Much of the discourse I have read or watched about the global financial crisis between 2007 and 2008 has centred on the bursting of the housing bubble in the United States, with blame laid on the excesses of Wall Street, where greed and irresponsibility of banks or financial institutions have been criticised. In “Between Debt And The Devil: Money, Credit, And Fixing Global Finance”, Adair Turner – who became chairman of Britain’s Financial Services Authority, which was responsible for the regulation of the finance industry, in 2008, and who redesigned global regulation too – focused even more specifically on the role of credit, and how rising debt has in fact driven real estate booms and busts. And in addition to this exposition about credit, the emphasis on policy recommendations also makes the book a compelling read. He said at the start:
“But important though the incompetence and dishonesty of some bankers was, it was not a fundamental driver of the crisis, any more than the misbehaviour of individual financiers in 1920s America was of more than peripheral importance to the origins of the 1930s Great Depression”.
And subsequently summarised the debt overhang problem:
“Excessive private debt creation before the crisis left many households and consumers over-leveraged and determined to pay down debt. Reduced private consumption and investment then depressed economic growth, producing large fiscal deficits and rising public debt to GDP. Leverage has not gone away, but simply shifted around the economy, from private to public sectors, or among countries … Attempted de-leveraging has thus depressed economic growth, but no overall de-leveraging has actually been achieved.”.
Across the five parts, Turner explained why the crisis occurred and why post-crisis recovery has been difficult (it is the growth of private debt, observed through the growth of leverage since 1950), how traditional policy levers are blocked (that funded fiscal deficits could worsen long-term debt sustainability, and that ultra loose monetary policies of the central bank – such as quantitative easing – could worsen inequality or stimulate further financial speculation), and finally details on how to improve public policy. Through these parts his central thesis is that there has been too much debt, and harmful real estate lending constitutes a large portion of this.
This thesis also goes against the conventional wisdom of the functions of banks. Banks used to lend borrowers deposits of money from savers, yet they too “create money, credit, and purchasing power”. And though it has been thought that banks lend money to entrepreneurs for investments, banks could lend to consumers to increase consumption or to companies to finance competition over assets which already exist. Such lending is often unrelated to capital investment, which could lead to productivity gains.
“Between Debt and the Devil” is not a straightforward read, and there are points – even after a re-read or two – when I did not necessarily understand the deeper economic theories or analysis, or when I was not familiar with the cited economists or central bankers. But Turner makes it easy when he rehashes arguments from other chapters, and when he previews his arguments in a clear, expository fashion. Chapters are divided into sub-sections too. For instance, he cited real estate, rising inequality, and global imbalances as three fundamental drivers of unnecessary credit growth, and in turn policies are proposed in direct responses to these drivers.
Perhaps Turner’s suggestion to print fiat money – in other words, to monetise government debt and to finance fiscal deficits with central-bank money – would prove to be most controversial. And in this vein his suggestions for higher bank capital ratios (even higher for real estate), or to deliberately direct credit flows toward productive investment, may not be well-received too. In all he contended that “We have to constrain and manage the quantity and mix of credit that the banking or shadow banking systems create”, and ultimately that future approaches “must recognise that both markets and governments can fail, and that optimal policy inevitably involves a choice between alternative imperfections and alternative dangers”. Whether governments will heed this, unfortunately, is another question altogether.