Joseph Stiglitz on financial innovation

Here's an extract from an online debate organised by The Economist magazine entitled "This house believes that financial innovation boosts economic growth". It's the case opposing the motion, written by Joseph Stiglitz, a former chief economist at the World Bank and Nobel laureate. Stiglitz calls for financial services to fulfil their economic function but believes most recent innovations in finance had the exact opposite effect, while plenty of good financial innovations were suppressed by the industry. Here is his summary of where it all went wrong:

Robin Hood ambushed by Undercover Economist

Tim Hartford, the FT’s Undercover Economist, leapt out of the shrubbery to launch a stinging attack on the Robin Hood campaign today.

In my view he was too harsh and should have treated the campaign more as an opening salvo in a debate about financial transaction taxes than the last word. The campaign, run by charities not finance experts, made a tactical blunder in describing the tax in too much detail, too early.

The Robin Hood tax

There’s a lively debate on the Robin Hood campaign’s website about whether the introduction of a transaction tax is worth all the controversy.

Unlike the original Tobin tax idea of 1% on currency markets, the Robin Hood tax would be 0.05% on all non-retail financial transactions. Its aim would be to raise revenue rather than curb speculation.

It’s worth pointing out that, quite apart from the 0.5% stamp duty on UK equities, there is already a far bigger private version of the Tobin tax in place - the transaction costs of financial intermediaries.