The Man Who Got Britain Through The Recession Now Says We're 'Very Exposed' To A New Debt Crisis

Adair TurnerPeter Macdiarmid / Getty ImagesLord Turner in 2009, during his five-year stint as the chairman of the Financial Services Authority, the UK’s premier financial regulator.

Lord Adair Turner is Britain’s foremost technocrat.

With a list of expert and management positions longer than the average arm, Turner was most recently the chairman of the Financial Services Authority, a post he took up in September 2008, a week after the collapse of Lehman Brothers, and just as the Treasury and FSA were preparing to nationalise British bank Bradford & Bingley.

Meeting Turner, it’s easy to imagine him as a British version of Mario Monti, the Italian economist parachuted in (without election) to become Italian Prime Minister in 2011 after the Berlusconi government fell apart. He’s often floated as a serious contender for high-level economic policy jobs, as he was the last time there was a vacancy for the position of Governor of the Bank of England.

He is now senior fellow at the Institute for New Economic Thinking, and is increasingly preoccupied with questions around the UK’s debt levels. Particularly, he’s interested in the pernicious effect of Britain’s extremely high household debt on the economy’s performance, why that happens, and how it might be counteracted.

The UK has some of the most highly-leveraged households in the advanced world, and although debt has dipped, it’s still way above levels seen before the turn of the 21st century. Turner thinks this will pose huge problems for the country, leaving it more exposed to financial crises.

The idea has some trans-Atlantic resonance. Turner may be doing for the UK (and Europe) what Professors Atif Mian and Amir Sufi have done for the US. We asked him what he thinks of the British economy today, and what he’s been working on.

Business Insider: How exposed are we to another financial crisis?

Adair Turner: I think we’re still very exposed. Broadly speaking, what has happened since the crisis is that we have shifted leverage around the world but we haven’t gotten rid of it. This is the great conundrum to which we don’t yet have an answer.

In the UK and Spain and in Ireland and most dramatically in the US, there has been some deleveraging. But there has been a more than offsetting increase in public sector debt. So for every percentage point decrease in private sector debt as a percentage of GDP, there’s been a more than percentage point increase in public debt. Total leverage across the global economy has gone up.

We still don’t seem to know how to run our economies without credit growing somewhere faster than GDP, but that produces an eventual crisis.

BI: You’ve mentioned that you think that inequality is a factor here. Could you explain that?

AT: We have a trend in our societies towards rising inequality with more income being accumulated by people who don’t need more income. If it were not for the credit system, we would truly face a secular stagnation.

There were various people in the mid 1930s and 1940s who talked about it, Keynes talked about it in the General Theory.

Because rich people can essentially get paid more and put money into the financial system which then lends money to middle income and poorer people. The system balances, and what we have is an increase in credit which does not produce an excess of expenditure and therefore inflation. It simply takes us back to the level of expenditure there would have been if income had been distributed in a more equal fashion in the first place.

Let’s suppose we lend against existing real estate. Imagine a country that’s building no new houses at all. But there is an expansion of credit, an increase in asset prices … What you can get there is an increase in credit, in the vulnerability of the economy, which is not essential to the growth process, but which can screw up the growth process when it goes wrong.

BI: So is part of your complaint about modern economics?

AT: There is a general amnesia of modern economics of the last 30 or 50 years, as it has become more formal or mathematical, to ignore the insights of many people of the early and mid 20th century who wrote in a less mathematical style.

So I think there are many insights in Knut Wicksell, in Hayek, in Schumpeter, in Keynes, in Fisher, in Simons et cetera. A lot of economists never read those people, and have moved away from their insights, and gravitated towards a highly mathematical description of economics in which there was a set of assumptions about rational expectations, complete markets and competitive equilibrium … There were a variety of reasons why those sort of insights which we could have had 10 or 15 years ago about the impact of inequality on an increasingly credit intensive economy.

BI: You were the UK’s chief financial regulator as the crisis hit. What do you think of Britain’s regulatory policies as they’re unfolding now?

AT: I think we’re doing fine preparatory work … we are currently in the environment where we’re still dealing with the post-crisis debt overhang rather than the exuberant upswing. So almost definition, we’re not testing a set of macroprudential tools on the exuberance … We’ve got some signs of a house price boom but it’s a complicated situation because it’s been regionally focused. There’s no house price boom in Newcastle or Edinburgh or Glasgow.

I think the bigger issue is in the downswing of the crisis, what is the balance between fiscal stimulus and monetary stimulus? What are the policy tools which are not pushing on a string? I’ve become increasingly convinced that the only one which is not pushing on a string is fiscal… fiscal stimulus says ‘I have cut your taxes’, or ‘I am going to employ you to build a road’. It clearly has a much more direct entrance into the income stream than a set of indirect levers that says ‘well there is some central bank money available to the commercial banks to lend money at cheap rates if somebody wants to borrow it’.

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