If FDIC chief Sheila Bair really wants to cause a regulatory stir, she ought to take a look at what Lord Turner, chairman of the Financial Services Authority, is up to. He wants to trim down the size of the U.K. financial sector (via the Telegraph):
If higher capital requirements did not eliminate “excessive activity and profits”, options could include taxes on financial transactions, so-called Tobin taxes, after the economist James Tobin. The economist suggested a small tax on foreign exchange transactions in the 1970s to discourage speculative trading.
Me: Generally, the theory is that such a transaction-based tax could only work on the international level since market participants would inevitably jurisdiction shop. Here are four possible benefits from a Tobin tax from the George Soros-funded Open Society Institute:
First, it is likely to generate significantly greater revenues. Second, it maintains a level playing field across financial markets so that no individual financial instrument is arbitrarily put at a competitive disadvantage versus another. Third, it is likely to enhance domestic financial market stability by discouraging domestic asset speculation. Fourth, to the extent that advanced economies already put too many real resources into financial dealings, it would cut back on this resource use, freeing these resources for other productive uses.
Interestingly, only the third reason had any appeal initially to economist James Tobin who certainly didn’t view it as a “capitalism tax” the way anti-globalists do. The idea has also received some support in the past from White House economist Lawrence Summers.