Love Reign O'er Me: Tobin Tax Re-Re-Re-Visited

♠ Posted by Emmanuel in , at 1/23/2010 12:39:00 PM
[Before reading on, cue The Who--see, 70s music this time.] It's somewhat odd that the Great Banker Backlash is gaining momentum only so many months after the fact, but here we go. Perhaps all those fat banker bonuses from artificially huge spreads--borrow cheap care of expansive fiscal policies but still led relatively expensively--did them in. Barack Obama got this most recent round going only a few days ago with proposals to separate "banks" from "casinos" as well as limits to bank size. It's not quite Glass-Steagall II insofar as the delineation between investment and retail banking isn't as clear. Plus, limits to interstate presences of banks in Glass-Steagall will not be reinstituted--the concern the so-called Volcker plan raises has more to deal with balance sheet size as opposed to geographic spread.

At any rate, the race is on for world governments in one-upmanship for implementing banking regulation. Not to be outdone, our very own Gordon Brown is again raising the spectre of a Tobin tax. Financial Services Authority (FSA) head honcho Lord Turner suggested implementing this tax not so long ago, if you will recall. In its original form, Nobel laureate James Tobin proposed that international foreign exchange transactions be taxed to limit currency volatility near the end of the dollar-gold standard era. Proceeds from the tax could then be used for socially productive endeavours. I will spare you the arguments for and against this tax; the Wikipedia entry has grown a jillionfold since I last visited it so you can find much food for thought there even if it's rather helter-skelter in typical Wiki thousands-of-people-assembling-it fashion. You may find this OECD Observer commentary to be more cogent and intelligible.

The most recent BIS data suggests daily FX volume exceeds three trillion dollars. It is imperative, however, to separate FX transactions dealing with actual trade from those based more on speculation which I assume is what they're trying to control. Think, for example of harming Kenyan importers who have a requirement for US dollars to bring in much-needed goods: should their transactions be lumped in with those of Conglom-o-Capital Corp speculating on the dollar's direction with HedgieWedgie plc? I think not.

The latest news from 10 Downing Street is that Gordon wants to bring back attention to a Tobin tax given improved political appetite elsewhere for major rule changes. In particular, he wants to bring the cause up in global fora:
Gordon Brown plans to exploit Barack Obama's surprise crackdown on Wall Street banks to step up Britain's campaign for a new global transaction tax on financial products. The prime minister believes the dramatic US move to curb risky activities by major US banks indicates a new-found willingness on the part of Washington to contemplate radical reform of markets...

Amid signs that key opponents of a transaction tax in Obama's administration have been sidelined, Brown intends to use a series of meetings in the coming weeks and months to build international support for a "Tobin tax", which he floated at last autumn's G20 meeting. Lord Myners, the City minister, is to host a crucial mini-summit on Monday at which US officials will spell out the details of the Volcker plan – through which Obama intends to stop banks running hedge funds, private equity arms and taking bets on markets with customer deposits.
Back in America, meanwhile, Obama is saying to the others, "Right on, right on." I hadn't foreseen motivation of this extent many months before, to be honest, but it's happening anyway. What can be said to the new components of the emerging global financial architecture?
  • Limits to banker bonuses;
  • Crackdowns on offshore tax havens (paradis fiscaux);
  • Curbs on leverage;
  • Higher reserve and capitalization requirements;
  • Separation of commercial banking and speculative trading, especially among major banks;
  • Crackdowns on banks setting up proprietary private equity and hedge funds;
  • Limits to the outright size of financial institutions (to render them not too big to fail); and
  • Taxes on international financial transactions
There's always the cynical response that crafty banks almost always find ways to outsmart regulators. Perhaps, but such a possibility places the onus on authorities to really straitjacket the bankers. Topping the list, of course, is the requirement that countries the world over apply similar rules and not try to attract casino capitalists via regulatory arbitrage. I hope this is possible; perhaps Obama help can deliver on the "change we can believe in" he promised in his campaign. Sticking it to Larry "Wooden Racquets" Summers is certainly a good start. Love reign o'er me, indeed.

UPDATE: One thing that bothers me about activists is that worthwhile causes they sometimes pursue are not argued very well. At one extreme, you have Naomi Klein-style nincompoopery (and dodgy causes anyway). I am afraid that some Tobin tax proponents also make similar arguments: Online, the "Tobin Tax Initiative" offers us these factoids:
  • Currency speculators trade over $1.8 trillion dollars each day across borders. The market is huge, and volatile;
  • Each trade would be taxed at 0.1 to 0.25 percent of volume (about 10 to 25 cents per hundred dollars);
  • Billions in revenue, estimated at $100 - $300 billion per year, would be generated.
Simple arithmetic tells me that the tax rates that need to be applied to generate such revenues (assuming volume is unaffected--and that's a big if) are 100/1800=5.56% for $100B and 300/1800=16.67% for $300B. You can be as socialist as you wanna to be online. However, you are not likely to persuade many with such blatant mathlexia. Some people should never have been allowed past the fourth grade.