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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.
- Sales Rank: #118659 in Books
- Published on: 2015-10-20
- Original language: English
- Number of items: 1
- Dimensions: 9.40" h x 1.30" w x 6.30" l, .0 pounds
- Binding: Hardcover
- 320 pages
Review
One of Financial Times (FT.com) Best Economics Books of 2015, chosen by Martin Wolf
One of The Independent's Best Economics Books 2015
One of Bloomberg Businessweek's Best Books of 2015, chosen by V�tor Const�ncio
"Whether you agree with Turner's proposal or not, [Between Debt and the Devil] represents an important challenge to economic orthodoxy, which, as he rightly notes, has already failed us once."--John Cassidy, The New Yorker
"Extensively researched and well-written."--Edward Chancellor, Wall Street Journal
"[A] remarkable new book."--Will Hutton, Observer
"Lucid and forcefully-argued."--Peter Thal Larsen, Reuters Breakingviews
"Turner offers a convincing account of the debt-fuelled global economic cycle of the last 15 years or so. I found myself skimming over large sections and nodding in agreement."--Erik Britton, Management Today
"An overdue challenge to a taboo against monetary finance held sacred for too long."--Giles Wilkes, Financial Times
"Adair Turner, the former chairman of Britain's Financial Services Authority and described by The Economist as a man for all policy crises, upends financial orthodoxy in Between Debt and the Devil. He argues that nothing regulators have done thus far has addressed the fundamental underlying cause of financial instability. . . . Turner's book is tightly argued and is packed with insights about the financial markets as well as the real economy."--Brenda Jubin, Investing.com
"If developed economies fall back into recession, people may hear quite a bit more about Lord Turner's ideas."--The Economist
"This is an important book because Turner thinks clearly where much analysis has been fuzzy . . . [a] stimulating book."--Ben Chu, The Independent
"Adair Turner's Between Debt and the Devil: Money, Credit and Fixing Global Finance--out this month--joins a select group of books that provide as clear an explanation of the financial crisis as one could hope for."--Diane Coyle, The Enlightened Economist
"Some astonishingly original ideas."--Alex Brummer, Daily Mail
"[A] brilliant new book. . . . [The] prose crisply conveys analysis of real force."--Tom Clark, Guardian
"[A] scintillating individual [contribution] to the debate not just on the future of finance but how we should run our economy."--Felix Martin, New Statesman
"Adair Turner's new book Between Debt and the Devil is definitely worth your time."--Clive Crook, Bloomberg View
"A challenging but relentlessly logical book about the flaws of the system that led us to the Great Recession: excess finance, excessive indebtedness. He adds to the literature that explains why more and more finance is not always good. The proposed cure requires going beyond the present financial regulatory reform. A bold and thought provoking book."--Vitor Constancio, Vice president, European Central Bank, one of Bloomberg's Best Books of 2015
"This book lays down a challenge which subsequent accounts of monetary policy will have to address."--David Willetts, Prospect
"[An] excellent book."--Nick Butler, Financial Times
"[H]is extensive work both at financial institutions and in academia, have given Turner an insider's view of the world of finance and economics. But his conclusions--that the banking system needs to be fundamentally restructured, and that periodically, instead of a government running up debt, the central bank should just print money for the government to spend--are far from conventional."--Matt Phillips, Quartz
"This is a good book, well worth reading. . . . It is well and clearly written and supported by good, non-technical analysis and empirical evidence."--Charles Goodhart, Financial World
"These provocative and insightful arguments are particularly valuable at a time when austerity retains its intellectual luster despite its manifest failures."--Andrew Moravcsik, Foreign Affairs
"Turner's book should make policymakers and commentators sit up and take notice."--TT Ram Mohan, Economic & Political Weekly
From the Back Cover
"This is a superb book. A must-read for anyone interested in understanding the unhealthy relationship between debt and the modern economy."--Atif Mian, coauthor of House of Debt
"This is the most penetrating analysis of the inherent imperfections of our financial system to appear since the crash of 2008. It will and should provoke extensive debates about the policies needed to avoid future crises."--George Soros
"Adair Turner is a writer who thinks unusually deeply and is prepared to follow his answers to their logical conclusion, however unsettling. Here, he offers a set of proposals for financial reform that are radical yet practical. As the global financial crisis recedes and the danger mounts that the momentum for change will be lost, we can only hope that the world heeds Turner's clarion call."--Barry Eichengreen, University of California, Berkeley
"Turner's fresh and deep insights into our financial system come with the expertise of an insider. Between Debt and the Devil is a landmark in monetary economics, with profound implications for policy reform."--Joseph E. Stiglitz, Nobel Laureate in Economics
"A masterwork! Insightful, scholarly, and persuasive. Adair Turner has provided a convincing analysis of what has gone wrong before, and what could go wrong again, among the intertwined complexities of money, credit, and misguided theories of finance."--Paul Volcker, former chairman of the U.S. Federal Reserve and the U.S. Economic Recovery Advisory Board
"Between Debt and the Devil is a devastating critique of the banking system and a powerful intellectual challenge to conventional wisdom. A splendid book."--Robert Skidelsky, author of John Maynard Keynes, 1883-1946: Economist, Philosopher, Statesman
"Stunningly thorough yet highly readable, Between Debt and the Devil is a thoughtful and deeply researched book that covers all the policy angles on debt in advanced economies, from the problems in regulating credit binges to the challenges of dealing with their aftermath."--Kenneth S. Rogoff, coauthor of This Time Is Different: Eight Centuries of Financial Folly
"Between Debt and the Devil is a wide-ranging and highly ambitious book. Turner presents an alternative way of thinking about financial economics."--Alan D. Morrison, coauthor of Investment Banking: Institutions, Politics, and Law
"Original and powerful. In a crowded field, this book stands out."--Robert Pringle, author of The Money Trap: Escaping the Grip of Global Finance
"Turner's book augments the growing literature that lays bare the realities of boom and bust, bubble and crash, and the recurrent coordination failures that characterize financial history. Between Debt and the Devil will enrich debate among both academics and policymakers."--William H. Janeway, author of Doing Capitalism in the Innovative Economy
About the Author
Adair Turner is chairman of the Institute for New Economic Thinking and the author of Economics after the Crisis. He lives in London.
Most helpful customer reviews
26 of 26 people found the following review helpful.
Broadly right, but you've heard most of it before
By Eric Lonergan
Too many books have now been written on the causes and consequences of the 2008 financial crisis. Do we really need another? Most of the ground Adair Turner covers has already received exhaustive treatment in Martin Wolf’s The Shifts and the Shocks. Turner’s view is very familiar: the financial sector is too big, we have too much debt, and the banking system should be heavily regulated. There is little surprising or original here. For example, Turner has virtually nothing to say about the interaction between the financial sector and technological innovation. The genuinely innovative ideas in Robert Shiller’s Finance & the Good Society, get passing mention.
Turner’s real strength is the directness of his argument, and the relative brevity of his writing - unlike many post-crisis tomes, this book is reasonably short - and much of the familiar ground can be skipped. He correctly frames the current global macroeconomic problem as how to generate growth without ever-rising debt - public or private. He also gets close to reaching the right answer: no well-organised free-market economy which can print money should ever have a persistent shortfall in demand. Turner recommends that central banks should “monetise budget deficits”, which amounts to financing budget deficits by printing money, rather than issuing bonds. Perhaps what is most significant, is that a supposedly radical policy is being endorsed by someone at the heart of the establishment - after all, Turner was Chairman of Financial Services Authroity (FSA) and may well have been Governor of the Bank of England, had the Canadian rockstar not been available.
The need for genuine innovation in macro policy making is a clear theme. Turner should be applauded for this. But disappointingly, he fails to consider the range of institutional options which are available - printing money can take many forms: framing and institutional structure is a critical factor. The serious proposals on the table include giving central banks the power to make cash payments to households, subject to their inflation target; steeply negative interest rates and abolishing cash; and cooperation between the fiscal and monetary authorities. Adair Turner only really considers the latter, and without much detail. The relative merits of these policies deserve far more extensive consideration.
Eric Lonergan Author of Money (second revised edition)
21 of 21 people found the following review helpful.
Erudite, heartfelt and totally insane
By Athan
The literature surrounding the Financial Crisis of 2008 comes under two categories: (i) blow-by-blow accounts of the story as it happened and (ii) books that seek to understand how it came about. It is obviously the latter that one must turn to when it comes to exploring what we need to do from now on, and Adam Turner, who ran the UK Pensions Commission until 2008 and the UK Financial Services Authority for the next six years is uniquely placed to answer the question, because he not only lived the crisis from an amazing vantage point, but was additionally tasked with keeping the system safe. That was his job!
His analysis of what happened is far from complete. He only mentions technological change in passing, for example. It is, regardless, extremely well-informed and it concentrates on the stuff the author learned in his tenure at the FSA. The crisis was a credit crisis, so he chooses to concentrate on credit, while acknowledging there were other possible causes.
His recommendations, on the other hand, I find alarming.
First, the findings on credit:
1. It can make sense for a bank to extend credit which may not be socially desirable. So, for example, a loan against real estate is a super-safe loan for the bank to make because the collateral will not become worthless overnight. Even if the borrower disappears, recovery will be great. But if banks lend mainly against real estate, that’s less desirable than banks funding new productive ventures. To elaborate this point, the banking system has found it historically much simpler to lend to those seeking to invest in already existing assets. In year 1900 it was arable land (which thus hit an 80% score on Piketty’s hit list as a percent of all value) that served as the collateral for all this credit creation and in 2006 it was residential real estate in the US, the UK, Ireland and Spain that attracted all the credit creation, to the point where it still represents north of 70% of all banking assets in the UK even today, some 7 years after crisis of 2008. Real estate lending has its merits, of course, (families can smooth their spending over many years, for example) but lending to the corporate sector is a much better deal for the economy as a whole.
2. It can make sense for an individual to take on debt that may not be socially desirable. So, it might make tremendous sense for me to borrow up to the gills to finance a business venture or even to buy a property in a market that’s going up (and will completely run away from me if I wait any longer). But for society as a whole this will pose a problem when for whatever reason the economy slows down a couple years down the line. If I notice the slowdown, and to make sure I can carry on servicing my debt, I will curtail my spending by much more than if I was carrying less debt. If I am representative, if everybody’s done what I did, our collective behavior will hurt the economy as all spending stops and our actions will engender an undesirable feedback loop. Debt that makes sense for me individually can thus introduce instability for society as a whole.
3. In our world (as opposed to Economics textbooks) most “money” is really the product of debt creation by the banking system in its sundry guises. Fiat money really corresponds to a small fraction of the money supply worldwide. The rest of what we call “money” is what originally appeared in your bank account as the bank’s liability when it gave you a loan, same time the bank also registered as an asset the fact that you would one day pay that money back with interest. Supposing you used that money to build an extension for your kitchen, the money (the bank’s liability) moved from your account to the builder’s account with the bank and B&Q’s account with the bank (and its asset of course remains your loan) and the bottom line is this money did NOT originate with a saver turning up at the bank’s door saying “please keep this safe for me.” You turned up one day looking for a loan and the bank made it possible for the builder to have more money in his account with the bank and the bank made it possible for you to owe it a loan. The banking system created this money, like it created most money. The free market originates credit, bottom line.
4. The free market in lending arises from two agents fulfilling their individual needs with no immediate or automatic consideration for the greater good. Externalities of this credit creation are not costed properly at the point of credit creation. By definition, then, the free market will produce (i) more credit than is good for society and (ii) predominantly credit secured by already existing assets, rather than credit that creates growth directly. QED
5. Inequality induces more credit: the super-rich can’t possibly spend all their money. The credit system lends their money to those who must borrow to carry on spending. This is to some extent a good thing (think of the student who borrows money to attend a university, which makes him more productive and allows him to pay back society –and the lender- with his more productive labor) but it can also be catastrophic if people borrow to spend money they cannot realistically ever hope to pay back. Bottom line, though, inequality leads to more credit creation.
6. Globalization has led to more credit creation, and not in the direction you would expect. The Chinese economy on a whole, for example, has acted as a manufacturer of goods, but also as a lender to the US government, whose citizens have been importing Chinese products in their droves. It’s not the rich Americans who have been lending to the poor Chinese, but the other way round.
7. You cannot risk-manage for the entire system. Risk management tools, such as derivatives, do not reduce overall debt. All they do is shift from one entity to another who will pay for it and when. So let’s suppose I’m really good at risk management and do a bunch of contracts which mean no matter what interest rates do my business ought to be safe. And suppose absolutely every other company does the same, to its full satisfaction. Is the world any safer overall? Contrary to what Greenspan would have you think, not by a whole lot. It’s a bit like you standing up in the stadium so you can see better. By the time everybody’s standing up, we’re back to an unsatisfactory situation where on average we all see the game as well as before. Some can see it a tad better and some can see it a bit worse, but overall it’s a bit of a wash. The best possible result from all the financial wizardry is that people will be holding risks they are more comfortable with, but society overall will have to pay the same amounts in exchange for the same investment decisions and you’re really going to have to keep track of who owes what to whom as an added bonus, making any bankruptcy much more difficult to work through. Financial wizardry will not turn a house that should never have been built into a place somebody will want to live in.
8. You cannot properly measure risk and certainly not using the conventional measures such as Value-at-Risk. It’s the basic Nicholas Nassim Taleb story which says that if you look in the recent past to inform you about risk, you will be using inflated asset prices to evaluate your collateral and you will be using frothy markets to judge the chances of an investment being able to refinance itself. Stability thus breeds instability, to put it in Minsky’s words.
There are other fantastic observations about debt. For example, he notes that the legislation in all modern countries favors companies that raise debt over companies that raise equity. He also notes that you could send all the bad apples from the banking industry to jail or you could stick interest rates somewhere up in the sky and you’d still fail to get rid of the fundamental cause of the problem: Lenders and borrowers both have a strong incentive to extend / take on more debt than is socially desirable.
The author concludes, not in so many words, that if the free market produces too much debt and if we cannot collectively risk manage this debt, then the one remaining choice is to find a way to artificially regulate debt. And then he spends a big chunk of the book discussing how we should contain debt. One-by-one he examines 100% reserve banking, tax on credit intermediation, capital requirements, risk weights, haircuts on funding, constraints on usury, enforced market fragmentation etc.
And do you know what he recommends next? Debt forgiveness, in all its sundry guises, from QE to writedowns and the inflation that will come from helicopter drops.
So basically Adair Turner’s strategy is two-pronged
1. Constrain debt using a mix of all ideas out there
2. When things go wrong, forgive those who made it past the roadblocks and managed to load up anyway
I think that’s quite simply a dreadful set of recommendations. It’s not that fine a line between being practical and being hypocritical. As a blueprint for how to go forward, this strikes me as very clearly on the wrong side of that line.
Yes, yes, I know, he’s saying “forgive past excess and get serious from now on” but I come from Greece and I can tell you that’s not at all how it works. People can remember an amnesty and will hold out until the next one is granted. And this idea that we should meddle with markets first and meddle with the ensuing bankruptcy next is from outer space, as far as I’m concerned.
I’m not saying I have the answer. I don’t. But neither does Adair Turner and he seems to think it’s the linear combination of two inane concepts, which he calls the Debt and the Devil
Finally, I think somebody like Adair Turner ought to have made two observations I could not find anywhere here:
1. The repeal of Glass Steagall was all about finding massive loan books in the “bank” side of the business, valuing them using “mark to market” on decades’ worth of future Net Interest Margin based on accounting that came from the “investment banking” side of the business and paying upfront bonuses on that yet-to-be-realized Net Interest Margin from the Enron side of the business, perhaps after having bought some protection from AIG’s most profitable business unit. But, looking on the bright side, this cannot be repeated. It’s now done and it’s behind us. We’ve learnt, by trial and error.
2. Similarly, while he's right to point out that debt can be issued in socially undesirable amounts when there is no regulation because both lenders and borrowers want to do more business than is socially desirable, the true cause of overindebtedness in the crisis was the emergence of the “originate and distribute” model whereby I lend you money and then immediately stuff the receivable into a structure that I sell into the market, after having bought for money some sort of rating that absolved the buyer of any blame if it turned out I was making bad loans. The picture was not “two guys doing something that was OK for them but in a scope that’s bad for society overall” it was more like “there is a role for government, and it is to supervise securitized lending, where all incentives are totally wrong.” Again though, we’ve probably ended up exactly at that point through trial and error, as Fannie and Freddie are now government owned and represent 90% of all such loans.
So yes, I found this book terribly disappointing.
18 of 20 people found the following review helpful.
Economic Pollution
By David Wineberg
Real estate accounts for more half of all wealth. That is the nub of the problem in global finance. Banks have switched from financing business to financing real estate, almost exclusively. They don’t care that this is non-productive; it is bigger, safer and more profitable. The banks have taken over from government in the creation of credit, and so control is nonexistent. We used to be afraid government would create inflation and financial crises. But government is no longer the biggest player, by a long shot. Banks continually inflate the money supply and the level of debt, even today. We are not better off for it. In Turner’s words, limited land doesn’t mesh with the infinite capacity to create debt obligations. Left to the markets and the bankers, debt will continue to flourish, multiply, and overwhelm. Excessive debt is “economic pollution”.
This is powerful, damning stuff, from a man who has a seat the table. Of the sagging shelf of such books, Between Debt and the Devil is possibly the most lucid, intuitively correct and clear answer yet to the why of the financial crisis.
Along the way, Turner tells us that one of the reasons no mainstream economist predicted the financial crisis is that their economic models do not include banks (!). Central banks, but not the hundreds of thousands of banks that create money by lending for real estate. Yet we base mission critical decisions on them.
-We learn that real estate financing is a dead end. It does not produce new industry or new consumption; it produces more wealth for those who don’t need it, and more debt for those who can’t afford it.
-Those who don’t follow this system do far better. The catch-up successes of Japan, Taiwan and South Korea resulted from banks lending only to business, not consumers.
-Money is almost entirely a product of credit creation for real estate. The amount of actual government-issued cash in the system is a percentage in the low single digits.
Oddly, although Turner emphasizes repeatedly that real estate speculation and lending is at the center of our financial miasma, he does not suggest the Henry George solution in his trial balloons in the Conclusion. He mentions George once, and lists his epoch-making book in the bibliography, but that’s it. George addressed the 2007 financial crisis in advance - 150 years in advance. He said if we taxed real estate, the speculators would leave, prices would fall, homeowners could not only afford their homes but have extra cash to spend, and the entire economy would benefit.
Turner’s solutions, if they can be so classified, are a kludge of patches that if implemented, might temper the wild swings somewhat. But he inspires no optimism that even this little is possible. There is no global political will to tame the private sector bank beast. At least we know the why now. When it happens all over again, shame on us.
David Wineberg
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