Why the Transaction Tax Isn't Such a Terrible Idea

Aug.28.09 | About: SPDR S&P (SPY)

A year ago, it occurred to me that if the popular blood lust against the financial sector was to be given vent, one could do worse than adopt a small (but global) tax on financial transactions. The Financial Times reports Thursday, August 27, that Adair Turner, head of the UK Financial Services Authority, has come out in support of just such an idea.

It is worth recalling that the original goals of the bailout packages of a year ago have been attained better than many commentators expected. The goal of preventing a depression in the general economy has been accomplished. You don’t punish someone who has been smoking in bed by allowing the resultant fire to burn down the block. The Administration and the Fed always said that helping some undeserving financiers would be an undesirable but necessary side effect of the rescue plan (even though the Treasury would recoup a share of the budget costs, when banks repaid loans).

Nevertheless, it is indeed irksome that the banks have continued to pay out huge bonuses, and to oppose the creation of a new US agency for financial consumer protection. So the public’s anger is understandable. Perhaps the transactions tax is indeed the right way to go. Our Treasury and others’ could really use the revenue. Furthermore, the idea of shrinking the volume of transactions in financial markets nowadays looks much less likely to damage economic efficiency than was once believed.