Why the banks aren't scared of the Robin Hood Tax
We'd all be paying it anyway
Since we had that first little movie made by Britain's premier writer of RomComs, Richard Curtis, we've had a number of people pitching in on the bits of economics he seems not to have learned while wondering who Hugh Grant should shag this time.
The EU put out a briefing paper (pdf) which made the unfortunate allegation that the RHT would be illegal. Simply, the Treaty of Rome insists upon the free movement of capital. Taxing FX is a limitation on such free movement and is thus illegal. Yes, the European Parliament voted heavily for the RHT but that's what constitutions are for - to stop politicians doing things which are illegal. It's theoretically possible that we could change the Treaty but we all recall the fuss we had getting the Lisbon amendments through? Plus doing away with the basic pillars of the EU - the free movement of goods, labour and capital - rather does away with the very purpose of having an EU in the first place.
We then had some World Bankers pointing out (pdf) that a financial transactions tax (FTT - what the RHT is) wouldn't have prevented the financial system falling over in the first place. That the subtitle is “Panacea, Threat or Damp Squib” gives you an idea of where they're going, and yes, the conclusion is the damp squib bit. For example, we'd all like to point at the securitization of mortgages into these CDOs, which then turned into toxic waste, as part of the fall, wouldn't we? And an FTT wouldn't have made a blind bit of difference to these as they're very rarely traded and 0.5 bps (of 5 or even 50 bps) just wouldn't have changed anything at all. They also point out that there would be a lot of changes where we wouldn't want to see them - in futures and options for example. One fascinating point they make is:
Close analysis of the minute-by-minute microstructure of the foreign exchange market reveals that most foreign exchange transactions (spot and forward) have nothing to do with speculation, but are instead undertaken to hedge risk and ensure liquidity.
That is, that all of that frothy speculation in FX markets which the RHT would righteously tax doesn't actually exist. Most of it's about real world stuff, not just games being played with money. So the RHT is a bad idea, it's illegal and anyway we'd be paying it not the bankers. So seeing it killed off is extremely pleasing.
Which brings us to today's IMF proposals. One of these is eminently sensible even if it did emanate originally from the Obama adminstration. This is the idea of an insurance levy on banks' liabilities. There are two reasons here.
The first is that we know that banking systems which do not have deposit insurance are liable to runs. No bank keeps all of its depositor's money in the vaults - they have to lend it out so they can earn the interest to both pay for running the bank and to pay interest to the depositors. Lending tends to be for longer terms than deposits are: we borrow for 25 years for a mortgage while we might only put our savings in for 30 or 60 days. So if we all turn up at the same time the bank cannot simply whip all the cash back from those who have bought houses and, yes, the bank then goes bust.
This used to happen with depressing regularity and the solution is that the government guarantees the depositors money, making it less likely we'll all descend in a mob and demand it back. Sensible systems, like the FDIC one in the US, charge the banks an insurance premium to pay for this guarantee. Where the modern banking system has become vulnerable is that instead of getting most of their money from such depositors, who are guaranteed, much funding was coming from wholesale money markets. And this isn't insured. This is what did for Northern Rock. No, it wasn't the lines in the streets asking for their thousands back, it was the wholesale markets asking for (or refusing to lend again) the millions and billions the bank needed to fund the mortgages it had already issued.
Banks without deposit insurance are subject to runs. Wholesale deposits were not insured and we had a run on wholesale deposits. The solution of offering insurance on such deposits (which, in the jargon of banking, are the liabilities of the banks) makes sense, as does charging banks for the privilege of being able to buy such insurance. The one wrinkle here is that, knowing they've got such insurance, they may be even more reckless in what is known as “moral hazard”. Well, yes, true enough, but we're not going to let large parts of the banking system fall over whatever happens so we might as well make explicit and charge for what we're going to be offering implicitly anyway.
The second proposal is that there should be extra taxes on the profits and wages paid out by banks. There is some element of banking profits coming from “economic rents” and profits made from such rents are righteously taxed. But one of the declared aims is to reduce bonus payments and this seems a very odd way of doing that. Profits plus wages is roughly equal to gross value added in a company, analagous to the way we calculate gross domestic product for countries. This particular tax could have the perverse effect of actually increasing the amount of staff compensation paid in bonuses rather than decreasing it.
Still, we should look on the bright side of all of this. We've had the luvvies make their suggestion, the Robin Hood Tax, and now the adults, the EU, the World Bank and the IMF have all said yes. How lovely, but it's respectively illegal, useless and ineffective.
The above might all seem a little technical but here's how I know absolutely that the IMF proposals are along the right lines. The banks and the bankers haven't bothered to argue about the RHT. There have been no press releases, no squeals, no aghast cries that "You just can't do this to us!" For they knew, as the campaigners didn't, that they wouldn't be paying it, so it's an irrelevance. However, the IMF's plans were only leaked overnight Tuesday and already my inbox is filling up with press releases from the likes of the IEA telling us what an awful idea it is.
There's got to be something sensible in an idea that actually does have bankers squealing. ®