Between Debt and the Devil: Money, Credit, and Fixing Global Finance

Between Debt and the Devil: Money, Credit, and Fixing Global Finance

Language: English

Pages: 320

ISBN: 0691169640

Format: PDF / Kindle (mobi) / ePub


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.

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suffered from a massive misallocation of capital investment into unprofitable real estate projects. China could have chosen in 2009 to offset the impact of the global recession with money-financed fiscal stimulus: it chose instead to use bank credit creation. But it is still left with excessive real estate and infrastructure investment in many cities and a severe debt overhang problem. Pre-crisis macroeconomic orthodoxy combined total anathema against fiat money finance with an almost totally

and complexity were making the economy more efficient. Overall there was much to applaud and little to fear. Financial Deepening—The Empirical Evidence Three strands of theory thus seemed to justify a benign assessment of finance’s dramatic growth. Historical and empirical research appeared to support the theoretical assertions. Although proof is difficult, economic history strongly suggests that the development of modern financial systems played an important supportive role in the early

whole the impact is negative because of the costs of skilled labor, computers, and physical premises involved. The response of EMH devotees is that this activity must still be valuable, because it improves “price discovery,” ensuring the more rapid and efficient processing of new information and thus better informing the allocation of capital in the economy. Given the timescales over which real investment decisions are made, however, this argument is utterly unconvincing. If a company’s share

Moreover, achieving such yield uplift appeared to be vital in an environment where the real return on risk-free investments—government indexed linked bonds—had fallen from more than 3% in the late 1980s to less than 1.5% on the eve of the crisis. A report by the Financial Stability Board in 2012 described the complex intrafinancial links that this search for yield generates.25 Secured funding from prime brokers enables hedge funds to trade with borrowed money: long-term institutional investors

the total amount of money in circulation, since if the supply of money exceeded individuals’ or companies’ “demand for money” for transactions purposes, they would increase spending and thus stimulate nominal demand. As a result, it was assumed that the velocity of circulation of money (the ratio of nominal GDP to the money stock) would be somewhat stable. In fact velocity declined in most economies in the 1980s and 1990s, as both credit and money increased more rapidly than nominal GDP.

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