Bankers have been awesomely incompetent and the financial system is broken. But a Tobin tax is not the answerby Oliver Kamm / September 2, 2009 / Leave a comment
Published in September 2009 issue of Prospect Magazine
Lord Turner’s comments in this month’s Prospect are not “crackers” (in the pregnant phrase of Boris Johnson). The FSA chairman makes weighty criticisms about the role of finance in the wider economy. But he is wrong in his diagnosis of the problem and his recommendations on how to fix it.
Competitive markets work best. A complex economy comprises the decisions of innumerable buyers, sellers, consumers, investors, borrowers and lenders. No central authority can anticipate all these decisions, which is why planned economies are inefficient. In a market economy, shifts in relative prices of goods, services and inputs are an efficient signaling mechanism. But finance is an exceptional case. Asset prices are not set in the same way: they reflect estimates about the future, and specifically the future cash flows that an investor will receive. Notoriously, asset prices are prone to overshoot, in both directions.
A large part of the financial history of this decade is a massive boom and bust in house prices, driven by an expansion of credit—and many commentators mistakenly assume that the financial crisis is about the first of these when i…