Between Debt and the Devil |

Between Debt and the Devil



In the wake of the sub-prime debt crisis that led to the global financial meltdown of 2009, how should economies be run such that debt growth is curbed and well-managed? Lord Adair Turner, Baron of Ecchinswell, offered a provocative solution during his S.T. Lee Distinguished Lecture held on 28 January 2016, in the LKY School. The lecture was chaired by Professor Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy (LKYSPP).


 In September 2008, just five days after the collapse of Lehman Brothers, Lord Turner was made Chairman of the UK’s Financial Services Authority. It was “like being made captain of the Titanic right after it got hit, but before it had fully sunk”, he said. Months of constant crisis management and fire-fighting ensued before Lord Turner and his team were able to take a step back and attempt to reform the system, in order to prevent another global financial crisis in the future.  

The reforms came about through many “endless meetings in windowless rooms”, recalled Lord Turner, adding: “but I believe we are much better prepared today”. Yet the EU’s GDP remains lower today than before the crisis, and domestic debt is still growing in many advanced economies. Thus, a new question has emerged: Why has recovery has been so slow and difficult all across the globe?

A key reason, according to Lord Turner, is that there has been a misunderstanding of the function of banks, which do not simply accept deposits and make loans. Banks can also multiply purchasing power through the use of credit, an especially potent capability in the area of mortgage lending. Real estate prices are largely dependent on land scarcity, resulting in an inelastic supply of land. With mortgage lending freely available, this can lead to a cycle of continually rising property prices, said Lord Turner. In other words, debt never goes away – it merely gets shifted around.


As a result, debt has grown to a point where traditional economic policies cease to work, observed Lord Turner. Methods such as quantitative easing and funded fiscal deficits now have a less-than marginal effect on eroding debt. The only apparent viable solution is to re-stimulate the growth of private credit through very low or even zero interest rates, but this ultimately leads to the creation of new debt, and to a permanent debt overhang.

Are modern economies and financial systems thus inextricably bound to instability? No, Lord Turner said. Banks should aim to avoid credit-intensive growth, which appears to spur an economic recovery in the short-term but can lead to long-term global imbalances in current accounts, and hence exacerbate inequality. There is also a need to address the rising importance of real estate as a marker of wealth in modern economies, he added.


Lord Turner then offered his now well-publicised proposition, radical even by his own admission: governments should undertake overt monetisation to stimulate demand and create purchasing power by handing currency to citizens, or paying off its own debt.

Monetisation, he said, has long been scorned, as critics worry it could lead to hyperinflation. But the key, said Lord Turner, is to undertake it astutely and with moderation. He cited the policies of Takahashi Korekiyo, Japan’s Prime Minster in the 1920s, as an exemplar of well-managed monetisation. “Yes, such an undertaking comes with political risks, but the printing of money should not be seen as an unorthodox solution any longer,” he concluded.


Click here for the recorded lecture.

Lord Adair Turner is Chairman of the Institute for New Economic Thinking. He chaired the UK Financial Services Authority between 2008 and 2013 and played a leading role in the redesign of the global banking and shadow banking regulation as Chairman of the International Financial Stability Board’s major policy committee. Lord Turner was at McKinsey from 1982-1995 and went on to hold roles including Director General of the Confederation of British Industry and Vice-Chairman of Merrill Lynch Europe. He has been, since 2005, an independent member of the House of Lords, and chaired the Climate Change Committee from 2008 to 2012. In addition, he is Senior Fellow at the Centre for Financial Studies in Frankfurt and a visiting professor at the London School of Economics and at Cass Business School. His publications include Just Capital – The Liberal Economy, Economics after the Crisis, and Between Debt and the Devil: Money, Credit and Fixing Global Finance.

Written By the External Affairs department

Monday, 25 January 2016

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