Turner wants new powers to restrict lending in a boom
Adair Turner, the chairman of the Financial Services Authority, says that banks should be forced to rein in lending when there are signs that a market is overheating.
In an interview with me at the World Economic Forum in Davos, he threw his weight behind the creation of a new official body, which would have a mandate to assess whether financial bubbles are being created and would have powers to deter lending in those circumstances.
He used the example of the commercial property sector, which has crashed spectacularly over the past two years.
If in the future commercial property prices started to rise excessively fast, Lord Turner would want to see a new official body pushing up the cost for banks of lending to commercial property businesses and projects.
It would do this by obliging banks to hold much more capital relative to their property loans - which would have the effect of making such loans more expensive to provide because capital is scarce and costly.
A similar approach could be applied to the mortgage market, if there were signs that house prices were rising too fast.
Lord Turner said that in the case of an overheating housing market a superior approach might be to force banks to reduce the amount they could lend relative to the value of individual houses.
Either way, he has come round to the idea that there must be much more direct intervention by the public sector in the provision of credit by banks, to prevent boom-and-bust cycles.
What he is describing is typically known as macro-prudential policy.
It is being explored by the Treasury and the Bank of England. But neither the Chancellor or the Governor have yet come out as decisively as Lord Turner in favour of such explicit interference in commercial lending.
Adair Turner favours the creation of a macro prudential committee that would sit somewhere between the Bank of England and the FSA. It would draw on the resources of both the FSA and the Bank.
As he admitted, in some ways he is advocating a return to the rationing of loans, which we haven't seen in the UK for some 30 years.