Does the world need a global “Tobin” tax? That is the question buzzing around London's financial circles. Some three decades ago, James Tobin, the economist, first proposed introducing a tax on financial transactions to deter short-term currency speculation. Since then few policymakers have dared air the idea since it seemed wildly unfashionable. But this month Adair Turner, chairman of the FSA, took part in a round-table organised by *Prospect magazine – and suggested a new “Tobin” debate. Unsurprisingly, this has grabbed attention. However, the really interesting thing about Turner's suggestion is the wider intellectual impetus behind it. For the FSA chairman is increasingly convinced that Western policymakers are at an intellectual watershed.
In recent years, he argues, “the whole efficient markets 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. Now, he says, there has been “a very fundamental shock to the “efficient markets hypothesis” which has been in the DNA of the FSA and securities and banking regulators around the world.” Hence “the idea 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 took part). Reflect on those words. Turner previously worked at McKinsey, the management consultancy which has been an evangelist for the creed of shareholder value, free-market competition and financial capitalism. He now thinks that the intellectual compass-cum-bible which has guided the FSA – and McKinsey – has been wrong. A cynic might say this is political posturing. The FSA, after all, has faced criticism for failing to get tougher on bank bonuses and it is fending off proposals to put it under the Bank of England. But Turner's comments are a sign of the times. And they raise a crucial question: namely what type of intellectual framework should Western regulators use if their compass has turned out to be so flawed? Sadly, Turner does not offer any pat answers. He has many ideas he thinks that politicians and regulators should debate. For example, 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, that 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 that policymakers and investors were using flawed economic and financial theories, but using them so blindly that they often disengaged their brains.