30 Dec 2012

Adair Turner on the causes of the financial crisis

The people at Positive Money have every reason to feel vindicated. As Mira Teklova reports on their website, "Adair Turner, the chairman of the UK’s Financial Services Authority, member of the BoE’s Financial Policy Committee,  set out the fundamental cause of the financial crisis in his speech to the South African Reserve Bank on Friday 2nd Nov 2012:
 “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.”
The speech (which can be downloaded here) is quite remarkable, and could well be the clearest admission that one of the major causes of the financial crisis stems from the fractional reserve banking system that gives commercial banks the right to create money out of thin air, to make loans, and then charge interest on those loans. For example, Turner states that :
The impact of fractional reserve banks is thus to make the financial system and the overall economy inherently more vulnerable to instability, creating risks which have to be balanced against the economic advantages which can arise from the risk pooling and maturity transformation which banks perform.”
Banks which can create credit and money to finance asset price booms are thus inherently dangerous institutions.
"... it is clear that the financial sector – to a far greater extent than other sectors of the economy – has the potential and the incentives to create forms and volumes of activity which are optimal for the private agents involved, but sub-optimal at the social level."

He gives a remarkable clear statement of how the fractional reserve banking system works.
"The banking system can thus create credit and create spending power  – a reality not well captured by many apparently common sense descriptions of the functions which banks perform.  Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses).  But in fact they don’t just allocate pre-existing savings; collectively they create both credit and the deposit money which appears to finance that credit.
Thus banks can create credit and private money."  
Turner also discusses the "Chicago Plan", orinally proposed in the the 1930s and which argued for a switch to full reserve banking.
"The answer the early Chicago’s theorists gave us was ‘very radical’– so radical indeed as effectively to abolish leveraged maturity transforming, fractional reserve banks.
Thus in the Chicago Plan and other variants of 100% money banks no private money is created since no private credit is extended, but instead all money in circulation derives from public debt or money issuance.
Essentially this would mean that banks which provided money services would face a 100% liquid assets requirement: while any institutions which made loans would face a 100% capital requirement, and could hold no deposits a set of prudential requirements which certainly makes Basel 3 look a pretty weak package."
He also comments on the recent report by two IMF economists ("The Chicago Plan Revisted"
"But extreme though it is, there are modern economists who believe that the Chicago Plan is a feasible model for real world policy. Indeed in an IMF working paper published in august this year, entitled ‘The Chicago Plan Revisited’ Jaromir Benes and Michael Kumhof have argued that a transition to a 100% money banking system is both desirable and possible, and that it could and should be accompanied by a dramatic write-down of existing household debts, removing in one fell swoop the vulnerability to financial and macroeconomic instability created by high levels of household leverage."
Turner doesn't go as far as to recommend implementing the Chicago Plan. Indeed, he specifically argues that it would be best to leave the fractional reserve mechanism in place. But it is very refreshing to hear someone so close to the heart of the financial system actually raising the question of whether the system has to work in the way it does. 


  1. Thanks for drawing attention to that Adair Turner speech. There is just one point you could have added, which makes even more of a nonsense of fractional reserve, and it is this.

    It is PRECISELY when an economy is booming that fractional reserve banks are most likely to create new money and lend it out, which exacerbates the boom. And of course the opposite happens in a recession: witness the numerous complaints in the UK about banks’ reluctance to lend over the last 2 years. I.e. there is a very simple reason for the instability that fractional reserve brings.

    In reference to Turner you say “he specifically argues that it would be best to leave the fractional reserve mechanism in place..”. I just can’t wait to examine those “reasons” and smash them to pulp.

  2. Having now had a look at Turner's reasons for rejecting full reserve, those reasons are as I suspected complete nonsense. I've set out details here:


  3. Thanks Ralph.... your hatchet job on Adair Turners "arguments" for defending fractional reserve banking is spot on.


  4. Sods -----


    For almost two
    decades we have strived to get justice for the injustice we have
    suffered at the hands of a world renowned bank--- PICTET & CIE.

    Two yorkshiremen
    both running their own small family businesses trying to resolve the
    problem by taking all the correct legal procedures to recover their

    The matter was
    raised in Parliament – twice-- the FSA investigated the matter
    concluding that PICTET had rogues operating in their London Bank ---
    but the rogues had left ---saying no one left to prosecute.??? -----
    so there.

    We then
    approached the Financial Ombudsman Service. (FOS) --- our case was
    dealt with by seven different people ---- then our numerous E-Mails
    were ignored --- nobody would speak to us -------so there.

    We then asked the
    SFO ( Serious Fraud Office.) to investigate our case ---- the
    criteria of our case ticked all their boxes. --- we were instructed
    not to send them any documents/evidence.------ in fact they wrote to
    us advising us to go to the Citizen's Advice Bureau.(CAB.)

    Richard Alderman
    the SFO boss ---- who responded to our letter was the same man who
    would not investigate the “ Madoff” scandal or the “Libor”

    The MP's
    committee ---- said he was sloppy--- and the SFO was run like “
    Fred Karno's Circus” ----- it was an office of fraud.----- so

    Our M.P.
    approached our local Chief Constable to investigate----- he was
    called---- Sir Norman Bettison--- Chief Constable of West Yorkshire
    Police ---- a force that made “ Dad's Army” look like the S.A.S.
    They were inept – corrupt ---malicious --- from top to bottom. We
    were criminally dealt with by the Forces Solicitor---- the Head of
    the Economic Crime Unit ----and the Chief Constable ----- so there.

    We were then
    advised to pass our complaint against West Yorkshire Police to the
    I.P.C.C. – which we did --- they advised us to make our complaint
    to ---- the West Yorkshire Police --- we did with reluctance --- all
    we got was abuse and obfuscation. ----- so there.

    Sir Norman
    Bettison ---- The Forces solicitor--- and the Head of the Economic
    Crime ---- have all been removed from their posts and facing criminal

    ------ so there.

    We even sought
    justice through the Courts --- culminating in a visit to the Court of
    Appeal-London.--- On leaving the Courts of Appeal that day our
    barrister a “rising star” informed us --- that if that was
    Justice then you can keep it. He quit the law and moved to Canada
    ----- so there.

    A few years later
    we learned that one of the judges in our case at the Court of Appeal
    was related to a senior executive of the Pictet Bank -----so there.

    Pictet & Cie
    .Bank --- voted private bank of the year 2013.

    Ivan Pictet ----
    Voted banker of the year 2012. ---- the senior partner --- lied on
    numerous occasions and had documents destroyed --- also said genuine
    documents were forgeries. ----- so there.

    Ivan Pictet in
    Oct. 2013 ---- Given the Legion of Honour --- but saying that ----
    honours were given to Hitler --- Eichmann --- Mussolini ---Franco
    --- he's in fitting company. ----so there.

    RAPHAEL.Q.C. -- Peters & Peters.London. They were the banks

    Raphael.Q.C. along with Ivan Pictet withheld crucial documents
    requested by the High Court ---- the FSA ---- and the police Fraud
    Squad. ----so there.

    Raphael.Q.C. became an Honorary Queens Counsellor in March. 2012.

    Raphael.Q.C. became a Master of the Bench in Nov.2012.

    An expert in
    Fraud ---the Doyen of Fraud Lawyers. ----- so there.

    This says a lot
    about Banks --- the consensus of opinion is that they are highly paid
    “crooks” ---- no wonder they voted Ivan Pictet banker of the

    It appears that
    crimes in the “establishment.” are honoured by their peers.


    Full Story.----
    “google or Yahoo”




    Ivan Pictet/Monty