Adair Turner: has financial capitalism failed the world?

Adair Turner, a former chairman of the UK financial services authority, tried to answer the question of "has financial capitalism failed the world?"  His conclusion was no, financial capitalism had not failed the world but rather that financial regulators and central bankers were responsible for letting too much leverage enter the financial system.

Mr. Turner is headed in the right direction when he places the blame for the failure of the financial capitalism at the feet of financial regulators and central bankers.

The problem however was not the amount of leverage they allowed into the financial system.  This leverage was simply a symptom of the underlying problem: opacity.

Opacity in the financial system made it impossible for market participants to understand exactly how much risk was building up and where it was building up.

For example, bank disclosure leaves them in the words of the Bank of England's Andrew Haldane resembling "black boxes".  Only the financial regulators know what is inside the box.

Because of opacity, other market participants have no way of assessing how much risk the banks are taking.  As a result, they cannot exert discipline by linking risk and a bank's cost of funds to restrain risk taking.

This leaves the financial system dependent on the financial regulators accurately assessing the risk of the banks and taking steps to restrain the overall level of risk in the system.

Clearly, as shown by our current financial crisis and the CFTC's admission they did not catch JP Morgan's London Whale trade, the financial regulators are not up to this task.

Mr. Turner proposes banks hold more capital as the solution.

Higher capital ratios don't solve an opacity problem.

What solves an opacity problem is transparency.