Adair Turner, the Baron Turner of Ecchinswell is not
your average regulator. First off, he steered the British banking system
through the financial crisis in 2008 as the head of the Financial
Services Authority (FSA), Britain’s former financial regulatory body.
But how is that different from other regulators such as Timothy Geithner and Ben Bernanke?
He started to ask questions going beyond capital ratios and
counterparty risk management. He questioned the whole financial system
itself and came to the same conclusions previously reserved to rogue
economists such as
Hyman Minsky and
Steve Keen.
Banks create credit money and purchasing power
As one of the only senior decision makers in financial regulation he
boldly states what these rogue economists have known for a long time:
Banks manufacture money in the form of credit and it’s not always for
the best of society. In his book “
Between Debt and the Devil,” he describes the process in detail and also makes the case of printing money to finance government deficits.
Epoch Times: When did you realize bank credit was dangerous?
Adair Turner: I felt that we were not asking some
fundamental questions that need to be asked. I remember a point in
autumn 2008 where we were debating whether we should take measure to
regulate the credit default swap market, which had played a role in the
crisis.
Some of my staff experts at the FSA said to me, “If we regulate
credit default swaps that will reduce the liquidity and that will make
it more difficult to create credit in the economy.” Even at that stage I
began to ask, “Are we confident that all credit in the economy is a
good thing?”
So I began to ask those questions early on. Then I gave a speech in
spring 2010 titled, “What Do Banks Do and What Should They Do?”
I did a lot of analysis then and it was at that stage I began to be
struck by the huge difference between what our textbooks said they did,
and what they actually do.
A lot of bankers themselves don’t understand that’s what they do.
Epoch Times: People think banks compete for deposits and then loan
out that money. What do banks do in your opinion?
Mr. Turner: Banks create credit money and purchasing
power. It’s mathematically the case that once a bank creates a loan,
there is a bank liability and there is purchasing power.
The fact that banks create money, credit, and purchasing power is
something very well understood by early 20th century economists such as
Knut Wicksell or
Friedrich von Hayek, but it went out of the way of thinking from about the 1960s onward.
I ask the question in the final chapter of my book, “Why did
economics make so many fundamental mistakes?” I think it developed a
desire to model the system in a highly mathematical fashion and it turns
out it is much easier to do if you just ignore the banking system.
What you end up with is an economics that is mathematically very
sophisticated, but totally unrealistic. One of the ways that it’s
totally unrealistic is in its representation of the baking system.
Epoch Times: So banks basically print money. Why are you the first high-level official to delve
into the topic?
Mr. Turner: Often in the worlds of financial
regulation experts are very slightly detached from real economic theory
as well as from reality. I find it a bit of a mystery because it has
become very obvious that this is a fundamental understanding of the
economic process. It’s the same mystery of why the insights
of Hyman Minsky were ignored for so long?
There’s really something very odd about the resilience within
economics of certain rather mechanical ways of looking at the world
which are mathematically traceable but deeply untrue.
What you end up with is an economics that is mathematically very sophisticated but totally unrealistic.
Epoch Times: Do you think banks are actively engaged in protecting their monopoly of creating money?
Mr. Turner: Whether the banks directly influenced
the academia on this particular issue of “let’s cover the fact that we
create credit, money, and purchasing power,” I’m not so sure because I
think the funny thing is a lot of bankers themselves
don’t understand that’s what they do.
To them it feels like I’ve got to get a deposit in before I can lend.
They fail to think through how the interaction of several banks
together and the operation of the interbank market means the system in
total can create new credit and money that didn’t previously exist.
So one of the things that struck me is how little many, very good,
successful, practical bankers understand the totality of the system of
which they are a particular cog.
Epoch Times: What about the political system?
Mr. Turner: At any one time there is a whole group
who had a shared interest in there being more credit. So the banks
wanted to grow their balance sheets and they wanted low capital
requirements.
Then let’s take the United States: You had politicians which wanted the banking system or the capital market system to lend
as much money as easily as possible to householders to enable people to feel like they were participating in the American Dream despite not receiving any increase in real wages.
The idea is that we’ve got to extend house ownership, and the way to
extend house ownership is to extend easy mortgage credit. This was a
belief shared across the political spectrum and interfaced with the
banking system saying “Ah yes, and if you leave us alone and give us
light capital standards and let us develop all these complicated new
credit securities we’ll be able to provide that credit.”
Epoch Times: But this whole scheme doesn’t work.
Mr. Turner: Easy credit and housing markets are a
very interesting paradox. Easy credit is good for the person who doesn’t
own a house, because they get to borrow money for the house.
Lots of easy credit is terrible for the person who doesn’t yet own a
house because it pushes up the price of houses to a level where they can
only afford it by taking on levels of debt which are a threat to their
sustainability.
Often in the
worlds of financial regulation experts are very slightly detached form
real economic theory as well as from reality.
In the United Kingdom, up until about 1998 we had an increasing level
of house ownership, which a lot of people assumed was being driven by
easy mortgages supply. Then from about 2000 the level of house ownership
begins to go down because 25- and 30-year-olds can no longer afford the
deposits.
The price has been driven really high precisely by the easy credit, which was meant to allow them into the system.
Epoch Times: So how do we get rid of excess credit and shrink the banking system down to size again?
Mr.Turner: There are two ways essentially to
control a bank balance sheet,
two regulatory levers. One is how much capital, on the liability side
of their bank balance sheet they have to have as a percentage of total
assets or liabilities.
The other, how many liquid reserve assets they have to hold on the
asset side of their balance sheet. In subtly different ways these both
constrain the growth of bank credit.
On the capital side, I would like to see much higher capital ratios
but I would have to develop those slowly. If I simply walked in tomorrow
and I said, “Right, you’ve all got to have capital ratios of 20 percent
not 10 percent; you can only be leveraged 5 to 1 not 10 to 1,” the
immediate impact of that would be the banks ceasing lending in an
attempt to raise their capital ratios and there would be a credit
crunch.
Once you’ve got a level of debt in the economy you can’t switch off
the new debt supply just like that. You’ve got to slowly migrate out of
that situation.
When you make quantitative easing permanent it ceases to be a liquidity exercise.
You could have a process where you say, “You’ve got to get to a much
higher capital ratio quickly. I’m not going to let you do that by
shrinking your balance sheet. You’ve got to do that by issuing new
shares. If you can get that new equity issue from the private market,
very well, if you can’t, the government will subscribe that equity,
which you may not want, and I’ll make sure that we get that higher
equity without producing a credit crunch.”
On the reserve asset side, which basically says we’ve got to control what’s called
the banking multiplier, that’s the relationship between the
monetary base
and the credit money. We couldn’t suddenly put it up to a 20 percent
ratio [now around 7 percent], but gradually increase it to 15 percent.
At the point where you’ve got enough stimulus and you don’t want
more, you make those reserves mandatory, so they can’t say, “Oh you’ve
given me a whole load of reserves. In year one, I didn’t do much more
than hold them. In year two, I suddenly expand my balance sheet.”
Epoch Times: You are a proponent of so called
“helicopter money,” permanently printing money and giving it directly to
the people without putting the tax payer on the hook.
Mr. Turner: We’ve created a lot of new monetary base
with the quantitative easing, so what we could do is accept that the
new monetary base is permanent, which is helicopter money that is never
going to have to be repaid. This removes some of the constraints on the
government’s fiscal position.
It can literally be a direct funding of government. … There are a
variety of ways to do it. It can be the government debt finances an
increased fiscal deficit at the end of which the banks have a whole load
of government bonds on their balance sheet.
The central bank buys the bonds from the banks and does an accounting
exercise on the asset-side to turn them into an irredeemable, zero
interest asset from the government.
When you make quantitative easing permanent it ceases to be a
liquidity exercise and becomes a mechanism for allowing governments to
run fiscal deficits which do not create a future debt servicing
liability.
All these helicopter money exercises require us to break a taboo.
And the money goes to the people directly. But because with
fractional reserve banking the worry is that you think you want to do a
$100 billion stimulus. So you do a $100 billion stimulus, but unless you
take a controlling mechanism through reserve asset ratio, the banks
could subsequently turn what you wanted to be $100 billion stimulus into
a $500 billion stimulus.
Epoch Times: This process would violate virtually
all central bank statutes ever written.
Mr. Turner: All these helicopter money exercises
require us to break a taboo. We have put in place a set of constraints
which are precisely designed to prevent governments believing they have a
free source of money.
My resolution of that is to authorize the independent central bank to
say how much of this helicopter money you can do. So I wouldn’t write a
central bank constitution that says you must never fund government
expenditure.
I would write a constitution that says the government cannot force
you to fund its expenditure and you, the monetary policy committee of
the central bank, must make a decision about how much monetary finance
is appropriate given the inflation target which we have asked you to
follow.
Epoch Times: And we need two inflation targets.
Mr. Turner: I don’t think one is sufficient. We also
need another set of measure to control the bank’s creation of credit
which has nothing to do with [consumer price] inflation because a lot of
credit doesn’t produce current goods and services inflation. It
produce’s
asset price inflation, so you need to control that as well.
In pursuit of the consumer price inflation target, I would give the
central bank the authority to say, “We have thought about how we’re
going to get back to target—the most efficient way to do it would be to
do a certain amount of money-financed deficits.”
Easy credit and housing markets have a very interesting paradox.
In 2009 I would have given to the Bank of England the authority to
say “We’re not going to do 375 billion pound reversible quantitative
easing which we think somehow gets to the real economy through asset
price increases. We are going to authorize 35 billion pounds of direct
expenditure for the government funded by permanent central bank money
creation.”
Then as the government, they would consider how that 35 billion
pounds was going to be used. Is it done as a tax cut, is it done as a
new public investment, public expenditure, etc.? You can’t have the
central bank make the decision. Is this regressive or progressive?
Those are essentially political decisions. But I think you can
separate the decision about the amount, which would reside with the
central bank, from the decision about how specifically to deliver the
boost, which can be made by the government.
