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2008 saw the collapse of the Icelandic bubble, its almost overnight switch from rich to poor due in large part to the collapse of its currency. Iceland’s three largest banks were nationalized, interest rates leapt to 18%, and it will take a generation to pay off the economic damage.

A large contributing factor to the crash was currency speculation. Panicked by the misfortune of finance’s poster child economy, investors instantly withdrew their money from the Icelandic economy, leaving it in freefall. The investors cut their losses, and is the people of Iceland who pick up the pieces. It really shouldn’t be possible, let alone legal, to do that to an economy.

However, despite the Icelandic crash, and the crash of the Thai and Malaysian currencies before it, speculation is as aggressive and unregulated as ever. The internet has made is far too easy to move money around, and the currency markets have enjoyed huge growth in recent years, with trillions of dollars now moving around the world every single day. Untaxed, these speculative trillions can make and break entire economies without ever contributing anything back to the governments or the real economies that make them possible.

A solution to this was first proposed in the 1970s by economist James Tobin, who proposed a 1% tax on currency transactions. Later incarnations reduced that to smaller percentages, the latest to just 0.005%. The idea is that this would raise a potentially enormous sum of international cash, which could then be used for development or for fighting climate change. If taxed at a middle-ground 0.25%, it would raise over $300 billion a year.

More importantly for our purposes, the Tobin Tax would have a stabilizing effect on the markets, and stability is crucial to a low-growth strategy. A further protective measure would be to raise the percentage tax to protect a currency, deterring speculators from raiding it. A temporary high percentage tax on krona transactions might have saved the Icelandic economy, slowing the capital flight and preventing profiteering. Protecting an economy from attack safeguards jobs and homes, and stops unproductive financial activity from destroying the productive activity of the real-world economy.

Why hasn’t it happened? The simple reason is that there isn’t the political will, particularly from the US and the UK. The European Parliament voted on it in 2005. It only lost by six votes, but annoyingly it was the British MPs who voted it down to protect the City of London.

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