FSA Chairman Lord Turner calls for greater central planning in banking

October 03, 2011 10:58 AM

Adair Turner, the chairman of the Financial Services Authority, said regulators should take control of much more commercial decision-making by banks and financial institutions. In a speech to a conference on banking and the economy at Southampton University on Thursday, 29 September, he said that leaving the market to decide how to allocate capital leads to boom and bust:

We may need to get far more involved in the details of credit capacity within the economy and even of the sectoral allocation of credit than we have for several decades


Lord Turner’s startling call for much greater economic central planning in the banking sector involved criticism of the market as a mechanism for the best allocation of resources. He questioned:

the extent to which private credit creation processes can be relied upon to be socially optimal


The problem is that centrally planned economies have been tried in the Soviet Union, North Korea and 1970s Britain. They failed dismally. Central planning in banking has also been tried. It too has failed dismally. Government planners in the US forced banks to lend money to risky, low-income aspiring home-owners. This created the ‘sub prime’ market which has proven to have been disastrous for the global financial system and economy.

If Lord Turner’s suggestions turn into Government policy and banks are forced to lend to unviable but “socially optimal” businesses to meet “sectoral allocation of credit” criteria, the financial disaster it will create may well prove to be manageable during the next boom, just as sub-prime lending did. But when the recession that will inevitably follow exposes the business failure and reveals the losses from those “socially optimal” loans, it will no doubt be taxpayers who will be expected to bail out the banks involved.Adair Turner, the chairman of the Financial Services Authority, said regulators should take control of much more commercial decision-making by banks and financial institutions. In a speech to a conference on banking and the economy at Southampton University on Thursday, 29 September, he said that leaving the market to decide how to allocate capital leads to boom and bust:

We may need to get far more involved in the details of credit capacity within the economy and even of the sectoral allocation of credit than we have for several decades


Lord Turner’s startling call for much greater economic central planning in the banking sector involved criticism of the market as a mechanism for the best allocation of resources. He questioned:

the extent to which private credit creation processes can be relied upon to be socially optimal


The problem is that centrally planned economies have been tried in the Soviet Union, North Korea and 1970s Britain. They failed dismally. Central planning in banking has also been tried. It too has failed dismally. Government planners in the US forced banks to lend money to risky, low-income aspiring home-owners. This created the ‘sub prime’ market which has proven to have been disastrous for the global financial system and economy.

If Lord Turner’s suggestions turn into Government policy and banks are forced to lend to unviable but “socially optimal” businesses to meet “sectoral allocation of credit” criteria, the financial disaster it will create may well prove to be manageable during the next boom, just as sub-prime lending did. But when the recession that will inevitably follow exposes the business failure and reveals the losses from those “socially optimal” loans, it will no doubt be taxpayers who will be expected to bail out the banks involved.

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