Nov 20, 2015, 2:45 PM ETConference Presentation, Fireside Chat, Interview

Between Debt and the Devil: Money, Credit and Fixing Global Finance

Lord Adair Turner is the author of Between Debt and the Devil: Money, Credit, and Fixing Global Finance, published to address the slow global recovery post-2008 and the "malaise" of the current economic stagnation.
Turner served as Chairman of the UK Financial Services Authority (2008–2013), chairing the committee that designed the Basel III global banking regulatory standards.
He currently serves as Chairman of the Institute for New Economic Thinking and the International Financial Stability Board's major policy committee.
Turner's central thesis argues that modern economic models and central banking policies have ignored the critical role of private credit creation and its link to real estate, leading to unsustainable debt cycles.

Private debt in advanced economies rose from 50% of GDP in 1950 to 170% in 2007, growing at an accelerating pace while nominal GDP grew at roughly 5% annually.
Modern banking textbooks falsely claim banks merely intermediate existing funds; in reality, banks create new money and purchasing power through lending.
Over the last 50 years, banks have shifted from funding business capital investment to primarily lending against existing real estate assets.
Approximately 85% of credit in advanced economies is now directed toward real estate, while only 15% funds non-real estate business investment.
Credit expansion for existing real estate creates a self-reinforcing cycle: more credit drives up asset prices, which encourages further borrowing and lending against higher collateral values.
Rising income inequality acts as a secondary driver of credit intensity, as lower and middle-income households borrow to compensate for stagnant real wages while the wealthy save rather than consume.

The economics profession largely failed to anticipate the 2008 crisis due to a "collective failure of imagination" that removed banks and credit creation from macroeconomic models.
Mainstream economic models, particularly Dynamic Stochastic General Equilibrium (DSGE) models used by central banks, contain no banks and assume rational expectations and efficient markets, effectively assuming crises away.
A 2006 IMF report erroneously claimed the global financial system was more resilient than ever due to credit risk dispersal, only 15 months before the crash.
Turner identifies a "strange amnesia" in modern economics where the study of money creation and banking was removed from university curricula starting in the 1960s and 70s.
Post-crisis recovery has been stifled by a "debt overhang" where private deleveraging offsets public stimulus, and central bank tools like Quantitative Easing (QE) fail to stimulate broad demand effectively.

Turner proposes increasing bank capital requirements to a leverage ratio of 5:1 (20% equity), a significant increase from the post-Basel III standards of roughly 10:1 (5% equity on a risk-weighted basis).
He argues that financial markets cannot be regulated like other free markets because the "market discipline" does not function effectively when banks create money and can face infinite leverage.
Historical precedents cited include Henry Simons and Milton Friedman, both free-market champions who argued for strict banking regulation distinct from other sectors.
To curb real estate bubbles, regulators should impose higher risk weights for real estate lending (e.g., 50% minimum) and enforce Loan-to-Value (LTV) or Loan-to-Income (LTI) limits.
Global imbalances, such as Germany's 8.5% GDP current account surplus, must be addressed to prevent surplus nations from exporting credit bubbles to deficit nations.

Turner advocates for "overt money finance" of fiscal deficits, where central banks create money directly to fund government spending, a concept he terms "helicopter money."
This approach is technically possible but politically taboo due to fears of hyperinflation; Turner argues it can be safe if strictly limited by central bank mandates (e.g., a specific cap on the amount issued).
He warns that without such tools, the Eurozone faces significant risks of social and political instability due to persistent unemployment and slow growth.
Turner predicts that Japan has effectively monetized its debt permanently, and other major economies (US, UK, Eurozone) will likely see interest rates remain near zero or negative for an extended period.
He suggests the Federal Reserve may never fully unwind its $4.5 trillion balance sheet, as the permanent increase in the monetary base serves as a form of monetary finance.

Regulatory Comparison: Turner acknowledges the UK's new Financial Policy Committee as a positive step for systemic risk monitoring but critiques the US system for remaining fragmented and allowing activities to fall "between the cracks."
Slow Recovery: He attributes the slow post-2008 recovery primarily to over-leveraged households and businesses (demand-side issues) rather than overly tight banking regulations.
Inequality Impact: Ultra-loose monetary policy has increased inequality by boosting asset prices (benefiting the wealthy) while depressing yields on bank deposits (hurting savers).
Greed vs. Self-Interest: Turner distinguishes between productive self-interest and the "computer game" nature of detached financial trading, which removes physical reality constraints and encourages unethical behavior.
Glass-Steagall: The abolition of Glass-Steagall facilitated the growth of shadow banking and complex securitized credit products, which magnified financial system complexity and systemic risk.
Citizen Engagement: Turner urges the public to engage in these technical debates, noting that the 2008 crisis occurred because technical experts failed to act and that common sense must be reintegrated into monetary policy.

Interest Rates: Turner predicts US nominal interest rates will likely remain below 2% through 2018, with Eurozone rates staying at zero or negative.
Debt Trajectory: In advanced economies, private debt deleveraging will be offset by rising public debt, preventing a net reduction in total leverage.
Structural Shift: He suggests the global economy may face a new equilibrium where nominal GDP growth and nominal credit growth are equalized at roughly 5%, avoiding the leverage spiral without returning to the old credit-intensive model.
Political Reality: He anticipates that the "functional equivalent" of debt monetization (via QE) will become more openly acknowledged as necessary, particularly as the taboo against it erodes due to persistent stagnation.