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“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 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.” Read more...
The best books on Challenges Facing the World Economy
Martin Wolf, Economist
