Original URL: http://www.theregister.co.uk/2010/04/22/robin_hood_tax/
Why the banks aren't scared of the Robin Hood Tax
We'd all be paying it anyway
Thank God the adults have arrived, finally. The IMF has just come out with its suggestions for how we might want to tax and reform parts of finance and is saying things which are sensible, at least in part. In doing so they've continued the process of killing the Robin Hood Tax stone dead, which is great news.
Well, something like the RHT was bound to be proposed. Yes, the financial system fell over and at such times every crank with a shiv to sharpen will run out to slice up the carcass. The basic ideas rested on two - how shall we put this gently, highly contentious seems a little too weak - let's say insane propositions.
The first was that we could raise humongous amounts of tax money without anyone really noticing. Figures of $400bn globally were bandied about along with, looking at the underlying papers, some £100 billion in the UK alone. All from this teensie tax which only those pinstriped bastards in The City would actually have to pay. The reason that this is insane is because the total economic output of “The City” is less than £100bn a year. Something like £60bn is the usual figure. Quite how to get more tax than there is actually money produced from a sector without anyone noticing wasn't really explained.
Indeed, the RHT's proponents went out of their way to insist that we plebs wouldn't pay any of it at all. Only the bankers and the banks would... but as above, if we're trying to get more in tax than the banks and the bankers actually have then it just ain't gonna be so, is it? And indeed it wouldn't be so. Just one little example of how the tax would indeed end up being paid by all of us.
One of the sectors which they suggested taxing was foreign exchange trading. It's certainly a large market, $1.5 trillion a day or so in London alone. Stick 0.005 per cent (also known as 0.5 basis points or bps) on that stream and my word what a lot of money we can raise! They were intellectually honest enough to recognise that much of this trade goes on at very slim margins. 0.5 bps on standard size transactions in a well traded currency pair isn't unusual. They agreed that doubling the cost of trading would mean that the volume traded would fall. Excellent, but they then missed the next logical step, which was that a fall in volumes traded would lead to a widening of margins.
Quite why they missed it can only be guessed at. One of their supporting documents makes it quite clear that, back in the crisis days, volumes did fall and margins did widen. Another (their budget submission) pointed out that way back when, when volumes were lower, margins were more like 4.5 bps. So they did know that lower volumes would lead to wider margins but they didn't mention it.
Can't think why - unless it's that wider margins mean that it's not going to be just the bankers that pay the economic burden of the tax. It's going to be all of us who never have any interaction at all with the FX markets. Like if we change money for beer on our hols. Or if our pension fund (ha, ha, yes, I know, an amusing concept for all us contractors and freelances) is invested abroad. Or if we ever bought anything which was imported or worked for a company which ever exported anything. You know, like everyone in the country does. If FX margins widen then buying foreign currency is more expensive and we get less when we sell pounds (these two are of course the same thing): in every FX transaction the costs are higher.
Now it is true that no one at all is predicting that margins will widen to 4.5 basis points from the imposition of a 0.5 bps tax. But they will widen. A reasonable guess from one in the markets is 1 to 2 bps. Which means that for each £1bn raised in tax we're all paying £3-5bn (the increase in the spread plus the tax). And it is very much all of us paying that extra money, not just the shysters at their dealing desks.
So, the Robin Hood Tax is not a tax on bankers, it's a tax on us and a very expensive one to boot. The second aspect of its madness is that it wouldn't actually have cleared up any of the things that caused the financial crisis in the first place. FX markets didn't cause the crisis, futures didn't, options didn't, shares didn't and not even bonds did. Yet all of them would have been taxed as a method of making sure that a crisis none of them caused would never happen again. It's extremely difficult to trace the motivations for the tax to anything other than “bankers are icky so let's tax bankers”. Even if bankers wouldn't pay it and it wouldn't solve anything.
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. ®