James Tobin wrote an article of this title in 1984. After 25 years, it must be admitted that James Tobin had been smart and courageous:
I have decided … to voice some sceptical views of the efficiency of our vast system of financial markets and institutions. These views run against current tides – not only the general enthusiasm for deregulation and unfettered competition but my profession’s intellectual admiration for the efficiency of financial markets.
In his paper, Tobin attacks the financial system as being too big and too inefficient. There are costs for making markets, and it would not be clear how some of the markets created would help to increase efficiency. By 1984, financial marktes were still small compared to what they look like today. Finance and Insurance provided only 7,5 percent of after-tax profits, compared to a number of 30-80 percent recently.
It seems to me that we have to review the whole financial system and decide which parts are efficient, which are necessary and what we expect of the financial system. If we pay smart people to fool the other people which then bear the cost is not a way of running an economy. The distribution of income should be skewed in favor of those who are more efficient than average in creating value, not those that are more efficient than average in destroying value.
I think even Alan Greenspan would agree with that, based on Ayn Rand’s ideas as developed in Atlas Shrugged. Firms should not go into debt deeply, they should invest by using retained earnings. That way, only productive firms that are financially healthy get to expand. But somehow Alan Greenspan did not agree with Tobin, and since he was chairman of the Fed he got his way.