The free market consensus of the last two decades, which promoted unlimited liberalisation of financial services, should be questioned following the economic crisis, the chairman of the FSA says.
Policymakers and regulators must be ready to challenge recent assumptions about the expansion and liberalisation of the global financial sector, Lord Turner said in a speech at the Reserve Bank of India in Mumbai.
Comparing the 1997 Asian financial meltdown and the recent crisis, Turner said both had shown the dangers of unchecked growth in the scale and sophistication of financial activity.
"What we saw in respect to capital flow liberalisation in the 1990s (regarding domestic financial liberalisation in developed countries) was the assertion of a self-confident ideology, which also happened to be in the direct commercial interest of major financial services firms with powerful political influence in the major and developed economies and, in particular, the US," he said.
The latest crisis was "rooted in over-exhuberant credit extension in developed markets, and in the development of complex and opaque forms of securitised credit and of new and risky forms of maturity transformation".
In both cases a combination of ideology and interests enforced "an over-simplistic conventional wisdom", said Turner, in which it was possible for speculators to produce "destabilising and harmful herd and momentum effects".
He admitted the solutions to such risks are "less obvious", though said developed countries should consider macro-prudential tools to control credit expansion - particularly in an upswing.
"This could be done by countercyclical variations in banks' capital or liquidity requirements, which may need to be applied at a sectorally specific level (for instance to constrain commercial real estate lending)."
He also said policy instruments such as taxes which place constraints on short-term speculative inflows may suit some emerging economies.
"The sensible conclusion on the overall benefits of increased financial activity, liquidity and innovation is that it is valuable in some markets, but not in all markets and not limitlessly," he said.
"It is much easier to proceed in life on the basis of a clearly defined and simple credo which provides the answer to all specific issues. But it is more likely produce good results if we live in the real world of complex trade-offs and of relationships which are true up to a point."
Full text of Lord Turner's speech is here
‘Important to have an anchor’
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Lack of innovation for solutions
Some 2,000 consumers affected