Adair Turner Between Debt and the Devil-Money, Credit, and Fixing Global Finance (2016)

Adair Turner
Between Debt and the Devil-Money: Credit, and Fixing Global Finance (2016)
 

The devil is in the details (and debt somewhat) by Kelechi Okoye-Ahaneku

“The cycle of manias and panics results from pro-cyclical changes in the supply of credit…Money always seems free in manias.”

Adair Turner through his book “Between Debt and the Devil” goes into minute detail to explain the true nature and underpinnings of a thing we like to call debt. First of all what is debt you say? Debt is not something that we the general pubic have a good general understanding or grasp of what it is or of what it entails. We have a basic premise and understanding but nothing of true depth and magnitude. Adair Turner a man that has been chairman of Britain’s financial Services Authority in 2008 during the global financial crisis, whom of which you could very much argue is a man who is best applicable to explain to us, the general public something that is truly central to our way of life here in the West.
Turner uses the notions that had already been laid down by Charles Kindleberger that booms and busts that result in the greatest economic harm are driven by “procyclical” credit supply, with a rapidly growing and easily available supply of credit in the boom, followed by a dearth of credit in the subsequent downswing. It seems in Turners eyes that the potential for irrational exuberance exists in all asset markets, but when it’s financed by debt, severe economic harm arises from it.

With that Turner goes on to assert that in the decade leading up to the 2007-08 crisis, private credit grew rapidly in almost all advanced economies: - In the US at 9% per year, in the UK at 10% per year, in Spain at 16% per year. In most of all advanced nations it grew faster than nominal GDP; as a result, private leverage (which is the ratio of private credit to GDP) significantly increased. Turner continues to assert that a 10-year pattern was a continuation of the far longer term 60-year trend of increasing real economy leverage. When you look at total UK private-sector leverage grew from 50% in 1964 to an astonishing 180% by 2007: - whilst in the US it grew from a humble 53% in 1950 to an outstanding 170% in 2007.

The crazy thing is that in all of this proliferation of numbers in relation to the levels of debt doesn’t just stop at advanced economies where high debt levels are somewhat expected. These exuberant levels of debt are even displayed in more developing economies. Turner goes on to highlight that the trend of an increase in private. Nations like South Korea’s private leverage grew from 62% in 1970 to 155% before the Asian financial crisis of 1997: it is now even higher at 197%. Continued from that fact the ratio of Chinese debt to GDP has grown from 124% in early 2008 to more than 200% today. These numbers are insane when you realize that these levels of leverage are proliferate all over the world, with most if not all nations having similar levels.

Well, it seems from the outset that debt is one of the threats to the wellbeing of any economy, well it is to a large extent. Nonetheless debt/debt contracts/ credit whilst looked at with suspicion, in many ways provide the needed sustenance of any economy, especially advanced, post-industrial, free market capitalist economies. Using Craeber as reference, Turner states that debt has been around as long as money has been around, Craeber even argues for even longer. Turner states how Islam prohibits usury, whilst medieval Christianity was deeply suspicious of it. Aristotle in his well famed writing “The Politics” described lending as a “most hated sort” of way to accumulate wealth. These suspicions are understandable; however, it seems that modern economic theory sees debt/debt contracts as vital to spur economic growth. Moreover, according to Turner, it is precisely their fixed nature-the fact that the returns to lenders are largely independent of the success of the business project that makes them valuable.

 Turner also highlights that the earliest days of the Industrial revolution, capital accumulation in fact involved a major role for debt capital markets and banks as well as equity markets. With this it is also paramount we understand that economic theory provides good reasons for believing that without debt contracts, capital mobilization would be more difficult.

With equity contracts, the return to investors varies with the success of the business projects being financed. Turner deliberates and emphasises that what is important here is that these results are unknown in advance to entrepreneurs or investors. Once projects are completed entrepreneurs or business managers know for more about the true results achieved than even the investors themselves. This results in equity contracts having investors face risks that they themselves cannot even control.  Whilst in contrast to equity contacts, debt contracts offer a return that is specified in advance and is fixed as long as the business project does not actually fail. As a result, they support capital mobilization from sources who would be unwilling to find investment projects if all contracts had to take an equity form. This benefit would be delivered by debt contracts that take a simple “direct” form, with an investor holding bonds issued by companies.

Turner further highlighted that the development of “fractional reserve banks” also played an important role in enabling economic development. Using Walter Bagehot, whom wrote in 1878 argued that Britain’s more developed banking system compared with that of much of continental Europe, enabled wider pools of savings to become “borrowable” by entrepreneurs, rather the merely hoarded. Also, the economic historian Gersehercken argued that investment banks in the late 19^th century Germany played a role as important as industrial technologies in driving economic growth.

Turner then pinpoints that it’s not surprising that empirical studies have found evidence of a beneficial effect of financial deepening that measured as either the ratio of private debt to GDP or that of bank assets to GDP as countries progress through the early stages of economic growth. Turner goes even further that even in emerging countries like India, a strong case can be made that the extension of banking into small towns and rural areas would facilitate capital formulation by small and medium enterprises, which would not occur if capital accumulation required either equity or direct debt contracts between investor and entrepreneur.

All in all, as we all know with debt/credit, it garners many problems to economies, some of these fatalistic in nature. Most notable of these problems are deflationary debt effects, lost confidence in credit supply, ignorance of risks linked to debt and unstainable debt contracts. All these problems have amalgamated to become something of even greater concern that have caused havoc to economies all over the world. It indeed comes with its problems, but it also comes with its benefits as well as Turner has duly pointed out. We must find a balance to how we access credit as a means of prosperity but also armed with the knowledge that too much of credit/debt is not a good thing. At all.