Customer Reviews

The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis

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Graham is one of the best applied economists of our generation. He was the first economist to go public about the Japanese banking crisis in the 90's and almost lost his job over it whilst working for a Japanese Securities Company. He correctly anticipated the economic consequences of the reunification of East and West Germany on the German economy. He has a long track record of highly accurate predictions. Note that this book was written substantially prior to the public meltdown of the banking system in October 2008. Graham Turner has identified the causes and anticipated the outcomes of the macro-economic trends of the last 3 decades. He goes further than most economists and addresses the political dynamics that underpin the lack of regulation in the Western banking systems.

For the purposes of full disclosure, I worked professionally with Graham for approximately 6 years in the financial markets. He is a person of great integrity. During that period of time we never once discussed politics. His analysis was always based on a highly objective independent research into the causes of the both macro and micro economic phenomenae. I have not been in touch with Graham for over ten years. It was a complete surprise for me to see Graham on a TV broadcast commenting on the current crisis, when they mentioned this book.

Any person interested in the reality of the current collapse of the banking system, the underlying causes and the likely outcome should read this book. It is the best analysis that I have seen so far, and comes from an Economist who has an exceptional track record.

I cannot recommend this book more strongly.

I found the book fascinating. It explained a number of economic trends I had observed but did not correctly understand. I developed a much better understanding of what happened over the last couple of years and even continues today. My only critique is that I wish Mr. Turner had done more with recommendations on how to fix the imbalances he has highlighted. The book left me depressed knowing that things are moving in the wrong direction and the politicians seem to not understand why... even if they did, I believe they would not have the will to change course.

I'm looking forward to the next book and hoping to learn more.

"The Credit Crunch" was rushed into print last year to tap the market for books on the global economic crisis. It's repetitive, disorganized, and filled with long digressions that seem written for a different setting. Worst of all, it is now seriously outdated, so quickly have events developed over the last twelve months.

On the other hand, "The Credit Crunch" has enough strengths to merit a three-star rating:

-- It's breezy. It really could be read at the beach.

-- It's smart. Two detailed chapters dissect the failed Japanese response to asset deflation in the 1990s.

-- It's practical. The book stresses over and over again that monetary authorities have to take bubbles seriously.

-- It has a Big Idea. The author believes that the movement of manufacturing production from developed countries to low wage countries (especially China) has depressed demand and generated deflationary tendencies across the world economy. With inflation tamed, central banks have been free to ease up on monetary policy. The resulting avalanche of debt has fueled asset bubbles in the US and elsewhere, with catastrophic results for financial stability.

Bottomline: Get a used copy of "The Credit Crunch," read it once (quickly), and then donate it to a library book sale.

Graham Turner rightly blames Alan Greenspan for the current financial mess. More than anything else, Greenspans rate cutting after the bursting of the it bubble, produced the housing and credit bubbles of the US, which now are bursting and unwinding.

However, Turner blames Greenspan for his stance towards international trade for the former Fed chief main fault. According to Turner, the trouble is outsourcing of manufacturing jobs, mainly to East Asia. To compensate the unemployed and impoverished workers in the West, the Fed and other central banks have kept the rates low. Why? To create a housing bubble, from which homeowners could extract equity to spend.

This conspiracy theory just doesnt make sense to me. I am pretty sure Greenspans actions were decisive in making the bubble, but Im equally sure that Greenspan didnt think it was a bubble.

On the bright side, Turners book has some interesting parallels between Japan in the 90s and the US now. This saves him two stars. On the hole, the book is not worth reading.

Graham Turner is the founder of a firm that `provides forecasting services for some of the world's largest banks'. He writes, "the free trade agreements ... drained jobs from the heart of industrial America, caused the real median wage to fall and led to an inexorable rise in debt. Globalisation causes the export of jobs, increases profits and forces wages and prices down. This keeps interest rates low, encouraging easy loans and reckless lending, driving up debt levels and house prices, and creating housing and credit bubbles.

Governments and banks encouraged extreme borrowing by individuals, companies and local authorities. In 1997 in Britain, individuals' debts totalled £570 billion, by 2007, £1,512 billion, rising from 102 per cent of disposable income to 173 per cent, the highest level in the developed world. Add in company debt, and total private sector debt rose from 133.5 per cent of GDP in 1997 to 227.4 per cent in 2007. In 1997, net external debts were £33.8 billion, by 2007, £318.9 billion, 22.5 per cent of our GDP. Since 2000, more than a hundred countries have seen debt levels rise even more than in Britain, e.g. Belarus by 6000 per cent, Kazakhstan by 4000 per cent and Ukraine by 3000 per cent.

Global free trade inevitably becomes an engine of destruction. Debt-driven consumer demand sucks in record amounts of imports, again forcing wages down. As Turner notes, "Imports of cheap goods from low-cost countries have been fundamental to the downward pressure on wages for many workers." Free trade policies are `beggar-my-neighbour' policies.

We have record trade deficits against low-cost competitors like the new EU members: between 2004 and 2008, our imports from the Czech Republic rose by 106 per cent, from Hungary by 113 per cent, from Poland by 133 per cent, and from Slovakia by 390 per cent.

As Turner admits, "The jobs lost since New Labour came to power have been the result of free trade and cost-cutting." All the parliamentary parties support `the free trade policies that underpinned New Labour's economic mirage'. 1.3 million manufacturing jobs have been destroyed since 1997. In machine production, 30 per cent of the jobs have gone, and a £3.8 billion surplus in 1997 became a £17.4 billion deficit in 2007. In road vehicle production, a £6.9 billion deficit worsened to £15.2 billion. In scientific and photographic equipment, a £0.9 billion surplus became a £0.5 billion deficit.

He sums up the reasons for Japan's debt deflation: "The inexorable slide into a liquidity trap had been initiated by uncontrolled asset inflation, record borrowing and corporate excess. This could happen to any country that failed to check the forces of unbridled speculation. ... By putting so much pressure on companies to dispose of bad debts and boost profitability, the Japanese government inadvertently sent wages spiralling down, fuelling deflation and boosting real borrowing costs." Japan's profits and debts rose, while its wages fell by 14 per cent between 1998 and 2006.

What does Turner propose we do? He veers from liberalism to realism. First, he calls on employers to `allow' higher wages and writes, "The only resolution can come from governments acting in unity to ensure and orderly rebalancing of worker and environmental rights vis-à-vis the all pervading dominance of corporations." Then he admits, "Out of a naked self-interest, companies will never voluntarily agree to partake in a less uneven and destabilising mode of globalisation" and accepts that free trade is merely `a means to exploit wage differentials'.

He opposes workers' efforts to protect our industries and jobs, writing, "Free trade is a good thing, but not when it is used by companies simply as a ruse to cut costs." And how would he stop companies using this `ruse'? He wants a `new economic agenda ... that balances the interests of companies and workers more evenly, and promotes a free trade that does not fuel the boom and bust seen today." All he wants is free trade without its inevitable consequences.