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Adair Turner (2): Misguided remedies

 

Caveat: I should mention to begin with that this critique is based on Lord Turner’s paper  on “Escaping the Debt Addiction”; one paper cannot cover every area and he has (I understand) written a soon-to-be-published book that will presumably range more widely.

 

The approach in this paper can be compared with that developed in The Money Trap. I agree fully on the inadequacy of reforms made so far and the need for radical action. But Adair Turner’s solution could not be further removed from that which I favour. Whereas I support calls for better rules, he favours more discretion for bureaucrats. How to create conditions for growth that do not rely on increasing debt? Central bankers must “lean against” the tendency of free financial systems to produce “too much” debt; “we” must tackle inequality; “we” must reduce global imbalances.

 

Lord Turner does not probe sufficiently into the underlying reasons for the lax policies behind the debt-fuelled growth he criticises. He does not stop to consider how the tendencies he points to were held in check in the 19th century, or more recently. He does not pay attention to the role that an agreed structure of international rules, notably on exchange rates, liquidity and adjustment, and the financial discipline enforced by the threat of losing one’s money, can help make free banking and capital markets compatible with an acceptable degree of financial stability. Why is it that under the gold standard and Bretton Woods there was no systemic banking or financial crisis? There were of course many individual crises (necessary for discipline), but they did not threaten the system itself. The rules enforced adjustment on the public sector and private sector alike. There were sanctions – not some petty official doling out arbitrary punishments but a system, including a strict ethical code, that punished defaulting sovereigns and private sector institutions and individual financiers that stepped out of line. It made creditors monitor their investments. Of course there was always a role for the State, but it was narrowly confined. Its boundaries were well understood and respected by participants.

 

In The Money Trap I try to show how this largely self-stabilising system deteriorated, became corrupted and relied increasingly on detailed regulations and interference by (sometimes) ignorant bureaucrats. Now banks have to put up with yet more interference by regulators who (according to some bank directors I know who have recently been through the regulatory mill) often know little about banking. Now he wants them to have even greater powers.

 

Adair Turner and others of like mind can best be described as monetary authoritarians. They would find the way out of present dilemmas, which as stated above Lord Turner analyses well, in handing over ultimate power to well-intentioned, enlightened monetary guardians – people who will command enormous amounts of iformation and be blessedly free of the illusions that have dogged past attempts at reform – i.e. to people like themselves. They will also have the independence from political inffuence to act purely in the public interest.

 

But this flies against the entire experience of history – especially 20th century history. They seem blind to its lessons. They remind me of the socialists I knew at university in the 1960s. When one criticised their schemes for a better world, a world of fairness, universal wewlfare provision, and the end of property-owning, petty-minded bourgeoisie, on the grounds that you could not trust the government with such powers they would look at you pityingly – “but the new government would be composed of dedicated idealists, working for the common good in a selfless manner!”. Adair Turner, equally, has not taken on board Hayek’s criticism of arbitrary power in “the Road to Serfdom” or Lord Acton’s warnings about the corruption of power.

In this paper he does not consider the probability that such all-powerful regulators, who will inevitably be political animals, will be captured and suborned by the banks they regulate. He should know, from his time as a regulator, how politicians encouraged “light-touch” regulation and would have stopped anybody from “leaning against” banks creating credit.  He rightly criticizes conventional economics for neglecting finance; he himself seems to set aside the lessons of history, political science and public choice theory.

 

It was British innovations in political philosophy and practice, as much as in techniques of lending and capital-raising that made possible the City of London’s growth as a financial centre and the world’s first great period of financial and economic globalisation.

 

By the way, this took place without any official financial regulation at all.