Gordon Brown’s attempt to introduce a Tobin tax (yet again – I’m sure he’s floated the idea a few times before) has fallen flat once again. I particularly enjoyed the Russian Finance Minister’s response – ‘it’s a tax therefore Brown likes it’.
Actually ever since I learnt about it at university I’ve always quite liked the idea – but not to bail out banks. I remember writing an essay about how the only way for less developed countries to develop was to pump-prime their economies, and resolve the underlying problems of infrastructure, education and health, and that one answer to funding that should be a Tobin tax.
That was written somewhat over ten years ago; but my view hasn’t changed. Yet if the international system is serious about saying ‘never again’ to the banking crisis, we certainly shouldn’t be setting aside funds to bail them out next time. I suspect the first steps might be to separate retail banking from riskier investment operations (so that savers and mortgages are not put at risk), and then to ensure that nothing is too big to fail. And if they insist on high-risk strategies – well, fine, but make sure your investors are aware of the risk, and of the fact that we’re not stepping in again.
What we absolutely should not be doing is giving financial institutions a licence to over-risk by effectively institutionally insuring them. It’s like an all you can eat buffet – you always end up with a bizarre mixture because you want to try lots of different things, not because you want them but because you can.
Interestingly, this is precisely the same argument made by a responsible travel company which has decided to stop offering flight offsets, arguing that while it does a certain amount of good, it doesn’t change behaviour; indeed, it gives people a licence to fly as much as they want, as long as they plant some trees at the end of it.
While I would agree that changing behaviour is much more important than assuaging your conscience by planting a few trees (or energy efficiency projects, my preferred option), money does help. If by some incredible negotiating fluke a Tobin tax is introduced, I would far rather it did some good in the world rather than entrench recklessness. We could protect everyone from malaria, or give everyone clean water, or help less industrialised countries to leapfrog the dirty industrialisation phase and move directly to clean technologies, or… well, the possibilities are endless. It really could be revolutionary in the right way. But what is certain is that giving institutions yet more licence to take risks is not going to resolve the underlying problem.
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hear hear. The greatest disservice Clinto did was abolish Glass-Steagel – and then say if you don’t give people who can’t afford houses a mortgage we will prosecute you for racism.
The banks duly obliged – and after a couple of years when the arrears started mounting they remortgaged at a higher price.. etc etc.
It’s a good point. I’d always heard the Tobin Tax being proposed for third/developing-world development. It’d feel a bit of a swindle to implement it but then use it as insurance for those institutions.
This is nonsense. Northern Rock did not engage in “risky” investment banking. They simply bet the ranch on an ever-rising housing market. The downfall of RBS and HBOS was not investment banking but making very large numbers of loans (i.e. plain vanilla banking) imprudently. So recreating Glass-Steagall looks like a diversion from the real issues.
As for the Tobin Tax, before you drive financial services out of the UK, can you remind me how the so-called “progressive Conservatives” plan to fill the money pit called the NHS if they undermine one of the UK’s few successful businesses?
Mr. McGowan – Northern Rock may not have been investment bankers but they committed the cardinal sins of a) lending more than an asset is worth ( with no cushion) b) borrowing short and lending long.Banks don’t go bust because their customers do – they go bust when noone will give them money anymore.
As for RBS and HBOS, I would suggest that indeed it was their investment banking attitude that created the problem – the plain vanilla had all it’s funds drained away to pay for the risky bets they were making elsewhere.
And again, they got themselves to the point where they had not enough long term money – hence all the recapitalisations. But the Government’s insurance for the toxic debt won’t help them in the long run – we just have busted banks and won’t havbe anything better until the split takes place.
And your point is what? RBS has just made a huge loss which would have been even bigger had it not been for its profitable investment banking activities. I don’t see how a UK version of Glass-Steagall is going to make RBS healthier nor HBOS.
The bank has yet to be invented which doesn’t borrow short and lend long.