Lord Adair Turner, the head of the FSA, last night launched an outspoken attack on the banks, claiming their ability to create credit and money is ‘potentially dangerous'.
He also called for new powers for regulators to intervene in their lending, the Daily Mail reports.
Turner, who is a member of the interim Financial Policy Committee, said the country should not rely on free markets to ensure bank lending goes to ‘socially optimal' borrowers such as small firms.
He said only a fifth of the vast expansion in bank balance sheets in the run-up to the credit crunch had made its way into the real economy.
Measures to control the banks might include risk-weightings for loans to small firms being set by regulators instead of the banks themselves.
He added that we ‘cannot avoid' considering options that would have been thought ‘unacceptably interventionist' before the credit crunch.
Turner rejected the previous free market orthodoxy as ‘wrong and dangerous', saying it ‘appeared to justify the enormous rewards enjoyed by many financiers'.
Regulators should challenge the idea financial innovation is a good thing, he said. He said this is because much of it is focused on tax avoidance, or created profits that turned out to be illusory because people did not understand the risks involved, the Mail reports.
He said that while investment banking activities, or so called ‘casino' operations, had taken much of the blame for creating the financial crisis, traditional lending had also been a big contributor.
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