The Anfield legend and noted pundit told LFC Magazine that Liverpool's current policy is the only way a team with limited resources can compete with free-spending rivals.
"Critical to the improvement [at the club] has been Liverpool's transfer policy which has seen several young players with huge potential brought in, predominantly from other Premier League clubs," Hansen said.
He also noted that adding seasoned Premier League performers like Craig Bellamy, Charlie Adam and Jose Enrique have made an instant impact.
"There is no way that we, or any other club for that matter, can compete with Manchester City as far as transfer fees go. That leaves Liverpool with a question to answer. Do you sign what's left of the bigger named established players, or do you try and build a new team around youth?
"Liverpool have done the latter and that policy of buying younger players will, I believe, ultimately reap rewards and dividends, hopefully sooner rather than later."
In the year since Damien Comolli and Kenny Dalglish have been in charge of recruitment, LFC has spent nearly £120 million ($191 million) on new players. That has seen the club freshen the squad with talented players and much needed depth of quality.
Jordan Henderson, Andy Carroll and Sebastian Coates all moved to Anfield within the last 12 months and Hansen expects them to make an impact in 2012 and beyond. LFC is looking to develop them into stars, rather than purchasing established ones at the top end of the transfer market.
Arguably LFC's best-ever center back, Hansen played 13 years at Anfield, winning eight league titles and three European Cups.
Do You Agree That Liverpool's Transfer Policy Is Right for the Club?
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