Taming the wild beast

August 29th, 2009

At last someone in a position of authority has spoken some sense about taming the wild beast of finance. In a round-table discussion with Prospect magazine, the FSA chairman Lord Adair Turner has questioned the “social usefulness” of much of what happens on Wall Street and in the City of London.

Turner said that a so-called Tobin Tax should be considered in order to tackle the world’s “swollen financial sector.” A global tax on transactions along these lines could be used to redistribute wealth to the world’s poor. Coming from the chairman of the main City regulator, the remarks are hugely to be welcomed.

Turner added that “there clearly are bits of the financial system, and particularly the bits that relate to fixed income securities, trading, derivatives, hedging, but possibly also aspects of the asset management industry and equity trading, which have grown beyond a socially-reasonable size.”

“If increased capital requirements are insufficient, I am happy to consider taxes on financial transactions,”  he added. “Such taxes have long been the dream of development economists and those who care about climate change — a nice sensible revenue source for funding global public goods.”

This is the first time that “Red Adair” has suggested a global tax on banking deals. The remarks follow his review of financial regulation published in March 2009 and a July government paper detailing how these plans might be put into practice. Turner’s earlier report covered the need for higher capital requirements and suggested a “tax on size” for banks deemed too big too fail.

In the Prospect interview, Turner went on to question whether it is appropriate for the FSA to have “maintaining the competitiveness of London as a financial centre” as one of its goals.

“It’s clear to me that the FSA has to be very, very wary of seeing the competitiveness of London as a major aim, and that’s not a popular thing to say because it has been defined as an aim,” Turner said.  The obvious danger, of course, was the FSA and UK government used the promise of lax regulation to lure in dodgy bankers and amoral dealers from all over the world.

It is little wonder that US finance houses have in recent years referred to London as “Guantanamo Bay” — they it was the offshore centre where they could get away with stuff that would never be permitted by the SEC and Federal Reserve back home.

Unsurprisingly Turner’s remarks have prompted a furious backlash from City types. Angela Knight at the British Bankers Association is typical of the chorus of disapproval. She complained that Turner’s proposals and other reforms may threaten the City of London’s very future. Que? I thought it had already threatened its own future with its lack of morals and devil-may-care obsession with the fast buck.

James Tobin, who died in 2002, won the Nobel Prize for economics in 1981 for his work on financial markets. In 1971 he proposed a tax on currency trading to deter speculation in the wake of the collapse of the Bretton Woods system of pegging currencies. Would that he had been listened to then!

• The original article How to tame global finance, published in Prospect magazine, August 27th, 2009

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Posted by Ian Fraser on Aug 29 2009. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry