Why progressives should back the Robin Hood Tax


1:00 pm - February 11th 2010

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contribution by Sargon Nissan

As you’ve probably already seen, yesterday saw the launch of a major campaign to introduce a Robin Hood tax on financial transactions by a host of organisations working on issues of global and domestic poverty, international economic reform and social justice.

The Robin Hood tax would impose a very small fee for every financial transaction between financial institutions. That means it is not a tax on the financial services you or I would use.

It is intended to make those who brought our economy to its knees, massive multi-national financial institutions, pay for the $20,000,000,000,000 (that’s twenty trillion dollars or a third of global GDP) of bailouts, guarantees and quantitative easing they have benefitted from.

Here in the UK we’ve spent more than $ 1 trillion (£635 billion) to bail out our banking sector.

Very conservative estimates suggest it could raise £100 billion for domestic and international issues, helping to limit how far we have to cut public services in the UK and ensuring that we meet our commitments to the developing world to alleviate poverty.

At a rate of just 0.05% per transaction, and given the huge sums taxpayers have stumped up, it seems a no-brainer in terms of being an appropriate and feasible policy option.

It may seem uncomfortable to line up the usual cast of celebrities and endorsements. It may seem too good to be true. But it actually gets better.

The real value of the Robin Hood tax, more commonly referred to as a Tobin tax after James Tobin, even beyond the vast sums it could raise, is as ‘sand in the wheels’ of the most damaging aspect of our casino financial system – speculation.

By imposing a tax on every transaction equally, such a tax could have a very positively unequal impact by penalising most those who trade most often. If we wish to see pension funds and other investors putting our money to work for the long term, a pre-requisite of a more stable and sustainable financial system, the damaging effects of ‘churn’ and high-frequency trading needs to be addressed.

A Tobin tax, such as in the Robin Hood model, would do precisely that. Rather than complex and unenforceable legislation that tries to define who is a damaging speculator and who is a bona fide investor, this simple tax could overnight re-balance the investment equation in favour of those who buy not because they want to make a fast buck, but because they are investing for the long-term.

Our financial system has become woefully disconnected from the real economy. Investors make more money betting on the movement of prices than they do by analysing the profit or losses of the investments they hold. More of the latter would have helped put off the day of reckoning that the Credit Crunch became for our footloose financial captains of industry.

Instead of being unenforceable, a simple tax like this would be very easy to collect but very hard to avoid. How do I know that? Because we already do it, in the case of stamp duty on share trading.

It hardly stopped the growth of the City of London, so why would another tiny imposition suddenly impede the genuine job of the financial sector, to determine the long-term value of assets and to re-invest the nation’s savings and pensions to invest in our economy and provide all us with a safe and stable income over our lives.

A Robin Hood tax is well-overdue. Hopefully this campaign will bring us a step closer to seeing it become reality.

————————-
Sargon Nissan is Researcher (Business, Finance and Economics) at the new economics foundation. nef is a co-signatory.

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Robin Hood Tax: the right wing blogosphere gets to work

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Reader comments


lol nef.

On a serious note, I blogged against it here, holding up stamp duty really made me chortle.

http://bit.ly/99XQHF

Have any other political parties come out and endorsed this, or do they have policy supporting it? The Green Party has had this for a long old while, see for example:

http://www.greenparty.org.uk/mediacentre/releases/28-08-2009-Tobin-Tax-Green-Party.html

One objection I’ve heard (among many) is that collecting the tax on cross-border transactions would be very difficult. Does the stamp duty analogy hold true here? PS I am a finance duffer so please speak slowly.

Oh yes, and as per Thomas’s blog post, another common objection is that the cost of the tax would be passed on to the consumer.

I want to be convinced, I really do. I think having squillions to spend on international development and climate change mitigation would be ruddy marvellous.

“Here in the UK we’ve spent more than $ 1 trillion (£635 billion) to bail out our banking sector.”

No, Not Economics Foundation, we have underwritten that amount. Spending is not the same, you ought to know that.

This tax would end up being paid by the end users of finance That’s you and me, by the way; the people who need capital to be invested, the people who pay the transaction costs, the people who are price-takers.

The participants in the financial market who revolt you so tend to benefit from the barriers to entry that increasing transaction costs tends to achieve.

You also misdiagnose the problem, if you are serious about trying to make finance more robust. The crisis revolved around a LACK of liquidity. The liquid markets worked well. it was the markets that stopped trading that caused the problem. Attacking the liquid markets is a very poor idea. The crisis was not an object lesson in “the damage caused by churn”, something you ought to know if you were in any way economists rather than anti-capitalist ranters.

“Investors make more money betting on the movement of prices than they do by analysing the profit or losses of the investments they hold.”

Does the concept of “zero sum game” mean anything to you? How can investors as a whole make money from betting on prices? Can we all go along to a horse-race and all come out richer? Stop and think for a little while. .. .

Finance needs reform, and social justice demands that the rich contribute more. But what we don’t need is dumb ideas, unratified by logic, and motivated purely by anticapitalist, incoherent bias.

This gives me a new Law:

“when someone calls something a no-brainer, they are telling you something about their brain . …”

The investment banks don’t pay stamp duty of course…though leaving that point aside…corporations do not pay tax, only people pay tax.

So the cost of the £100bn which you believe can be magicked out of thin air will be borne, as all taxes are, by some combination of shareholders, employees and customers.

A few basis points off savings rates here, a few points on borrowing rates there, a few jobs cut here…really, do you think that banks will not pass on the additional cost?

Back to the drawing board.

Giles has it.

“That means it is not a tax on the financial services you or I would use.”

It’ll lower liqudity and widen spreads. Now, I agree, that’s part of what Tobin wanted to happen.

But we will all end up paying for those two things. It just ain’t a tax that will solely fall upon the pinstriped bankers.

As one of the few poeple around here who has actually read the original report that this is all based upon (the Austrian one) might I point out that this will hamstring the overnight interbank market? Current overnight rates are something like 0.2 basis points. Adding a 5 basis point tax is going to play merry hell with it. That’s equivalent, the tax alone, of making LIBOR 15%. Anyone really think that high short term interest rates is what we need right now?

Oh, and it’s on the nominal sum, not the premium. So that screws the futures and options markets big time.

No, not well thought out this at all.

10. Luis Enrique

You are a “researcher” at the New ECONOMICS Foundation. I think you should know how to use the word “cost” correctly, seeing as you use it to make your case here.

If I spend £1000 on a course of psychotherapy to help me come to terms with the existence of the NEF, that costs me £1000 and I get psychotherapy in return. Did the bailouts cost us £1tn, in the same everyday meaning of the word? Did we pay £1tn and get bailed out banks in return? Perhaps a bank lent me that £1000, and I repaid it with interest: £1100. Would you say that transaction “cost” the bank £1000? No, you’d say it profited by £100. If I’d only repaid £900 it would have cost the bank £100. This is not mere semantics, it’s a fundamentally different thing.

The £1tn figure comes from adding up money lent, money spent buying shares, and amounts of loan guaranteed. How much it costs us is net of how much we get repaid, plus interest and fees, plus how much we can sell the shares for. I don’t know the overall cost, I do know some components of the bailout may actually be profitable (the Fed reported a $45bn profit in 2009, as you’d know if you bothered to pay attention to the subject matter you supposedly “research”). (Oh and surely you understand that printing money (quantitative easing) is not a “cost” in any sense either, unless it causes inflation).

If you want to talk about the cost of the financial crisis, please talk about the awful costs of unemployment, and the long-term costs of the deteriorating fiscal position caused not by the bailouts, but by dramatically lower tax revenues and higher expenditures (mainly benefits payments). This is for the US, but anger should be focused on things like this

Oh … a Tobin tax is a sensible idea; it may or may not be a good idea. Some links here. There are some drawbacks, it’ll be easier to avoid than the author supposes (see ‘practicality here), and there may be some better alternatives taxes (taxing systematic risk, taxing size). It would of course have quite dramatic effects on behaviour, such as shutting down the short-term lending market (which might not be a bad thing), and it will of course be passed on to consumers, mostly in the form of lower rates on savings and/or higher service fees and rates on loans (as if you can take hundreds of billions out of the banking industry, and just have them accept lower profits and bonuses, and leave rates and fees unchanged, because you know, they’re just famously nice unselfish people).

11. Luis Enrique

damn … took to long, Giles beat me to it

So this “new” economics isn’t economics at all.

13. Luis Enrique

N.B. of course I think progressives should support some big reforms of the financial system, including taxes to both retrospectively pay for the damage they’ve done, and to influence behaviour to try and make them safer and to reduce “socially useless behaviour”*

Some ideas may be found here. And while I’m providing links, and outstandingly informative post about the structure of the banking system and what we want to cut out to prevent a repeat performance, is here

* which despite what Tim W might say, need not mean “things we don’t like” but has a well specified meaning, including things like rent extraction and the lovely “directly unproductive profit seeking

“which despite what Tim W might say, need not mean “things we don’t like””

Sure….need not but often does.

15. astateofdenmark

I would imagine the Mayor of Zurich will be enthusiastically supporting this campaign. Although I admit there are plenty of people who would be happy to see the back of the city types.

Others above have torn apart the mistakes, so I shan’t bother.

“If I spend £1000 on a course of psychotherapy to help me come to terms with the existence of the NEF, that costs me £1000 and I get psychotherapy in return”

And that psychotherapy would be worth much much more. I’m googling for one right now.

Luis is right; it is not an idea that is daft per se, but only when presented as a no-brainer, and in this simplistic and misguided ‘get the b****ers to pay for it’ manner. You have to look through all the tax incidence, as Tim W explained on the TUC blog, not just stop at stage 1.

Taxing the things that genuinely cause damage makes more sense. Highe capital requirements achieve most of it

The trouble is, the moment nef takes an idea up, it discredits it. I’m christening it “the curse of nef”.

17. Luis Enrique

The trouble is, the moment nef takes an idea up, it discredits it. I’m christening it “the curse of nef”.

Oh, would that it were so.

In your eyes maybe Giles, but if The Guardian can be taken as a reasonable proxy for what is credited/discredited by leftwingers, I’d say sadly the opposite is more likely true.

I’m not sure. Do you know ANYONE who believes, with NEF, that 1976 was the best year ever?

http://www.independent.co.uk/news/uk/this-britain/1976-when-national-happiness-peaked-566594.html

or that, because child carers look after the children of richer better paid people, then you should calculate how much those carers are worth from those other people?

http://news.bbc.co.uk/1/hi/8410489.stm

well, maybe. The day any of this nonsense influences legislation will be a worrying one. Tobin taxes are amongst the less lunatic ideas they have had.

“Rather than complex and unenforceable legislation that tries to define who is a damaging speculator and who is a bona fide investor,”

Oh fucking great. The NEFs are now declaring that there’s a sharp dividing line between “damaging speculators” and “bona fide investors”.

I mean christ almighty. I’m on the left. I think modern capitalism and modern finance have serious problems.

But I’m able to see that the idea of a a sharp difference between “damaging speculators” and “bona fide investors” is self-serving, disingenuous, financially and economically illiterate jibberish of the worst, most popular and most hubristic sort.

I fucking hate the NEFs.

I’ll say it again: the NEFs are bad for the left.

Sunny, stop giving them space.

OK, iv’e been too quick and too harsh about the NEFs there; I suppose they could say that I’ve missed their point.

So on another tack: the tobin tax is supposed to simultaneously be “sand in the wheels” of bad transactions we apparently don’t like, yet is also supposed to be so small that it doesn’t affect the financial industry and hence they won’t notice it.

Perhaps I’m just not understanding things. But to me, that looks like a contradiction…and the points above about tax incidence and how the financial sector isn’t going to blithely accept the loss fo billions seems to support me on this one, surely?

21. Luis Enrique

I think in some respects, arguments about tax incidence are a red herring, because they apply to all taxes, sensible and foolish alike. Of course, it would be better if the proponents of this tax were honest about its incidence. More pressing questions are how easy it would be to avoid and what behavior will it actually discourage.

One of the more sensible arguments in favour of a Tobin tax is that it will dry up liquidity, in a good way. Contrary to your post @6 Giles, or perhaps just qualifying it, too much liquidity can be bad if it encourages behaviour that only makes sense with lots of liquidity or if liquidity enables rash behaviour.

Here’s Felix Salmon agreeing with Krugman about that. And here’s liquidity isn’t apple pie from Interfluidity. Zingales prefers taxing short-term debt directly. .

So on another tack: the tobin tax is supposed to simultaneously be “sand in the wheels” of bad transactions we apparently don’t like, yet is also supposed to be so small that it doesn’t affect the financial industry and hence they won’t notice it.

It’s the same contradiction that this is a tiny little tax that won’t really affect the financial sector, but is also estimated to raise a sum that amounts to approximately half of the global profits of the sector.

Another dissonance is that the reduction in speculation is supposed to prevent (or at least reduce) volatility in markets, when all the evidence that we have is that speculation, and particularly derivative trading, reduces volatility rather than increasing it.

Interesting analysis of this whole area here.
http://www.sfu.ca/~djacks/papers/publications/populists.pdf

Instead of being unenforceable, a simple tax like this would be very easy to collect but very hard to avoid. How do I know that? Because we already do it, in the case of stamp duty on share trading.

A considerable amount of work goes into avoiding paying stamp duty on share trading. Think, for instance, of the structure put in place by the Guardian when it sold its share in Autotrader. The sale was structured through an offshore company to avoid Stamp Duty incidence. Easy peasy. This happens with most large scale share transactions. Separation of Opcos and Propcos, so that the only SD payable will be on a handful of Propco shares, and not the underlying company.

That last point is a really good one. During my years on a dealing desk I saw plenty of liquidity that had no real purpose. People trying it on over the figures, for example. But I wish the advocates would look at those arguments, rather than this wishful thinking stuff.

24. Luis Enrique

sorry for all the links – I am presuming at least some people are interested! – this argument against liquidity is worth giving some thought to, too, I think.

What the hell is with that ad hominems? they’ll be deleted.

But we will all end up paying for those two things. It just ain’t a tax that will solely fall upon the pinstriped bankers.

May be, maybe not. But it’s not like banks are low on margins so have to pass on their costs to us. They have high margins and they give out hugely inflated bonuses. So, frankly, because the elasticity isnt there – your theory doesn’t stand up directly.

Christ, unanimity. Never thought I’d see the day.

Can either Luis or Tim or anyone else point me at any proposals that are specifically designed to target rent-seeking?

Clearly the Tobin tax does not do it – any idea what might, or is the question too specific to the type of rent seeking behaviour under consideration?

Sorry, I was being daft and hadn’t actually looked up the links you did put up.

28. Donut Hinge Party

I don’t understand the “if we tax them more then they’ll just pass it on to us,” argument.

This will only affect those financial institutions that currently play the casino game anyway, who don’t seem that keen on lending out money anyway.

I’d like to see an exception for shares and bonds held for a longer period – say fiv years – to encourage long term investment rather than shorting and commodity trading.

That’d make it worthwhile and workable

29. Luis Enrique

Sunny please. Print out out the following in a large font, put it on your bedroom wall, and see what you think about it in a few days time:

“I, Sunny, believe that should a tax that raises hundreds of billions of pounds be imposed on the banking sector, rather than choose to increase their charges or lower savings rates or do anything else to restore their returns, the bankers will be content to take home much lower pay and bonuses and pay much lower dividends to shareholders. This is somehow consistent with my understanding that bankers are greedy sonsofbitches with too much market power.”

see if that theory stands up directly.

tax incidence isn’t some questionable economic theory, arguing against it is like being a AGW denier, don’t do it.

“But we will all end up paying for those two things. It just ain’t a tax that will solely fall upon the pinstriped bankers.

May be, maybe not. But it’s not like banks are low on margins so have to pass on their costs to us. They have high margins and they give out hugely inflated bonuses. So, frankly, because the elasticity isnt there – your theory doesn’t stand up directly.”

Which world do you lve in Sunny? Not the one I live in, where the banks take the margins they can get away with, increasing the spread at the same time as eliminating the direct charge for currency exchange assuming, correctly, that most people won’t notice that the actual profit they make on the contract is at least the same as the one that they made before …

Not the one I live in, where the banks eliminate direct charges for a basic current account, but introduce accounts with extra benefits charges for extras no-one actually uses … and then makes it very difficult for customers to avoid the extra benefit accounts …

The idea that the Banks won’t pass on the cost to them of any Tobin tax to customers is pie in the sky … they’ll explain, very patiently, that it is very expensive and that ‘they will do what they can to reduce the impact’ … and Switzerland will continue to laugh at the stupidity of those in country’s whose populace is less financially aware and the politicians and economists who protest that ‘solving’ the percieved and real difficulties with financial services is either easy or straightforward.

“But it’s not like banks are low on margins so have to pass on their costs to us.”

I’m sorry? What do these two things have to do with each other? And since when has banking been high margin? Don’t you understand that the leveraged up, geared up, so as to try and make higher margins? The ones they were making without borrowing not being enough?

“They have high margins and they give out hugely inflated bonuses.”

High profits, yes, high bonuses, yes, but not high margins particulalry. Profits are high because turnover is high. Margins, which is the amount made on any particular trade or activity, tend to be very low indeed. The buy sell margin of foreign exchange or example, so I’m told, is three basis points. 0.03% that is. Profits are made because there’s $2 trillion a day or so of such trade in London. This is a high volume low margin business.

“So, frankly, because the elasticity isnt there – your theory doesn’t stand up directly.”

And what does elasticity have to do with any other of your (wrong) points? I agree that where a tax ends up, the incidence of it, depends upon elasticities, yes. But at first pass your other points have no connection with this.

““I believe that should a tax that raises hundreds of billions of pounds be imposed on the banking sector, rather than choose to increase their charges or lower savings rates or do anything else to restore their returns, the bankers will be content to take home much lower pay and bonuses and pay much lower dividends to shareholders. This is somehow consistent with my understanding that bankers are greedy sonsofbitches with too much market power.””

Bravo Luis, bravo.

That’s the most cogent response to the whole Robin Hood tax thing I’ve seen. I’m going to have to steal it for a piece I’m doing on it, sorry. Buy you a beer at some point…..

33. Luis Enrique

Tim W, I’m flattered

(but will you use my argument @21 about tax incidence being a bit of a red herring?)

“but will you use my argument @21 about tax incidence being a bit of a red herring?”

No, because if you look at the Robin Hood Tax site a major part of their appeal is that you, the ordinary consumer, won’t have to pay any of it.

Which is, as we’ve been pointing out, entirely bullshit.

I expect the reaction to “Bankers will pay $400 billion in taxes” and “You’ll have to pay $400 billion more in taxes” to be rather different really.

35. astateofdenmark

Surely nobody thinks you can take 400 billion from somewhere and it won’t be noticed?

Doesn’t this also presume that every state in the entire world signs up? Which is a heroic assumption methinks. I doubt the gnomes of Zurich, the Carribean offshores or the South East Asian corporatists will be signing up somehow.

Stillborn.

Luis – I’m afraid that’s a very bad strawman and it’s not surprising to see you and Tim praise it.

First, banks used to earn less money in the past and made it by without handing out massive bonuses. What you’re saying is – we cannot now under any circumstances do anything to penalise banks because that would simply mean consumers might get the cost.

This doesn’t necessarily stand up because:

1) There is (some) competition in the market. If one bank decides it’s going to raise charges on how it deals with me I can move to another one. There’s no guarantee that every bank will behave in exactly the same way.

This also means you think there is no competition between banks.

2) This argument was also applied during the railing against the Minimum Wage – that if the profits of companies was in any way affected then there would be dire consequences for employment because obviously they wouldn’t absorb costs.

Didn’t work out like that did it?

3) Regulation. Your assumption that higher costs will automatically be passed on depends on what you mean. Banks can’t easily suddenly start charging high rates for credit cards or ramping up costs in other ways. The FSA could crack down on underhand tactics to pass on costs to consumers.

4) Lastly – the assumption is that the economy can’t change. So we’ve lived beyond our means and therefore people and governments have to change their behaviour to take into account the new economic paradigm since the crash.

Apparently though, banks are above all that. They can carry on as before and pretend the world hasn’t changed and people’s anger at how they were screwed over by the financial system doesn’t matter.

In the US there’s been a movement encouraging people to close bank accounts with big banks and move to smaller, local banks. It’s a populist movement and if it takes off and makes a dent if bigger institutions are pressured to join in – then the big banks will have to change behaviour too.

This assumption that banks don’t have to change their practices following the crash, or as a result of public anger, is very fatalistic isn’t it?

So yeah, I don’t expect banks to be nice and altruistic. But that doesn’t mean they can’t be forced to change. This is part of that attempt to change minds and attitudes.

“First, banks used to earn less money in the past and made it by without handing out massive bonuses.”

True. And now make larger profits and hand out larger bonuses.

So far your argument is that banks can increase profits by paying larger bonuses. This is what the banks believe, certainly. I’m just a tad surprised to see you saying the same thing.

“What you’re saying is – we cannot now under any circumstances do anything to penalise banks because that would simply mean consumers might get the cost.”

No. Neither Luis nor I are saying any such thing. * Some* things that might be done sound very sensible (I’m in favour of an insurance levy to pay for future bailouts for example, like the FDIC levies). *Some other* things are not sensible. Because the consumer will end up carrying the cost, just as an example.

*This specific idea* will end up….OK, could end up…..with the cost carried by the consumers being higher than the tax raised. It was Joe Stiglitz in a 1980 paper who showed that this was possible: that tax incidence could be so skewed that the losses to the workers from a corporation tax could be higer than the amount raised from such a tax. Yes, really, that Joe Stiglitz who now writes for The Guardian, has won a Nobel Prize….

“This doesn’t necessarily stand up because:

1) There is (some) competition in the market. If one bank decides it’s going to raise charges on how it deals with me I can move to another one. There’s no guarantee that every bank will behave in exactly the same way.

This also means you think there is no competition between banks.”

Sorry, no. Think for a moment. Foreign exchange bid/ask spreads tend to be around 2 basis points at present. Add a 5 basis points tax….spreads widen, obviously. Who pays that tax? The bank? Or you going on holiday and needing euros?

“2) This argument was also applied during the railing against the Minimum Wage – that if the profits of companies was in any way affected then there would be dire consequences for employment because obviously they wouldn’t absorb costs.

Didn’t work out like that did it?”

As Chris Dillow has pointed out a number of times: yes it did work like that. Or, from you own site:

“Many of the cleaners – who are members of the Unite trade union and are predominately migrants from West Africa, Latin America and some European countries – were involved in a campaign in 2008 to win the “London Living Wage” at UBS, currently £7.60 per hour.

Despite this victory, most workers still have to work multiple shifts in order to make ends meet. UBS has encouraged a race to the bottom resulting in their cleaning contractors cutting cleaning staff hours – therefore pay – or make redundancies.”

Wages per hour rise: hours paid for fall. The price of labour rises, less labour is hired. We did tell you this would happen, didn’t we?

“3) Regulation. Your assumption that higher costs will automatically be passed on depends on what you mean. Banks can’t easily suddenly start charging high rates for credit cards or ramping up costs in other ways. The FSA could crack down on underhand tactics to pass on costs to consumers.”

That isn’t what tax inxidence is about. We’re not talking about whether charges rise. We’re talking about where the economic burden falls.

“4) Lastly – the assumption is that the economy can’t change.”

Ooooooh, no, we’re arguing the opposite. Economies change all the time. They change in reaction to the incentives faced. Our argument is that the changes which this particular tax will bring are changes that you don’t desire.

It isn’t that all changes are bad. It’s that this change is bad.

“In the US there’s been a movement encouraging people to close bank accounts with big banks and move to smaller, local banks.”

Hey, great, whatever. But what does this have to do with the tax incidence of the Robin Hood Tax?

Tim Worstall,

Banks handle transactions on behalf of folk do they not? Sure, there are marginal earnings to be made in that. But currency trading is a real market, is it not? Why should it remain untaxed? It is not, as I see it, necessarily a tax on banks but on the folk that speculate on currencies. The people that ought to be paying the tax are not the banks, but the speculators.

Obviously this is wrong. Talk me down here a bit.

39. Luis Enrique

Sunny

first

I’m afraid that’s a very bad strawman and it’s not surprising to see you and Tim praise it.

that wasn’t very nice; I’ll regard it as a lapse on your part.

thing is … it wasn’t a straw man: if you want to argue that the tax on banks will not be passed on the consumers, then you do have to believe that bank charges and rates won’t be adjusted to protect returns, and that the only margin to move will be profits and bonuses. I wonder why, if you don’t even understand that, that you are so trenchantly arguing your position. Is this really an area you know a lot about? What’s stopping you from simply reconsidering your opinion?

What you’re saying is – we cannot now under any circumstances do anything to penalise banks because that would simply mean consumers might get the cost.

As has been pointed out above, I have said nothing of the sort. So how do you explain having written that? This is not the first time you have utterly failed to read what I actually have written and have started arguing with a made-up opponent. Really, why do you do that?

Yes there is competition between banks. Would you like me to walk you through some of the economic theory concerning how perfectly competitive firms will respond to a tax increase? Would you like me to show you some empirical research on this question? Also, do you really want to find yourself relying on the argument that banks act competitively? Have you seen the profits they were making?

his argument was also applied during the railing against the Minimum Wage

yes, you’re right it is similar, and yes you’re right the labour market is more complicated than a simple “cost up, demand down” argument accounts for. Of course firms can also respond to the imposition of higher wages by raising prices. But think magnitudes Sunny – how far was the minimum wage above the market wage? Now what magnitude is taking hundreds of billions in tax out the banking sector?

your point 4 – regulation – come on now, there’s no regulation that can stop banks increasing their lending rates by a 0.2% or cutting savings rates, or charging firms more for banking services of various sorts.

I can’t make much sense of the rest of your comment. Of course ‘economies can change’, but why do you think the imposition of a transaction tax is going to change how banks take pricing decisions to such an extent that they leave their prices unchanged and solely take the hit on profits? The rest of what you write bears no relation to anything I’ve written. I’d like to see big changes in banking, see for example my comment @13.

What puzzles me is why you find yourself denying the reality of tax incidence. It’s quite possible to understand tax incidence and still support a Tobin tax. If you’d read my comment, you’d have seen that I support new taxes on banks. Do you imagine Paul Krugman and other economists who support a Tobin tax also believe that banks won’t change their pricing in response?

“Wages per hour rise: hours paid for fall. The price of labour rises, less labour is hired. We did tell you this would happen, didn’t we?”

That’s not what those communists at KPMG found:

‘KPMG has found that paying the London Living Wage is a smart business move as increasing wages has reduced staff turnover and absenteeism and increased productivity and professionalism.’

Y’see – raising the price of labour can make us all richer.

http://www.london.gov.uk/view_press_release.jsp?releaseid=11430

*

I’m not sure those of you who think that you have a knock out argument because the banks will try to pass the charges on have thought this one through:

Supposing the people who run the banks manage, somehow, to pass 100% of the costs on to their customers, through various charges etc. So the Robin Hood Tax raises lots of money, which governments spends on good things like ensuring every child in Africa can go to school (thus building human capital and helping make us all richer), as well as popular things to help people in Western countries.

Result is that the government gets a popular tax which redistributes to the poor, and people get even more annoyed with the banks. And this is your worst case scenario why you think it will be bad for us to do this?

More likely, the bankers aren’t suicidal enough to try to pass on all the costs, so they end up paying more taxes and having a slightly reduced (though still vastly opulent) standard of living.

I do like, though, the story of Robin Hood according to Tim Worstall – Robin Hood was an enemy of the poor because his actions forced the barons to take more from ordinary people to compensate them for their losses.

Sunny,

Although Tim and Luis are converging on points here, I think it’s unhelpful to lump them together.

Tim’s a raving classical liberal mental case (:P) but we already all knew that.

Luis is one of the few people on the left with a high-level understanding of economics. I think we do well to listen to what he says.

Certainly, he speaks more sense and has a better grip on economic theory than the entire working output of NEF and all its employees and fellows put together.

Really, what we’ve had on this thread is two highly-qualified economists (Giles and Luis) and also one not-a-proper-economist-but-let’s-concede-pace-my-own-earlier-bitchiness-knows-a-lot-more-about-economics-than-average-joe come on here and tear the NEF stuff to shreds.

As I argued before (in the piece you refused to run :P) the NEF idiots are bad for the left. Just because they are on our “side” doesn’t mean they should be encouraged or even respected.

Don,

Good points – but I think it’s worth stressing (before it gets lost in the fury of battle) that your points about tax incidence not being completely-as-Tim-would-have-us-believe were well made by Luis at frequent points above.

(Not having a dig; just concerned at the way this thread seems to be disintegrating into a black/white for-us-or-against-us fight)

Luis is one of the few people on the left with a high-level understanding of economics. I think we do well to listen to what he says.

But as a complete utter idiot, I do not think he says anything, much. The Tobin Tax is supposed to be about transactions on currency transactions is it not? What the heck has that to do with banks?

Or even ‘taxing currency transactions’.

When is Sunny going to give us an edit facility again?

Like any tax on an antisocial activity, it’s a simple win-win: either the activity carries on, in which case we raise lots of money, or the anti-social activity is discouraged. Or, a bit of both.

Unchecked rampant speculation is obviously an anti-social activity.

*Cue torrent of complete shite about how it is economically more important than anything other form of human activity, because it provides liquidity to markets.*

Yeah, yeah, yeah.
Well done NEF, sharp campaign

“The Tobin Tax is supposed to be about transactions on currency transactions is it not? What the heck has that to do with banks?”

Banks lend to each other.

Often, banks are in different countries.

Often, big banks have branches in different countries.

Accordingly, banks trade currencies when they lend to each other.

Often, banks trade many commodities. My mate works for JPMorganChase. He sells and buys metals. Often he buys them from, say, Egypt (or wherver). In Egypt, they use different money.

Often banks sell and trade, erm, money.

In short: currency transactions are at the heart of, erm, banking.

Strategist,

Well, what you said was a bit obvious. These economists are a bit stupid, aren’t they?….

Paul Sagar @ 46,

No.

I am a simple man.

Currency transactions can be at the heart of profit. And it is not bankers that bet. Bankers are simply bookies in that game…. It seems reasonable for the state to tax a gamble, does it not? There are huge currency flows, few of which are to do with trade?

Your explanation doesn’t cut it.

To repeat, it has fuck all to do with banks.

@47 “These economists are a bit stupid, aren’t they?….”

Yes, you could put it that way. I’d call them small minded.

And I wouldn’t call them economists, I’d call them market ideologues. They have grasped one single idea, that has great elegance and would be wonderful if the entire world could be levelled so that the theory could work. They’d be perfectly harmless if they hadn’t seized power and weren’t far into the process of laying waste to the planet and enslaving the majority of its population in pursuit of their big idea.

They are mad and sadly, not harmless, but dangerous.

In response to Tim at #37

And now make larger profits and hand out larger bonuses.

Unless you show me a correlation between bonuses and profits – which you can’t – it’s difficult for you to argue those large profits were down to large bonuses. So my point is: there’s no economical reason why bonuses should be so high.

*This specific idea* will end up….OK, could end up…..with the cost carried by the consumers being higher than the tax raised.

yes yes, just as your lot argued the Minimum wage would lead to large scale unemployment.

Sorry, no. Think for a moment. Foreign exchange bid/ask spreads tend to be around 2 basis points at present. Add a 5 basis points tax….spreads widen, obviously. Who pays that tax? The bank? Or you going on holiday and needing euros?

Oh rubbish. Most forex speculation is just speculation – not an attempt to adequately give consumers the best rate as determined by the market. The market in fact is incredibly inefficient when it comes to forex – people get ripped off all the time on changing currency. The impact of the levy will be minimal too because, as I said, most of the impact will be on speculative movements.

The point about competition still applies (in terms of banks competing to not pass on rates to consumers. You haven’t adequately addressed this.

Despite this victory, most workers still have to work multiple shifts in order to make ends meet. UBS has encouraged a race to the bottom resulting in their cleaning contractors cutting cleaning staff hours – therefore pay – or make redundancies.”

Actually in most cases around the LLW – this hasn’t happened, otherwise London Citizens would have dropped the campaign ages ago. They’re not ideologically driven.

You can’t use one example of a bank being stingy to illustrate LLW hasn’t worked.

That isn’t what tax inxidence is about. We’re not talking about whether charges rise. We’re talking about where the economic burden falls.

And I’m saying there are regulatory ways to make sure consumers don’t feel that burden – but it depends on how banks respond.

It isn’t that all changes are bad. It’s that this change is bad.

you haven’t convinced me.

But what does this have to do with the tax incidence of the Robin Hood Tax?

My point is you’re predicting big behaviour without taking into account a possible consumer backlash if they try and pass on too many charges

Luis: Do you imagine Paul Krugman and other economists who support a Tobin tax also believe that banks won’t change their pricing in response?

This comes to the heart of the issue.

A few questions first:

Most currency trading is speculative isn’t it? Currency moves around to catch small changes that would make them lots of money. Isn’t that right?

Secondly: My point is that you’re assuming banks are perfectly competitive while Labour markets are not – while Tim W would start from the position both are. I start from the position that neither are.

In which case you’ll need to offer some emprical proof that such a tax on transactions, which is largely about speculative currency flows (is it not?) will automatically be passed on to consumers.

What I’m saying is – I just don’t buy your central assumptions the banking industry is perfectly competitive. If that were the case:

1) people wouldn’t have been able to hide such huge losses on their balance sheets just before crisis
2) banks wouldn’t have been rewarding people for taking their firm to the verge of bankruptcy
3) banks wouldn’t have been sucked into a systematic failure because they would have thought about their own solvency while dealing with other banks that were trading highly risky investments.

Does that clarify my position?

“But currency trading is a real market, is it not? Why should it remain untaxed? It is not, as I see it, necessarily a tax on banks but on the folk that speculate on currencies. The people that ought to be paying the tax are not the banks, but the speculators.”

I’ve no problem with people who trade in currencies being taxed. As indeed they already are. An individual pays income tax on their profits, a company corporation tax.

““Wages per hour rise: hours paid for fall. The price of labour rises, less labour is hired. We did tell you this would happen, didn’t we?”

That’s not what those communists at KPMG found:

‘KPMG has found that paying the London Living Wage is a smart business move as increasing wages has reduced staff turnover and absenteeism and increased productivity and professionalism.’

Y’see – raising the price of labour can make us all richer.”

Don, aboslutely nothing in your response refutes or even addresses any of the points I made. I said that if the price of labour increases then the amount purchased will fall. Which is exactly what those cleaners on the other thread are complaining about.

You have come back and said that staff turnover and absenteeism have fallen. OK, but what’s happened to the amount of labour bought?

There’s a very good Paul Krugman essay out there on this very point. If you pay more for a certain type of labour than the other firms around you, you’re going to end up employing either the good such labour there is floating around or you’re going to get better behaviour out of the labour you’ve already got. Because, obviously, you’re offering a better deal than people can get elsewhere.

However, here’s the catch. It’s not because of generally higher wages. It’s because your wages are higher than the other employers competing for that same labour. If everyone starts paying the higher rate then we’ll settle back to the old equilibrioum on staff turnover and absenteeism. It’s even possible to test this. We see, when one copmpany raises wages for a specific kind of labour, those bad things decline. So far so consistent with the theory. So, did we also see those bad things decline right across the economy when we introduced the national minimum wage? Indeed, we should have seen them diminish several times as tne min wage wase increased above the rate of wage inflation a couple of times over the years.

Each such increase should, if your theory is correct (that it’s the level of the wage itself, not that it is higher than others are offering), have reduced those bad things. Well, did it?

“Supposing the people who run the banks manage, somehow, to pass 100% of the costs on to their customers, through various charges etc.”

Sigh….we’re not suggesting that banks “will try” to pass along these costs. Well, perhaps they will, but that’s not the major point. We’re saying that behaviour of all of the participants in the market will change so that inevitably the costs will be passed on to the consumers. There’s no effort necessary by anyone to deliberately make this happen. There is no evil bastard counting coins, Scrooge like in the background. No Scrooge McDuck swimming in gold coins as the peasantry starves.

A transactions tax will widen the margins at which deals take place. For example, the current 2 basis points or so at which foreign exchange transaction take place will widen to perhaps 10 basis points (the tax itself plus a bit more for the loss of liquidity). Thus everyone who makes a foreign exchange transaction is paying more for having done so.

It’s the same as the tax incidence argument with corporation tax. Most of that economic burden is carried by the workers. Not because some plutocrat decides that he wants to shift that burden to the workers. But simply because adding capital to labour makes labour more productive. More productive labour gets paid more (average wages in an economy are, as Paul Krugman tells us, determined by hte average productivity in that economy).

So, we tax the returns to capital in one place, in a globalised world. Less capital will be added to labour in that place because that capital can be added to labour elsewhere instead, where it isn’t taxed. Thus labour in our place with the tax has less capital added to it, is less producive and thus gets paid less. Those lower wages are the economic burden of the corporation tax.

I repeat, tax incidence does not depend upon some villain attempting to shift the burden. It isn’t that “the banks” will try to shift the burden onto their consumers. It is that the entire marketplace itself will change and shift the burden.

“Result is that the government gets a popular tax which redistributes to the poor, and people get even more annoyed with the banks. And this is your worst case scenario why you think it will be bad for us to do this?”

Let me see if I’ve got this right. The RH proposal is that we’ll only be taxing the banks. Us wee consumers won’t be paying any of it, oh no siree!

You say, well, even if it is us wee consumers who pay it, we’re so dumb that we won’t notice and we’ll think it’s the banks anyway. So therefore it’s a good idea.

Seriously? You want to base taxation upon the ignorance of the population?

“Tim’s a raving classical liberal mental case”

Ooooooh, stop, I’ll be blushing next…..

“The Tobin Tax is supposed to be about transactions on currency transactions is it not?”

The Robin Hood proposal takes the Tobin Tax on currency transactions and applies it to all wholesale financial market transactions. It thus becomes a financial transactions tax (FTT). That’s what they’re proposing. All foreign exchange, all futures, all options, all shares, bonds, money transfers between market participants, everything…..the overnight interbank market, CHAPS, etc, etc, etc….

“Unchecked rampant speculation is obviously an anti-social activity.”

Tehre are an awful lot of economists who disagree with that. Andno, not all of them are “raving classical liberal head case”s. Robert Shiller for example, points out that if you’d been able to properly speculate in house prices, been able to sell short, then the housing boom wouldn’t have got as out of hand as it did. Indeed, his solution is to build markets where you can speculate short on housing.

There’s been a lot of work done on the influence of futures and options markets on the prices in the underlying spot and physical markets. The general conclusion (with, agreed, some dissenters, but they do tend to be, those dissenters, those who have not studied said markets) is that they reduce volatility of prices and smooth the physical markets in all three of volumes, price and stock availability. Indeed, Adam Smith pointed out that this was what wheat speculators did way back in 1776 (in his many pages of 18th century prose which is why so few bother to read it).

“Unless you show me a correlation between bonuses and profits – which you can’t – it’s difficult for you to argue those large profits were down to large bonuses. So my point is: there’s no economical reason why bonuses should be so high.”

Err, no Sunny. You made that point. I was just pointing out the logical inference of what you said. Banks used to have small profits and small bonuses. They now have large profits and large bonuses. That is what you said….

“yes yes, just as your lot argued the Minimum wage would lead to large scale unemployment.”

Dunno who “my lot” are. I argued that the minimum wage would lead to some unemployment. And that unemployment would be concentrated in the least skilled….the teenagers or example. Chris Dillow has already shown that the min wage did lead to some unemployment. The American experience has been that teenage unemployment has indeed risen along with the recent min wage rise. Don’t see that I’ve been shown wrong yet….unless you think that the utterances of some dozy Tory are my responsibility?

“Oh rubbish. Most forex speculation is just speculation – not an attempt to adequately give consumers the best rate as determined by the market. The market in fact is incredibly inefficient when it comes to forex – people get ripped off all the time on changing currency. The impact of the levy will be minimal too because, as I said, most of the impact will be on speculative movements.”

But Sunny….it’s all that speculative trading that leads to the 2 bps margins. Take that away and the spreads will widen. We can even test this. Go to the Stock Exchange and look up the bid/ask offers on some shares. (The bid/ask is the same as that margin thing.) Big companies, where there’s lots of (speculative) trading in the shares have low bid/ask margins. Smaller companies, where there is a lot less activity, less speculation, have wider bid/ask margins.

There’s nothing specific to financial markets here either. High volume markets of any kind tend to be low margin. Low volume markets to be high margin. If I trade a few hundred tonnes of aluminium (as I have done, moving it from Russia to Japan) I’m lucky if I can make 5% margin. If I trade a few hundred kilos of scandium oxide (as I have done, indeed, as I do, from Russia to the US) it’s a sad, sad day when I can’t make a 20% margin. The Al market has thousands of participants and tens if not hundreds of thousands of speculators in it. The scandium market has perhaps 15 worldwide and no speculators at all. The Al market is at least millions of tonnes a year if not tens of millions. Sc perhaps two tonnes a year. Margins and volumes tend to be (and it’s very unusual for them not to be) negatively correlated.

“The point about competition still applies (in terms of banks competing to not pass on rates to consumers. You haven’t adequately addressed this.”

We could look at what happens with Stamp Duty on shares here. The LSE is a competitive market. There’s any number of people you can buy and sell your shares through. None of them offer to pay your Stamp Duty. None of them offer to absorb it into their own margins. So it’s unlikely that an FTT will be, isn’t it? Especially as that Stamp Duty is being held up by the Robin Hood folks as the model for the FTT….(no, really, they do, they use a paper by Dean Baker as part of their intellecual justification…one of their two pieces of academic justification actually….where he makes exactly this point).

“And I’m saying there are regulatory ways to make sure consumers don’t feel that burden ”

Do please lay those out. I’d be fascinated to hear them.

“My point is you’re predicting big behaviour without taking into account a possible consumer backlash if they try and pass on too many charges”

As above, we’re not trying to say that the banks will pass on the charges. We’re trying to say that the market will change so that consumers bear the burden. There is no evil mastermind trying to shift the burden from banks to consumers.

“Secondly: My point is that you’re assuming banks are perfectly competitive while Labour markets are not – while Tim W would start from the position both are. I start from the position that neither are.”

Well, no, even I don’t claim that labour markets are perfectly competitive. But if you’re going to look for one that probably is, foreign exchange is probably it. Trillions of $ a day, many market participants, very low barriers to entry (you or I could be trading foreign exchange in about 30 minutes and for the cost of perhaps $100 in software to aid us….there are companies that sell such packages), everyone’s a price taker, no one participant can control prices (even central banks have huge problems trying to do this as you may have noticed)…..that’s as close to being perfectly competitive as you’re going to see in the real world I would hazard.

“In which case you’ll need to offer some emprical proof that such a tax on transactions, which is largely about speculative currency flows (is it not?) will automatically be passed on to consumers.”

Again, we’re not trying to say that the currency dealer consciously tries to stick the consumer with the tax. We’re saying that changes in the markets (less speculation, less liquidity, higher dealing spreads, just as examples) will mean that the consumer does bear the economic burden.

“What I’m saying is – I just don’t buy your central assumptions the banking industry is perfectly competitive. If that were the case:

1) people wouldn’t have been able to hide such huge losses on their balance sheets just before crisis”

Err, Sunny, before the crisis there were no huge losses. For before the crisis people would buy and sell this toxic waste at face value. Thus those who held it were not holding a loss. When people would not buy and sell it at face value, that’s when the losses started and thus we had the crisis.

Which neatly takes care of 2)….and 3) indeed. The banks really did think that these CDOs were worth what was printed on the tin. When house prices started to fall and mortgages to fall into arrears, it caught them as much by surprise as it did anyone else.

53. Luis Enrique

Where has this idea that a transaction tax is all about currency transaction come from?

Sunny:

Most currency trading is speculative isn’t it?

I have no idea. Some portion will be, but firms, banks and governments all do business involving currency exchange. This is beside the point. If the Tobin tax was just about sterling interbank lending, we’d still be having this debate.

My point is that you’re assuming banks are perfectly competitive

Why do you keep doing this? @36 you suggested that competition between banks would prevent the tax being passed on to consumers, I wrote @39 that even if banks were perfectly competitive, that’d still mean taxes are passed on and suggested that you wouldn’t want to based your denial of tax incidence on the idea that banking is competitive, because their profits suggest otherwise. Please please start reading what I actually write.

In which case you’ll need to offer some emprical proof that such a tax on transactions …. will automatically be passed on to consumers.

And if I do provide some evidence along those lines, tell me, are you going to acknowledge that you have got things wrong here? because you’re not showing much sign of amending your position in the light of argument. Oh look. And here.

I just don’t buy your central assumptions the banking industry is perfectly competitive.

Bloody hell Sunny, you really are all at sea here. Competitiveness is not “central” to the idea of tax incidence at all. Think about this for a second – do you imagine that a monopoly wouldn’t pass on a tax to its customers?

Does that clarify my position?

No, it doesn’t. It just reinforces my perception that you are engaged in a bizarre crusade on a topic you don’t really understand, not bothering to read and think about what other people are writing, and are pathologically opposed to conceding when you’ve got things wrong. As pointed out above, you are disagreeing with Joe frikkin Stiglitz on this one. Give it up.

It’s a shame because if you actually took the trouble to read what I write, you’d see that I provide arguments in support of the Tobin tax – see #21.

Some further points of clarification I want to add:

1. “Tax incidence” doesn’t mean all of the tax will be passed onto consumers, it merely says that some combination of lower wages, higher prices and lower profits will happen. That point is that it’s very hard to believe that 100% of a hundred billion pound tax will come out of profits and bonuses, without prices (or worker’s wages) moving at all.

2. Sunny’s point above about consumer activism is a good one, but quite separate from the question of tax incidence. If consumers do become more active switching banks to get a better deal, that will put pressure on prices. Should that happen at the same time as a Tobin tax, it would help counteract any incidence of that tax on price, but it wouldn’t mean the incidence isn’t happening.

3. Nobody should have the idea that anything done to increase costs for banks will simply be passed on to customers. Something explains why finance become so grotesquely profitable, and some targeted tax or similar could potentially address whatever that something is. Sadly, I don’t see how a Tobin tax addresses anything like that – if the ability to transact frequently somehow explains these gigantic profits, then a small tax isn’t going to stop them doing it, is it?

54. astateofdenmark

53 Luis Enrique:

”Where has this idea that a transaction tax is all about currency transaction come from? ”

It’s part of the spin. How do you convince people that the state taking 400billion is painless? Tell them it’s coming from evil bankers, socially worthless speculators and dress it up as Robin Hood. It’s tiny and there rich anyway.

Repeat the above endlessly and hopefully nobody will think about the consequences.

Something explains why finance become so grotesquely profitable, and some targeted tax or similar could potentially address whatever that something is.

Isn’t there an argument that, as Tim W says upthread, banking is a low margin, high turnover industry, and it is the turnovers that have increased so much? In other words, banks are just doing much much more than they were 20 years ago. In part this is surely due to those financial innovations that allow you to sell the same debt three times in three different forms.

I remember a particularly ghastly lecture on derivative transactions where the financial sector was compared to a cappucino. The amount of coffee has only increased a bit, but there’s been an exponential increase in froth.

This is a tax designed to fund global governance.
People should be aware of that before saying they support it because some celebrities make a film promoting it.

And never fall for a teaser rate. 0.05% is just the introductory special offer

Adam the Libertarian

Louis Enrique @ 53

Where has this idea that a transaction tax is all about currency transaction come from?

This is all a bit slippery for us non economists, but the original article talked about a Tobin Tax.

So, probably, from here:

http://en.wikipedia.org/wiki/Tobin_tax

The first few sentences of which read:

A Tobin tax, suggested by Nobel Laureate economist James Tobin, is a concept initially associated with a tax on all spot conversions of one currency into another. The tax is intended to put a penalty on short-term financial round-trip excursions into another currency.

I think Tim @52 (Paul, just as much a proper economist as me …) captures the real issue here (and in only 2200 words.)

According to my rough calculations, banks on the $3trn of global FX turnover make about 0.5bps per trade. That means half as much as when the £ moves from 1.6000 to 1.6001.

The promise of the 5bps charge would take away about 10 x the current profit.

That would decimate the level of activity. Now, Sunny might say: “so what? Lots of speculators trading manically to make 1bps – so what if they go out of business? Scumbags”

But it would remove a vast amount of trading from the market. Currently, if Company A needs to sell £ and buy $, he can rely on there being bids at 1.6000, 1.5999, 1.5998 and so on. In large size. Because the liquidity and low cost of the market means it is economically rational for those who think they can make a 2-3bps profit to stick in their bids. If they were to be paying 5bps in and 5bps out, they would disappear, and then the market would be populated only by thos who felt 20bps was possible.

I know about this: I worked in speculation (www.iggroup.com) from the era of 10bps down to 2bps.

That would then mean that the liquidity would be way worse. So when Company A needs to sell £1bn, he finds that his average price is 1.597 instead of 1.5996, say.

So the cost then falls on Company A. What does Company A do? Curtail investment – it now needs a higher hurdle. Shop abroad less widely. Raise prices somewhat – it is a bit like the rent going up. Worry less about competitors (a lower number of them are attracted to his business).

This is not about Banking. It is not about “Banking -> customers of Banking”. It goes far further than that – it is about all trading.

This is not a knock down argument against Tobin taxes. But people should not think they can limit the ramifications to “what does an extra 5bps of cost on something I understand mean? Oh, not much. Let’s do it”

“omething explains why finance become so grotesquely profitable”

Well this paper thinks it was technology enabling markets to work better:

http://www.jrf.org.uk/sites/files/jrf/tackling-poverty-online-summary.pdf

and advocates government intervention to create small scale online markets. Slightly off topic but I’d be interested to know what Tim, Luis, Giles etc think of it.

60. Luis Enrique

Douglas,

of course, you are right. However not that from your quote “A Tobin tax …a concept initially associated with a tax on all spot conversions” and also that the Robin Hood tax being discussed here is explicitly a tax on all ‘speculative’ financial transactions, not currency dealing.

61. Luis Enrique

Planeshift,

The paper looks interesting & full of good ideas – sorry, only time for a quick scan.

Not sure it’s related to the question of why the finance sector grew so large. One point: as I understand the words, if technology made “markets work better” then excess profits should have been competed away. I’d regard the grotesque profits within finance as some sort of market failure.

@59. I’ve read that paper before. All in favour of the basic idea. Yes, markets where people can trade things are a good idea. By definition, voluntary exchange makes both parties better off.

From memory (not going to read the paper again right now) one of the major implications is that government has to get out of the way here. Not worry too much if someone does 17 hours and thus risks losing benefits, if next week they do 5, make sure that such very temp and part time work doesn’t lead to the aquisition of employment rights and so on.

Essentially, relax and let people get on with it all.

But then I think that about most of the economy anyway.

But local such markets? Bring it on! I’ve been hugely in favour of local such capital markets for donkey’s years as well. Let’s have not just a London Stock Exchange where you can invest in huge companies, but Bristol, Liverpool, Manchester (as we did at one time) exchanges, hosting regional companies. Hell, why not one for Bath where you can buy a share in the local greengrocer if you wish? (one of the local Bathfishmongers did in fact float on OFEX a few years ago.)

Louis Enrique @ 60,

Thanks for clearing up the difference. It would seem to me reasonable that ‘speculative’ trades could be identified by the time that the instrument was held.

So, if you bought and sold currency futures within, say a week or so, you should be viewed as a speculator, and subject to the tax. Same goes for stocks and shares.

64. Luis Enrique

Douglas,

potentially, although banks borrow and lend very large amounts on short durations (sometimes overnight) to cover cash flow shortfalls and balance books.

Doug @63

Wouldn’t work. Well, suppose I bought £ against the $. Want to avoid extra tax for closing early. instead of selling £ and buying $, I could do a trade in £-E, and in E-$. Or arrange a swap, or a future, or an option.

I don’t think it is easy to tell externally when someone gets and loses an exposure.

I think grotesque profitability of banking is a simple matter of leverage. Let’s go after leverage, not transactions. Haldane’s big on this

66. Luis Enrique

Sunny,

I need to apologize for something. @53, what I wrote about @36 and @39 and how you’ve got things back to front, was unwarranted. I can see why you might have read @39 and thought I was asserting that banks were perfectly competitive. I wasn’t: I was responding to your argument @36 that competition would prevent banks from passing on the tax, by saying (by implication – I wasn’t clear) that even under perfect competition one would expect taxes to be passed on, hence your argument about competition does not refute the idea of tax incidence.

guys I’ll have to respond to the essays later – am a bit busy today, sorry…

@52 “Unchecked rampant speculation is obviously an anti-social activity.”

“There are an awful lot of economists who disagree with that. And no, not all of them are “raving classical liberal head case”s. Robert Shiller for example, points out that if you’d been able to properly speculate in house prices, been able to sell short, then the housing boom wouldn’t have got as out of hand as it did. Indeed, his solution is to build markets where you can speculate short on housing.

There’s been a lot of work done on the influence of futures and options markets on the prices in the underlying spot and physical markets. The general conclusion (with, agreed, some dissenters, but they do tend to be, those dissenters, those who have not studied said markets) is that they reduce volatility of prices and smooth the physical markets in all three of volumes, price and stock availability.”

Interesting response – thanks. My view – there’s probably a happy medium between a very clunky illiquid market such as that for housing and an absurd casino market that’s packed full of gamblers speculating on “sentiment” and making life impossible for actual wealth creators needing to use & hence having to trade in the actual commodity in question.

An example of this is what purpose is served by this wonderful new industry of computers buying and selling stocks within microseconds? All they can do to defend this nonsense is spout crap about providing liquidity to markets. In reality all it does is make life harder for real wealth creators.

I am not convinced by conventional economics’ received wisdom, which is just another case of lemming-like intellectual herd behaviour.

@53 Sunny: “Most currency trading is speculative isn’t it?”

Luis Enrique “I have no idea. Some portion will be, but firms, banks and governments all do business involving currency exchange.”

Some portion? WTF? I thought a sum in dollars was traded every day something like equal to total world economic product in a year. Maybe others can assist here. But clearly the vast majority is gambling.

@45 “Unchecked rampant speculation is obviously an anti-social activity.
*Cue torrent of complete shite about how it is economically more important than anything other form of human activity, because it provides liquidity to markets.* ”

And, bang on cue, there it is from Douglas @58.

“According to my rough calculations, banks on the $3trn of global FX turnover make about 0.5bps per trade. That means half as much as when the £ moves from 1.6000 to 1.6001. The promise of the 5bps charge would take away about 10 x the current profit. That would decimate the level of activity.”

Good! I think one tenth the level of activity from people like yourself is precisely what society and the real economy needs.

“nteresting response – thanks. My view – there’s probably a happy medium between a very clunky illiquid market such as that for housing and an absurd casino market that’s packed full of gamblers speculating on “sentiment””

To an extent this is true. But determine that extent is the problem. I’m extremely wary of anyone at all pointing to the activity of someone else and saying “what you’re doing is useless”. I regard Coronation Street as so (sorry Mr. Dillow) but some millions disagree with me.

“and making life impossible for actual wealth creators needing to use & hence having to trade in the actual commodity in question.”

I’m very unconvinced here. Speculators provide liquidity, yes, they also provide price discovery. This makes such markets *easier* to use by “wealth creators” not harder. All that froth of the secondary trading in hte stock market makes it easier for people to raise new money by issuing shares at a better price for example.

You’ll note that it’s the markets without speculators, like housing (speculators who can go short especially) that do get horribly out of line.

This seems like a nice sounding idea born out of desperation. I am concerned that people like Dr Neil McCulloch at the University of Sussex IDS suggest it may not work as intended (http://www.guardian.co.uk/business/2010/feb/12/robin-hood-tax-tobin-speculation)

What is needed is some way to stop the business-as-usual approach from banks and government. What really does seem like a no-brainer is to separate retail banking from casino banking. Then something could be done about damaging speculation by large banking institutions.

As an aside, those who argue that the trillions of pounds used to prevent a banking collapse will eventually be payed back, the latest edition of Private Eye, issue 1255, has an breakdown of the cost of the bailout of Barlowe Clowes. The public stumped up £150m (£300m current value). In the end, due to litigation costs in several jurisdictions plus admin costs of liquidators and a failure to properly identify assets none of that money has been returned. In fact the expenses cost the public further money.

“and making life impossible for actual wealth creators needing to use & hence having to trade in the actual commodity in question.”

“I’m very unconvinced here. Speculators provide liquidity, yes, they also provide price discovery.”

Except where there’s a shortage of an essential commodity and speculators buy it all up, and then hold everyone to ransom, eg as recently happened with rampant speculation in oil and food staples which lead to enormous hardship and real hunger for millions of the world’s poor.

They also provide price bubbles and instability. I don’t think anything would be lost if trading in certain essential commodities was restricted to those actually prepared to physically deal in the commodity.

and strategist, your evidence is?

Diogenes. The problems when the price of food staples was driven up by speculation a couple of years ago has been well documented. Try looking it up.

My second comment about nothing being lost by restricting speculation in a commodity to those prepared to physically deal in that commodity is a hypothesis.
I don’t know if it has been proposed by others, modelled or tested. I’d be interested to find out.

Or maybe it’s a piece of new thinking provided free and without charge to clods on websites who think it the height of cleverness to go “…and your evidence is?”

Strategist, where is your evidence is a fair question?

For speculators trading in futures contracts to drive up the physical price they would need to hoard the commodity in order to sell at a higher spot price at some future date. Buying a paper futures contract does not reduce the quantity of the underlying commodity available for consumption. Only a decrease in supply relative to demand can do that.

During the commodity spikes of 2008 many on the left and the right were screaming about speculators. However, a rather large hole in their argument was the complete lack of any evidence in substantial increases in physical commodity inventories. Moreover, crops are perishable so hoarding is rather difficult. Furthermore, in the oil run up to $147 pb, the market was not in contango where future prices were higher than spot prices. The market was actually in backwardation so although the physical price of oil had massively increased it was speculators who were preventing it going even higher. Speculators are only anticipating the supply and demand dynamics of the underlying commodity in the futures market. They can only increase the demand for a commodity, when they buy the product in the spot market and hoard it off the market. Connecting speculative buying of futures contracts with physical price rises has no validity without evidence of increases in inventories.

Some economists claim that speculators bidding up the price of futures well above spot prices can create incentives for others to hold the physical off the market. However, this still needs evidence from inventories.

Speculation in commodities creates an efficient use of resources and holds prices down. The price finding mechanism from the market sends a price signal to producers to tell them what is scarce and what is in abundance. The ‘ invisible hand ‘ then magically produces more of what was scarce ( better price ) and less of the abundant ( poor prices). What was scarce then falls in price as more is produced and the abundant rises as less is produced. Net result efficiency.

Imagine a world without commodity markets. Scarcity and gluts would be the norm. Imagine a world of commodity markets where only those taking physical delivery could operate. The risk would fall entirely on those buying forward from producers. Therefore, for bearing that risk they would offer poorer prices for producers and widen the spread by selling on at a higher price, which would transmit to higher prices for consumers. Poorer farmers and poorer consumers. Net result inefficiency.

“The problems when the price of food staples was driven up by speculation a couple of years ago has been well documented. Try looking it up.”

Ahhhhh, a classic case of cart before horse here.

The benefits of speculation in physical commodities are discussed by Adam Smith in WoNations. Pages and pages of it.

Imagine that there was going to be some future shortage of wheat. No, just imagine. A speculator will buy up wheat now and store it to be sold in hte time of shortage, when the price is higher. By buying wheat now he’s increasing the price now. This signals to others that, given that wheat is more expensive, they should be using less of it now. Thus, if the shortage is over more than one harvest, there is an incentive for farmers to plant more. If the shortage is between harvests, there’s still been a reduction in consumption earlier, leading to less of a shortage when the shortage does indeed come.

In agrarian societies, this is a valuable service: the hungriest time of the year was late summer, just before the harvest usually.

What the speculator has done is both moved prices intertemporarily and also reduced the physical shortage itself.

In the modern world, with international wheat markets and multiple growing seasons (N. and S hemispheres for example) it’s still a valuable service.

The idea that we should all fill up our petrol tanks with ethanol made from grains (wheat, yes, but obviously the effect was felt much more with corn)…in fact, the legal insistence by both the EU and the USA that we would, meant that observers of the grain markets could see a grain shortage developing in the future (and that they could and that the politicians who passed the laws could not tells us something about the relative merits of having governments or markets running agriculture). They purchased, prices rose.

The nett effect of that was that the idiot politicians were forced to consider the effects of their ethanol mandates on food prices and production. Which is a good thing, no?

Yes, speculators drove up global grain prices. But this was in reaction to politicians enacting laws which made grain shortages inevitable. By forcing up prices speculators forced governments to look at their folly.

This is, I would submit, a good thing.

Without speculators we would have sailed merrily on, eating and driving and then one day, looked in the granaries and oooops! there ain’t no grain. That would be a bad thing.

Now, not even I would claim that markets are perfect: exactly this sort of speculation and subsequent hoarding is blamed for the Bombay famine of 1944. There was no real shortage of rice then.

But as Amartya Sen won his Nobel for, we’ve not had peacetime famines where there are markets (not necessarily “free”, but “freeish”) in food, a free press and democracy for over a century. Precisely because the changes in prices, people’s reactions to them (including that very speculation) and the ability for that information to disseminate widely mean that people do something about such impending famines.

Like, perhaps, rescind or suspend idiot laws creating the impending famine.

76. diogenes1960

strategist, I’m still trying to find a case where speculation can be blamed for destructive price movements in commodities or currencies. In every situation I can think of – Bunker Hunt’s attempt to corner the world’s silver market, the tin council’s attempts to keep tin prices high, the oil price rises of a year or so ago, Soros betting against the level of sterling – speculators have either cataatrophically failed to move prices the way they would like (Hunt and the tin council) or forced the price to adjust to a more appropriate level – Soros. Maybe the property market in the UK is a situation where you are right – evil property speculators driving up the price of housing. However, if that market had been fully exposed to speculation, I think there would have been a lot of short-selling of absurdly over-valued properties, potentially reducing the bubble.

“Diogenes. The problems when the price of food staples was driven up by speculation a couple of years ago has been well documented. Try looking it up.”

No. Citation needed. Think about this: speculators will only hoard if they *really think* that prices in the future are going to be a lot higher. By speculating in this manner they tell everyone *now* that there is going to be a food shortage down the line, and if they are wrong they will lose money.

Speculators are not some group of horrible monsters out to eat your babies, it is their actions, as Tim says above, that help the market discover the right price for things. It was painful to read Sunny saying:

“Most forex speculation is just speculation – not an attempt to adequately give consumers the best rate as determined by the market”

Because speculation is *exactly* how we determine the best rate for something! If we can’t incorporate future expectations into the price of goods, markets become utterly meaningless. What’s the point of holding shares at all, if you have no idea what the return on them will be? What’s the point of buying aluminium if you have no idea how much you are going to be able to sell it for later?

78. Randy Bullock

From a conservative American, or maybe I’m not as conservative as I think.

The private sector loves it (I do too as I am a business owner) when government is removed from the economics and taxation equation. We have a moronic tax code and yours in so much worse.

BUT

Taxpayer funding was used to prop up their otherwise failing businesses so when those beneficiaries reap record profits and bonuses would it not be common sense that the taxpayer share in those rewards especially during a period of massive government deficits?

The tax should also apply to the governmental agency executives that aided in lending to unqualified borrowers….in the states we have Freddie Mac and Fannie Mae and those organizations were rampantly corrupt and playing the race card (you were a racist if you opposed giving a $300,000 loan to minority with a poor credit rating… after all, the value of the house cannot go down!) and also contributed to our recession. They were bailed out and their executives are still getting lavish bonuses and there is no word on penalties/special taxes on them.

Its also time for governments to stop trying to do everything for everyone and stop SPENDING so much but that is a conversation for another time.


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