Between Debt and the Devil | Adair Turner

Summary of: Between Debt and the Devil: Money, Credit, and Fixing Global Finance
By: Adair Turner


Step into the complex world of global finance and explore the key factors that contributed to the 2008 financial crisis in ‘Between Debt and the Devil: Money, Credit, and Fixing Global Finance’ by Adair Turner. This book examines the failures of mainstream economic policy and critiques the fundamental faith in the free market’s ability to optimize credit allocation. Turner investigates the dangers of unregulated financial innovations and the changing dynamics of modern economies, which have resulted in greater focus on property markets and a decline in capital investments. Additionally, the book sheds light on the unprecedented rise in economic inequality and debates the taboo surrounding government money creation. Prepare yourself for a thought-provoking journey into the intricate workings of the global financial system and the potential solutions that could improve its stability and fairness.

Flawed Free Market Principles

The book examines the flawed principles of the free market leading to the disastrous monetary policy during the Great Moderation. This policy failed to control inflation despite central banks fine-tuning interest rates. The belief that free market innovation and credit creation would result in stable markets and risk allocation was proven wrong when excessive debt created a property bubble. The book exposes the erroneous thinking of mainstream economists and authorities who misplaced their faith in the free market principles, leading to economic instability.

Economic Progress and the Changing Nature of Rich Economies

As economies become more efficient, people spend a smaller share of their income on previously necessary items, resulting in a finite appetite for spending in certain areas, such as location-specific housing. Meanwhile, advancements in technology have led to modern businesses focusing on financing mortgages and commercial property rather than business investment. These trends have contributed to the credit cycle and the economic instability of the past few decades.

The Cycle of Debt

Microeconomics teaches us that growing economic inequality can lead to an increase in debt for middle-class families. Meanwhile, the super-rich shift their high savings rate away from the economy. When there are more ultra-wealthy individuals in society, monetary policy is used to maintain economic activity by either running deficits or lowering interest rates. Thus, struggling families are encouraged to borrow to maintain their lifestyles. The problem of economic inequality leads to unproductive debt, which is further amplified by property and financial imbalances among different countries. In the past, the government was against printing money and relied on private credit free markets to generate private credit, which played a role in subduing inflation in some countries that faced deficits. To balance economy now, wider macroeconomic trends supporting the build-up of debt need attention.

The Social Cost of Banks’ Intra-Financial Trading

The modern financial system’s focus on generating excess credit immediately results in creating new asset booms and increasing the frequency of banks’ intrafinancial trading, which are not socially useful. Although providing liquidity, market making, and price discovery in financial markets are essential for some purposes, banks have exploited these areas beyond the threshold of benefit to the wider economy. For instance, oil futures trading has surged from 10% of physical production value in 1984 to about 10 times the actual amount of oil sales. Foreign exchange trading is now approximately 73 times the global trade in goods and services. In essence, financial transaction tax is necessary to regulate the short-term trading trend.

The Monetary System’s Rollercoaster

The book sheds light on how the 2008 crisis brought attention to the way the capitalist economies expand their money supplies. The system has relied on banks issuing new loans that theoretically create new money as the economy grows. However, banks generated too much new money during pre-crisis, made too few new loans when the credit crunch hit, and managed down existing portfolios. The book argues that procyclical credit supply drives the economic harm in booms and busts. QE became the result of monetary impotence, as the policy injected money into the economy when governments bought assets with electronic money created from thin air.

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