Adair dares, and other unlikely tales, updated

The headline, of course, should have been British bank watchdog states the blatantly bleeding obvious, but I suppose that is a little more sensational than Financial Services Authority chairman backs tax on 'socially useless' banks. Still, most observers would agree with Lord Turner that much financial activity is socially useless; that the banking sector is too big for the good of the economy; and that Tobin taxes would provide useful revenue while slimming down the bloated banks.

(Update: I should really say something about why Tobin taxes are good from a financial stability perspective. The point is that they introduce more friction into the financial system. Even a small absolute increase in bid/offer spread, when spreads are low, dramatically reduces arbitrage opportunities, and thus 'useless' financial activity. A real money transaction - driven by global trade for instance - would not notice an extra 0.05% on their FX rate; but a program trading volatility would. The same applies in the equity markets: one way to reduce the impact of high frequency trading is simply to make it (marginally) more expensive.

It is interesting to see Lloyd Blankfein, Goldman Sachs' CEO, agreeing with Turner that some of finance had become socially useless. There were always useless parts, of course, but the fraction has grown significantly over the last 20 years.)

So how would we make this work? Well, how about this for a Europe-wide proposal. Transactions physically done in Europe are taxed. In order to (a) sell securities to a European domiciled investor, (b) take deposits in Europe or (c) trade derivatives, FX or repo with a European counterparty, you have to demonstrate that you pay the tax on your global business too (although not necessarily to a European government: any old government will do). OK, some banks would decide to leave Europe entirely. But most wouldn't if the level of the tax was sufficiently low...