European parliament loves the Tobin tax
But if it becomes law, it's us plebs who'll be paying
Believe it or not?
So, whether you believe it or not, is the same not true of banking and finance? There most certainly were things that went wrong and there most certainly should be changes. But it would be useful to make changes which deal with the problems, rather than changes which wipe out those bits of the banking/financial system which we'd rather like to keep...
Here again, we have some real world evidence. The Swedish brought in a financial transaction tax (FTT), much like the Robin Hood Tax. The result was:
During the first week of the tax, the volume of bond trading fell by 85 per cent, even though the tax rate on five-year bonds was only 0.003 per cent. The volume of futures trading fell by 98 per cent and the options trading market disappeared. On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991, the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.
Now there are those out there who think that this is exactly what should happen, that the financial markets must shrink in size and thus the tax would be a good idea just because it would shrink the financial markets. This is, as you will note, somewhat in conflict with those who want to raise money: you cannot abolish an options market and still tax said options market. Just not going to work, is it? But more importantly, we want to have options markets. And futures markets, for they both enable something we devoutly desire: the management and transference of risk.
Spreading the risk
It's also true that such a tax wouldn't actually shrink the areas of the financial markets which led us to our current problems. You recall those CDOs, those collaterialised debt obligations, which bundled up American mortgages and spread them around the world? These things weren't in fact traded all that much. They were created, sold, then they sat on balance sheets until everyone went bust. So a transactions tax isn't going to shrink that market – as there aren't all that many transactions to be taxed.
So we do seem to have something of a problem with this FTT, this Tobin or Robin Hood tax. We're told that it will be the bankers, not us plebs that pay it. But it won't be – as the IMF points out. It'll be precisely us plebs who do. And it won't be trivial amounts of money, it'll be well above our SMU. We have direct evidence from an extant FTT that this is so, that we will have to carry the burden.
It will also close down the financial markets that we'd rather like to stay open while not affecting in the slightest those that brought us to this pretty pass. We've also direct empirical evidence of this.
And finally, it absolutely won't raise as much money as is said, precisely because some of those markets will indeed close down.
So is this the end? Are we entirely screwed? No, fortunately not. For while the European Parliament did vote for this by a very wide margin, no one has been stupid enough to give the elected politicians any power over this sort of thing. Only the European Commission can propose new laws: there is nothing like a backbench bill in the system. So, this being an attempt at a sort of backbench bill, this isn't law and won't become so. It's a piece of grandstanding no more. ®