stopped him from implementing these ideas when he worked in those types of institutions. Where does the power lie in them and so on.
The macro arguments are well made, though can be found elsewhere in books and articles written by Martin Wolf, John Kay and Larry Summers. I think a book focusing on his institutional knowledge in relation to these questions would have been much more interesting.
September 26, 2024
Adair Turner's 'Between Debt and the Devil: Money, Credit and Fixing Global Finance' is both wide-ranging analysis of the runup to the GFC and provider of solutions for fixing the turgid growth seen by major economies in its aftermath. Although almost 10 years have passed since its publication, the themes and analysis contained within have not aged.
Turner builds upon the work of Charles Kindleberger's 'Manias, Panics and Crashes' through his focus on the role of excessive credit growth before financial crises, particularly with regards to the dangers of real estate lending growth over business investment lending. He points out that in 1928, in 17 advanced economies, real estate lending averaged 30% of bank lending, in 1970 it was 35%, but by 2007 it was closer to 60%. This was just direct too, and a proportion of the remaining 40% financed construction firms too. In economies where this was financing new asset construction this was less problematic, though dangerous where it financed an existing asset boom, as Turner reveals.
After this, Turner moves to discuss the aftermath of the GFC, honing in on the difficulties on stimulating demand in a deleveraging environment. He notes the debt overhang issue, explaining how it can be caused as much by those who don't default on their mortgages as those who do if the desire of the former to pay down debt outweighs desire to consume.
Turner's moment of arch heterodoxy comes at the end of the book, where he suggests the 'one-off' use of fiat money creation to stimulate nominal demand - supplying the most taboo solution possible.
Whether or not one agrees with the final extension of his arguments, the meticulous evidence and airtight logic cascades presented before make this a must-read for anyone interested in financial systems. It would be very difficult indeed to read this book and not learn something.
Turner builds upon the work of Charles Kindleberger's 'Manias, Panics and Crashes' through his focus on the role of excessive credit growth before financial crises, particularly with regards to the dangers of real estate lending growth over business investment lending. He points out that in 1928, in 17 advanced economies, real estate lending averaged 30% of bank lending, in 1970 it was 35%, but by 2007 it was closer to 60%. This was just direct too, and a proportion of the remaining 40% financed construction firms too. In economies where this was financing new asset construction this was less problematic, though dangerous where it financed an existing asset boom, as Turner reveals.
After this, Turner moves to discuss the aftermath of the GFC, honing in on the difficulties on stimulating demand in a deleveraging environment. He notes the debt overhang issue, explaining how it can be caused as much by those who don't default on their mortgages as those who do if the desire of the former to pay down debt outweighs desire to consume.
Turner's moment of arch heterodoxy comes at the end of the book, where he suggests the 'one-off' use of fiat money creation to stimulate nominal demand - supplying the most taboo solution possible.
Whether or not one agrees with the final extension of his arguments, the meticulous evidence and airtight logic cascades presented before make this a must-read for anyone interested in financial systems. It would be very difficult indeed to read this book and not learn something.
December 16, 2017
Easy to read book, divided into parts and subsections
Ultimately It's striking the balance between debt creation on the one hand the devil -- the imbalance created by monetary policy. MP can be good in small doses but when taken to an extreme it leads to its own set of issues. So instead of completely shying away from it, it's possible to have institutional levers to constrain the creation of credit in the formal and in the private sector. And these do need to be institutional levers -- financial markets left free and to their own devices inevitably create excess credit that is misallocated generating booms and busts, overhangs and post crises recessions. More plainly, the aim of the book is to define politics to prevent excessive debt, how to escape debt overhand, why economics failed to see the crisis coming
rest in ON
Ultimately It's striking the balance between debt creation on the one hand the devil -- the imbalance created by monetary policy. MP can be good in small doses but when taken to an extreme it leads to its own set of issues. So instead of completely shying away from it, it's possible to have institutional levers to constrain the creation of credit in the formal and in the private sector. And these do need to be institutional levers -- financial markets left free and to their own devices inevitably create excess credit that is misallocated generating booms and busts, overhangs and post crises recessions. More plainly, the aim of the book is to define politics to prevent excessive debt, how to escape debt overhand, why economics failed to see the crisis coming
rest in ON
October 31, 2018
This requires some effort to read - quite technical at times and the author doesn't even try to dumb it down for non-eco people. It challenges all the micro and macro eco you learn in classroom books and provides a new lense to see the financial turmoils the world economy has so grown used to.
Highly recommended for all those curious about economics and banking in general.
Highly recommended for all those curious about economics and banking in general.
April 27, 2021
The writing is too dry, makes it a difficult read. The content is good and pertinent. Important critique of current economics. Realistic assessment of the policy choices. In the end there is an interesting reflection on the impact of inequality in marginal consumption and the deflationary/demand reduction it creates.
July 3, 2017
Some familiarity with economics and finance is recommended before jumping into this. But easily one of the best and most thoughtful books on macroeconomic theory, financialization, and the financial crash I've yet read.
June 15, 2018
In regard to private debt creation, Turner provides a very strong argument against conventional economic wisdom and highlights the keys flaws in recent economic policy. Yet I find his argument for monetisation weak- I would have preferred Turner to explore his proposed solution in more depth.
October 14, 2022
Excellent book by a guy with great theoretical knowledge and practical experience. Good to see post Keynesian and MMT ideas working their way into the mainstream. Gets a little repetitive at times, but highly recommended nonetheless.
March 6, 2017
Amazing book. Provides a great foundation for understanding debt, money, credit and global finance. Truly a knowledge oriented book.
May 31, 2017
Iconoclastic, smart writing on credit, banking, debt, and inflation. Not sure he successfully makes the case for monetization - does a better job explaining why private money creation is problematic.
April 8, 2018
Great read on various economic issues that continue to plague us in the Western World.....
July 30, 2018
A refreshing take on debt's role in our society. A bit dry and repetitive at time.
December 19, 2018
the book is just brain-storming.
This entire review has been hidden because of spoilers.
September 2, 2019
Great content, could have been better written. Quite repetitive arguments
June 28, 2022
After all the films about the crisis. This book shows all in details and try to answer question how to avoid such situation in future.
July 14, 2017
I won this in a Goodreads giveaway.
After 3 months this finally arrived and I should have used that time to brush up on my college economics. It was a rough go and without knowing enough I can't say the ideas are good or not. I am handing it off to someone who has more of a finance background and hopefully they will have a better understanding of what the author is saying.
After 3 months this finally arrived and I should have used that time to brush up on my college economics. It was a rough go and without knowing enough I can't say the ideas are good or not. I am handing it off to someone who has more of a finance background and hopefully they will have a better understanding of what the author is saying.
June 28, 2020
A number of extraordinary books have come out of the Global Financial Crisis (GFC). Of those I have read, the standouts were 'The Bankers' New Clothes' (Admati & Hellwig), 'The End of Alchemy' (Melvyn King), and 'Crashed' (Adam Tooze). But Adair Turner's relatively short contribution strikes me as the most incisive and broad-ranging.
Turner's main insight is that unregulated growth of private credit - i.e. money created by the banking and "shadow banking" systems through lending - is the key contributor to financial instability and the low growth trap that many economies, notably Japan and the Eurozone, were experiencing in the 2010s. Therefore the "golden straightjacket" view that central banks and financial regulators could concentrate on stable inflation and consumer protection was, with hindsight after the GFC, dangerously wrong. This is predicated on a clear and persuasive view that the main business of banking has been to provide lending for the purchase of real estate, leading to a cycle of property asset inflation and greater leverage, exacerbated by hot money stemming from free international capital flows.
Turner agrees with the post-GFC consensus that banks should have higher capital ratios, retail and investment banking groups should be structurally separated, mortgage lending should be limited and that shadow banks require regulation. Interestingly he is relatively dismissive of the regulatory requirement for banks to issue debt which can be converted into equity at a given trigger: this would be counterproductive, he suggests, if multiple banks were to require 'bail in' at the same time; and it would be better to focus efforts on higher initial levels of equity and the stability of the wider economy.
Therefore he advocates a still-radical program that includes the reintroduction of reserve-to-deposit ratios and the application of risk weighted capital requirements that reflect 'social' factors not just private risk to particular financial institutions. He goes so far as to suggest that growth should be achieved not so much through private credit creation but through 'direction' to more productive investments, as in Japan, Korea and Taiwan post-WW2.
Most radically, he strongly advocates the expediency of monetary financing - central banks creating money and using it to fund government spending - as a route out of current debt overhangs through inflation, and to stimulate aggregate demand. It is this much-demonised policy tool which supplies the book's titular reference to the devil and its cover illustration of Faust and Mephistopheles, via Goethe and a Bundesbank speech.
I gave this a 5* review because this all struck me as rather persuasive at the 'big picture' level, and as necessary devil's advocacy. Turner was made Chairman of the UK Financial Services Authority, as he tells us, the week after Lehman collapsed; and he writes as one who went through the deeper levels of hell in the GFC. Throughout he is clear-eyed that there are no easy options, just trade-offs and imperfections; some imperfection "is unfixable" but equally that implies that some is. This is an important caveat. It seems, surveying the decade since Lehman through Turner's eyes, that the policy mix has had major downsides: QE in particular has sustained high asset values and the cycle of real-estate and credit. This has reinforced societies of haves and have-nots which, as noted in the afterword to the paperback edition, fed into the 2016 populist upsurge.
What is the relevance to 2020? So far Covid 19 has exposed the massive lack of resilience outside the financial sector, in supply chains and corporate finances in particular. As the policymakers look to restore economic growth there is a risk that a credit-fueled boom will be stimulated, consciously or not. Turner's analysis suggests there is another way, and I have sympathy for the old devil.
Turner's main insight is that unregulated growth of private credit - i.e. money created by the banking and "shadow banking" systems through lending - is the key contributor to financial instability and the low growth trap that many economies, notably Japan and the Eurozone, were experiencing in the 2010s. Therefore the "golden straightjacket" view that central banks and financial regulators could concentrate on stable inflation and consumer protection was, with hindsight after the GFC, dangerously wrong. This is predicated on a clear and persuasive view that the main business of banking has been to provide lending for the purchase of real estate, leading to a cycle of property asset inflation and greater leverage, exacerbated by hot money stemming from free international capital flows.
Turner agrees with the post-GFC consensus that banks should have higher capital ratios, retail and investment banking groups should be structurally separated, mortgage lending should be limited and that shadow banks require regulation. Interestingly he is relatively dismissive of the regulatory requirement for banks to issue debt which can be converted into equity at a given trigger: this would be counterproductive, he suggests, if multiple banks were to require 'bail in' at the same time; and it would be better to focus efforts on higher initial levels of equity and the stability of the wider economy.
Therefore he advocates a still-radical program that includes the reintroduction of reserve-to-deposit ratios and the application of risk weighted capital requirements that reflect 'social' factors not just private risk to particular financial institutions. He goes so far as to suggest that growth should be achieved not so much through private credit creation but through 'direction' to more productive investments, as in Japan, Korea and Taiwan post-WW2.
Most radically, he strongly advocates the expediency of monetary financing - central banks creating money and using it to fund government spending - as a route out of current debt overhangs through inflation, and to stimulate aggregate demand. It is this much-demonised policy tool which supplies the book's titular reference to the devil and its cover illustration of Faust and Mephistopheles, via Goethe and a Bundesbank speech.
I gave this a 5* review because this all struck me as rather persuasive at the 'big picture' level, and as necessary devil's advocacy. Turner was made Chairman of the UK Financial Services Authority, as he tells us, the week after Lehman collapsed; and he writes as one who went through the deeper levels of hell in the GFC. Throughout he is clear-eyed that there are no easy options, just trade-offs and imperfections; some imperfection "is unfixable" but equally that implies that some is. This is an important caveat. It seems, surveying the decade since Lehman through Turner's eyes, that the policy mix has had major downsides: QE in particular has sustained high asset values and the cycle of real-estate and credit. This has reinforced societies of haves and have-nots which, as noted in the afterword to the paperback edition, fed into the 2016 populist upsurge.
What is the relevance to 2020? So far Covid 19 has exposed the massive lack of resilience outside the financial sector, in supply chains and corporate finances in particular. As the policymakers look to restore economic growth there is a risk that a credit-fueled boom will be stimulated, consciously or not. Turner's analysis suggests there is another way, and I have sympathy for the old devil.
December 6, 2015
An interesting book that certainly will have a few people upset, challenging the “conventional wisdom” that we must have credit growth in order to generate economic growth. The author is the former head of Britain’s Financial Services Authority and he took over the hot seat just as the 2008 financial crisis struck and he had a front-row seat in helping redesign global financial regulations and work towards getting the ship back on an even keel.
The author believes that the endless credit growth actually fuels the flames of potential problems, boosting real estate booms and busts and creating market mayhem. Debt, it is claimed, needs to be taxed as a form of financial pollution and banks must be encouraged to be better capitalised. A correction to society and the greater financial industry is necessary.
“The fact that we are now slowly recovering from a deep and long- lasting recession must not blind us to the reality that the 2007-2008 crash was an economic catastrophe. This catastrophe was entirely self-inflicted and avoidable. It was not the result of war or political turmoil, nor the consequence of competition from emerging economies. Unlike the problems of stagflation – simultaneous high inflation and high unemployment – which afflicted several developed countries in the 1970s, it did not derive from under-lying tensions over income distribution, from profligate governments allowing public deficits to run out of control, or from powerful trade unions able to demand inflationary pay claims. The fundamental problem is that modern financial systems left to themselves inevitably create debt in excessive quantities and in particular debt that does not fund new capital investment but rather the purchase of already existing assets, above all real estate. It is that debt creation which drives booms and financial busts: and it is the debt overhang left over by the boom that explains why recovery from the 2007– 2008 financial crisis has been so anaemic,” wrote the author.
It was a fascinating read, even if some of the economics theory and reasoning went whooshing over one’s head. It seems to make a strong, reasoned argument for a system-wide reform and change in thinking. However the “how may we implement” such changes side of the book was a little less forthright. In any case, this book was a read that the concerned amateur could enjoy, whilst the industry professional or politician might have a few sweaty moments. Maybe you should read this book and, after you are finished with it, send it the leading politician of your choice…
Maybe they will even read it and slowly but surely the message will get through if enough people “recycle” the book!
Autamme.com
The author believes that the endless credit growth actually fuels the flames of potential problems, boosting real estate booms and busts and creating market mayhem. Debt, it is claimed, needs to be taxed as a form of financial pollution and banks must be encouraged to be better capitalised. A correction to society and the greater financial industry is necessary.
“The fact that we are now slowly recovering from a deep and long- lasting recession must not blind us to the reality that the 2007-2008 crash was an economic catastrophe. This catastrophe was entirely self-inflicted and avoidable. It was not the result of war or political turmoil, nor the consequence of competition from emerging economies. Unlike the problems of stagflation – simultaneous high inflation and high unemployment – which afflicted several developed countries in the 1970s, it did not derive from under-lying tensions over income distribution, from profligate governments allowing public deficits to run out of control, or from powerful trade unions able to demand inflationary pay claims. The fundamental problem is that modern financial systems left to themselves inevitably create debt in excessive quantities and in particular debt that does not fund new capital investment but rather the purchase of already existing assets, above all real estate. It is that debt creation which drives booms and financial busts: and it is the debt overhang left over by the boom that explains why recovery from the 2007– 2008 financial crisis has been so anaemic,” wrote the author.
It was a fascinating read, even if some of the economics theory and reasoning went whooshing over one’s head. It seems to make a strong, reasoned argument for a system-wide reform and change in thinking. However the “how may we implement” such changes side of the book was a little less forthright. In any case, this book was a read that the concerned amateur could enjoy, whilst the industry professional or politician might have a few sweaty moments. Maybe you should read this book and, after you are finished with it, send it the leading politician of your choice…
Maybe they will even read it and slowly but surely the message will get through if enough people “recycle” the book!
Autamme.com
May 30, 2016
Book 2 in my series on today's macroeconomic challenges. I had recently been thinking that there is something fishy about debt. How when too much of it builds up in an economy it causes a slowdown (recession). Wondering why we get to a place where the people who need and want to spend money don't have it, and the people who do have it don't want to spend it. Since it is (put simply) the circulation of money that keeps people employed and provisioned, the dynamic that creates growing indebtedness is counter to a healthy economy.
So Turner addresses this dilemma in a clear, if somewhat repetitive book. He does a good job of linking things like growing inequality and the disappearance of pensions to the forces driving cycles of excessive private debt leading to recessions. As more income funnels to the wealthy and everyone needs to save more to fund their retirement, funds get saved rather then spent, leaving a gap in the capacity to spend that gets filled by growing private (bank) credit. The ability of banks, especially in the US, to create money is key to the overextension of credit, and the biggest "sink" for this credit is housing. But borrowing (and thus creating) more and more money to purchase existing assets is what creates bubbles. Healthy borrowing is the kind that gets invested in new assets, leading to new economic activity, new jobs, new products and services, etc.
So we have gotten into a pattern where continued economic growth seems to require these cycles of credit-fueled growth followed by a debt overhang and resulting recession as people and businesses have to cut their debt. Turner offers the alternative that government provide the spending capacity instead of relying on unsustainable private credit growth. And the blockbuster idea of monetizing the government debt (basically printing money). It is such a taboo to think about this that society is dooming itself to periodic economic catastrophes by refusing to consider all the alternatives. Bottom line is that when the problem is one of insufficient demand (and when we are saving so much instead of spending, that will mean not enough demand), injecting new money into the system does not create inflation. Anyhow, this is a closely argued and accessible book by an experienced practitioner and helped me to understand the mechanics of the issues we face. It is sad and worrisome that son few of our legislators seem to have a clue about how a modern economy works with all their talk of cutting spending and emasculating the power that we collectively hold to help ourselves with their mantra of minimizing government's role.
So Turner addresses this dilemma in a clear, if somewhat repetitive book. He does a good job of linking things like growing inequality and the disappearance of pensions to the forces driving cycles of excessive private debt leading to recessions. As more income funnels to the wealthy and everyone needs to save more to fund their retirement, funds get saved rather then spent, leaving a gap in the capacity to spend that gets filled by growing private (bank) credit. The ability of banks, especially in the US, to create money is key to the overextension of credit, and the biggest "sink" for this credit is housing. But borrowing (and thus creating) more and more money to purchase existing assets is what creates bubbles. Healthy borrowing is the kind that gets invested in new assets, leading to new economic activity, new jobs, new products and services, etc.
So we have gotten into a pattern where continued economic growth seems to require these cycles of credit-fueled growth followed by a debt overhang and resulting recession as people and businesses have to cut their debt. Turner offers the alternative that government provide the spending capacity instead of relying on unsustainable private credit growth. And the blockbuster idea of monetizing the government debt (basically printing money). It is such a taboo to think about this that society is dooming itself to periodic economic catastrophes by refusing to consider all the alternatives. Bottom line is that when the problem is one of insufficient demand (and when we are saving so much instead of spending, that will mean not enough demand), injecting new money into the system does not create inflation. Anyhow, this is a closely argued and accessible book by an experienced practitioner and helped me to understand the mechanics of the issues we face. It is sad and worrisome that son few of our legislators seem to have a clue about how a modern economy works with all their talk of cutting spending and emasculating the power that we collectively hold to help ourselves with their mantra of minimizing government's role.
December 12, 2017
A thought provoking guide to macro economic policy ideas post Basel III. Best suited for philosophers willing to wade through the slough.
December 8, 2016
A great story about the financial crisis of 2008 that should never have taken place according to leading economists and policy makers at that time. In essence a story about human hubris believing that complexity and uncertainty can be managed through human created decision models. The author also describes the root causes of the crisis and in summary one could argue that the Central Banks turned off the alarm system without addressing the real fire i.e. debt overhang. Even worse, it is clear that the debt crisis which was created is cured by another debt crisis (ref. Draghi's et al programmed for ultra-loose monetary policies). So the debt overhang remains and if not tackled with alternative policy measures will give rise to secular stagnation (no growth) for decades. Therefore it is good to read in the book which alternative paths could be explored. So positive to learn that there are ways out of this economic misery. Hopefully policy makers start considering them.
I recommend this book to everyone who wants to have a balanced view on the financial crisis of 2008 as well as the way out. At the end it will help you to better judge current policy from a societal standpoint as well as from a personal investor's standpoint.
I recommend this book to everyone who wants to have a balanced view on the financial crisis of 2008 as well as the way out. At the end it will help you to better judge current policy from a societal standpoint as well as from a personal investor's standpoint.
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