Adair Turner, Chairman of the failed Financial Services Authority, clearly does not even partially understand the industry he is meant to be in charge of. The extent of his ignorance is just stunning.
His interview in Prospect magazine published today has been widely reported this afternoon, see BBC coverage here.
The idea that a Tobin tax could curtail the bonus culture in investment banking is just facile. There is a major structural problem with investment banking – if the market worked properly then excess profits and bonuses should be competed away. The fact that they are not is a real problem. Merely trying to tax these transactions does not change that situation. It could be argued that this would simply be a case of the state trying to take a share of these excess profits. Not very efficient I think.
The UK’s banking crisis has not really been an investment banking crisis. It has been a wholesale (or commercial) banking crisis. The major casualties were Northern Rock, HBoS/Lloyds and Royal Bank of Scotland. None of these had significant investment banking activity. Indeed Barclays, which was the one British bank with a significant if specialised investment banking arm, has had a good crisis comparatively speaking. Northern Rock overtraded on a duff business model. Bank of Scotland was bought low by massive criminality in its commercial lending operation.
Turner has clearly forgotten, if he ever knew, the modern history of wholesale banking in the City of London. It prospered in the seventies and eighties because the Eurodollar market allowed corporates to manage financial risks outside the onerous US regulatory environment.
It is all very well to point out that our financial sector is too large compared to the rest of our economy. The answer is not to hobble financial services but to take the brakes off the rest of the economy. A good place to start the process might be to look at lower corporation tax levels to persuade some other businesses to come home and reverse the current trend for businesses to move offshore.
Turner is one of those “high powered” management consultants who doesn’t really know anything. The sooner the Tories abolish the FSA and Turner the better.