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Is the financial sector too big?

September 2nd, 2009 · No Comments

Until mid last year, the financial sector has grown way out of proportion almost anywhere in the developed world, drawing the best and the brightest from many colleges and universities in the process. Some, like Adair Turner (whose books, especially the compelling “Just Capital, The Liberal Economy” we highly recommend) thinks it has gotten way out of hand…

We have earlier published a rather devastatingly good article by Simon Johnson (‘The Quiet Coup‘), former head economist of the IMF, on how finance has captured US politics.

Lord Turner now has put the cat amongst the pigeons in the financial center of the UK, the City of London. It is too big, according to him. And he should know, as a former Vice-Chairman of Merrill Lynch Europe, director of McKinsey, professor at the London School of Economics and Director General of the Confederation of British Industry, amongst others. This is no lightweight by any means.

He set off a very interesting debate in the Financial Times, of which we reproduce some items:

Is the City of London too big?

Lord Turner, chairman of the UK’s Financial Services Authority, casts a sceptical light on the role of the City of London in the UK economy in an interview with Prospect Magazine. During the last boom, the financial sector grew as a share of gross domestic product, and ballooned as a share of profits and taxes. Should the government have as a goal to protect the City as a pre-eminent financial centre? Or has the City grown too big for Britain’s good? Lord Turner says the City watchdog should be “very, very wary of seeing the competitiveness of London as a major aim” and has made a robust defence of his idea for a global tax to curb the “swollen” financial sector. Which British industries – if any – have the potential to replace the City? Does the UK have any choice other than to nourish the financial services industry? Join the debate: click on comment.

Andrew Hill, Lombard column editor: Fix the system and useless bankers will flee the City
It is bad enough that recklessness in some areas of banking and finance led to economic boom and bust. But social boom and bust is even harder to repair.

Editorial: cutting finance back down to size

For years, the “Tobin tax” – a tiny levy on cross-currency financial transactions – has been a roving solution in search of a problem. It has now found a friend in Lord Turner, chairman of the UK Financial Services Authority, who suggests that since the financial sector has become too big for Britain’s good, measures such as a Tobin tax might be needed to rein it in. This is a false note from a man whose reasoning on finance is otherwise generally sound.

Some other very good contributions:

  • Way before the Turner report, it was star columnist of the FT Martin Wolf already addressing this issue, responding to that seminal piece from Simon Johnson
  • One of Turner’s proposals is a so called Tobin tax for financial transactions, here discussed by Avinash Persaud (chairman of Intelligent Capital, chairman of the Warwick Commission and a former banker)
  • Some critical and highly interesting notes from Willem Buiter, one of Hollands best (and most friendliest) economist, and former policy member of the Bank of England
  • Benjamin Friedman, a well known American economist weighs in with a fundamental take on the role of the financial sector.

Tags: Public Policy · Reform Capitalism