Is a 'Tobin tax' the answer to City excess?
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Associate Editor
David Stevenson Sep 04, 2009
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Turner: City is 'socially useless'
All praise to Lord Turner, the chairman of the Financial Services Authority, who admitted last week that much of what happens in the City is "socially useless", says Iain MacWhirter in the Sunday Herald. Turner's calls in Prospect magazine for a reduction in the size of the financial sector, and for steps to eliminate high-risk practices, "are radical and right. If capitalism is to be saved from itself, it should listen – not that it is."
Indeed, Lord Turner has been kicked all round the City by angry bankers and politicians. The London mayor, Boris Johnson, said Turner was "crackers" for risking the City of London's standing as Europe's leading financial centre, while the Association of British Insurers described his remarks as "Marxist". "It's a race to see who will sack him first," says Simon Gleeson of City law firm Clifford Chance.
What's really stirred up the bankers is Turner's talk of a 'Tobin tax'. This "neglected brainchild of American economist James Tobin was simple", says Larry Elliott in The Guardian. The idea was to impose "a tax on foreign currency transactions that would allow national governments to stop their economies being at the mercy of speculators". Yet Turner seems to throw the net wider, saying that if you want to stop excessive pay in the financial sector, you have to shrink the sector, or apply special taxes to pre-remuneration profit – a Tobin tax on all financial transactions, not just currency deals. The time is ripe, says Elliott, for such a move to "become a practical policy proposition".
Nonsense, says Jeremy Warner in The Daily Telegraph. The X Factor serves no useful social purpose. Should it too "be taxed to destruction in the supposed interests of wider economic prosperity"? As Turner himself admitted, the Tobin tax is "a somewhat utopian concept", which would "crucify the City… unless done on an international basis".
All this "silly talk about the size of the City" distracts from the two real issues that must be dealt with, former editor of The Economist Bill Emmott tells The Times. Firstly, rescue measures used by governments have stored up trouble – if banks thought their business was a one-way bet before, that risk has "multiplied many times over". The authorities "have deferred talk of tighter regulation or bigger capital requirements for fear of deterring banks from lending money... This mustn't be deferred for much longer."
Secondly, pre-crisis, banks hid their riskiest ventures "off balance sheet" when they could, so "no one knew where the risks lay, nor how large they were". So the financial system must become more transparent. That requires international agreement – if just one big financial centre enforces transparency and higher capital requirements, then "the business will simply move to the ones that don't".
"Now the banks are returning to profit, many in the City would like to return to the status quo ante. Let's be clear: this would be unacceptable," says the Financial Times. But the goal shouldn't be "vindictively" to restrict their size or profitability. "It should be to prevent growth if it occurs in ways that rely on implicit public guarantees. Rewards should accrue only to people who take risk on their own account." In short, the government must take steps to create "a genuinely private financial system".
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