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Between Debt and the Devil: A Review

According to Adair Turner, Britain’s former chief financial regulator, the global financial crisis had one big cause: bad ideas.  These are ideas that Turner disapproves of.
The key proposition of his new book is simply stated: “banking systems left to themselves are bound to produce too much of the wrong sort of debt, instability and crisis”.

The problem pre-crisis, he says, was laissez-faire, light touch or no touch regulation. So Turner wants to control the financial system so that banks produce only the right sort of debt – the kind he approves of.
Like many regulators and economists, he dreams of a world where wise guardians would have enough information in real time to be alerted to risks. This would enable them to steer the ship of finance away from the rocks and into calm seas.
A pretty picture but utterly misleading.

The banks were already regulated. By 2003 there were stacks of books and academic studies on the lessons of financial crises. Few regulators or commentators (or even politicians) believed in the caricature of free market ideology that Turner attributes to them.
This book amounts to a long-winded job application. Turner is applying to be Britain’s (or maybe the world’s) credit Czar, the guy we are supposed to trust to decide what sectors get credit and which are not worthy. He knows how the job should be done.
It’s strange, as in other contexts Turner sees through the “fatal conceit” that planners have enough information to make wise decisions. He likes to cite Hayek (who gets more citations than anybody else after Keynes), yet falls straight into the trap that Hayek identified.

Turner does not see himself as a would-be planner, but that’s exactly what he is – or what he is calling for.

The main proximate cause of the great financial crisis and recession had nothing to do with such “bad ideas”. It was that politicians wanted another boom – just as they do today. Stimulating creditand a lowering of banking standards by keeping interest rates too low for too long was the only way they could get it. Central banks obliged. Right now, regulators and central bankers are again doing what is expected of them: i.e. nothing, at least nothing effective to stop runaway property prices.


Turner’s “bad ideas”

Instead policy-makers are busy building ever more elaborate structures of regulation – just what Turner wants. Turner sees himself as a voice crying in the darkness! In fact he is mainstream. We are putting into practice his ideas; so that, although bad ideas did not cause the last crisis, they may very well cause the next one.
That is another thing Turner fails to recognise. Every new bubble presents in a different guise – or disguise. There is always enough room to doubt; the evidence is never clear cut ex ante, however clear it may seem in hindsight. Just as Turner finds excuses for the mistakes regulators made last time, so will officials in future find good reasons for future mistakes (Just read Ben Bernanke’s memoirs, if you can bear it). After all, Howard Davies, the man who headed Britain’s financial regulatory body for six years to 2003 and established the regime of light-touch regulation which Turner blames for the crisis has come out of it smelling of roses. His punishment?  To be appointed head of one of Britain’s biggest banks, an outfit that had to be rescued by taxpayers in the crisis brought on, says his successor, by light-touch regulation. (By contrast, the only really tough financial regulator the UK has ever had, Martin Wheatley, was recently pushed out by the government because the City didn’t like him  — a signal that  future regulators  will of course take on board. This,  my dear Lord Turner, is “accountability” in practice.)
Turner thinks he – or somebody like him – is qualified to spot unsustainable or dangerous credit growth. He believes he – or somebody like him – can also distinguish which sectors are worthy of receiving credit and which are not. He does not think he will be corrupted, or his staff, by receiving favours from those who want credit. What a wicked idea! The problem, my dear boy, is bad ideas, not bad people: oh really?

Presumably he imagines the likes of Tory chancellor George Osborne will sit smiling while he, or somebody like him,  reins in credit,  depriving would-be house buyers of the chance to get a mortgage, buy their dream home and vote Conservative? And that governments of any complexion will sit idly by while he decides that “x” sector is more deservingof support  than “y” sector.  Turner is too worldly-wise to be kidding himself; so he’s trying to kid us.

But even given the totally unrealistic political assumption that a regulator of credit will be allowed such autonomy, why should we trust him, or anybody else, to guide credit in a wise direction? That person, or committee, will become the central source of credit decisions; in effect, it will be the monopoly supplier. Its mistakes will be Gargantuan, irreversible and completely undemocratic.


Remember too that the super-regulator must be given draconian powers to detect “illegal” flows and stop institutions giving credit to non-approved sectors: that means powers to issue orders, threats, and secret snooping to ferret out offenders. Yes, it has all happened in democratic countries, in England, in my lifetime.
This is no solution, it is the way to repeat the crisis again and again


The way forward
Short of the more radical reforms advocated in my book, the answer is to recreate a decentralised, competitive, banking system where those  institutions and individuals which allow credit are held responsible by their institutions, creditors and customers if their judgements are faulty.  This is not to maintain that markets are always right, a completely absurd proposition; but it is to say that, given the right conditions, the allocation of credit arising from market operations will generally be better than a political allocation. The entire structure of regulation, which is currently growing like topsy,  could then be drastically pruned.

It will be a long haul but there is no short cut. That is the way to stimulate healthy credit growth. And use interest rates, not direction, resolutely when needed, as now.

This book has the great virtue of clarity. It should be studied by everybody who wishes to know how one experienced policymaker thinks the system should evolve so that we can strive the better to avoid such a future.

Between Debt and the Devil: Money, Credit and Fixing Global Finance,  Princeton University Press, pp 301. by Adair Turner