Lord Turner's speech at the 14th CD Deshmukh Memorial Lecture in Mumbai examines the costs and benefits of financial liberalisation. The concluding section highlights the practical problems facing policy makers:
Well developed corporate bond markets which enable non-bank debt finance to flow in a simple transparent form to corporate borrowers and can play a major beneficial role in financing investment. And competition in basic banking services, including competition by global banks with transferable skills and willing to make long term commitment to a country is likely to prove a beneficial form of liberalisation.
But we cannot extrapolate from the beneficial impact of financial deepening and sophistication up to a point, and assume that still more financial deepening, innovation and complexity is limitlessly beneficial. That if a good basic banking system benefits a country so too does ever more active trading in all categories of derivative. And it is possible that beyond some point, increased financial intensity, measured by the many sorts of indicators which I considered earlier, may cease to deliver positive benefits or indeed have negative effects.
We do not know for sure and the truth is likely to differ between different markets. The problem for regulators and central bankers is that this conclusion does not provide us with nice easy answers on which to base policy. It might be optimal simultaneously to seek to make one market (say spot equities) more liquid and more efficient in a technical sense, while in another market (eg, complex bi-lateral CDS contracts) to be indifferent if capital requirements and collateral management rules result in the market dwindling in size. Such a complex conclusion will make many people uneasy. It is much easier to proceed in life on the basis of a clearly defined and simple credo which provides the answer to all specific issues. But it is more likely to produce good results if we live in the real world of complex trade-offs and of relationships which are true up to a point.