Adair Turner’s Book

The first few parts of the book lay out the scenery for those unfamiliar with the issues. Part IV is on the policies to build less credit-intensive and more stable economies and part V discusses how to escape from the debt overhang accumulated by past policy mistakes.

The epilogue is entitled, “The Queen’s Question and The Fatal Conceit”.

From “Between Debt and The Devil“¹,

All advanced economy banks suffered big share price falls in 2008, but most survived without taxpayer support. Lessons can be learned from the relative winners. Simple caution – a banker’s gut intuition that markets were too exuberant and that it was time to let others take market share – was often as important as any sophisticated risk management techniques.

But some banks were also better at using risk management tools to spot market trends early and exited trading positions to avoid loss. The less capable suffered disproportionate losses. The UK Financial Services Authority’s report into the failure of the Royal Bank of Scotland noted that the bank lacked best-practice systems to monitor rapidly changing risks, and that its mark-to-market valuations of trading positions were toward the less prudent end of the acceptable spectrum. It was left holding securities that more competent banks had sold.

But that does not mean that if all banks had had excellent risk management systems, disaster would have been averted. The sophisticated risk management techniques deployed – secured lending against collateral, mark-to-market accounting, the calling of margin, and Value at Risk models – hardwired the system’s tendency to produce self-reinforcing credit and asset price cycles. Better risk management could advantage one bank relative to others, but moving every bank to best practice could paradoxically make the overall system more unstable.

I find it interesting that the act of redistributing risk actually opens the doors to speculative activities. Hence, although an increase in the concentration of risk at fragile points might be mechanically diluted, the overall level of risk in the whole system would naturally rise.

Turner puts up many arrows pointing to the direction of the solutions, but not a clear map of how to get there. In addition, I’m still not convinced that private credit creation is as evil or that the outright monetisation of debt would be as desirable. As a thought-provoking read nonetheless, the book is recommended.

For more:

[1] pp.166-167


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