Between Debt and the Devil: Money, Credit, and Fixing Global Finance
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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.
private-sector leverage and, 23, 51–52, 76; fatal conceit that produced, 15, 251; huge increase in financial intensity and, 21; innovations implicated in, 99; lack of foresight about, xi–xii, 241–42; low mortgage losses following, 165–66; most important causes of, 5–7, 164; slow recovery from, 4, 7, 56, 74–75, 174, 213–14; theoretical foundations of orthodoxy prior to, 36–38. See also post-crisis recession financial deepening: defined, 1; economic efficiency and, 1, 35; economic growth and, 32,
75, 77, 78, 79, 166, 216 Korea, 134, 135, 136, 138–40, 141, 142, 143, 181 Krugman, Paul, 129 Kumhof, Michael, 121–22, 188, 189, 263n31 land, urban: changing pattern of consumption and, 69–70; inelastic supply of, 70, 77, 175, 177, 247; Japanese boom of 1980s and, 75; need for three-factor model including, 276n11; taxation of, 177–78; wealth residing in, 68–69, 117; wealth-to-income ratios and, 176, 247 land reform, 136 Lane, Philip R., 74 Lange, Oscar, 249 Latin America, 135 Lehman
advanced economies is not used to finance new capital investment. Chapter 4 describes that reality. FOUR TOO MUCH OF THE WRONG SORT OF DEBT With very few exceptions, the banks’ primary business consisted of non-mortgage lending to companies in 1928 and 1970. In 2007 banks in most countries had turned primarily into real estate lenders…. The intermediation of household savings for productive investment in the business sector—the standard textbook role of the financial sector—constitutes only a
transformation—outside the constraints of bank regulation. Meanwhile, market reference pricing—for instance, using CDS spreads to infer the appropriate price of credit—increased the exposure of the credit intermediation system to the potential irrationality of liquid traded markets. And the very risk management devices supposed to contain the resulting risks—secured financing, mark-to-market accounting, and Value at Risk models—exacerbated the dangers. Shadow banking thus took the inherent
dire: GDP in 2014 was still 1% below the 2007 level, and GDP per capita was still further behind.7 The eurozone faces an entire decade of no growth in living standards. In many eurozone countries the private sector is attempting to deleverage after excessive pre-crisis borrowing; in most, the state is also attempting to pay down high public debts. From 2011 to 2014 the predominant policy assumption was that loose monetary policy alone could stimulate the economy, provided the “monetary policy