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Book Review Between Debt and the Devil: Money, Credit and Fixing Global
Finance by Adair Turner
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Sergey Avetisyan
Central Bank of Armenia
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September 2018
Abstract
Turner’s book presents a new approach to monetary theory and policy. What’s
novel in Turner’s book is not the proposition that debt can be dangerous, but that
debt is what modern financial systems naturally create; and always to excess. Debt
as an economic evil is an old characterization. Aristotle was sniffy about the money
lenders, some of the world’s major religions have prescribed or stigmatisedusury.
And modern economic thinkers have denounced leverage just as sternly as the
ancients. Irving Fisher saw the Great Depression as stemming from the curse of
”debt deflation”. The shocking results of that 2008 failure meant that subsequently
the authorities, quite rightly, did what they had to do to avoid a complete meltdown
in the markets. But this book is not a memoir of his role in steering us through the
financial crisis. Instead, he addresses deeper questions about what got us into such
a mess in the first place, and demolishes much of the conventional wisdom about
the functioning of financial markets and monetary policy.
Key Words: Adair Turner; book review; financial crisis; monetary theory.
views in this Review are those of the author and should not be interpreted as those of Central Bank of
Armenia.
3 Main Idea
The book contains five basic chapters. The first part (”Swollen Finance”), begins with the
explanation of (potential) instability of the financial sector of the economy, the pre–crisis
assessment of the “financialization” (excessive credit expansion in deregulated economy,
when there are many incentives for financial deepening and creation of the debt overhang)
Turner describes a process whereby households and firms borrow in great quantities
from eager banks not to fund productive investments but primarily to finance purchases
of real estate that already exists. This drives up asset prices, prompting lenders to create
still more debt, turning the leverage ratchet again and again until, inevitably, the machine
blows up. Instability, says Turner, becomes ”hard-wired” into the system. And debt
drives the world after the bubble bursts too.
Policymakers, it turns out, have been wasting their time in recent years trying to get
banks to lend more to drive growth and to coax the private sector into borrowing and
spending again. The fundamental reason growth has been so weak in recent years, says
Turner, is a lack of demand for credit in a still excessively leveraged world, not inadequate
credit supply.
It’s a radical analysis. And Turner doesn’t shy from some radical policy responses.
Government debt that cannot feasibly be paid back, he argues, should be effectively
cancelled by central banks.
He’s talking about ”monetisation” – the ultimate heresy in central banking circles.
Turner also argues that the ability of private banks to loan out customers’ deposits should
be heavily curtailed for the sake of future financial stability – the ultimate heresy as far
as private bankers are concerned.
Turner is admirably fearless. He goes where his fundamental analysis tells him to
go. But is his underlying thesis right? A weakness of the book is that Turner doesn’t
fully engage with the counter evidence. For instance, there are signs that small firms in
the UK have been turned down for loans by their banks, or at least discouraged from
seeking credit - an indication that lack of credit supply is part of the problem. Demand
for mortgages in the UK seems to have bounced back, despite still elevated household
debt to income ratios here in Britain.
Curiously, although Turner emphasizes repeatedly that real estate speculation and
lending is at the center of our financial miasma, he does not suggest the Henry George4
4 Henry George (1839 – 1897) was an American political economist and journalist. His writing was
immensely popular in the 19th century, and sparked several reform movements of the Progressive Era.
His writings also inspired the economic philosophy known as Georgism, based on the belief that people
should own the value they produce themselves, but that the economic value derived from land (including
natural resources) should belong equally to all members of society. His most famous work, Progress and
Poverty (1879), sold millions of copies worldwide, probably more than any other American book before
4 Summary
Turner (2017) said governments should finance fiscal deficits by printing money. And he
said that the stock of government bonds already held by central banks should be written
off (more precisely: restructured to become ”perpetual” bonds, which never mature, and
which therefore never get repaid). These two steps would mean that, at a stroke, we could
stop worrying about government debt and keep the economy afloat with government
spending, while households gradually paid off their mortgages.
Can it really be that simple? No. As Turner acknowledges, you can’t just burn debt
obligations without hurting somebody. But who gets hurt in this case? You would only
be writing off that portion of debt that was held by another branch of government. Net
effect on the government as a whole: zero. A bit like transferring money from your savings
account to your current account.
The most obvious objection is that if you save someone (the profligate government)
once, you are implicitly promising to save them every time: expect their behaviour to
change as a result. Turner is sanguine about this risk. If the central bank allowed its
holdings of government debt to be restructured in the way Turner proposes, then it
would be holding a worthless asset. But it would have a corresponding liability (cash
in circulation and reserves posted at the central bank by private banks) that is worth
something - at least to start with. That inequality would matter if the global economy
ever got back to ’normal’. It’s a bit like turning the heat up to maximum under a pan to
bring it up to the right temperature - makes sense as long as you can turn it down again
later. Restructuring the asset in the central bank means you can’t turn it down: you’re
committed to having that much high-powered money in circulation for good.
Once back to normal, we would either have to reverse the debt restructuring and sell
the debt back to the market, or accept much higher inflation (like burning the contents of
the pan). Turner waves away this objection by saying that central banks could tighten
policy rates to prevent excessive inflation (like adding ice to the pan). But that would
imply a far more aggressive path for policy rates than in the past (you would have to
keep on adding ice, because normally the gas is not stuck on full).So be it, Turner might
say: we need the economy to run hotter, even if we have to break some taboos and risk
overheating to get it there. If the problem is deficient demand, as he asserts throughout
the book, then he has a case. But what if the problem is on the supply side? What if the
debt-fuelled, housing-market-led cycle of the last 15 years has undermined the long-run
supply potential of the global economy? What if ’excessive debt’ is really another way of
saying ’misallocation of resources’ ? Then boosting demand, without reallocating those
resources, will just lead to inflation, in asset prices or consumer prices or both. We’ve
seen that film before - in the 70s (consumer prices) and in the noughties (asset prices).
Here we go again.
Right or otherwise on his central thesis, this is an important book because Turner
thinks clearly where much analysis has been fuzzy. A particular highlight is his dismantling
of the dominant pre-crisis delusion among regulators and academics that hyperactive
trading by financiers and mountains of debt securitisations were to be heartily welcomed
because these practices aided ”price discovery” and efficient ”risk allocation”.
In the end, this stimulating book leaves an intriguing thought. Turner applied to be
that time.
References
T. Clark. Between debt and the devil by adair turner review – should the government
start printing money? The Guardian, 25 Nov, 2015.
W. Giles. Between debt and the devil by adair turner (a wide-ranging overdue challenge
to a financial tabo). Financial Times, November 1, 2015.
A. Turner. Between debt and the devil: money, credit, and fixing global finance. Princeton
University Press, 2017.
Sergey Avetisyan (2018), ”Book Review: Between Debt and The Devil: Money,
Credit, and Fixing Global Finance by Adair Turner.”
Sergey Avetisyan (2018), ”Book Review: Between Debt and The Devil: Money,
Credit, and Fixing Global Finance by Adair Turner.”
Sergey Avetisyan (2018), ”Book Review: Between Debt and The Devil: Money,
Credit, and Fixing Global Finance by Adair Turner.”