Lord Turner: Housing bubble could drag UK back into crisis

Adair Turner, former chairman of the Financial Services Authority, is still sounding the warning bell with regards to the current housing bubble:

“[The UK is] developing a recovery which is simply returning to the very issues that led us to this problem in the first place.

“Even the Office for Budget Responsibility has said the only way we’re going to get growth back in the next five years is for the [debt to income ratio] to go all the way back to 170pc again. If in five years time debt has gone back up to 170pc, and if interest rates have returned to 3pc, 4pc or 5pc, then a lot of people are going to be struggling.”

In other words, and just as Positive Money have been arguing for the last 4 years, the UK government’s strategy for fuelling growth is people to go further into debt, because every loan made by a bank creates brand new money. But the crisis was caused by people borrowing too much, and overall levels of personal and household debt have not fallen significantly since then. Piling even more debt onto the over-indebted public could very well lead us into another financial crisis.

There are alternatives to fuelling our economy through bank-created money. Our paper ‘Sovereign Money: Paving the Way to a Sustainable Recovery‘ shows how we can fuel an economic recovery by allowing the Bank of England to create new money which would be spent directly into the real economy (through government spending or tax cuts).

Just £10 billion of newly created sovereign money would have the same effect on jobs and growth as £375 billion of Quantitative Easing, and a significantly  better effect than another £10 billion of bank-created money flooding into the property bubble.

But instead, the government has recognised that the current monetary system, in which banks create 97% of our money by making loans, leaves us with the choice of either having:

• More money AND more debt, or

• Less debt AND less money

They’ve taken the first option. There’s a very real risk that we’re now sleepwalking directly into another crisis.

Further Reading

Why is there so much debt? 

Why are house prices so high? 

Why low inflation figures mask a housing crisis