Progress and Monetisation – Interview with Adair Turner

This interview with Lord Adair Turner by Bharat Azad is very well worth a read. Here’s a short extract:

Until last summer, there has been scant official acknowledgment that retail banks can create money, too.

“This is interesting”, Turner smiles, looking at my much scribbled-upon copy.

“You’ve been saying this a while”, I say.

“I’ve been saying this a while”, he replies.

We are looking at a paper in the Bank of England’s quarterly bulletin, “Money creation in the modern economy”. The paper’s diffident title conceals its revolutionary content. This is the first official public statement by the Bank of England setting out the mechanics of money. “The reality of how money is created today differs from the description found in some economics textbooks”, the authors state with some modest mischief, “rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits”.

This came as a shock to many who already question the standard model but also as a surprise to Turner himself: “this was the Bank of England at last saying it, whereas I can tell you, you will find things in the Bank of England before which were expressing the previous, I think wrong, model. You will find them repeating the idea that what banks do is take money from savers and they lend it to borrowers in order to allocate between alternate capital investment projects and I think this document you’re quoting from is a major step forward”.

I tell Turner that my shock stemmed from a conversation I had some 3 years ago with a very senior official at the Bank of England, proposing this alternate view of credit creation. I was listened to with bemusement. I had got it wrong, I was told, politely but with a slight look of incredulity. A major central banker did not know this three years ago but this is far from an anomalous example, Turner says: “I was told by a very, very senior economist – I won’t tell you whom – in a global organisation, not long ago. We had lunch together and I had given him a copy of a recent lecture I’d done and he said in advance, “just to spice up our lunchtime discussion, I do not believe that banks create money, I think they intermediate money that already exists”. And I tried to persuade him that he was wrong”.

“But it’s only really after the crisis that I have really discovered and thought about money creation, and in that, I’ve gone back to some texts that I’ve read before. But I also read texts that I hadn’t read: when I was at Cambridge, I don’t think I’d read Hayek, I’m sure I didn’t read Wicksell, I did read Keynes but the Keynes of the General Theory doesn’t focus on this, the Treatise on Money does a bit more, but Hayek and Wicksell were clear about it. So I sort of knew it but I hadn’t focused on it. I have to say that what happened was that, after the crisis occurred, it was so huge that I, in addition to doing the work that had to be done, I would spend my time trying to understand what had gone wrong and I began to go back to reading old texts that I hadn’t before and it wasn’t complete news to me that banks created money – at the back of my mind I knew that, but I really began to focus on it in a way that I hadn’t before”.

One key point below is that it’s likely to be recognised that Japan has financed government spending with newly created money to about 150% of GDP, through endless QE:

Turner then later returns to the Japanese situation and this is the closest he will get to making a prediction. “I think that Japan is going to be the interesting case…I’m getting close to being willing to bet that Japan will effectively de facto end up doing permanent monetisation and that also more and more people over the next year will point out that de facto they’ve done it and I think there’s a fair possibility that within the next five years it will be officially admitted that they’ve done it and that there will be a statement of why it was a perfectly sensible thing to do, simply because the reality is the debt can’t be repaid in any other way.

In the Eurozone, it would be great if we could have a helicopter money drop, but I don’t think it will occur because the ECB will not be allowed to do it. But I think Japan is going to be the forcing device because it is bound now de facto to occur, it will be the forcing device for – I hope a more – open-minded debate at global level as to the circumstances in which it should occur”.

Read the whole interview here.