Adair Turner, former Chairman of the FSA and now Senior Fellow at George Soros’ Institute for New Economic Thinking, gave a fascinating speech at the Stockholm School of Economics last week, which was also picked up by the Financial Times’ Gillian Tett. He argues that western economies have become hooked on ever-expanding levels of debt, with only 15% of financial flows going into actual investment projects that generate growth. The rest buoys prices of corporate assets and real estate and supports personal consumption. The result? A vastly expanding level of private credit with little growth, implying that the productivity of money is falling even as financial systems become more prone to higher leverage and boom and busts. This, clearly, is not good for the stability of the global financial system.
What is the solution? A Gillian notes, Adair recommends that:
- There needs to be a radical overhaul of the intellectual models that economists and central bankers use to create monetary policy.
- Policy makers should deliberately reduce credit, and to this end…
- …the Basel III framework for banks should have tough counter-cyclical capital requirements and regulators should reintroduce “into the policy toolkit quantitative reserve requirements, which more directly constrain banking multipliers and thus credit growth than do increases in capital requirements”.