Current Edge of Adair Turner’s Thinking
This video was published on Youtube a week ago and has only had 27 views. The video is of a talk Adair Turner gave in November at the Bristol Festival of Economics. It reflects his current insights.
He gives explanations for 4 big patterns developing in the global economy.
- Increased Inequality
- Rising ratio of wealth to income
- Rising leverage (rising debt to GDP)
- Falling interest rates over decades
His ideas are good. For example, one main idea is that the increased values of real estate are making our economies unstable. Most leverage is created for real estate and not capital investment. Confidence in property values then goes through intensely more volatile cycles.
His explanations of falling interest rates is based on… ex-ante savings being more than ex-ante investment plans. He explains why investment needs are going down. The result is lower interest rates which make it easier for people to compete for real estate ownership, which brings him back to his main point.
He does make mention that in the past 3 years, monetary policy should have dropped money from helicopters instead of what it did. Helicopter drops of money is actually fiscal policy. I agree with his “radical” view as he calls it, because using the IS-LM model, I see the same idea… that we should have had less monetary policy and more fiscal type policies. (Link to my post)
Basically, less easing off the brake and more pressing the accelerator pedal. I learned that when I learned to drive.
The idea is using less monetary transmissions and more fiscal transmissions. Letting up on the monetary accelerator and pushing on the fiscal accelerator.
Turner explains it very well. I think he is ahead of Krugman in understanding what is needed… Krugman still can’t decide if inequality causes financial stability. Turner knows it does and is developing solutions. It is possible that Krugman will figure this out though… hopefully.
Yes, he gets it though I have to hand it to the economic profession for it’s language. Because this issue of over leverage, real estate as wealth economy is simply what I have called since blogging here: making money from money.
That’s it. We changed the economy to work in the way that wealthy people make their money…from money.
As to leveraging and controlling it and not allowing it to be based so much on real estate? Again, it relates to making money from money. Put the bank back into their proper roll for an economy, that is in service to a production economy and this will end. But, allow them to keep acting as if they are actually part of the producer economy and even in competition with it for the production of money and you get what we got. The creation of “products” by banks for creating money which are all based on money and not something based on people.
Turners arguments seem persuasive but much less persuasive when you discover the facts he presents are not accurate.
Most of US household wealth does not come from real estate.
At the height of the housing bubble 20% of household wealth was real estate and currently it is about 12%. Before the bubble real estate equity was about 15% of net worth.
It may be true that for the blue collar worker most of his net worth comes from his home equity. But if it were not for owning a home, he would have little net worth at all.
Also Turner claims most of bank lending is funding competition between households for real estate. The fact is only
1/4 of bank lending is for residential real estate.