BETWEEN DEBT AND THE DEVIL BETWEEN DEBT AND THE DEVIL MONEY, CREDIT, AND FIXING GLOBAL FINANCE ADAIR TURNER PRINCETON UNIVERSITY PRESS PRINCETON AND OXFORD Copyright © 2016 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu Jacket/frontispiece illustration: Faust and Mephisto, engraving by Tony Johannot, 1845–1847. From Johann Wolfgang von Goethe, Faust: Der Tragödie erster Teil, ed. Hans Henning, 1982. All Rights Reserved Library of Congress Cataloging-in-Publication Data Turner, Adair, author. Between debt and the devil : money, credit, and fixing global finance / Adair Turner. pages cm Includes bibliographical references and index. ISBN 978-0-691-16964-4 (hardback) — ISBN 0-691-16964-0 (hardcover) 1. International finance. 2. Finance. 3. Financial institutions. 4. Credit. 5. Financial crises. 6. Mone- tary policy. 7. Economic policy. I. Title. HG3881.T88 2015 332´.042—dc23 2015015015 British Library Cataloging- in- Publication Data is available This book has been composed in Minion Pro and Helvetica Neue Printed on acid- free paper. ∞ Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 To Orna CONTENTS Acknowledgments ix Preface: The Crisis I Didn’t See Coming xi Introduction: Too Important to Be Left to the Bankers 1 Part I Swollen FInance 17 1 The Utopia of Finance for All 19 2 Inefficient Financial Markets 34 Part II DangerouS Debt 49 3 Debt, Banks, and the Money They Create 51 4 Too Much of the Wrong Sort of Debt 61 5 Caught in the Debt Overhang Trap 74 6 Liberalization, Innovation, and the Credit Cycle on Steroids 88 7 Speculation, Inequality, and Unnecessary Credit 108 Part III Debt, DeveloPment, anD caPItal FlowS 131 8 Debt and Development: The Merits and Dangers of Financial Repression 133 9 Too Much of the Wrong Sort of Capital Flow: Global and Eurozone Delusions 149 Part Iv FIxIng the SyStem 161 10 Irrelevant Bankers in an Unstable System 163 11 Fixing Fundamentals 175 12 Abolishing Banks, Taxing Debt Pollution, and Encouraging Equity 186 13 Managing the Quantity and Mix of Debt 195 viii CONTENTS Part v eScaPIng the Debt overhang 211 14 Monetary Finance— Breaking the Taboo 213 15 Between Debt and the Devil— A Choice of Dangers 231 Epilogue: The Queen’s Question and the Fatal Conceit 241 Notes 253 Bibliography 277 Index 289 ACKNOWLEDGMENTS T here are many people without whom this book could not have been written, and my acknowledgements here are incomplete. My first thanks must go to the Institute for New Economic Thinking (INET), which has supported me throughout the past 2 years, and to Robert Johnson, the executive director of INET, who has continually inspired me with the depth of his intellectual interests, encouraged me to think radically, and provided a never- ending stream of ideas for fur- ther research and reading. In addition I must particularly thank two others. The first is George Soros, one of INET’s founders, with whom I have discussed my emerg- ing ideas since we first met in 2009, and whose own writing has posed a profound challenge to the simplicities of pre- crisis economic orthodoxy. The second is Martin Wolf. For several years Martin and I have been on a very similar intellectual journey, and his Financial Times columns and latest book, The Shifts and the Shocks, have played an important role in the development of my thinking. My special thanks also go to friends who read and commented on early drafts of the book, including in particular Bill Janeway, Anatole Kaletsky, and Robert Skidelsky. And I am indebted also to Mervyn King, who, in the depths of the financial crisis of autumn 2008, first helped me understand the inherent instability of modern banking systems. There are also many people with whom I have discussed my emerg- ing ideas, or who have inspired me through their own writings. They include Anat Admati, Olivier Blanchard, Claudio Borio, Marcus Brun- nermeier, Jaime Caruana, Ulf Dahlsten, Brad DeLong, Barry Eichen- green, Roman Frydman, Charles Goodhart, Andrew Haldane, Will Hutton, Otmar Issing, Oscar Jorda, Richard Koo, Paul Krugman, Mi- chael Kumhof, Jean-P ierre Landau, Richard Layard, Paul McCulley, Atif Mian, Liu Ming kang, Rakesh Mohan, John Muellbauer, Avinash Per- saud, Michael Pettis, Thomas Piketty, Adam Posen, Zoltan Pozsar, En- rico Perotti, Raghuram Rajan, Hélène Rey, Kenneth Rogoff, Moritz