By Avinash Persaud
London - In Merchants of Doubt, the scientific historian Naomi Oreskes describes how a group of high-level scientists, with deep connections in politics and the tobacco industry, ran effective campaigns to mislead the public and deny well-established scientific knowledge on the link between tobacco and cancer. The same tactics are being used by London bankers today with regards to the proposal for a financial transaction tax (FTT), or Robin Hood tax. It is not the activity of bashing bankers that draws me to this debate, but the deliberate obfuscation by the industry. Doubt is their product, as a tobacco executive once said.
We know the UK government is opposed to the idea, and yet as finance ministers meet in Brussels to iron out the details of the 0.1%-0.01% tax on transactions that could raise as much as £48bn a year (£8.4bn in the case of the UK), nine of Europe's economies are in support.
Listening to some London bankers, you would think that a 0.1% tax would usher in a nuclear winter. Bankers are effectively saying that, while they justify their high pay with claims of superior creativity, credibility and connectivity, all of that cannot compete with a tax on each transaction of just one tenth of one per cent. If, despite the industry receiving billions in implicit public subsidies and guarantees, the largest sector in the UK economy hangs by such a thin thread, its value-added must be seriously questioned.
After hearing some of the bankers' responses, you would be forgiven for thinking that transaction taxes are a peculiar poison, but the economic and market impact of such taxes is no different than any other transaction cost (such as trading commissions; dealer spreads; fees for clearing, settlement, using exchanges; administration costs and the price impact of trading). This poses two problems to the nuclear-winter argument. First, just 10 years ago, these costs were collectively greater than they are today in the equity markets by the amount of the proposed tax, yet the sky did not fall on our heads. Indeed, and not unrelated, markets were a little more robust then than they are now. Second, the US is the largest and most efficient market in the world, yet a few years ago Professor Kenneth French documented that fees and charges by banks and funds on trading activities amounted to $100bn in the US, or 0.67% of the value of portfolios. By the nuclear-winter logic, this would hit investment, jobs and the wider economy far harder than a 0.1% transaction tax.
There are benefits to the services provided by dealers and fund managers for which they charge a fee, but if we are including benefits, then we must also consider the potential benefits of the use of FTT revenues. In the UK, it would likely raise £8.4bn that could reduce corporation tax by five percentage points to 19%, which would be the lowest in the world's rich countries bar Ireland, or eliminate all of the planned cuts to public education or double aid to the poorest.
It is interesting to note that the impact on the cost of capital of the alleged manipulation by some bankers of the British Bankers Association's Libor reference rates, on which $375tn of transactions are priced every day, was for many months greater than the impact on the cost of capital of a 0.1% tax on transactions in the secondary markets. But none of this will be equated and the heavyweights will be brought in to brush it all off with soothing platitudes: "These things happen" and "Isn't it good that this is now being put right?". In their foaming zeal to come up with examples of complicated off-balance sheet transactions that could potentially evade this tax, some bankers appear to have forgotten they are a regulated activity, and that today supervisors will require capital to be put aside for activities that seek to hide exposures, risks and clients.
Amid the obsfucation, we must take a broader perspective. Financial crashes are not random events – they almost always follow booms, and the bigger the boom the bigger the fall. One of the lessons of the last boom-bust cycle is that while low transaction costs are generally good, it is bad for the wider economy if they are so small as to be of no hindrance to financial activities that, through rapid turnover, give the impression of gleaming citadels of value when markets are rising, propelling the boom, but turn out to be nothing more than mirages when the boom busts, deepening the crash.
A little sand in the wheel of finance will help to smash the mirages that lure our economies in the wrong direction to the detriment of all. Taking this into account, a small transaction tax would be good for growth – helping to boost investment and jobs. Fast finance, like fast food, does not deliver sustainability.
London - In Merchants of Doubt, the scientific historian Naomi Oreskes describes how a group of high-level scientists, with deep connections in politics and the tobacco industry, ran effective campaigns to mislead the public and deny well-established scientific knowledge on the link between tobacco and cancer. The same tactics are being used by London bankers today with regards to the proposal for a financial transaction tax (FTT), or Robin Hood tax. It is not the activity of bashing bankers that draws me to this debate, but the deliberate obfuscation by the industry. Doubt is their product, as a tobacco executive once said.
We know the UK government is opposed to the idea, and yet as finance ministers meet in Brussels to iron out the details of the 0.1%-0.01% tax on transactions that could raise as much as £48bn a year (£8.4bn in the case of the UK), nine of Europe's economies are in support.
Listening to some London bankers, you would think that a 0.1% tax would usher in a nuclear winter. Bankers are effectively saying that, while they justify their high pay with claims of superior creativity, credibility and connectivity, all of that cannot compete with a tax on each transaction of just one tenth of one per cent. If, despite the industry receiving billions in implicit public subsidies and guarantees, the largest sector in the UK economy hangs by such a thin thread, its value-added must be seriously questioned.
After hearing some of the bankers' responses, you would be forgiven for thinking that transaction taxes are a peculiar poison, but the economic and market impact of such taxes is no different than any other transaction cost (such as trading commissions; dealer spreads; fees for clearing, settlement, using exchanges; administration costs and the price impact of trading). This poses two problems to the nuclear-winter argument. First, just 10 years ago, these costs were collectively greater than they are today in the equity markets by the amount of the proposed tax, yet the sky did not fall on our heads. Indeed, and not unrelated, markets were a little more robust then than they are now. Second, the US is the largest and most efficient market in the world, yet a few years ago Professor Kenneth French documented that fees and charges by banks and funds on trading activities amounted to $100bn in the US, or 0.67% of the value of portfolios. By the nuclear-winter logic, this would hit investment, jobs and the wider economy far harder than a 0.1% transaction tax.
There are benefits to the services provided by dealers and fund managers for which they charge a fee, but if we are including benefits, then we must also consider the potential benefits of the use of FTT revenues. In the UK, it would likely raise £8.4bn that could reduce corporation tax by five percentage points to 19%, which would be the lowest in the world's rich countries bar Ireland, or eliminate all of the planned cuts to public education or double aid to the poorest.
It is interesting to note that the impact on the cost of capital of the alleged manipulation by some bankers of the British Bankers Association's Libor reference rates, on which $375tn of transactions are priced every day, was for many months greater than the impact on the cost of capital of a 0.1% tax on transactions in the secondary markets. But none of this will be equated and the heavyweights will be brought in to brush it all off with soothing platitudes: "These things happen" and "Isn't it good that this is now being put right?". In their foaming zeal to come up with examples of complicated off-balance sheet transactions that could potentially evade this tax, some bankers appear to have forgotten they are a regulated activity, and that today supervisors will require capital to be put aside for activities that seek to hide exposures, risks and clients.
Amid the obsfucation, we must take a broader perspective. Financial crashes are not random events – they almost always follow booms, and the bigger the boom the bigger the fall. One of the lessons of the last boom-bust cycle is that while low transaction costs are generally good, it is bad for the wider economy if they are so small as to be of no hindrance to financial activities that, through rapid turnover, give the impression of gleaming citadels of value when markets are rising, propelling the boom, but turn out to be nothing more than mirages when the boom busts, deepening the crash.
A little sand in the wheel of finance will help to smash the mirages that lure our economies in the wrong direction to the detriment of all. Taking this into account, a small transaction tax would be good for growth – helping to boost investment and jobs. Fast finance, like fast food, does not deliver sustainability.
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