Between Debt and the Devil by Adair Turner, book review: A radical analysis

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

Click to follow
The Independent Culture

Debt as an economic evil is an old characterisation. Aristotle was sniffy about the money lenders. Some of the world's major religions have proscribed or stigmatised usury. 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".

So in warning about the dangers of credit, Adair Turner, the former chair of the Financial Services Authority, is sauntering down a well-worn trail. 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.

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.

There are also other plausible explanations, beyond excessive debt, for the weak recoveries across the world, not least the thesis of secular stagnation. Perhaps the incubus squatting on the chest of our economies is not a debt overhang, as Turner asserts, but slow growth brought on by demographic trends. Or maybe its dunderheaded fiscal austerity imposed by governments that's primarily to blame.

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 Governor of the Bank of England in 2012. He was beaten to the top job by Mark Carney. But what if Turner had won the keys to Threadneedle Street? Would he now be busy monetising debt and revolutionising high street banking? Or would the devil of institutional economic conservatism have caged even his restless spirit?

Princeton, £19.95. Order at £17.96 inc. p&p from the Independent Bookshop