Combating the debt addiction – commentary by Kristina Persson
Invited speakers were Lord Adair Turner, Institute for New Economic Thinking (INET) and former Head of the UK Financial Services Authority, and Swedish Minister of Finance Anders Borg. Panel participants were Prof. Karolina Ekholm, Deputy Governor, the Riksbank, Prof. Pehr Wissén, Managing Director, Institute for Financial Research (SIFR), and Kristina Persson, Chairman Global Utmaning.
“I would like to draw some concrete and, hopefully practical conclusions from what we have heard here today – in particular from what Lord Adair Turner has said:
First of all – it is obvious that we have a big problem of too much credit creation. The banks are creating money out thin air, “ex nihilo” – as Lord Turner puts it and as they have strong economic incentives to continue doing so, they will. They create too much money of the wrong kind, which is a source of great instability and risks.
The key problem is the purposes for which money is created – which is not what the textbooks told us – and still tell us – that banks intermediate money from savers to useful investments in productive capacity. As we just heard, only some 15% is channeled to the corporate sector, mainly for productive investments. Instead, money is invested in existing assets like private estate, creating asset bubbles and instability.
So, left to themselves the financial markets are not socially optimal. And as the financial markets are essential for the functioning of our economies, we must start talking about alternatives – systemic solutions to the situation. It is not enough to address the risks connected with individual institutions in individual nation states. We need Basel III, but we also need to address the real roots of the problem, which is how the system works and the strong interdependencies between different financial actors around the world. After 2008 we know that the present system is not stable, and we need to prepare for the next crisis and find lasting solutions.
Secondly, rising inequality is at heart of the problem and must be addressed: It is one of the consequences of an extremely rapid expansion of the financial sector in our economies. It has created a sector where some people have made huge profits and incomes while the vast majority of income-earners are left with very little or nothing, even reductions in incomes, as is the case for the lowest paid in the US – where the 1% richest have had wage increases of 275%.
This contributes to the stagnation that we find ourselves in: Demand is too low, and the present method to increase it through low interest rates and QE will not work in the long run. Even in Sweden, who has managed fairly well in the present crisis, unemployment in April hit 8.7%. Lawrence Summers has warned us for a secular stagnation if we don’t find the means and measures to get a more inclusive growth and Thomas Piketty has provided us with plenty of historic facts.
One explanation for this is that the high propensity to save among the rich is not matched by an equally high interest to invest. So there is a mismatch between the amount of money being shoveled around and sustainable growth and employment. And, as a result a highly instable system.
Third, we must start asking fundamental questions like ”should the banks be allowed to continue creating money?” Martin Wolf in the FT did this some weeks ago, and he answered “No, they shouldn’t”! There are various proposals being discussed in the international debate – the most radical is he so called Chicago-plan by Irving Fisher. They all see a strong case for governments and a need for public initiatives to increase investments.
So what should be done? From Adairs last two slides I draw the following conclusions:
- Economic activity depends too much on extremely low interest rates and liquidity. And in order to prevent bubbles in the real estate sector we would need interest rates that would kill activities in the real economy. Obviously, we cannot afford that. So one conclusion would be that we need different interest rates for different purposes.
- We also need institutions, banks that meet the need of credit in the business sector, including SMEs, who today in spite of the lavish supply of cheap money cannot borrow for investments.
- Finally there is a great need of international, political cooperation and leadership. The Global imbalances in the current accounts and the economic challenges that we see for in some very important countries speak strongly in favor of a new Bretton Woods conference. I wish EU and G20 would see this as their top priority.
And I wish that Sweden would take a much more outward-looking and proactive role in international affairs!”
Chairman, Global Utmaning
Adair Turner’s presentation can be found here:
Adair Turner interviewed about the debt addiction by Johan Hassel, Global Utmaning.