From the Tobin tax to Buiteruptcy

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Economist Willem Buiter has a reaction similar to mine to UK financial regulator Adair Turner’s suggestion that maybe we need a “Tobin tax” on financial transactions to shrink the financial sector down to size:

What problem would a Tobin tax on financial transactions solve? Lord Turner asserts, in an interview with Prospect magazine, that the UK financial sector has grown too big; that some financial sector activity is worthless from a social perspective; that the sector is destabilising the British economy; and that new taxes may be required to curb excessive profits and pay in the 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. Even if all these assertions are correct, they do not imply the need for a Tobin tax.

To be fair, Turner didn’t seem to be saying a Tobin tax was the ticket, just that it ought to be one of the remedies considered. But the media (myself included) picked up on the Tobin reference and ignored most of the other things Turner said because James Tobin remains, seven years after his death, so sexxxxy. (Did you know that there’s a character in The Caine Mutiny based on him? I’m afraid I don’t know which one. I’ve never read the book and never watched more than half the movie.)

So what is Buiter’s alternative remedy?

The financial sector is too big throughout the overdeveloped world in part because much of it enjoys a free state guarantee against default on its unsecured debt. … The solution is clear, and it is not a tax on financial transactions: bring default risk back into the calculations of unsecured creditors and other counterparties of the financial sector. This would eliminate the capital subsidy to the industry. The obvious way to do this is through the creation of a “special resolution regime” as an alternative to bankruptcy for all systemically important financial institutions.

Hmmm. Creating such a resolution regime actually is a priority of Tim Geithner & Co.—or at least was; sure haven’t heard much about it lately. But it needs a better name. Can we call it the Tobin regime? Or how about Buiteruptcy?

Update: Dean Baker thinks a financial transactions tax (FTT) would be swell (via Mark Thoma):

A FTT can allow us to raise more than $100 billion annually to finance health care or any other budget item that we consider important. It does so in a way that is very progressive and will weaken the financial industry both economically and politically.