5 Aug 2013

The cause of the 2008 financial crisis

Adair Turner, chairman of the UK’s Financial Services Authority, set out the fundamental cause of the financial crisis in a speech on 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.”

In Oct 2008, as reported in The Australian for example Alan Greenspan, the former US central banker from 1987 to 2006, famously said, 'I made a mistake'. Appearing before the US House Committee on Oversight and Government Reform, he said he had found a flaw in the "critical functioning structure that defines how the world works. ... I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms." In other words, he conceded that the free market philosophy he championed for 40 years has fundamental flaws and he said they must be addressed by a new era of regulation.


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