I agree with Anatole Kaletsky here: the lecture by Lord Turner about the financial crisis was about the most considered piece on the subject I have read.  And I have read a lot on the financial crisis.

Kaletsky’s article makes an incredibly important point that we should all remember the next time a politician or commentator wants to frighten us with the sheer numbers involved in modern finance:  there is a difference between assets within the financial sector and actual new assets.   He puts it better than I can:

“The difference between financial and non-financial debts - crucial in implementing the Treasury's new bank-lending contracts — can be seen in a theoretical example. Suppose a manufacturer such as GKN wants to buy a £1 million machine tool. In the old world of traditional bank finance, GKN would have borrowed £1 million from HSBC and that would be the end of the matter. But since the 1990s, the brave new world of securitised hyper-finance has managed such a transaction in a very different way. GKN would sign a £1 million lease with General Electric Credit. GE would then sell £1 million of bonds to a special purpose vehicle, which would fund itself by selling £1 million of commercial paper to a hedge fund. This hedge fund would borrow £1 million from its prime broker, which would borrow £1 million from Barclays Capital, which would turn around and borrow £1 million through the inter-bank market from HSBC. The net result is still that GKN's investment is financed by £1 million of deposits at HSBC. But in the process, £6 million of debt has been created instead of £1 million of debt.”

Lord Turner’s speech can be usefully complemented the Economist’s 14 page special on the subject.   I found this particular nugget about the ratings agencies amazing:

 “Although the agencies insist that they did a thorough job, a senior quant at a large bank says that the agencies’ models were even less sophisticated than the issuers’. For instance, a BBB tranche in a CDO might pay out in full if the defaults remained below 6%, and not at all once they went above 6.5%. That is an all-or-nothing sort of return, quite different from a BBB corporate bond, say. And yet, because both shared the same BBB rating, they would be modelled in the same way.”

 The Conservatives have launched a new plan aimed at making the government care more about your money.  Evidence of the seriousness with which they take this subject can be found in David Cameron sitting in the audience at the ICAEW as Osborne launched it.  There was no mention of their Office for Budget Responsibility in the speech, despite the prominence that this policy was given in September.  I wonder why?

 UPDATE (29th Jan) :  David Miles' presentation at the IFS Green Budget puts the same point as Anatole Kaletsky's with a great abstract example: see Figure 4.11 here.