The Agenda for a Finance Revamp

Original Source: The Wall Street Journal

The repair of the global financial-regulatory system is too important to future prosperity to be left to technocrats and bankers. But the substance is so arcane and complicated that few politicians or informed citizens can grasp the issues, let alone choose solutions.

That puts a premium on public-spirited insiders who think and speak clearly enough for the rest of us to understand, even if only to disagreewith their diagnoses and remedies. It is that talent that makes Adair Turner, chairman of Britain’s über-regulator, the Financial Services Authority, worth listening to.The U.K. didn’t, as Lord Turner puts it, have “a good war.” A couple of its big banks and several smaller ones imploded. It had a housing boom and bust. Its people ut savings in Icelandic banks that collapsed. Its economic engine, finance, is sputtering. Its recession was deAnd what had been seen by many in the U.S. as a model — a central bank that stuck to setting interest rates and a single regulator that oversaw banking, securities markets and insurance — is discredited. The rising Conservative Party wants to undo the structure built a decade ago by now-Prime Minister Gordon Brown and would fold financial supervision into the Bank of England.

The head of Britain’s Financial Services Authority says too much debt and too many transactions contributed to the U.S. economic collapse. WSJ economics editor David Wessel says Adair Turner’s ideas could prove a role model for others on financial regulation.

Lord Turner, 54 years old, a Cambridge-educated former Merrill Lynch executive and McKinsey consultant, didn’t arrive at the FSA until September 2008, well after FSA mistakes that contributed to the crisis. That liberates him to preach without first confessing sin, and preach he does. In a conversation in the London offices of the Climate Change Commission, which he also chairs, he was animated, even passionate, even though he had flown overnight from Washington. The word, according to Lord Turner:

One, finance got too big. “We must be more willing to ask…whether the financial system is delivering its vital economic functions as efficiently as possible, or whether parts of it can, and before the crisis did, swell beyond their economically efficient size,” he said in a recent speech. He clearly favors the latter view: There was more “clever finance” and more trading than desirable to keep the world economy humming. Hence his willingness to consider a global tax on financial transactions, to the horror of many of his peers and the banking establishment.

Two, there was too much debt in the system. “There is a huge bias in the tax system towards debt,” he said, largely because companies can deduct interest payments before computing taxable profits. “If we can’t change that, then the regulatory approach needs to lean against that.” Hence all the talk of reducing the leverage of financial firms. While U.S. and U.K. households and businesses did borrow more during the boom, the big run-up was in borrowing among financial firms matched by a huge increase in trading relative to the value of underlying economic activity, he observes. When bankers bellyache, he refers them to point one above.