Adair Turner: “Our savings are still addicted to debt”

For the former director of the Financial Services Authority (FSA), the British financial policeman, global imbalances, between individuals and between countries have inflated the huge bubble of private debt that led to the current crisis. The necessary detoxification will be long.

Between 2008 and 2013, Adair Turner headed the Financial Services Authority (FSA), the British financial policeman. According to this connoisseur of the banking system, today a member of the Institute for New Economic Thinking, the think tank created by George Soros, the developed countries have not yet tackled the root causes of the crisis: the poison of the private debt.

The European Parliament is debating the adoption of the law separating banking activities. Is finance today sufficiently regulated?

Since the crisis, regulators in different countries have acted to repair the financial system. Banks are better capitalized, stronger, liquidity ratios have been strengthened. Thanks to this, the risk of a new crisis of purely financial origin seems today behind us. On the other hand, we have not started working at all on the root causes of the 2008 crisis, which are also those of the instability of economic capitalism itself: the addiction to private sector debt. For decades, credit to the private sector has grown faster than GDP. In the United Kingdom, household debt thus swelled from 15% of GDP in 1964 to 95% in 2008. In the United States, total private debt rose from 50% of GDP in 1945 to 200% in 2008! For all advanced economies, it has increased from 50% of GDP in the 1950s to 170% in 2007. As long as we have not found a way to build growth that is no longer based on debt and leverage, we will fall back into the same crises.

How do you explain this addiction to debt?

I see three reasons. First, the hypertrophy of the real estate sector in many countries: the construction attracts massive capital flows, fed by the effects of leverage, without it being really useful to the economy. Next, the growth of inequality, especially in the United States and the United Kingdom. The higher the proportion of poor households, the greater the temptation to use credit to support consumption and growth. This is a vicious circle: the savings of the richest households is used to feed loans to the poorest, often not very solvent. It is this mechanism that led to the subprime crisis. The third factor fueling the debt addiction is the global imbalance between countries with large external surpluses, such as China, Japan and Germany, and deficit countries, such as the United States or some peripheral countries. of the euro area. This generates huge flows of destructuring capital. Here again, the savings of some fuel the deficit of others.

How to solve these evils?

The answer is extremely complex because you have to find both a way to reduce the accumulated debt and put an end to the debt addiction in the future. Reducing inequality requires more redistributive economic systems. With regard to global imbalances, the answer can only come from the countries concerned. Those in deficit must work to fill them. Those in surplus need to find a way to better channel their savings. On the real estate side, it’s quite simple: an unregulated financial sector mechanically produces, in the long term, this kind of abuse, that is to say, waste and bubbles. We must further strengthen its monitoring and regulation.

The UK recovery rests heavily on the real estate sector, fueled largely by credit. Does not the country make the same mistakes as in the past?

It is too early to say because paradoxically, the best way to revive activity in the short term is to stimulate credit. The question remains: which engine to find in the medium and long-term? In any case, we can see that the end of the crisis is always a delicate moment. In particular this one. The eurozone is nowadays working with dangerous deflationary pressures. The risk is to fall into a trap with liquidity comparable to that experienced in Japan in the 1990s, where very low-interest rates were no longer enough to revive activity. The only way out of such a trap is for the state to take over, through aggressive monetary and fiscal policy.

While their public debts are relatively low, many emerging countries, on the other hand, are showing increasingly higher private debts. Should we worry?

Yes. The risk is that in the long run, they will suffer the same ills as the United States, Ireland or Spain, where private debt has reached unsustainable proportions before the crisis. The situation is particularly worrying in China. Through the traditional banking network as shadow banking, the debt of companies, often semi-public, has inflated at an abnormal rate. In all, credit to the non-financial private sector soared from around 130% of GDP in 2008 to almost 200% in 2013. Beijing must at all costs find a way to control this phenomenon, otherwise, these imbalances will inevitably lead to a crisis.

Many emerging companies have also, in recent years, borrowed heavily in international bond markets …
Yes. This shows that all over the world, growth is too dependent on debt, which too often increases faster than GDP. To get out of this pattern, we must also change our ways of thinking. Before 2008, this dependency was not perceived as the ferment of future crises. It was even rather conceived as something positive. But the shock of subprimes has shown that a poorly regulated financial sector feeds credit inappropriately while making economies more fragile, and the bursting of bubbles much more devastating.

Why have the big central banks not seen these risks rise?

It is a failure of the classic orthodox approach. Prior to the crisis, central banks focused on one objective: to maintain a low and stable rate of inflation, thanks to the main tool, short-term interest rates. They have not paid sufficient attention to the balance sheets of financial institutions. They would have revealed, however, that the unreasonable growth of credit was the source of future imbalances. This means that in the future, they have to broaden their reach to instruments other than interest rates alone.

Is growth without credit condemned to be weak?

I do not think so. It is true that the recovery of developed countries since the 2008 crisis is surprisingly weak. I think it’s not just cyclical. Some economists have speculated that this weakness is related to lower productivity gains. But we must profoundly review the way in which we conceive the link between wealth and investment. Until then, we conceived of investments as the need to invest large quantities of goods in the manufacture of factories, cars, consumer goods. But the situation has been modified by new technologies, particularly with regard to software production. The number of man-years of work that had to be invested in Facebook does not have much to do with that required in previous wealth creation cycles, such as railroad construction.

Today, debt consolidation is needed.