FSA’s Lord Turner Walks into Buzzsaw by Suggesting Finance Industry Needs to Shrink

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.

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  1. craazyman

    And on that note . . .

    The Magonia Times

    "Business Leaders Reject Anti-Slavery Legislation"

    Central Magonia, August 35th
    reporting by J. Keel

    The Chairman the National Labor Relations Board ignited a firestorm of protest yesterday at his suggestion that slavery should be eliminated and wages paid to workers across all economic sectors.

    "Slavery is immoral, indecent, evil and a stain on our nation. We should eliminate it at once and pay fair wages to workers in all industries", said Chairman James Hightower, speaking to reporters.

    But the Financial Business Council was quick to argue that slavery is crucial to national competitiveness.

    "Our nation's economy can't afford the Chairman's utopian schemes," said Council Leader Claire Justice. "Business needs efficiency to be globally competitive and our labor structures are crucial to ensuring low-cost consumer goods and services for our citizens and for foreign markets."

    Other critics of the Chairman's proposals suggested that slavery was not the problem and that living conditions for workers would be worse without it.

    "The fact is that our current labor arrangements are essential for our economy to function at all," said Ben Right, Professor of Economics at the National University. "Without the effiencies that result, our economy would collapse and everyone would starve within 30 days."

    The current economic crisis has reduced paid employment in many economic sectors and swelled the ranks of workers forced into slavery to survive. Some critics have suggested a tax on high-profit businesses might serve to rebalance economic structures and boost the worker to slave ratio. But businesses who would be subject to such a tax are not convinced.

    "It's a terrible idea," said Financial Council Representative Jolly B. Banker. "All economic studies I've seen show that slavery assures food and shelter for workers in addition to supporting strong growth. It's what makes our country great and anyone who thinks otherwise is frankly pretty foolish and ignorant."

    And so it goes.

    Ecce Homo.

    –sorry folks, over the top but couldn't resist . . . —

  2. Demetrius

    Lord Turner has done us all a favour, by opening up the debate in a climate of malice and fear. The City is not a Free Market, it has been a highly subsidised racket for a financial and political elite, that has costed us all a great deal in the past and more in the future.

  3. jest

    Nice breakdown.

    Though I'm not crazy about the "Tobin Tax" idea.

    Let's step back a minute: the major problem with the industry isn't insufficient taxes, it's too much leverage. If you take down the leverage levels, profits & compensation have to fall. The financial system also becomes more stable.

    Besides, these firms have a lousy reputation of paying their taxes anyway. It'll just force more money into the Caymans and UBS.

  4. skippy

    Queen Elizabeth would be proud of the financial sector, they mirror her Privateers upon the Sea, which came in handy against the Spanish and to swell the coffers.

    Skippy…proud and free men of the sea, land locked, but old habits die hard eh. Ready boarding partys, theres enough to make us all rich men.

  5. Anonymous Jones

    City's response paraphrased: "But you don't understand, you commies. If we did that, we would no longer *lead* the race to the bottom."

  6. Gentlemutt

    " It'll just force more money into the Caymans and UBS."

    That is easy enough to address. Tax all cash flows into and out of countries who choose not to agree to a uniform tax on financial transactions. City of London can keep its position as a center of finance while the global financial industry shrinks so it no longer operates, as Mr. Turner quite rightly says, "beyond a socially reasonable size."

    All it would take is a little of Mr. Turner's spine in the U.K. and U.S.A., and the Chinese regulators for one would hop on this bandwagon in a heartbeat. They hate hot money. After that, everyone falls in line, no one loses their relative position, and the global finagling industry starts to shrink, as it must, relative to the global economy.

    …all a dream, of course, but still…

  7. LeeAnne

    Lord Turner took our idea without attribution:

    Anonymous said…

    U.S. Draft Law Would Ban Most Trading in Credit Swaps (Update1)

    "The document, distributed by e-mail by the committee staff in Washington, would also force /U.S. trading in the $684 trillion over-the-counter derivatives market to be processed by a clearinghouse."

    A tax on every transaction in the $684 trillion market could pay taxpayers back in a week, cover social security as far as the eye can see, pay for universal health care, pay decent middle-class wages to military families, educate all, pay high competitive salaries to an oversight agency and jail white collar criminals and traitors.

    January 29, 2009 6:09 AM

  8. rickstersherpa@msn.com

    Apparently, only Goldman Sachs can levy at "Tobin" tax (as that is what its high speed software is designed to do). Remember, the rallying cry of the Lords of Finance on Wall Street and the City: "Private Pofits, socialize the losses! Customers, investors, and taxpayers are all sheep to be sheared."

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