Carry trades lack economic value, FSA’s Turner says

Carry trades lack economic value, FSA’s Turner says
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First Published: Mon, Feb 15 2010. 11 05 PM IST

Asset quality worries: FSA chairman Adair Turner. PTI
Asset quality worries: FSA chairman Adair Turner. PTI
Updated: Mon, Feb 15 2010. 11 05 PM IST
Mumbai: The chairman of Britain’s financial regulator said that so-called carry trades have “no economic value” and could be curbed by taxes.
Consideration should be given to countries taxing “speculative capital flows,” said Financial Services Authority (FSA) chairman Adair Turner in a speech in Mumbai on Monday. Controlling carry trades, where banks and hedge funds borrow cheaply in dollars to bet on high-yielding investments in emerging markets, may not be possible without damaging liquidity, Turner said.
Asset quality worries: FSA chairman Adair Turner. PTI
“There is, for instance, no economic value that I can discern from the operation of speculation in currency ‘carry trades,’” said Turner, according to a copy of the speech he made to the Reserve Bank of India (RBI). “We should certainly be open to the application by emerging countries of tax constraints on inward speculative capital flows, such as Chile imposed in the 1990s and Brazil has recently introduced.”
RBI governor D. Subbarao also said that there has been a slight deterioration in the quality of financial assets held by the nation’s banks in recent months. The central bank released his speech via email in Mumbai.
Turner, 54, has questioned the size of financial activity, saying that some of it is socially or economically useless. He first floated the idea of a financial transaction tax, sometimes known as a Tobin Tax, in August. The International Monetary Fund is considering various surcharges on banks following the worst financial crisis in a generation.
Turner’s views have gained traction due to his position as head of a subcommittee at the Financial Stability Board, a collection of policymakers from the Group of Twenty nations.
He repeated calls on Monday he made last month for new tools to control asset-price bubbles and problems emerging in the financial system as a whole, arguing that interest rates alone are too blunt.
The tools could include “regulations which seek directly to influence borrower as well as lender behaviour, such as limitations on allowable loan-to-value ratios: new tools that entail moving away from the belief that a stable equilibrium will be delivered if only markets are efficient and classic monetary policy tools appropriately aligned,” he said.
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(Anil Varma contributed to this story.)
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First Published: Mon, Feb 15 2010. 11 05 PM IST