Joe Ballantyne writes: I went to see Adair Turner, the former head of the UK’s Financial Services Authority talking in London last week to promote his new book Between Debt and the Devil.
The book is subtitled, “Money, credit, and fixing global finance,” and his basic premise is pretty familiar. Economic inequality before the crash should have led to chronically weak demand, but this was headed off, at least in the short-term, by consumers taking on credit. In turn this meant that debt ballooned, in particular private debt.
This debt then fuelled unsustainable booms in consumption and property. At the time this was ignored by economists, who assumed, in line with neo-classical economic theory, that banks take money and use it to fund capital investment in a rational manner.
Actually, a lot of this debt is completely speculative. In the UK, for example, Turner calculates that only about 15% of bank lending is for traditional investment; the rest is mainly real estate speculation. It drives up the prices of unproductive assets (mainly land and housing), which encourages lenders to create more debt, which in turn drives up asset prices, and so the cycle continues until it inevitably blows up. Shades of the economist Hyman Minsky.
And perversely, while there is more credit available in modern economies, they actually require less of it, since capital investment requirements are lower than for industrialising economies. (We don’t build a lot of factories any more). Despite the underlying needs of the economy, this instability is hardwired into the system.
When the crash comes, it transfers a lot of the debt from the private to public sector. Over time, public sector debt rises to compensate. As we start to worry about public debt, public spending is cut, which in turn dampens demand in the private sector. And so the cycle continues, and the debt just gets moved around. Conventional monetary tools don’t work in this environment.
So far, this analysis is reasonably conventional. But the interesting thing is his prescription for a solution. Turner proposes monetising government debt, or, in other words, financing fiscal deficits by having the central bank print money. This is the ‘devil’ in the title of the book, since it’s a huge political and policy taboo. Conventional economic wisdom says it leads to hyperinflation (with memories of the hyperinflation of Weimar Germany, Zimbabwe, etc).
So policymakers are loathe to consider it. Turner was talking at the offices of the progressive think tank nef (formerly the new economics foundation) which looks for innovative policy solutions. If we don’t find ways to print money, he argued, we’ll continue to be caught in a world of slow growth, because debt is too high, and growth is too low to pay it down.
The problem is that whatever the political problems are with doing this, fiscally it starts to look like the only way to break the cycle. Incidentally, he sees absolutely no chance of this working in Europe. The politicians (meaning, broadly, German politicians) won’t have it. So, Europe is doomed to years of slow growth, weak demand, and likely more political instability).
If the message is quite interesting, what’s more interesting is the person giving it. You don’t get much more establishment than Adair Turner (full title: Baron Turner of Ecchinswell). He worked for McKinsey and Merrill Lynch, he was Director General of the Confederation of British Industry, and has had a string of high profile public appointments, including taking over responsibility for financial regulation in the UK days after Lehmann Bros collapsed.
The fact that he is willing to recommend such radical measures is a sign of how poorly conventional tools seem to be working, how far into the mainstream unconventional thinking has moved – and, perhaps, how deep and intractable our economic problems are.