Lord Turner - Carry Trades Lack Economic Value

[Fittster]

Far to quite today, need to get that piss boiling.

"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 Chairman Adair Turner in a speech in Mumbai today. 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.

“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. “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.”

http://www.bloomberg.com/apps/news?pid=20601102&am...

Not to keen on the free market is he.

Edited by Fittster on Monday 15th February 15:53

[_James]

What is the economic benefit of purely speculative capital flows?

[fido]

I think the Committee on Climate Change lacks economic value.

[Timmy35]

Strange then that he doesn't seem to think there's a lack of economic value in rising house prices then?

[Fittster]

Why is speculation a bad thing, if organisations want to bet their money why should it be prevented?

The carry trade creates a big demand for bonds which keeps interest rates down and borrowing cheap.

Edited by Fittster on Monday 15th February 16:15

[Eric Mc]

Fittster said:

Far to quite today,

Is that what you meant to say?

[_James]

Fittster said:

Why is speculation a bad thing, if organisations want to bet their money why should it be prevented?

The carry trade creates a big demand for bonds which keeps interest rates down and borrowing cheap.

Edited by Fittster on Monday 15th February 16:15

That doesn't answer the question.

Equally, if we had a perfectly free market, carry trade would be a thing of the past.

[Fittster]

Eric Mc said:

Fittster said:

Far to quite today,

Is that what you meant to say?

A missing vowel, a freestyle jazz approach to spellng.

[a_bread]

Fittster said:

Why is speculation a bad thing, if organisations want to bet their money why should it be prevented?

I agree with you. It shouldn't matter what the motivation is for participating in a market. If people have money and opinions about asset prices they should be free to express them. The market's outcome is the combined effect of all those opinions being expressed. Anything else is the market equivalent of a dictatorship (in line with the Labour way I suppose, and Turner isn't known as Red Adair for nothing). Speculation often forces much-needed adjustment.

In any case, imagine trying to enforce the "thou shalt not enter transactions purely with a view to making a profit on a financial transaction" commandment. How many inspectors would be needed to discern what is speculation and what isn't? How easy would it be for City innovation to run rings around regulators' capacity to monitor activity, prevent enforcement, even if some unambigious and measurable definition of speculation was possible?

_James said:

That doesn't answer the question.

Equally, if we had a perfectly free market, carry trade would be a thing of the past.

No it wouldn't. If uncovered interest parity held perfectly at all times then the carry trade wouldn't work (in the case of carry trades that utilise a cross-currency element, i.e. the most commonly understood interpretation of carry trade). But for UIP to hold, a perfectly free market is not a sufficient condition - in fact perfect foresight would be required, which is of course a fantasy world without risk.

Governments and monetary authorities, if they understand the mind of the market, can use speculators to their advantage by sending out signals about their intentions and establishing a reputation for certain kinds of policy. It is far healthier for state authorities to take the presence of all market participants as a given and to design policies which take into account their presence, than to attempt to outlaw them.