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, 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?
LONDON, England - Wherever you live, there’s always a local oddity or two: uniquely strange driving habits on the roads, maybe, or fast-selling products whose actual use is obscure. Here in England, it’s the strange phenomenon of the fiver famine.
The fiver, let me explain, is our smallest banknote, both in size and value: the five pound note. You would have thought they’d be common – not exactly two-a-penny, but fairly easy to find.
Er … no. The fiver is a rare bird which only occasionally flits across one’s path in its gray-green plumage, whereas its plumper companion, the £10 note or tenner, a classic brown job, flies out of cash dispensers with great regularity.
And here’s the second oddity: when your patience pays off and you do track the rare fiver bird down, it’s usually in a sorry bedraggled state.
People here were quick to embrace credit cards and then debit cards, and the old-fashioned cheque is still around in the background, no doubt still recovering from the excitement of its 350th birthday party earlier this year.
But the shortage of handy fivers is a nuisance for people who are forced to use a lot of cash, like market traders and taxi drivers. I’m not saying they’d change a tenner for a fiver just to make life more convenient, but they dislike having to give their customers a clunking great pile of our weighty little £1 coins rather than a handy banknote.
Talk to the Bank of England or the Payments Council, which monitors all kinds of payment on behalf of retailers, and they look in all directions and usher you into a private room before revealing a dirty secret about us Brits: we abuse our banknotes.
I’m serious. Those big denominations get treated with respect, of course: the average £50 notes can look forward to a decade of pampered life, lovingly tucked into fat wallets or squirreled carefully away in safes. By contrast, a tenner might last only a year or two, while the unfortunate fiver is treated as small change and handled accordingly: scrumpled up into a ball, stuffed into pockets next to bunches of keys, put through the washing machine, and generally viewed with scant respect.
So as fast as the Bank of England issues nice fresh notes, they’re soon transformed into limp dog-eared little rags that are simply not crisp enough to put through the machinery that counts banknotes. That means they have to be weeded out, and banks generally prefer to save themselves the trouble and cost involved.
That means fivers aren’t available from cash dispensers (with exceptions; I was intrigued to be issued with £5 notes when withdrawing money on a recent visit to Liverpool). Given that nearly two-thirds of the cash withdrawn in the UK comes out of those holes in the wall, the result is a shortage.
Just to tighten the vicious circle, retailers generally don’t even bother to bank the fivers they accumulate. So even if the banks could put them into cash dispensers, they’d be short of them anyway.
So while it’s tempting to think that this is all down to the recession here and our wanting to spend less and take out smaller denomination banknotes, it’s really all about printing more of the kind of money we like to use most.
Now the retail banks and the Bank of England are working together to address that. For a couple of months now they have been running a pilot centred on Central and Southwest England.
It’s too early to say whether this will mean more fivers everywhere; I personally fear a lot of banknote printing machines will burn out as the Bank of England tries to cope with the fiver famine and the need to pump cash into the financial system.
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