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Speaking today (30 November), Lord Turner said assumptions on complex financial vehicles such as credit default swap (CDS) spreads had provided "no forewarning of the crisis" highlighting the failure of market prices to demonstrate risk.

Lord Turner said: "In the aftermath of the crisis, we must therefore be willing to challenge two assumptions: First, that all markets are by definition self-correcting and in some sense rational; and second, that financial innovation resulting from market competition is by definition useful."

The FSA chairman said capital and liquidity regulation reforms for banks would act as a "shock absorber", cutting "too big to fail" banks down to size and reform of over-the-counter derivatives market were needed.

Lord Turner said direct regulation of bonuses, higher capital requirements, and financial transaction taxes were all measures that could be considered.

He said questions on the function finance performs in the economy, optimal levels of leverage and trading activity, could no longer be ignored.

"These are questions we used to avoid, because a dominant ideology said that they were invalid or irrelevant, with the level of leverage and the scale of trading activity axiomatically optimal because chosen by free markets," he said.

"In the face of this financial crisis, we can no longer avoid them."