Debt, Money and Mephistopheles: How do we get out of this mess?

Speech by Adair Turner, FSA Executive Chairman at the Cass Business School

In his capacity as FSA Chairman and visiting professor, Adair has given his annual address to the Cass Business School with this year’s topic being Debt, Money and Mephistopheles: How do we get out of this mess?

This annual event provided the opportunity to speak about financial crisis and the harm caused by pre-crisis financial folly and post-crisis deleveraging. Adair also touched upon the intellectual failure within mainstream economics to foresee the length of the subsequent recession.

Having provided the audience with the background to the crisis, Adair went on to outline the three main conclusions he had come to about this issue.

  • Firstly, that leverage and the credit cycle are important. The level of leverage in the real economy and financial system are crucial variables which were dangerously ignored pre-crisis.
  • Secondly, that arguments for free markets do not apply to banks as they do to other sectors. They need to be tightly regulated.
  • Thirdly, that financial crises resulting from excess leverage are followed by long periods of deleveraging which depress nominal demand.

In his address, Adair said: ‘We must think fundamentally about what went wrong and be adequately radical in the redesign of financial regulation and of macro-prudential policy to ensure that it doesn’t happen again. But we must also think creatively about the combination of macroeconomic (monetary and fiscal) and macro-prudential policies needed to navigate against the deflationary headwinds created by post-crisis deleveraging’.

Read the full speech [PDF]

Speech slides [PDF]