Does the world need a global ‘Tobin tax’?

Does the world need a global “Tobin tax”? That is the question buzzing around London’s financial circles this week.

Some three decades ago, James Tobin, the economist, first proposed introducing a tax on financial transactions to deter short-term currency speculation.

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?

Sadly, Lord Turner does not offer any pat answers. He has a long list of ideas he thinks politicians and regulators should debate. Aside from the Tobin tax, he would like to consider more curbs on financial innovation, and a review of market dominance and pricing activity in the wholesale finance sector. But those ideas are not really a manifesto. Instead, he stresses that regulators are “still trying to work out” what to do “after a fairly complete train wreck of a predominant theory of economics and finance”.

No doubt, this agnostic stance will infuriate some, or confirm the impression that regulators are toothless. But that may be the wrong response. After all, the real problem with finance in the past few decades is not simply that policymakers and investors were using flawed economic and financial theories, but using them in such a blind way that they often disengaged their brains.

Bodies such as the FSA, for example, were so wedded to ideas of market efficiency that they only intervened when there was a clear case of market failure. Similarly, investors were so obsessed with narrow, short-term definitions of shareholder value that they, like regulators, often appeared to be acting on autopilot.

However, the unpleasant truth is that there is never going to be any complete intellectual system to explain how financial systems should work. After all, as I wrote last week, ideologies are always rooted in shifting power structures and struggles. And just as the old intellectual model proved imperfect, any new “theory” that might yet replace it – with or without a Tobin tax – will have limitations too. What is needed now, in other words, is not so much a new creed, or magic-wand policies, but policymakers, politicians, investors and bankers who are willing to engage their brains, and keep remaking policy, as the world evolves.

That is not an easy idea to sell to politicians, voters or even regulators. After all, as Lord Turner points out, a world without a reliable compass is frightening, exhausting and time-consuming to navigate: “For the regulators of the world, once you have accepted that you don’t have an intellectual framework of ‘more market is always better’ you’re in a much more worrying space, because you don’t have an intellectual system to refer each of your decisions.”

It is unclear whether Lord Turner will ever be able to actually turn any of his rhetoric into policies, given the scale of backlash that his comments will undoubtedly spark from the banking world.

But I, for one, reckon he is to be applauded for at least trying to think the unthinkable again and move away from a crude reliance on creeds. The only question now is whether other regulators will follow, not just in Europe but, above all, in the US, where so many of the free-market dogmas first sprung to life.