The rationality-allocational reasons for limiting the size of financial firms and taxing financial transactions

After the recent financial crisis, many types of government policies have been debated as possible remedies, but most of them are still controversial. This paper considers two: (A) limiting the growth of financial firms; (B) taxing financial transactions. It strengthens the arguments for both by means of the recently proposed rationality-allocation analysis, which broadens the view of financial markets by supplementing their task of allocating investment with the one of selecting the investors. To be socially efficient, this selection must (a) keep itself going, (b) use the right selection criteria. Recognizing financial markets irreplaceable, but prone to fail in both, the analysis finds reasonably dimensioned (A) helpful against failures in (a), and (B) against failures in (b). -------------------------------------------------------------------------------------------------------