naked capitalism

Candor is clearly not a good quality in a regulator.

Lord Turner, the chairman of the UK’s Financial Services Agency, had the temerity to challenge the notion that rule by the Masters of the Universe was a good idea. From the Financial Times:

The head of the City of London watchdog says Britain’s “swollen” financial services industry has become too big for the good of the economy and needs to be cut down to size…..

He says parts of the financial services sector – including derivatives, hedging, and aspects of the asset management industry and equity trading – have grown “beyond a socially reasonable size”. He also argues that the debate about bankers’ bonuses has become a “populist diversion”, suggesting that global taxes on capital flows could be a more effective way of taming the over-mighty financial sector….

Lord Turner’s suggestion that a “Tobin tax” – named after the economist James Tobin – should be considered for financial transactions is also likely to reverberate in Europe. The proposed tax, championed by development economists and the French government as a means of funding the developing world, has been fiercely opposed by the finance industry.

Lord Turner appears worried about a return to “business as usual” in the City, suggesting that new taxes may be necessary to curb excessive profits and pay in the financial sector.

“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,” he says.

Lord Turner says higher capital requirements will be the FSA’s main tool to eliminate excessive activity and profit, but that a tax on transactions on a global level may be an additional option.

“The problem of getting global agreement will be very difficult,” he says. “But at least proposals for special financial sector taxes, with increased capital requirements, address the issue of excessive profits.”

He added: “Insisting that someone ‘does something’ about bonuses, by contrast, is a populist diversion.”

Effectively, Lord Turner offered two remedies. One, the afore-mentioned Tobin tax, would be a small levy on each transaction to discourage speculative churning. It of course counters the modern tendency to excess, that if liquidity is good, more liquidity must be better. Second, he wants higher capital charges against risky activities. But he also sees international coordination as of paramount importance.

Needless to say, his comments elicited a firestorm of criticism, from saying he was overstepping his bounds to accusing him of being a Commie (I thought that sort of accusation was made only in America). From a second Financial Times piece:

Lord Turner’s critics said he had overstepped his remit as a regulator and risked damaging London’s standing…

Boris Johnson, the London mayor, said anybody who did not believe the FSA’s responsibilities included protecting the international competitiveness of the City was “crackers”…

John Cridland, deputy director-general of the CBI, said: “The government and regulators should be very wary of undermining the competitiveness of the UK’s financial services industry.”

Lord Turner’s comments…. drew a stony silence from the Treasury yesterday, other than a statement saying that it was Alistair Darling, not the FSA chairman, who set tax policy. George Osborne, shadow chancellor, declined to enter the debate.

Vince Cable, Liberal Democrat treasury spokesman, said Lord Turner was right to warn that the City might need to shrink and that “defending London’s competitiveness” was being used as an excuse to defend “business as usual”….

But Lord Turner’s backers were drowned out by the City reaction. The British Bankers Association was among the most trenchant in its criticism. “If we introduce the wrong kind of regulation or the wrong kind of taxes we could so easily lose that position by driving business abroad … On so many occasions in the past the country has lost chunks of industry through making the wrong decisions. Let’s not do that again.”

The Investment Management Association and the Association of British Insurers were critical of the likely impact on investors. “It is just illogical to want to shrink one of your most important industries,” said one London banker. “If you want to turn London into a Marxist society, then great.”

Perhaps the real testament to how far this idea is likely to go (as in not far at all) is that the tempest in a teapot is getting virtually no attention from the general interest British newspapers.