August 27th, 2009
04:14 PM GMT
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LONDON, England – On a quiet summer day in August, when many in London's financial district are away, or wishing they were away, comes a lightning bolt from the head of the Financial Services Authority.

Adair Turner proposes the idea of a special tax on financial transactions.
Adair Turner proposes the idea of a special tax on financial transactions.

Adair Turner, the man in charge of regulating the City of London, has said that some parts of the financial sector have grown "beyond a socially reasonable size," and some of what it does as "socially useless activity."

In short he thinks financial services account for too much of Britain's output, robbing other sectors of some of the best and brightest.

To underscore his point, he looks at what “percentage of highly intelligent people from our best universities went into financial services." And then goes to say, "Unless you've got a theory that explains why financial intermediation suddenly needs all this extra resource, there is something of a conundrum. Is it really the case that financial intermediation today is a more complex thing that a decade or two back?”

He proposes the idea of a special tax on financial transactions.

His is not a new idea.

Originally, an economist named James Tobin suggested a special tax on foreign currency transactions to curb speculation. Then in 2005, then president of France, Jacques Chirac, placed a "Tobin tax" on financial transactions to deal with what he perceived to be the excesses of "liberal globalization."

"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit," Turner said.

It's clear that freewheeling capitalism didn't work, that policymakers need to devise ways to curb excessive risk taking. Higher capital requirements should be the first line of defense.

Unsurprisingly, Turner's possible solution and open questioning of whether the financial district is too large, is already provoking sharp debate and response. He even went so far as too suggest that London's competitive advantage as one of the world's premier financial hubs shouldn't be defended at any cost.

The head of the British Bankers Association Angela Knight, did not mince words in response. "I think that if we say we do not want to have an international, competitive industry here, then we will do to financial services what we have done to manufacturing and engineering in the past and that is have it as a minor industry and lose it to others," she said.

I agree with Knight.

Yes, there have been excesses and recklessness in the financial sector that will take decades to unwind, including eye-popping amounts of money bailing out a financial system that could have been put to much more productive use.

But haven't they acknowledged the excesses? Let's not further undermine an economy already on its knees by making it less competitive and attractive. Let's first start with better supervision.

Do you agree there should be global taxes on financial transactions as a way of curbing excesses? Would such taxes be effective?



soundoff (20 Responses)
  1. Munjal Kamdar

    I agree with Adair Turner.

    Let's look at the basic business of stock picks itself. The person who spots the right stock (say a Warren Buffett) ends up making more money than the person who made the stock great (say a Jacl Welch). What sort of fairness is that in the first place? Moreover what we are witnessing is a much more complicated version of what I state above wherein the likes of Goldman Sachs and Citadel Capital have worked on trading engines that make money by merely executing trades a few milliseconds ahead of other engines! Where is the social productivity in these activities? To top it all such executives look to the government for a bail out when they make losses!

    August 27, 2009 at 7:17 pm |
  2. Brett S

    How many more times will we allow the financial centers to wreck the world economy. The dot com stock burst, oil speculation, mortgage derivatives, etc. The financial industry is always there to use that irrational exuberance of the masses to make massive short term profits at the cost of long term economic stability.

    August 27, 2009 at 7:57 pm |
  3. Luke

    Trading shares makes sense to a large degree. In fact it's certainly alot better than the property speculation that has bought on the current crisis and certainly in the UK left a very poor and very expensive housing stock. House prices are tied to earnings, shares can 'in theory' go up at above inflation (i.e. earnings) forever as companies expand. It's also good for the economy to invest in companies rather that dead estate.

    Currency speculation is the most stupid, $4 trillion a day is speculated. Betting against each other, at the end of each trading week the overall balance is always $0 (minus commission). This speculation and dreams of free profits are what caused so many collaspes.

    August 27, 2009 at 8:10 pm |
  4. robert patel

    Hi Todd,
    Nobody wants to kill the goose that laid the golden eggs!!

    However,one can hardly wonder at the extremist reactions on part of various groups whose life savings/pensions,homes,jobs and health have been utterly destroyed.

    Our global banking industry can only expect responsible conduct from the general populace/governments if they themselves act responsibly.

    Undoubtedly,UK/global economy needs a strong,competetive and thriving financial sector;but this cannot be achieved by total abuse of venture/investment capital base and patent self-enrichment on part of some who clearly ignored/bypassed all legal/regulatory mechanisms
    and considered it as their birthright to acquire wealth at any cost.

    Afterall,how are our other industries able to be competetive and vibrant without destroying the very base which enables them to thrive?

    International banking has come pretty close to destroying the goose that laid the golden eggs for them for a long period and thereby dealt mortal blow to their very own existence;almost suicidal!

    August 27, 2009 at 10:02 pm |
  5. Chris

    This is perhaps one of the worst ideas I have ever heard. The financial markets have created more capital than about any other industry in modern history. This capital is what feeds other development throughout the world. It also disturbs me greatly that the government is going to decide what types of careers are "socially contributing" and what are not and than tax people based upon the "social usefulness". Seems like an extremely socialistic and omniscient role of government being advocated.

    August 27, 2009 at 10:08 pm |
  6. Per Holmlund

    30 years too late

    Instead of looking in the mirror and creating roles and regulations for a market that is history – the 1982 to 03-2000 market – politicians, intellectuals and idiots should concentrate on finding solutions’ to save the market during the next business cycle contraction.

    The history, a run away market, extreme leverage and zero interest money during 20 years. And now the politicians are going to wash there hands with a new Tax.

    Focus should be on how to create a positive return for the Aug 2009 – Aug 2019 period, not to cement the negative result for the Aug 1999 – Aug 2009 period by looking at/dreaming of the Aug 1979 – Aug 1999 period!
    Aug 2009 – Aug 2019 ????
    Aug 1999 – Aug 2009 Negative 20 %
    Aug 1989 – Aug 1999 Positive 300 %
    Aug 1979 – Aug 1989 Positive 200 %

    August 27, 2009 at 10:13 pm |
  7. aitorbk

    I really don't see capitalism in the current banking system. What I do see is mercantilism.. a different thing.

    If we were capitalists, many banks would have closed doors right now.. but they took the money when things looked right and also now.. against free competition, so we ha given a prize for the supposed losers.. and they gained advantage on the most correct banks.

    August 27, 2009 at 10:51 pm |
  8. Andreas

    "Socially useless"? Well, in that case, what about sports or art? What use are those really? A lot of human activity is seemingly without tangible benefit. If "socially useless" activities were frowned upon in the past, presumably we would have had no use for Shakespeare either.

    How about the government butting out? How would they know better what is socially useful? And furthermore, how about leaving it up to individuals what they want to do? I would like my children to choose their own careers without heavy-handed government interference, thank you very much.

    Regulation to decrease risk taking? Yes please. Regulation to control what jobs are "socially useful"? No thank you very much.

    August 28, 2009 at 12:38 am |
  9. DESH BHUSHAN JAIN

    Doing away linkage to real currency–Gold in 1971 has brought present financial catastophy.USA can produce trillions of usd curency on computers and give to its banks to do curency/stock trades–and big gains are shared.
    Small investors out of their casino mentality,gets sucked in.
    Like casino can not be closed so also currency trades worth 6 trillion usd can not be done awy with until we rein in money printing/creation
    by USA.
    can any one file a public interest litigation/class action suit in some international court for the blatant racket being run by financial sectors in USA/UK etc

    August 28, 2009 at 2:24 am |
  10. pete

    The financial markets are the main agents that created the current economic debacle, of which we may have not seen the end yet.
    Unconstrained blind search for profits (in another age it was called greed) feeds back on itself until something gives. Guess what, all of a sudden the public is called to "save" the ruined gamblers in a most "socialist" manner. Myself I feel tired and disgusted with this whole bad comedy in the name of "free markets", mysterious "invisible hands" that never show up and sheer raw repulsive greed. I say tax them. Tax them HARD.

    August 28, 2009 at 2:26 am |
  11. peter from Australia

    Yes – Sooner than later!

    August 28, 2009 at 3:30 am |
  12. Robert Lomax

    The reason the finance sector needs the brightest people is that they need to be smarter than their customers and their regulators (and they are!). Otherwise how could they create an oligopoly that controls the financial spigot, and acts like reckless capitalists when times are good, but switches to socialism when times are bad, then back to capitalism again once the taxpayers picks up their bills for them? And their genius at work? Smoke and mirrors. It is possible to make millions in the finance industry simply by answering the phone when the right calls comes in, sometimes. I know, I worked there.

    August 28, 2009 at 3:49 am |
  13. NW from Switzerland

    Communism did'nt work so the people got rid of it. It now seems like capitalism as it is practiced in the current form does not work either-no use arguing over it, it's a fact! Those who continue to insist that the current system needs to be defended are perhaps doing so due to narrow self-interest or due to being brainwashed into believing what they are told in high school about capitalism being the only true path. As far as the financial sector is concerned, I do agree with Mr. Turner to a great extent. It is not really producing anything substantial. It is simply a form of gambling, albeit couched in fancy jargon in order to hide its true nature.
    As one of my friends who is pretty high up in the financial sector once told me, we just move money around from here to there and along the way its value goes up or down depending how smart/lucky you are. He eventually got tired of the pointlessness of it all and is not doing something more productive. Some people in the industry are smart and knew the folly of being so highly leveraged. But, but greed and peer/client-pressure prevented them calling a halt to it.

    August 28, 2009 at 6:08 am |
  14. Sandy Walker

    Financial sector executives have fallen into the trap of believing their own b******t.
    They assume that the obscene remuneration of the past is theirs by right, regardless of performance of the assets for which they are responsible..
    It's time to issue hunting licences on them, to seek out those who were in charge of the organisations reponsible for the savaging of superannuation and pension savings, and distrain upon all their assets ( personal and family) as repayment. Let's put them out on the street to see how they like it.

    August 28, 2009 at 7:02 am |
  15. Tim Clarke

    Sauce for the goose is sauce for the gander! He might as well say "some parts of the political sector have grown “beyond a socially reasonable size,” and some of what it does is “socially useless activity.”; or even the regulatory sector, or the civil service. All one needs to do is point to their expenses, or index linked pensions and the arguments go on and on.

    August 29, 2009 at 9:45 am |
  16. Darby Fletcher

    Of course there needs to be greater control of the financial sector, to generate more responsible behavior. When the motives of greed and near-sighted profits dominate, then all others loose. The run-up to the "crisis" was a predictable and inevitable spiral, an ever-escalating feeding frenzy, which cannot be permitted to repeat. The only historically valid mechanisms to control this cyclic phenomenon are fiscal accountability and responsible regulation. But the recent massive financial bailouts have effectively eliminate the concept of fiscal accountability; the lesson there is "go ahead, and when the bubble bursts the taxpayers will bail us out". And so we are left only with the alternative of regulation to prevent the next cycle of runaway greed.

    But the failure here is not just the "financial sector", rather it is all of us. We have no right to impose the burden of bailouts upon our children and grandchildren; we are shamelessly transferring the cost of our failures to them via the horrific long-term public debt which they must now assume. Shame on us all. And please proceed with responsible regulation now.

    August 29, 2009 at 4:10 pm |
  17. C P Madhusudan

    We need to understand the difference between real wealth creation and speculative wealth creation. The financial services industry has become addicted to gambling with other people's hard earned money and skimming the cream off. Therefore It has become necessary to tax excessive speculation and risk taking with other people's money.

    August 31, 2009 at 7:49 am |
  18. Andreas, Stockholm

    The financial sector as a whole has in my opinion outgrown itself. Although it may seem politically correct at this time to try to reign in some of the excesses I believe this will with time self regulate. People like myself are disgusted by the behavior of some banks and their apparent lack of understanding of the general public sentiment. I no longer trust nor listen to banks and I will do whatever it takes to stay away from them. I believe that new company structures will emerge out of this that do not rely on speculation driven stock markets. Instead these companies will issue bonds and return to good old fashion organic growth – healthier in my view. If you look at IKEA they are a prime example of how a company can be very successful without being publicly traded – others will follow, I hope.

    September 4, 2009 at 7:29 am |
  19. Peter Kramer

    If we get the entire G20 to accept the same anti-financial-crisis rules, then these rules can be very strict without pushing anybody away to other G20 countries. The financial crisis affects us all, perhaps we can also resolve it together.

    September 9, 2009 at 3:40 pm |
  20. harry

    Together (the G20) countries we can defeat the financial crisis
    and reverse the financial downtrend.
    http://www.american-schools.net

    May 17, 2010 at 11:02 pm |

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