Reshaping financial sector DNA
Posted by ecoshift on September 1, 2009
FT.com / Columnists / GillianTett –
Could ‘Tobin tax’ reshape financial sector DNA?
Some three decades ago, James Tobin, the economist, first proposed introducing a tax on financial transactions to deter short-term currency speculation.
Few policymakers have dared air that idea in the intervening years, since it seemed wildly unfashionable. But earlier this month Adair Turner, the chairman of the Financial Services Authority, participated in a round table organised by Prospect magazine and suggested a new debate about the old “Tobin” idea.
Unsurprisingly, this has grabbed attention, particularly in a quiet August. However, the really interesting thing about Lord Turner’s suggestion is the wider intellectual impetus behind it. For, as the FSA chairman surveys the financial crisis, he is increasingly convinced that western policymakers are at a crucial intellectual watershed.
In recent years, he argues, “the whole efficient market theory, Washington consensus, free market deregulation system” was so dominant that it was somewhat like a “religion”. This gave rise to “regulatory capture through the intellectual zeitgeist”, enabling the banking lobby to swell in size and power.
But now, he says, there has been “a very fundamental shock to the ‘efficient market hypothesis’ which has been in the DNA of the FSA and securities and banking regulators throughout the world”.
Hence, “the idea of that more complete markets were good and more liquid markets are definitionally good” is no longer trusted. “[This crisis] requires a very major reconstruct of the global financial regulatory system, [not] a minor adjustment,” he concluded during the Prospect discussion (in which I also participated).
Reflect on those words for a moment. Lord Turner previously worked at McKinsey, the management consultant group that has recently been a key evangelist for the creed of shareholder value, free-market competition and financial capitalism. Yet he now thinks that the intellectual compass-cum-bible that has guided the FSA – and McKinsey – has been wrong.
Now a cynic might attribute some of this to mere political posturing. The FSA, after all, has faced criticism for failing to get tougher in curbing banking bonuses, and in also fending off proposals to put it under the Bank of England. Yet, if nothing else, Lord Turner’s comments are a striking sign of the times. And they raise a crucial question: namely what type of intellectual framework should western regulators now use, if their prior bible – or compass – has now turned out to be so flawed?