Stephen Nickell
Economist James Tobin first proposed a tax on cross-border currency transactions in the 1970s. The financial crisis has revived the idea of a “Tobin tax” and it was endorsed by Adair Turner, chairman of the Financial Services Authority, in Prospect’s September issue.
A Tobin tax would need to be applied more widely than merely on currency transactions, which could be easily disguised in derivatives trading. A recent study by the Austrian government estimated that a 0.05 per cent Tobin tax imposed on all financial trades in Britain would raise £100bn a year—even assuming a two-thirds drop in transactions. This is an enormous sum, more than 6 per cent of GDP.
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Jonathan Wolff
In Prospect’s September cover story Adair Turner worried that the City engages in “socially useless activity.” He is by no means the first. In 1845 Friedrich Engels asked the workers of Elberfeld in Germany to consider “how many speculating, swindling superfluous middlemen have now forced themselves in between the producer and the consumer.” Discussing a bale of cotton travelling from America to Germany, he attacked the “exporters, commission agents, forwarding agents, wholesalers and retailers who actually contribute nothing to the commodity itself.”
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Prospect
Above: A workman mows the roof of a building near Torshavn, capital of the Faroe Islands. Grass roofs have been a feature of the islands since the Viking age
BRITAIN
Britain lectures America on climate change 101
The Copenhagen climate conference kicks off on 7th December, and the Brits are already limbering up. In August climate change minister and possible future Labour leader “Red Ed” Miliband launched edspledge.com, a website to “campaign for a deal.” What are your priorities, asks Ed in an online quiz, where one option—“the PM attending Copenhagen to help deliver a deal”—sets a worryingly low bar for success. But Ed’s efforts seem a model of sanity next to his department’s latest exercise in soft power: the “100 Voices, 100 Days” campaign. Run from the British embassy in Washington, this plans to win over sceptical Americans in the run-up to Copenhagen by posting an online video every day from a different climate change evangelist.
The wheeze, unveiled to sceptical American journalists in September, led some to worry that such British meddling will backfire as badly as the Guardian’s legendary “operation Clarke county,” which pushed lefty Brits to advise rural Americans during the 2004 presidential election, with predictably poor results. Introducing the latest drive, Miliband said he hoped “that Americans from every corner of the country” would contribute, but there is little sign of this: most videos are filled with dutiful speeches by professional lobbyists.
The next Adair Turner
Adair Turner certainly shook things up with his comments in September’s Prospect, but this is unlikely to prevent his job being taken (in the event of a Tory victory) by James Sassoon—team Cameron’s main man on the City, and the brain behind George Osborne’s plan to redesign City regulation. The 53-year-old Sassoon was previously Gordon Brown’s envoy to the square mile, having left a senior banking post to take the main financial regulation job at the treasury in 2002. Like another Labour-to-Tory turncoat—David Freud—he had a glittering career at Warburg’s as a young man, where he was so thin and ascetic he was known as “swipe” (as in card). Colleagues remember him as “intensely political”—and he certainly seems to know when to jump ship.
Will Nesta burn on the bonfire of the quangos?
With Cameroons desperately seeking possible cuts, the juicy £300m lottery-funded endowment enjoyed by the National Endowment for Science, Technology and the Arts (Nesta) is ripe for a credit crunch culling—especially given the vagaries of its remit. Can Nesta escape the chop? CEO Jonathan Kestenbaum has certainly been behaving like a hunted man, cozying up to team Cameron—a bit awkward given his previous role as a prominent backer of David Miliband’s abortive 2008 Labour leadership bid. Rounds of lunches with senior Tories were followed in August by his hiring of “red Tory” (and noted medieval theologian) Phillip Blond, to advise on innovation policy. Now Nesta are laying on five events at October’s Tory conference (against just two for Labour and one for the Lib Dems). The coming quango cull will certainly be bloody, judging by a recent Institute of Directors report demanding savings of £818m by scrapping a dozen public bodies, including the Welsh Channel 4. Yet Nesta was oddly absent from the list. Might Kestenbaum’s frantic schmoozing save his skin after all?
INTERNATIONAL
A hard cell for Georgia’s hard done by opposition
Since Georgia won its post-Soviet independence, all of its presidents have been removed, at least in part, by street protests. This is a fate current leader Mikheil Saakashvili is determined to avoid—earlier this year he sent in riot police to make arrests and beat back the crowds during long, occasionally violent street protests.
The opposition responded by erecting fake prison cells in protest, denoting their imprisonment by Saakashvili’s despotism. Only one remains, sitting in a small television studio. Since January it has been occupied by a man who to many has become a patriotic icon: rapper and poet Giorgi “Gia”Gachechiladze, who has vowed to sit it out (with a few breaks) till Saakashvili goes.
As Gachechiladze, whose brother stood in the 2008 presidential elections, recently told Prospect, massive fraud had thwarted his brother‘s campaign, while Saakashvili’s “fascist” state runs on torture and corruption. Listless and chain smoking after months in self-enforced captivity, he has nevertheless gained a huge following, largely thanks to his rambling nightly talk-cum-reality show, where he invites guests to drop by the studio and curse the government. It’s a strangely appropriate brand of opposition for this dismembered, intensely theatrical nation.
A season of mourning for European thought
The last 18 months have been a bad time for Europe’s elder statesmen of the mind, with the deaths of Polish historian and politician Bronislaw Geremek, critic and historian of ideas Leszek Kolakowski (also Polish), and the German-British social theorist Ralf Dahrendorf. Now Canadian political philosopher GA Cohen has been added to the sad toll, passing away on 5th August, aged 68. Cohen was an influential Marxist theorist with a talent for eye catching arguments, most obvious in his 2000 book If you’re an egalitarian, how come you’re so rich? Yet beyond the expected obituaries his passing has been little noted—similarly (in Britain at least) with Geremek, Kolakowski and Dahrendorf. The intellectual world in which they moved has, it seems, slipped from public view. Their ideas will not fade so easily.
SPORT
All set for a Rio Olympics?
Aside from an unsavoury track record on human rights, what do Prince Nawaf of Saudi Arabia, Fifa President Sepp Blatter, former King Constantine of Greece and Henry Kissinger have in common? All four, writes David Goldblatt, will vote at the International Olympic Committee’s congress in Copenhagen on 2nd October, where the 2016 hosts will be decided. Rio de Janeiro, Chicago, Tokyo and Madrid remain in the running. Madrid’s pitch is competent but cheesy (their slogan: “hola everybody”). After London in 2012, however, another European city is unlikely. Tokyo promises a low-carbon event—but its residents are so unenthusiastic that their bid is probably a non-starter. Chicago has made a still stronger green case, but the US government won’t underwrite the games, and the city’s finances look shaky. Rio, then, is the late favourite. South America has never hosted the games, while public and government support seem strong. But the Brazilian claim that their Olympics will be a “catalyst for social integration” looks far fetched coming from a society where inequality is among the highest in the world. And even if such egalitarian claims were true, the IOC’s electorate of minor royals, retired sportsmen, alleged war criminals and cosseted international bureaucrats seems poorly placed to judge.
Richard Haass and the geopolitics of golf
2008’s brief war between Russia and Georgia finally disproved Thomas Friedman’s “golden arches” theory of international conflict—that no two countries with a McDonalds have ever gone to war. Thankfully, Richard Haass, president of the Council on Foreign Relations, has now moved to fill the gap in geopolitics-cum-leisure theorising with a successor hypothesis: the “fairway theory of history.” Countries with many golf courses, Haass noted in Newsweek, tend to be friendlier towards America than those without. Just look at Vietnam, whose animosity towards the US has melted in recent years in parallel with the development of the luxurious Ho Chi Minh Golf Trail courses and resorts. Venezuela, by contrast, has closed several courses, with Hugo Chávez even condemning golf as “bourgeois.” Naturally, relations with America have suffered. Perhaps Obama should look into creating a special envoy for the game?
Prospect
Adair Turner: stop blaming bankers
The art of the nappy
31st August 2009
Sam Leith’s amusing piece on the cultural penumbra of nappies (September) is essentially about the confusion generated in people’s minds—including, it seems, his own—by the use of the kinderschema. This is the phenomenon where the appearance of infant humans, indeed all mammals, differs from that of adults: bigger head relative to body, chubby roundedness, less protruding (snub) nose, large eyes, small mouth and so on. It gets the “ah how cute” reaction from adults and, most importantly, elicits caring. It has been used by makers of films, books, toys, clothes and nappies to appeal to adults by drawing a similar response to the product as to the children themselves. From Disney to the Teletubbies, the kinderschema has been exploited to say: this is cute and suitable for children, watch me, buy me.
John Richer
Children’s Hospital, Oxford
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Adair Turner 1
7th September 2009
Adair Turner (September) suggests that bad remuneration policies encouraged excessive risk taking among bankers, even though he admits that the same policies wiped out fortunes in bank stock held by bank employees. He brushes away this contradiction by claiming that bankers took “irrational” risks, and argues for higher capital requirements as a check against them doing so in the future.
Yet capital requirements may have actually caused the crisis. From 2001, US banks were required to hold 60 per cent more capital against a mortgage than against a mortgage-backed security rated AA or AAA. This encouraged banks to buy these securities—arguably the root of the problem. But 81 per cent of the securities bought were rated AAA, meaning that they were less risky and less lucrative than AA-rated securities. It would appear, then, that bankers did not knowingly, and thus “irrationally,” embrace risk in pursuit of higher remuneration. Rather, they mistakenly believed that triple-A bonds were virtually risk free—as did the regulators whose rules privileged such bonds.
Jeffrey Friedman
University of Texas, Austin
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Tom Chatfield
"I do not apologise for being correctly quoted"
Speaking at the City Banquet at Mansion House yesterday, FSA chief Adair Turner reflected on his interview last month with Prospect in robust terms, declaring that “I do not apologise for being correctly quoted as saying that while the financial services industry performs many economically vital functions, and will continue to play a large and important role in London’s economy, some financial activities which proliferated over the last ten years were ‘socially useless’, and some parts of the system were swollen beyond their optimal size.”
You can read the full text of his speech online here, and it comes highly recommended as both a summary of Turner’s position and as a riposte to his critics’ suggestions that the social usefulness of economic activities cannot be judged. Such judgements must be made, argues Turner—and this includes a recognition that it is the services banks provide to their customers rather than the money they can make for themselves that are the fundamental justifications for their existence. As Turner puts it: Read more »
Brian Semple
Will Sarkozy convince fellow leaders to adopt a Tobin tax?
It appears that Nicolas Sarkozy has taken a leaf out of Prospect’s book. Following last month’s interview with FSA chief Adair Turner, in which he described the City as “socially useless” and called for the introduction of a Tobin tax, there are now reports that Nicolas Sarkozy will urge fellow world leaders at next month’s G20 meeting in Paris to consider a Tobin tax on all financial transactions.
Speaking exclusively to Prospect for the September issue, Turner argued that reforms in the financial sector should be focused on excessive profits rather than excessive bonuses:
“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, after the economist James Tobin. Such taxes have long been the dream of the development economists and those who care about climate change—a nice sensible revenue source for funding global public goods. The problem is that getting global agreement will be very difficult…”
Indeed, while French foreign minister Bernard Kouchner has claimed that David Miliband is similarly in favour of a tax, it seems that others are less enthusiastic: Gordon Brown and Angela Merkel have voiced concerns about its practicality, and senior EU officials have described chances of international co-operation as “less than minimal.”
So can Turner’s idea work, or will reaching global agreement on this prove impossible? Read the interview and let us know your thoughts here.
Elizabeth Kirkwood
Warning signs: would increased regulation stifle or save the banks?
Following headlines over the past week about FSA chief Adair Turner’s comments in Prospect magazine on the “swollen” financial sector and his calls for a Tobin tax, we’ve gathered a diverse selection of opinions from industry experts and commentators to argue about Turner’s ideas.
Robert Kuttner, editor of the American Prospect, argues that a Tobin tax may be the only answer for the Obama administration and that, while Wall Street will no doubt protest loudly, Obama’s chief advisers may well back the idea. Early in his career, Larry Summers, Obama’s economic policy chief, was a supporter of the Tobin tax, as evidenced by a 1989 paper he wrote entitled: “When Financial Markets Work too Well: a Cautious Case for a Securities Transaction Tax.”
In contrast, the British economist Tim Congdon deems a Tobin tax “national economic suicide,” and instead asks: “Are we the British supposed to be anxious or ashamed that at least one part of our country is so fantastically productive?”
He adds, “Given that Britain’s financial services sector is so heavily an exporter it is ludicrous for Adair Turner to allege that the sector has grown too much. How can any export industry be too large for the country that hosts it?”
UBS senior economic adviser George Magnus believes that a Tobin tax would only destroy financial activity, arguing instead that “governments should summon the political courage to break up the largest banks… with the express purpose of introducing more competition.”
Meanwhile the Times’s Oliver Kamm is in no doubt that while the financial system is “broken,” a Tobin tax is not the answer. “There is no patriotic imperative to defend British banking… But the activities of the banks are far from valueless. The shame is that awesomely incompetent bankers were at the helm.”
“Even if the main financial centres were to apply a tax consistently, what incentive would offshore tax havens have to follow suit?”
Exclusive online responses from Tim Congdon, George Magnus, Oliver Kamm and Robert Kuttner
David Goodhart
Turner: a deep thinker
Adair Turner has done public debate (and Prospect magazine) a big favour by spelling out carefully and coherently what many people have long felt intuitively about the British financial system. He may not be correct in everything he said (although he has been most commonly attacked for something he didn’t say: that the British authorities should unilaterally impose a Tobin tax, instead he specifically said that such a tax would require a global agreement). But he has helped to broaden and deepen a debate that had become ensnared on the narrower issue of bankers’ bonuses. The scale of the reaction to his comments caught us at Prospect, and probably Turner too, by surprise. I had certainly expected a few headlines on his Tobin tax comments but not a news deluge—perhaps it was down to a sense that this was a financial insider articulating the thoughts of many if not most people in Britain.
In any case, Turner has once again proved himself a very useful public intellectual and a good advertisement for both intellectual self-confidence (oh, that we had more politicians like him!) and the old mandarin generalist principle. The fact that he has seen the business and financial world from so many different perspectives—McKinsey man, banker, head of the CBI, chairman of the pension reform commission—gives extra weight to his words. He is also a real intellectual with a wide range of interests—see, for example, some of his Prospect essays on environmental issues and his brilliant polemic against the pessimism of John Gray. I have long been meaning to read his political economy magnum opus, Just Capital. I will now pull it down from the shelf and start.
George Magnus
Read our other exclusive online responses to Adair Turner from Tim Congdon, Oliver Kamm and Robert Kuttner
FSA chief Adair Turner’s willingness to consider taxes on financial transactions, or a Tobin tax, to rein in the financial services industry has provoked a furore.
Much of the debate has, naturally, surrounded pay and bonuses. But to focus on compensation is to miss the bigger picture about how to control credit booms and finance in the first place. Turner is well aware of this. When he referred to possible Tobin taxes, he did so before saying “if increased capital requirements” are insufficient. Moreover, his comments came in the context of a longer debate about the excessive growth and size of the financial sector in general. Put another way, regulatory reform is essential for a more stable and orderly financial system in which discipline is restored. And in finance, size really does matter—but I would argue that the size of financial entities is more important for stability, profits and compensation than the size of the financial sector in principle.
If a Tobin-type tax were introduced, where would the authorities apply it? On foreign exchange trades, credit derivative exposure, leveraged lending, or particular types of asset-backed products? It beggars belief to imagine that this would subdue the financial industry. Resources would simply be switched to non-taxed products and services, taxed activities that were profitable would be moved to other locations, and clients would probably end up paying the tax in some form. Ultimately, a tax would have no effect on the compensation structures and levels of financial companies unless it were sufficiently penal to distort and destroy bona fide financial activity. Nor would it act to suppress the ability of banks to take excessive short-term risks and profits, especially now that we have created banks that are too big to fail.
This lies at the heart of the issue. Banks need to earn their way back to financial health, albeit currently with the aid of unprecedented financial policy intervention by public authorities. But the management of the financial crisis has ended up with a financial system dominated by a few banking behemoths, the most successful or strongly supported of which are scooping up profitable business from weaker rivals. This concentration within the sector is occurring alongside the revival of practices that have raised eyebrows, for example, leveraged lending and more aggressive compensation programmes, including the use of bonus guarantees.
It is now imperative for the government to undertake two vital tasks. First, following most of what Turner had to say in the Prospect interview, regulatory reform has to be implemented sensibly but quickly. This includes the application of higher capital requirements, linked to the stage of the economic cycle, and risk and liquidity on banks’ balance sheets. Higher capital is a direct charge against aggregate bank profits, and a wholly prudent way of mitigating systemic risk.
Second, governments generally should summon the political courage to break up the largest banks, directly or otherwise, with the express purpose of introducing more competition. That way, super-normal profits will be reduced, compensation structures will have to be changed, and larger rewards will accrue only to the really successful over the longer term.
One can understand the thinking behind a Tobin tax to affect compensation and profits, but it wouldn’t work in an open economy—and it is no substitute at all for the more pressing and effective challenges of re-regulation and more competition. Coincidentally, this is the way things used to work once upon a time before the boom.
More debate on the Turner interview will be featured in the October issue of Prospect, published 24th September
Tim Congdon
Read our other exclusive online responses to Adair Turner from George Magnus, Oliver Kamm and Robert Kuttner
Judging by his comments in this month’s Prospect, FSA chief Adair Turner is worried that Britain’s financial sector is too large. In 2008 its financial services surplus was £40-£45 bn. Most of this activity occurred in London; a very high proportion within the Square Mile. But how can the financial sector be “too large” for us as a nation? The bulk of the value added reflected sales to other countries. In particular, fees, margins, spread profits and so on are received from large multinational companies, which need these services and find that London is the best place to get them. As far as the British are concerned the receipts are from foreigners and enable us to import on a similar scale. Given that Britain’s financial services sector is so great an exporter, it is ludicrous for Adair Turner to allege that the sector has grown too much. How can any export industry be too large for the country that hosts it?
Or is Turner claiming that Britain’s financial sector, and the City more specifically, is over-sized compared with world output? Well, with world output in 2008 at over £40,000bn, the Britain’s gross financial exports were about 0.1 per cent of the total. Yes, for just one Square Mile, that one-thousandth of world output is pretty impressive. But in what sense can 0.1 per cent of world output have been excessive? And are the British supposed to be anxious or ashamed that at least one part of our country is so fantastically productive?
Britain has been pre-eminent in a range of international financial services. These industries demand high levels of numeracy, skill and judgment, and are accordingly well-paid. As with all successful industries, some people have become very rich. Britain needs to specialise in areas like this if it is to remain a relatively wealthy society in the 21st century. For the chairman of the Financial Services Authority to chastise these industries—industries which produce net exports equal to about 3 per cent of our national output and are disproportionately heavy taxpayers—is appalling. For a top regulator to condemn the industries he is supposed to oversee would be bizarre in any circumstances, but in this case it also amounts to a form of national economic suicide.
More debate on the Turner interview will be featured in the October issue of Prospect, published 24th September
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