Lord Turner's mortgage shake-up: simple but appealing

Lord Turner made himself unpopular in the City with his last blast against "socially useless" activities. Tonight's speech will double the resentment. Turner's analysis was a point-by-point attack on core beliefs that many in the City have held dear for a couple of decades. For past 20 years, the financial services industry has championed the notion that more liquidity – in other words, more trading – is necessarily a good thing. You might have assumed this idea would die with a banking crisis that revealed credit derivatives, securitisation and other financial "innovations" to be at its rotten heart. But no: belief that liquidity delivers only beneficial outcomes is alive and kicking. It's not hard to guess why: investment bankers are paid to conduct transactions and new products give them more things to sell. So when Turner cites Keynes to criticise "the fetish of liquidity" he is attacking something fundamental. He's right to do so. While everyone can agree that a well-functioning, liquid foreign exchange market is essential to serve the needs of exporters, it is impossible to mount a similar defence for many structured finance products. These simply became a means to disguise risk, increase leverage and create an asset bubble in the property market. They opened the door to irresponsible lending. That's the theoretical backdrop for Turner's radical idea for shaking up the mortgage market by placing limits on borrowing. The appeal is the simplicity. It becomes much harder for the financial system to create a damaging property bubble if the only people buying houses (or borrowing against the value of bricks and mortar) are those best-equipped to cope with falls in prices. Turner's thoughts were sketchy. He didn't say where he would set loan-to-value ratios or income multiples. He didn't say how these would be adjusted across the economic cycle. Nor did he say if lower-income households, deprived of the chance to take an easy step onto "the property ladder", should be given tax breaks to encourage saving. But at least he has provoked a debate. We should be grateful that he has, in effect, also acknowledged that simply forcing banks to hold more capital won't eliminate the problem of irresponsible lending. Going back to basics – and looking at straightforward issues like loan-to-value ratios – seems a good place to start the process of reform.