Adair Turner: The Clearest Explanation of the Cause of Financial Crisis

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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.”

This is something what we’ve been saying for over two years: that if we allow banks to create money effectively out of nothing, in the way that we’re doing at the moment, then sooner or later we’re going to end up with a financial crisis, debt crisis and the situation that we find ourselves in today.

But this, coming from a chairman of FSA, is the clearest explanation of what is going wrong with our current economic system that has ever come from one of the people who are in charge of regulating the system.

“…the existence of banks as we know them today – fractional reserve banks – exacerbates these risks because banks can create credit and private money, and unless controlled, will tend to create sub-optimally large or sub-optimally unstable quantities of both credit and private money.

Lord Turner further describes the negative impacts of fractional reserve banking:

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.

He then gives a clear description of what banks actually really do:
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.  

He also references to the work of Prof Richard Werner, who is a member of Positive Money’s Board of Advisors, and with whom Positive Money has made a joint submission to the Independent Commission on Banking that recommended the implementation of full-reserve banking for the UK.

“Werner is one among few modern economists who have focused on describing and thinking through the implications of the fundamentals of bank money creation, in the same fashion as did earlier economists such as Irving Fisher or Henry Simons.”

Adair Turner then goes on to look into the early Full Reserve Banking proposals (Chicago Plan):

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 (Exhibit 24) 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 IMF working paper “Chicago Plan Revisited”:

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.

Although Adair Turner is not convinced that we could or should move away from fractional reserve banks, he thinks “we should take their ideas – rooted as they are in theoretical clarity about the origins of financial instability – as a spur to radicalism in our response to the financial crisis.”

 “If we really have constructed an economic system in which adequate nominal demand growth is only attainable with a continual upward creep in the level of debt to GDP, we have created a dangerous system and should seek to identify less risky ways ensure that demand is adequate.”

Read the full speech here.

 

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  • DozyHole

    I thought I would miss Mervyn but if this is the next governor then things don’t look too bad for the future. We need open minds.

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  • David Jones

    Somewhat encouraging stuff, but…

    I suppose having a BOE governor who accepts some basic facts of reality (banks create money, banks create too much money and cause financial crises etc.) is better than having one who chooses conventional economic “wisdom” over said basic facts of reality. But having quickly read through his speech, I’m still left wondering what sorts of concrete policy measures Adair Turner actually has in mind (given full reserves are being rejected…) and am still skeptical of the idea that anything based on higher “capital adequacy ratios” or whatnot will actually work.

    Does Adair Turner accept the reality of an endogenous money supply, or does he still buy into the erroneous “money multiplier” stuff you’ll find in undergraduate economics textbooks? His goldsmiths example in this speech would seem to suggest the latter. I’d like to see somebody actually pin him down on this…

    Also – and this is hardly a trivial point – I am skeptical of the idea that maintaining “adequate nominal demand growth” and maintaining a habitable planet for future generations are in fact compatible goals. Is it too much to ask to have a potential BOE governor (and current Chairman of the Committee on Climate Change no less!) willing to question the dogma of perpetual economic growth on a finite planet? Plus if peak oil theorists like Richard Heinberg are right then the age of growth is essentially over anyway and it would be prudent to start preparing for a contracting economy – a good starting point here would be to design a financial system that doesn’t crash your economy the second it stops growing!

  • Simon

    He is about half way to Damascus…

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  • http://www.facebook.com/Stephannie.Roxanne.Clifton Stephanie Clifton

    I’m pleased he knows about it.

    According to this link:

    https://www.youtube.com/watch?feature=player_embedded&v=lrQX4CF6Bxs

    So
    …If you can raise £50 million pounds (what is needed
    to start a bank) then really you’ve raised infinity of money, because
    you have the power to just create imaginary money at the expense of your
    countries value.
    The
    government is so dumb to hand this power over to anybody, after all a
    bank could literally strip the value from the country, just like a
    takeover company asset stripping. Realistically, this could be the new
    warfare and Conquering of countries in the
    modern day. Think how many foreign banks there are
    in this country, they could just go mad and offer mortgages galore
    knowing they are devaluing a country. Who knows, some genius could have
    had this plan 10 years ago and is working towards the downfall of
    westernised countries, in order to bring the rising of the struggling
    nations and change the power of the world? Just a thought.

    We also need a government that runs it’s country like a business, competing and trading with the other countries, The Uk government does not seem to get to grips with the long term problems, maybe that because they only get a small window of power, but there should be better advisories for all parties.

    43 minutes ago · Like

  • http://www.facebook.com/Stephannie.Roxanne.Clifton Stephanie Clifton

    I’ve had an idea to solve immgration problems and maybe economical. Citizens of a country should be seen as “Bonds”.

    If one Citizen emigrates to another country for asylum for instance,
    that person sacrifices his/her Bond to the country the come from the the
    country they are going to. Ie Isreal to Australia.
    If Australia holds a greatest share of bonds, then they have conquered that country an
    d will hold power and ruling to it.
    This would step up the game and make sure governments looked after its Citizens.

    It would also encourage the Governments to make their countries more
    appealable to attract immgration. It will also elimate the fear of not
    being able to support its Citizens as the countries would inherit the
    wealth of the other countries too.
    Then the best government will be elected by footfall and would have the right power over the world.

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  • http://www.facebook.com/profile.php?id=100001572308913 Ashley Smith

    Breathtaking and hypocritical at the same time. Saying what we have all known about for 20 years and still doing nothing about it. I am left speechless than any regulator still has a job. If the rest of us were as negligent at our won work we would be fired.

  • http://www.facebook.com/profile.php?id=100001572308913 Ashley Smith

    Breathtaking and hypocritical at the same time. Saying what we have all known about for 20 years and still doing nothing about it. I am left speechless than any regulator still has a job. If the rest of us were as negligent at our won work we would be fired.

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  • http://www.facebook.com/profile.php?id=100000181074589 Anthony Migchels

    The Problem is not Debt, it’s Interest.

    Money creation is just fine, but it’s done by a monopoly parading as ‘competing’ banks (who all own each other and are in fact one massive cartel).

    we want interest free credit, not fully backed usurious credit. Under a full reserve banking system we would still be paying 300,000 pounds interest over a 200,000 pound mortgage over 30 years.

    All the money is and can be created through credit, which is grand. We just don’t want to be enslaved by the interest on it.

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  • jack loach

    Sods —–
    Law.

    April
    —- 2014.

    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.
    BANK.

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

    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”
    fiasco.

    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
    there.

    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
    allegations.

    —— 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.

    MONTY
    RAPHAEL.Q.C. — Peters & Peters.London. They were the banks
    lawyers.

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

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

    Monty
    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
    year.

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

    “HONOURS
    AMONG THIEVES.”

    Full Story.—-
    “google or Yahoo”

    Insert.

    Ivan
    Pictet.Banker.

    Monty
    Raphael.Q.C.

    Ivan Pictet/Monty
    Raphael.

    Update
    — March. 2014.

    Pictet
    & Cie Bank —- List of Crimes.

    1996 —–
    F.S.A— Breach in London.

    2003 —– F.S.A.
    – States rogues operating in Pictet’s London office. Ivan Pictet
    states that documents
    were forgeries but were later proved to be genuine in the British
    Courts. He had documents destroyed in their London office –hoping to
    hide the crimes.

    2007
    .- – - The Securities and Exchange Surveillance issued a
    recommendation that the Prime Minister and The Commissioner of
    the FSA to take disciplinary action against Pictet Asset Management –
    Japan Ltd.

    2008
    .– Dec. – Pictet Bank state – ” We have never chosen
    any funds linked to Madoff.

    2011 – - – Madoff
    Trustees sue Pictet & Cie. Bank for $156 Million.

    2011- – - Pictet &
    Cie Bank abetted a Bribery Scheme – Oil company sues Pictet for
    $350Million

    2012 – - – April
    – Geneva Bank Pictet used in Offshore Tax Scheme. ( USA.)

    2012 — – June.
    – Published in Anglo INFO .Geneva.— USA Trust Fund Investors were
    sent false and fraudulent documents by Pictet Bank in order to
    collect large fees. ( Like MADOFF)

    Even after the SEC
    in the USA uncovered the fraud Pictet continued to charge fees and
    drain whatever was left in these accounts. Estimated that $90 million
    lost in this Pictet Ponzi scheme.

    2012 – - – July.
    – De – Spiegel. — states – Pictet Bank uses a letterbox
    company in Panama and
    a tax loophole involving investments in London to gain German
    millionaires as clients.

    2012
    - – - August —- German Opposition Leader accuses Swiss Banks of
    “organised crime.”

    2013
    — Jan.— Swiss MP’ table motion to freeze Tiab Mahmud’s assets of
    ” criminal origins”

    held
    in Swiss banks – $18 million held in 5 accounts at Pictet &
    Cie. Bank. Bahamas.

    Ironically
    the Pictet & Cie.Bank partners are bigger criminals than the
    criminals who have accounts in the their bank.

    The
    bank is now seeking to re-structure — to cut the partners liability
    – hoping to off load their decades of criminal responsibilty –
    and move onwards to carry out new crimes. The Germans are right –
    the bankers should go to prison if found guilty of financial crimes..

    Both Ivan Pictet
    and Monty Raphael.Q.C. conspired to withhold crucial documents
    requested by the High Court – the FSA — and the Police Fraud
    Squad.

    Written
    Parliamentary Questions received by the table office ..

    (1) To ask the
    secretary of state what steps he is taking to ensure that Swiss Banks
    such as Pictet & Cie do not evade criminal prosecution under EU
    law even when the illegal act is committed by a London based
    subsidiary.

    (2)To ask the
    secretary of state what steps he is taking to protect the rights of
    UK citizens who seek redress following criminal activities by Swiss
    banks with subsidiary offices located in London.

    Quote.
    ( America’s Top Lawyer .)

    You can be
    the richest man in the world with the best lawyers that money can buy
    but you cannot win against a man who has got nothing left to lose and
    is telling the truth.

    *** We
    note that there has been a sharp increase in Peters & Peters
    partners leaving to go to other practices. Moving does not alleviate
    them of any responsibility from any illegalities that may have
    occurred at Peters & Peters during their partnership tenure. From
    1999 onwards.

    The consensus of
    opinion is the Pictet & Cie should be prosecuted , and that their
    U.K. banking licence should be taken away.

    Their Solicitors at
    Peters & Peters .London “ struck off and prosecuted..”

    *** Started
    campaign — June 6th.2008.

    5years —- approx
    10 .5 million e-mails – - – but still no writs, injunctions or
    threats of litigation – – - WHY – - – because it is all true.

    *** . The
    bigger they are — the harder they fall.!!!
    In America —- they would have
    all been in prison for the last seven years.

    Feb 2013,—
    Pictet & Cie Bank Partners remove their unlimited liability.They
    realise that all their personal wealth is at risk , the people they
    have conned might want their money back.

    Full Story.***

    . ” Google ”
    or ” Yahoo” .

    Insert– ( Charles
    Pictet. Banker.

    Insert– ( Ivan
    Pictet.Banker.

    Insert– ( Jacques
    de Saussure.Banker.

    Insert– ( Nicolas
    Pictet. Banker.

    Insert– (
    Jean-Francois Demole.Banker.

    Insert — (
    Philippe Bertherat. Banker.

    Insert– ( Renaud
    de Planta. Banker.

    Update.
    March. 2014.

    Over
    the last three years we posted the following on hundreds of sites .

    ***
    Were currently waiting for the West Yorkshire Police ;-

    Chief
    Constable . Sir Norman Bettison

    Forces
    Solicitor. Mike Percival.

    Head
    of Economic Crime Unit. Det Chief Inspector. Steven Taylor.

    -to
    see if they continue to cover up this case like the FSA. – “
    watch this space.”

    ****
    We can now state that all the above have been removed from their
    posts. All three facing criminal allegations.

    ****
    These three senior police officials assisted in covering up the
    crimes carried out by Pictet & Cie Bank and it’s lawyers.

    Swiss Bank
    Accounts. 2014.

    Is your monies safe
    in these accounts —- definitely NOT.

    Would you get your
    money back if every body decided to withdraw all their accounts –
    NO WAY.

    Economic Experts
    say that there would only enough money to repay 50% of their clients.

    Are you going to be
    in the 50% — that loose your money.– Get it out NOW.

    2012 — – June.
    – Published in Anglo INFO .Geneva.— USA Trust Fund Investors were
    sent false and fraudulent documents by Pictet Bank.Switzerland. in
    order to collect large fees. ( Like MADOFF) —Even after the SEC in
    the USA uncovered the fraud Pictet continued to charge fees and drain
    whatever was left in these accounts. Estimated that $90,000,000
    million lost in this Pictet Ponzi scheme.

    2012 – - – July.
    – De – Spiegel. — states – Pictet Bank uses a letterbox
    company in

    Panama
    and a tax loophole involving investments in London to gain

    German
    millionaires as clients.

    2012
    - – - August —- German Opposition Leader accuses Swiss Banks of
    “organised crime.”

    All
    the fines that crooked Swiss banks have incurred in the last few
    years exceeds £75.Billion.

    It
    is also calculated that the secrecy ” agreements” with
    regards to tax evation by their clients will cost the banks another
    £450 Billion.( paid out of your monies.)

    The
    banks are panicking — the are quickly restructuring their banks
    —- from partnerships –

    to
    ” LIMITED COMPANIES.” —– this will probably mean that
    in the future — they could

    pay
    you only 10% of your monies ” if you are one of the lucky ones”
    —- and it be legal.

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