February 24th 2018


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Articles from this issue:

COVER STORY Weatherill demand places Murray-Darling in jeopardy

EDITORIAL China completes island building in South China Sea

CANBERRA OBSERVED Greens: wouldn't know a cowardly act if they did one

REDEFINITION OF MARRIAGE Government forms say it is fluid gender marriage

FREEDOM AND LAW Gender and anti-discrimination: wedges between you and freedom

HISTORY A look back at B.A. Santamaria gives us a forward impulse

GENDER POLITICS Transgenderism: A state-sponsored religion

LAW AND SOCIETY Protecting freedom of religion in Australia

HISTORY Hungary, 62 years on from the anti-Soviet uprising

MUSIC Reel to real: Johann Johannsson, RIP

CINEMA Sweet Country: Sour taste of bush justice

HUMOUR

BOOK REVIEW Lessons from the UK front of the GFC

BOOK REVIEW The dragon has woken and rumbled

BOOK REVIEW Recovery manual for morals and culture

LETTERS

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BOOK REVIEW
Lessons from the UK front of the GFC




News Weekly, February 24, 2018

BETWEEN DEBT AND THE DEVIL: Money, Credit and Fixing Global Finance

by Adair Turner

Princeton UP, Princeton, New Jersey
Paperback: 320 pages
Price: AUD$39.99

Reviewed by Colin Teese

Adair Turner has written what must be one of the most important commentary’s on the 2007–08 global financial crisis (GFC) yet to be published. Certainly, it ranks up there alongside Mervyn King’s more technical, The End of Alchemy.

Lord King, it should be recalled, ushered the Bank of England through the 2007–08 debacle. He and Alan Greenspan, a former distinguished chairman of the U.S. Federal Reserve Bank, have characterised the GFC as the worst such crisis in history.

Greenspan, incidentally, is on record as conceding that all the models on which he advocated policy during his time at the Federal Reserve have been discredited. He has further conceded that he could not believe that banks could have been guilty of so many activities so damaging to their own self-interest.

It goes without saying that Alan Greenspan did not anticipate the crash; neither could he offer an explanation for it – except, of course, bank mismanagement.

Adair Turner, also a product of the finance industry and, indeed, an adviser to central banks in Eastern Europe and Russia, also did not anticipate the crisis. Like Greenspan, his understanding of economics, including financial economics, made such anticipation impossible.

By way of diversion, only a handful of economists, basing themselves on understandings going beyond orthodox economics, anticipated the GFC. Most notable was British economist Ann Pettifor, whose book, entitled The Coming First World Debt Crisis, was published in 2006. Initially it bombed out but became a best seller two years later.

Adair became chairman of the UK Financial Services Authority a few days before U.S. banking firm Lehmann Brothers collapsed, triggering what was to become the worst banking crisis in history. He was immediately involved, along with the Bank of England, in pouring money into ailing British banks. He admits, even then, to having no idea that the world economy was teetering on the edge of catastrophe.

He was in high company. Neither did central banks, regulators, finance ministries, financial markets or major economics departments. Even the International Monetary Fund was predicting good times ahead.

What Adair quickly learned was that he did not understand as much as he thought about credit creation and financial risk. However, as a major player on global reform measures, he began to understand what had caused the crash and what would be needed beyond merely correcting past mistakes. Most particularly, he understood the need to put in place measures to build larger bank reserves and appropriate regulatory mechanisms.

He claims some successes here, but he realised that much more was needed than merely the restoration of confidence on the banking system.

Adair does not say so but it is fairly clear that he has had little success in promoting wider and deeper reforms. He makes it clear that he has no faith in the gospels of economic orthodoxy – the so-called Efficient Markets Theory, which assumes a structure of our financial markets such as to ensure that credit will be distributed to achieve maximum economic efficiency. He further suspects the validity of Rational Expectations Theory, which asserts that individuals pursuing self-interest will make the best economic judgements about the future.

No doubt he had in mind Nobel Prizing economist Robert Lucas, devotee of both those propositions, who said after the GFC: “We didn’t anticipate it, because our models told us it couldn’t happen.”

Adair found himself compelled to look back to the world of early and mid 20th-century economists including Hayek, Keynes, Irving Fisher and Milton Friedman. Among other things, he has come to believe that there is a case for deficit spending by governments in the right circumstances. No doubt he has been influenced to this end by Irving Fisher and Milton Friedman.

Here’s his quote from Friedman: “‘Under the proposal (that is Friedman’s proposal) government expenditures would be financed entirely by tax revenues or the creation of money … the chief function of the (government) monetary authorities (would be) the creation of money to meet government deficits or the retirement of money when the government had a surplus.’”

Friedman saw no role in this for private banks. Their role would be mainly storing deposits and clearing cheques.

Between Debt and the Devil is highly recommended for any reader interested in how our financial system pushed us into the worst financial crisis ever, what we must learn from that, and how we might do things better in the future – all in easy-to-follow language.


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