adair turnerdick rodgers smallerBen Dyson, who visited the city last year to speak at the TedX Brum event, sent a link to a very interesting presentation by Adair Turner, Baron Turner of Ecchinswell, director of the Bank of England and Chairman of the Financial Services Authority (FSA). “Monetary and Financial Stability: Lessons from the Crisis and from classic economics texts” was delivered at the South African Reserve Bank in November. Adair Turner’s analysis is that of Northfield’s Dr Dick Rodgers (right) who has arranged a meeting on this subject – see the post on this website.

The problem as Turner and Rodgers see it

Turner: the financial crisis of 2007/08 revealed that the assumptions of the pre-crisis conventional wisdom were deeply flawed. Free market finance left to itself creates huge instability – too much leverage (use of credit to finance speculation) in the real economy and within the financial system. (Page 14 in the report). His points:

  • Banks which can create credit and, as a result, private money (6) to finance asset price booms are inherently dangerous institutions. (8)
  • Public intervention has had to create new credit and money to compensate for the private financial system’s sudden unwillingness to do so. (20)
  • If we mistakenly allow excessive debt and leverage to develop, the inevitable bust will follow as it did in 2008. (2)
  • We have created a dangerous system and should seek to identify less risky ways to ensure that demand is adequate. (14)

In fact “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”. (3)

Turner reviews the Chicago Plan presented to President Roosevelt

The Chicago Plan required banks to play no role in private credit extension, becoming simply payment system providers, with all bank money 100% backed by central bank reserves or government debt  . . . all money in circulation derives from public debt or money issuance. (15)

His comment: the analysis of risks which motivated these plans is highly perceptive and should guide the design of a real world financial regulation.

But moulded by arch-globaliser McKinsey, Turner ends not with a bang, but a whimper

Adair Turner was a McKinsey employee for 13 years, building its practice in Eastern Europe and Russia. Since then – as is the rule – he will have been a loyal associate. It is no surprise, therefore, that he continues:

“What should we make of these radical plans? Do most policy makers instinctively reject them only because we are trapped by an institutional and intellectual path dependency  . . . I am not convinced that the Chicago Plan or its modern variants would be socially optimal even in an ideal world . . . we should I believe accept the existence of fractional reserve banks as a given fact of modern economies  . . . The challenge of policy design is to support demand stimulus without creating future risks”.


In essence: business as usual . . .