In 1971, as currency speculation tore apart the Bretton Woods system of pegged exchange rates, the Nobel Laureate economist James Tobin proposed a small tax on foreign exchange transactions, to put ?sand in the wheels? of the market. When I was global head of currency research at JP Morgan in the 1990s, I used to be one of those bankers who expressed sympathy for the worthy things the tax could be spent on, but argued that while it was a desirable idea, it was utterly impractical. The foreign exchange market was in cyberspace not physical space, and could quickly move to where the tax was not. Moreover, while curbing speculation appears desirable, it is a bit like that old joke about advertising: you can be sure half of it is useless or worse, but you can?t be sure which half.

But then I became a managing director of State Street in London and, as a director of the bank, partly responsible for complying with ?know your client? rules and the new rules on anti-money laundering and anti-terrorist finance. I began to see that the authorities did actually have much control over the formal banking sector. I wrote a paper in 2006 recanting my earlier views and arguing that it was no longer the case that transaction taxes were impractical. Today, with governments nationalising banks, guaranteeing their loans, providing liquidity against worthless collateral and threatening to legislate against private sector pay, it is clearer than ever before that where there is a will there is a way.

The little secret bankers would like to keep is that there are already many national financial transaction taxes in existence today. Stamp duty on property or equity transactions is one of the oldest taxes. Where these taxes are large, they create an offsetting incentive to avoid them and their proceeds tend to be significant but falling over time. Where they are small, like the tiny transaction taxes that finance the US SEC and CFTC, traders hardly notice them, and they raise modest but rising sums. India?s securities transaction taxes have hardly made the Indian equity market sclerotic.

Financial transaction taxes have become easier to enforce by individual countries, without global agreement, as a result of trends in the arcane world of securities settlement and clearing. Even before the credit crunch there was concern over the systemic risks attached to the clearing and settling of securities and derivatives, where the gross value of exposures had grown exponentially higher than the net value. Concern that the demise of Lehman Brothers might cause such a failure?though it never materialised?was a key source of the market dislocation that followed. Consequently, there is a trend towards the consolidation of clearing and settlement systems, which has been given added impetus by the credit crunch. A majority of foreign exchange transactions, for instance, are now settled in the New York-based CLS Bank. Central clearing and settling systems provide substantial benefits in netting traders exposures, and as a result, reducing their risks. Lower trading risks should mean lower regulatory capital requirements and hence cheaper trading. If transaction taxes were levied in these centralised settlement systems, they could be very expensive to avoid.

Tobin taxes are now feasible; but are they desirable? Financial institutions naturally concentrate on developing products that they can make money from. The products they make most money from are those that trade extensively. Consequently, the financial system is biased to excessive trading, churning and volatility. The system is not interested in developing products, which are fit for a long-term purpose, that do not trade so extensively?like hedging life cycle risks of individuals or the GDP cycle of countries. These biases can be found in the way the financial sector places great attention on funds that move frequently in and out of markets and less on buy and hold pension funds; or in the way the size and profitability of the financial sector is out of kilter with its goal of facilitating growth in the real economy. The classic economists? solution to all of this is a tax.

The size and profitability of the financial sector affords it great political influence. Before the credit crunch it was the only industry more powerful than the defence industry. Like the defence industry it has been able to frame the intellectual and regulatory debate in its favour. Setting the right level of this tax so as not to damage liquidity will be hard, but probably not as hard as parrying the bankers? backlash at the mere suggestion of the tax, as Lord Turner, head of the UK?s financial watchdog, is experiencing. More power to him.

The author is chairman of Intelligence Capital Limited, chairman of the Warwick Commission and member of the UN Commission of Experts on Financial Reform