Turner Turns (3) Pre-crisis Orthodoxy

Turner describes the orthodox approach by central banks prior to the Global Financial Crisis (GFC)

• On their monetary theory side, low and stable inflation was considered to be desirable and sufficient as an objective. Low inflation indicates an economy in balance, so by definition, the right amount of credit would be created. Central banks did not have to pay attention to where the credit was going. The only concern was whether enough credit would be produced.
• On the financial theory side, debt contracts were considered to be essential Free markets will produce an optimal balance between supply and demand.

This orthodoxy was seriously exposed by the GFC. The crisis came about through too much of the wrong sort of debt. Both sides of the orthodoxy were wrong.

We actually have a system that can produce too much credit, if left to itself.