Between Debt and the Devil: Money, Credit, and Fixing Global Finance

"I decided to focus on books that are on things I think and write about a lot. Obviously, I constantly read books that don’t fall into that category, but that didn’t seem to me so interesting. They are all books which, in different ways, influenced my previous big book, which was on the financial crisis, The Shifts and the Shocks , and my current book, The Crisis of Democratic Capitalism , which is on what’s happening to politics. I have to admit I know all these authors. I tend to know people who write in my area, and one should always be upfront about this. I admire them all. What Adair is arguing in this book is that we have a Faustian bargain with the financial system, and particularly with debt, which is the major instrument of finance. Debt has real advantages, in that it allows people to shift their spending patterns over their lifetime, to borrow when they need to borrow (to buy a house, for instance), and then to pay it off over a long time. The net creditors, the people they borrow from, are mostly older and better off and can afford to give up this power to consume. This is all perfectly valuable. The banking system plays a core role in the debt system and we do need banks—at least as we are running our economy now. The trouble with debt is that it creates profound fragility in the economy because it creates a very large and important set of contracts—debt contracts—which are really inflexible. The only way you can end them is if you pay them off. So if you get a crisis when lots of people can’t pay their debt, then lots of people go bankrupt. And if lots of people, including companies, go bankrupt all at the same time, you have a whacking great recession, or even a depression. It takes a lot of time to work out who owns what, who owes what, and people don’t know how well off they are—either as creditors or debtors. It freezes the economy. So his view—which I share—is that we would do much better with less debt in our society than we have. If we didn’t have so much debt, we wouldn’t have had these huge financial crises in history and again now and our societies and economies wouldn’t be so fragile. The book is a simple statement of that fundamental point. It’s a very good statement of that case and had a lot of influence on my book, The Shifts and the Shocks . The most important, I think, are two. The first is that we have to turn more debt contracts into equity-like contracts, which are contracts in which people share in the risk. The suppliers of money need to share in the risk. A very simple way of doing that is to get rid of the current situation in which debt is tax-favored. It’s not true for households, but if companies borrow with debt, they can write it off against tax. You can’t write off the cost of equity against tax, so there’s a natural incentive to go for debt. That’s why we have so much private equity nowadays. Private equity is built on this disparity. So tax changes are important, I think. “We would do much better with less debt in our society” The second thing you can think about is reducing the role of the most highly leveraged or indebted sector in our economy, which is the banking sector. There you have to start talking about changing the assets that back ordinary bank deposits, shifting them from being private long-term debt to shorter-term debt, and particularly government debt. So you make banks safer, because the assets that banks hold are safer. So we could imagine a radical reform of the banking system, which would deleverage our economies quite substantially. Both of these are very radical. There are other possibilities which get to the question of how the state helps people. But it is possible to imagine a society in which debt is less important than it is and therefore financial crises will be less frequent than they are."