We staggered back into NYC early this morning, cross-country road-trip completed. I’ll write something soon about the important things I learned sitting in a small-to-mid-sized SUV (we had a Mercury Mariner, then traded it in at the Moline Hertz for a Hyundai Santa Fe) for up to 14 hours a day. But for now, the first headline to catch my attention after I awoke had to do with Adair Turner, the head of the UK’s main financial regulator, proposing a global tax on financial transactions. The former Merrill Lynch vice chairman did this in a Q&A with Prospect Magazine that non-subscribers can only read the first few paragraphs of. The FT summed up the juicy bits:
Lord Turner appears worried about a return to “business as usual” in the banking sector, suggesting that new taxes may be necessary to curb excessive profits and pay in the financial sector.
“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,” he says.
Lord Turner says higher capital requirements will be the FSA’s main tool to eliminate excessive activity and profit, but that a tax on transactions on a global level may be an additional option.
This idea of a financial transaction tax is generally credited to the late Yale economist James Tobin, but it actually goes back farther than that. John Maynard Keynes suggested in his General Theory, U.S. Sen. Carter Glass pushed it in 1929, and it surely must have been in the air before then as well. More recently, Larry Summers briefly got interested in transaction taxes in the 1980s. And the Swedes actually implemented such a tax in 1984 but gave up in 1990 because it didn’t raise much money and drove transactions abroad.
As somebody who doesn’t believe that the nearly half-century-long trend toward lower transaction costs more-frequent trading and has left financial markets significantly more rational or efficient, I’m not unsympathetic to these efforts. But I really can’t see how a global transactions tax would have prevented or even substantially altered the trajectory of the financial crisis of the past couple of years. The problem wasn’t too-frequent trading, it was too-gullible (or too-greedy) buying of debt securities.
I think Adair Turner agrees with this—he says higher capital requirements are his top priority, after all. But then why even bring up the transaction tax? Maybe because he knew it would generate lots of headlines in the UK and European press.