Here is a two month old interview of Adair Turner which is a great read. He discusses his new book, Between Debt and the Devil: Money, Credit, and Fixing Global Finance and the critical questions — and radical solutions — that can help put us on a better economic path.
First some bit on banks:
Lynn Parramore: Your book raises fascinating questions about the way we relate to money and how modern economies work. You talk a lot about finance— all the lending and swishing around of money and credit that allows a business to invest or lets me purchase a house, and so on. Why the focus on finance?
Adair Turner: A striking feature of the last 50 or 60 years in advanced economies, particularly in the U.S. and the U.K., is the dramatic increase in the relative role of finance. It’s gone in the U.S. from 2 ½ percent to about 8 percent of GDP. If finance was like restaurants or hotels or automobiles or clothes, we’d say, well, if it’s grown it must be because as people got richer, they wanted to buy more of these things, and it’s up to consumers. But nobody gets up in the morning and says, I think I’ll have a really good day today: I’ll go and buy some financial services. It’s not an end-consumption good. It’s not part of what makes us enjoy life. If what finance is doing is making the rest of the economy more efficient, then it’s beneficial. But there are some very big questions about whether we need all the finance we’ve got.
LP: When I walk down my city block, I pass three banks before I reach the end. I think, ok, those are the places I go to put my money and then the bank lends it out for investment. But there do seem to be more and more of them, which is kind of odd. You actually consider the question of whether banksshould even exist. Tell me about that. Don’t we need them?
AT: Banks do provide payment services, which we need. Banks also provide loans, and we certainly need some loans in the economy. But there are two big issues for debate — and I deliberately pose them, even though I don’t end up saying we should abolish banks. First, yes, we need loans and private credit. But can you have too much? Increasingly, economists are realizing that you can. If private credit to GDP, private loans to GDP, is 50 percent rather than ten percent, that’s probably good for the economy. But if it’s 200 percent, then that’s probably bad. So in my book I ask, why is it possible to have too much? And why does this create instability in the economy?
The second question is, do you want banks to be the people who provide loans? If loans weren’t provided by banks, there would be a naturally arising limit to them because a set of individuals would decide whether to pick up their money and loan it to somebody else. The really intriguing thing about banks is that they don’t just take preexisting money and lend it on. They have a capacity to create credit, money, and purchasing power.
He discusses history of banking. Well, the most common cited history is banking in England started via goldsmiths. But as Kindleberger explains this is not really true. Banks actually started from the fairs we had across Europe where people came and traded goods. Bank kind of entities were needed to convert currencies and even settle the transactions.
A bit of history on how banks arose: In the 13 th or 14 century, you might take your gold to a goldsmith for safekeeping. But then after a while, the goldsmith says, ok, if you give me the gold for safekeeping, I can give you a receipt. Then the receipt turns out to be something you could trade to other people. The goldsmith started saying, well, not everybody’s going to demand back the gold at the same time. So I can lend some out. Finally, they realized they didn’t need to lend out the gold, they could just lend out receipts to the gold. You just ended up with a very significant increase in credit or money or various forms of money-equivalent.
So who is the devil? It is printing money and he thinks printing can revive growth:
LP: So the devil is the printing of money?
AT: It’s called the devil because, interestingly, three years ago, Jens Weidmann, the president of the Bundesbank, gave a speech in which he came pretty close to suggesting that Mario Draghi was growing horns when first suggesting quantitative easing in Europe. Jens referred to a famous part in Goethe’s Faust, Part Two, in which Mephistopheles, the devil, tempts the emperor and says, you don’t need to be constrained in your expenditure by your tax revenues or how much people are willing to lend you, you can print money! Jens argued that this illustrates what a dangerous thing it is.
LP: So we have it in our cultural DNA to view the printing of money with alarm.
AT: We do. But there are many historical examples of printing money successfully. The Pennsylvania Colony, back in the 1720s and 30s, printed money, stimulated the economy, and did not produce hyperinflation. Other of the colonies printed money and produced extreme inflation. There’s a wonderful quote from Adam Smith where he says that the Pennsylvania expedient worked precisely because of the moderation, and for want of that moderation, the same expedient in the other colonies produced harm rather than benefit. It depends on how much you do.
The Union government, in the American Civil War, paid for quite a lot of the war by printing greenbacks. It did produce significant inflation, but it didn’t produce hyperinflation. On the Confederate side, it went completely over the top and produced thousands of percents of inflation, hyperinflation. Another case is when Takahashi, the Japanese finance minister, used money printing in the early 30s to pull the Japanese economy out of recession, and it worked. If you look at how America paid for the Second World War, probably 15 percent was effectively paid for by money printing. Money printing by the Federal Reserve directly funded the budget deficit. The government sold some bonds and then the Federal Reserve bought them, but it bought them permanently. That went on all the way from 1942 to 51. But it didn’t produce a hyperinflation. In 1951, it was brought to an end, but it was never reversed.
LP: So perhaps we need to develop, as the Rolling Stones put it, some “sympathy for the devil.”
AT: Monetary finance is like a medicine, which, taken in small quantities, can be very valuable, and taken in large quantities, is toxic. We have to make a choice as to whether we trust ourselves enough to create a set of rules and institutional relationships that would give us the confidence that we could use money printing and money finance in a responsible fashion in a small amount, or whether we’re so terrified that we’ll misuse it that we lock it away in the medicine cabinet, even if, in certain circumstances, it would be helpful.
My belief is that we are in such a deep deflationary problem across the world that we have to consider radical options.
Well, it is not that the devil has not been leashed on the economy. This has been the game for nearly ten years now. But it has had unintended consequences. In many ways, the devil has been like those two (or several?) headed devils which are part of Indian mythology. You try and handle one of the devils and pop comes another…