Turner urges second thoughts on financial services freedom
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Lord Turner: the concensus that liberalisation is beneficial in all circumstances is based on ideology rather than evidence
Lord Turner, chairman of the Financial Services Authority, says more evidence is needed to show that the financial services sector should be further liberalised.
Speaking at the Reserve Bank of India in Mumbai recently Turner told his audience that while a consensus has developed in the past two decades in support of ever greater growth and liberalisation in financial markets, this has been based more on ideology than firm evidence.
Turner says: “The evidence of both the financial crises of the past 13 years is that there are inherent risks in this ideology.
“The Asian crisis was rooted in short-term capital flows which proved susceptible to irrational exuberance as well as sudden and contagious losses of confidence.”
Turner believes the latest crisis was also rooted in what he calls overexuberant credit extension in developed markets, as well as complicated and opaque forms of securitised credit and risky forms of maturity transformation.
He adds: “Although speculators can play a useful role in providing liquidity and market information it is also possible for them to produce destabilising herd effects.”
Turner says that policy makers should identify the fundamental drivers of financial crises past and present, and be open to policy options that have been excluded by the free market consensus of the past two decades.
These include tools to control credit expansion - particularly in an upswing. This could involve countercyclical variations in lenders’ capital or liquidity requirements which may be applied at sec- tor level.
As well as policy instruments, Turner says taxes that place constraints on short-term speculative inflows may be relevant for some emerging economies.
He says: “The sensible conclusion on the subject of increased financial activity, liquidity and innovation is that it is valuable in some markets but not all, and not without limit.
“The problem for regulators is that this conclusion does not provide them with nice, easy answers on which to base policies.”
He adds: “It’s much easier to proceed in life on the basis of a simple philosophy which provides the answer to all the questions that might arise. But we are more likely to produce worthwhile results if we live in the real world of complicated trade-offs.”
