Mr Two Percent’s Tobin Tax …

… To Bin Or Not To Bin?

‘O Presidente’ in his ‘state of the union’ vanity show address yesterday unveiled among other things the European Commission’s proposal for a ‘Tobin Tax‘ or officially a Financial Transactions Tax (FTT). It would fall on monetary and financial institutions (MFIs), banks to ordinary people. It would apply to inter-MFI transactions within the EU and between EU MFIs and third country MFIs. In the commission’s own words,

The financial sector was a major cause of the crisis and received substantial government support over the past few years. To ensure that the sector makes a fair contribution to public finances and for the benefit of citizens, enterprises and Member States, the European Commission on 28 September put forward a proposal for a financial transaction tax (FTT).

So:

Through the FTT, the financial sector will properly participate in the cost of re-building Europe’s economies and bolstering public finances. The proposed tax will generate significant revenues and help to ensure greater stability of financial markets, without posing undue risk to EU competitiveness.


The proposal unveiled is simple. Per the FT,

Under the proposal, trades in bonds and shares would be taxed at 0.1 per cent, while more complex derivatives would face a 0.01 per cent levy. Both parties to a transaction would usually be charged, even for transactions where one was based outside the EU. The thresholds would be minimum levels to be put in place by all EU member states but national authorities could opt to “top up” the tax with domestic charges.

The full details of the commission’s proposals are here.

Timeline

This one’s been coming – well flagged and for quite a while – going back to 2009. Back then the commission began within the G20 exploring ways to introduce a financial transaction tax at global level. In October 2010 the commission published a communication setting out ideas and announced the launch of a comprehensive Impact Assessment (IA) to examine further the options for the taxation. In February 2011 by the launch of a public consultation. In June 2011 it announced that it would propose to set up a financial transaction tax as an own resource for the EU budget.

Next steps?

Whatever procedural rules and protocols dictate there is one absolute certainty. It is that this thing is going nowhere – or rather it is not going anywhere but into the shredder. That it managed to air at all and particularly at this juncture is a measure of current purposelessness at the commission and the absolute vanity of o ‘presidente’. As Alan Beattie observed on Gideon Rachman’s The World blog at the FT,

… perhaps the Commission should be spending more of its time on putting out the raging house fire that is Greece rather than making minor adjustments to the architecture. It isn’t excessive volatility in financial market trading that is causing the eurozone to go up in flames but boneheaded currency, fiscal and debt policy. First things first.

That is not a view – however sensible – that will travel very far. For one thing as the timeline suggests many miles have been traveled, meetings held, lunches had, and dinners dined to simply allow sense to prevail. This is only half time!

So expect the proposal to stay on the agenda – to surface for example at the forthcoming G20 gab-fest in Cannes in November and to pop up elsewhere. But dead it is – stiff – like Monty P’s parrot. The front page of the FT 29 September shows this; the reaction of the UK government is all the evidence one needs. The British are for it in principle but insist it must go global: forgeddit in other words. The French will continue to give vocal support to the tax – in reality on the ground that the British oppose and the French are engaged in nibbling at the City’s bum in attempting to build up Paris as a premier league venue on the global financial whirligig. The Irish will hide behind the British objection and …

Grit in the gearbox

John Plender in his FT column 28 September laid out the case for the FTT: the original Tobin argument (grit in the gearbox); the support of Bill Gates for such a measure; the perceived need to control high frequency trading (HFT) platforms; the awkward-for-the-Brits point that they’ve had such a tax since 1694 (it’s called Stamp Duty) and so on. Mr Plender did stop short of adducing Fidel Castro and Hugo Chavez (both advocates) in support – although he did acknowledge they were on the terraces – as is Bill Nighy and no doubt many other fashionable names.

Amen to all of that, but …

Rinky Dink

One is left with the reality that any and every British government will as a practical matter oppose (on the global necessity argument – regardless of the awkward point on Stamp Duty). One also is faced with the point made by Jennifer Hughes of the FT’s Lex team in conversation with her editor John Authers: the ‘Rinky Dink’ options implementation would create for imaginative traders and lawyers. Hughes does not oppose the proposal she simply doubts the design and sees an open goal for as she put it the Rinky Dink team. she does also make the point that Stamp Duty is not directly comparable – and of course it has not stemmed property bubbles.

There are other issues one might raise: for example the nightmare of Brussels bureaucrats getting their mitts around a few billion extra in ‘own resources’ as they describe the tax transfers they get from the Member States. And there is one big argument: whether it is really the pressing priority in bringing systemically important MFIs (big banks to the rest of us) to regulatory and supervisory heel. Might the focus alternatively not be put on Vickers-type measures – ring fencing, separation, resurrection of Glass-Steagal, Volker-type rules and so on? the fundamental point here is again from the FT, this time Martin Wolf’s blog of 25 September on the theme of banks’ target returns on equity. The proximate prompt for the piece was the news that Lloyds’ bank’s target RoE was 14.5 per cent. This sparked the following musing,

Forget banks, for the moment. What would you say if someone offered you an investment with a promised real return of close to 15 per cent? You might say: “How much can I buy?” Alternatively, you might say: “What is the catch?” Sensible people must take the latter view. If you thought that you were being offered a reliable real return at such an exalted level, you would buy as much as you could. This must be particularly true now when real returns on the bonds of relatively safe governments are close to zero.

So what is the catch? The obvious answer has to be that the real return in question is extremely risky, because it is volatile and offers a significant chance of total wipe-out.

Is it really clear that a fistful of grit in the gearbox deals substantively with the real issue, that of extreme risk? Not really and the energy and effort expended on playing the rinky dink game is frankly wasted. Better simply to separate utility from casino with it clear to the gamblers and croupiers that they are on their own: the house does not have access to OPM and that is the end of the matter. Leave them entirely free to play with their algos, spot their arb micro second opportunities, conduct their flash trades but do so with their own money. Let them go to Vegas.

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