Thursday, August 27, 2009

Britain's regulator calls much of City "socially useless"

Lord Turner, head of Britain's Financial Services Authority (FSA) has long been regarded as something of a lame duck: Private Eye calls it the "Fundamentally Supine Authority". For too long it has been seen as supporting the City of London - that state within a state - in its race to be lower than everyone else in terms of lax regulation and tolerance of criminality.

Now, in an interview in Prospect Magazine (not yet on the web) he has said the FSA should

"be very, very wary of seeing the competitiveness of London as a major aim."

And, The Guardian reported,

"Lord Turner described much of the City's activities as "socially useless" and questioned whether it has grown too large."

We have been saying this for years -- indeed this was one of our main themes since we launched, but the idea, it seems, is now becoming mainstream, and not only in Britain. Even a year ago, Ken Rogoff, former IMF chief economist, said the world was suffering from

"an excess supply of financial services"

and this was followed last May by an excellent column by Martin Wolf of the Financial Times, containing phrases such as

The UK has a strategic nightmare: it has a strong comparative advantage in the world’s most irresponsible industry
. . .
In the years leading up to the crisis, that influence was surely malign: the “light touch” approach led the way in a regulatory race to the bottom.
. . .
A recent report on the future of UK international financial services, produced by a group co-chaired by Sir Win Bischoff, former chairman of Citigroup, and Alistair Darling, chancellor of the exchequer, fails to provide such self-examination. This is partly because the committee consisted of the industry’s “great and good”. It is far more because Mr Darling had already decided that “financial services are critical to the UK’s future."

Could the tide be turning? We are sure that it will be, up to a point, but we should never underestimate the enormous stranglehold of power that the City of London and its secret guardian in the corridors of power - the Bank of England - have always held on the British state. This is absolutely no time for complacency, and Britain will need help from its foreign friends - with the judicious application of pressure - to help ordinary British people break this stranglehold.

What is to be done? Martin Wolf has one answer:

So how should one manage a sector that produces such “bads”? The answer is: in the same way as any polluting activity. One taxes it”.

And this, as it happens, is also what Lord Turner is now proposing - if a little timidly:

"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. Higher capital requirements against trading activities will be our most powerful tool to eliminate excessive activity and profits.

And if increased capital requirements are insufficient I am happy to consider taxes on financial transactions – Tobin taxes."

Now there is an idea. TJN is generally favourable towards Tobin taxes, although we haven't made it a central theme of ours, partly because others are already ably doing so. James Tobin's original and famous "sand in the wheels" article from 1978 is here, and it contains a number of things that could have been written by TJN, had it existed then. Such as:

"the mobility of financial capital limits viable differences among national interest rates and thus severely restricts the ability of central banks and governments to pursue monetary and fiscal policies appropriate to their internal economies. Likewise speculation on exchange rates, whether its consequences are vast shifts of official assets and debts or large movements of exchange rates themselves, have serious and frequently painful real internal economic consequences. Domestic policies are relatively powerless to escape them or offset them.
. . .
There are two ways to go. One is toward a common currency, common monetary and fiscal policy, and economic integration. The other is toward greater financial segmentation between nations or currency areas, permitting their central banks and governments greater autonomy in policies tailored to their specific economic institutions and objectives. The first direction, however appealing, is clearly not a viable option in the foreseeable future, i.e., the twentieth century. I therefore regretfully recommend the second, and my proposal is to throw some sand in the wheels of our excessively efficient international money markets.
. . .
The proposal is an internationally uniform tax on all spot conversions of one currency into another, proportional to the size of the transaction."

The Tobin tax is a currency tax, though the economist Dani Rodrik recently, commenting on Tobin's 1978 speech, added this:

"How about generalizing this idea to all securities transactions, domestic as well as international? If leverage--short-term debt--is a big part of the problem, isn't taxing it an important part of the solution?"

Now that makes sense. Hold on a second, however, for there are already nay-sayers about. The FT has this:

“This isn’t on the table,” said one government official. “If Adair Turner has views on tax policy, perhaps he should go and work in the Treasury.”

and The Guardian adds:

"Finance industry figures agreed that a Tobin tax would be complicated to implement and unlikely to be agreed by countries keen to protect rival financial centres."

Why can't these people see the obvious flaw in their own argument? The flaw is this: that they have a starting point that says that what is good for the financial services industry is good for Britain. As most people have come to realise, it isn't good for Britain. The result has been vast taxpayer losses, Dutch Disease effects, a drain of some of Britain's best minds into "socially useless" (though we'd prefer to say "socially desctructive") jobs, and almost the highest levels of inequality in the OECD.

Clearly the financial services industry - or at least one this size - isn't at all good for Britain. So a unilateral tax, without international agreement, is clearly a good idea. A properly implemented tax policy would flush all the dirty, dangerous and destabilising elements of financial services -- including much of the "casino part" - away from Britain, leaving it with the socially useful, mostly "utility" bits that everyone needs and benefits from.

International co-ordination on this would certainly be welcome, but we don't need to wait for it. Get cracking right away with regulating and taxing this sector appropriately, and Britain, on the whole, will be so much the better for it.

* * * And finally - some comments under the Guardian article -- which we love:

1. "If you will permit me to speak frankly, the answer to the question "why does a financial exec pay himself so much?" is the same answer to the question "why does a dog lick its private parts?" Because it can."

2. Responding to a comment that "The big winners from this will be Swiss, German and Dutch bankers." Which is very different, of course, from claiming that the big winners from this tax will be the Swiss, the Dutch and the Germans.

Quite so.


Blogger Physiocrat said...

The money appears to be made this way...

Shift it from A to B and it grows
Shift it from B to C and it grows again
Shift it from C back to A and it grows yet again.

Yet this money has not come from nowhere at all. This bubble-like growth consists of money, credit, foolishly created by bankers, for land purchase, on the security of land prices which have themselves been pumped up by lots of other people in this so-called "industry" playing the same game.

But land price is not the same thing as land value. The value of land is the rental stream it will yield. The price of land is what people will pay to get their hands on the rental stream, and as the bubble grew, the price became unrealistic in relation to those rental values. So by about 2006 the bubble was ready to implode.

It is not just house (the land on which houses stand) prices which bubbled. Much security trading is actually also trading on the land values which comprise a substantial proportion of their value - Tescos, for instance, is essentially a real-estate empire and much of its income is economic rent, plus a monopoly component squeezed out of its suppliers and customers. This income from securities consists, to a greater or less degree, or land rent and the price of securities is the capitalisation of that revenue stream.

You will not read any of this in standard economic textbooks or in the writings of those who have been brought up to think along standard lines, so the whole issue is misread and only the downstream phenomena are addressed, like the obscene pay enjoyed by the moneyshifters.

If the problem is to be addressed at source, one is forced to repeat the usual mantra - tax the rental value of land.

1:33 am  
Anonymous Adrian Wrigley said...

Henry is right. The private appropriation of land rent is the main "fuel" behind the finance sector's "profit". The problem is not the number or total value of transactions (which a Tobin Tax would seek to reduce), but the securitisation or hypothecation and distribution of land rents. Remove this "fuel" from the economy and the finance industry would shrink dramatically. The burden of the industry on the economy would be lifted and overall living standards would rise.

It's great to see influential people beginning to understand that the finance industry is largely parasitic on the real economy. But the deeper understanding is lacking. Don't be surprised if Tobin Taxes as proposed reduced the volume of transactions and the number of staff, but increased City pay (same rents, fewer staff, fewer transactions => bigger bonuses).

Henry neglected to mention the other key part of the story - the seignorage "profits" from a privatised money supply. The finance industry is the beneficiary of the issuance and control of money, via a state-backed currency and private cartel.

Perhaps TJN can explain how a Tobin Tax could help rein in The City, given that transactions are a cost to the finance industry, not the source of the industry bloat?

12:20 pm  

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