Tuesday, 4 October 2011

The case for a Financial Transaction Tax is compelling

Jim Stewart: The reaction to the proposal from the European Commission, France and Germany, for a financial transaction tax (FTT) has produced a predictably hostile reaction from the financial sector and its apologists. This is disappointing, but not wholly unexpected. It reflects an inability or unwillingness to learn from the Global Financial Crisis (GFC). The FTT concept is not new: as pointed out by Philippe Doustte-Blazy, there are over 40 such taxes already in place. What is new is that such taxes would be imposed on all financial transactions rather than, as in the current position, on a small number, such as the cash market for equities.

There are compelling reasons for the introduction of an FTT, regardless of the revenue generating potential of such a tax. We know from the GFC that those jurisdictions with a bloated financial sector suffered greatly in comparison to those with more balanced and hence more sustainable economies. Insofar as FTT would serve to restrict and reduce the size of the financial sector and the associated ‘crowding out’ of the productive wealth generating sectors, economic growth is more likely to resume and to be more stable through time.

We also know that those jurisdictions in which short-termism does not have primacy do better than those in which short-termism is the prevailing strategy. Insofar as an FTT would serve to act as a disincentive to short-termism, economic growth prospects would improve. Economies would be on a sounder footing for long-term sustainable progress.

Despite having large cash balances, global firms are not investing. The volatility that prevails in current financial markets helps create an environment of massive uncertainty for managers. Furthermore modern financial strategies, for example by hedge funds, thrive and depend on the creation of uncertainty. Thus managerial decisions dedicated to wealth generating activities are restricted, and indeed made to appear irrational. Insofar as an FTT would serve to curb volatility, uncertainty would be reduced and investment would be more likely in the wealth generating sectors.

Finally there are those who incredibly claim that an FTT would impair the operation of “efficient” markets. The belief that markets were “efficient”, held especially by regulators, was a key part of the development of the GFC (see Turner Report pp. 39-40). It is generally agreed that an FTT would reduce volumes traded in financial markets. While the relationship between volume traded and volatility in financial markets is mixed, there is much stronger evidence for a positive relationship between speculative bubbles and volumes. Recent financial history has shown that the growth in volumes and values of derivatives was a central part of the GFC (see Fig. 3.1 Financial Crisis Inquiry Report). Thus, irrespective of revenues raised, the introduction of a FTT would have beneficial effects on the stability of financial markets.

It is time financial markets returned to becoming the servant of wealth creators rather than their inhibitors.


Anonymous said...

Stewart has presented a highly convincing case for the introduction of the FTT. In contrast to the hysterical and irrational hostility from the financial sector and their apologists, Stewart offers a rational argument that speaks to the benefits to society and citizens and particularly to the wealth creating sectors of economies from the introduction of the FTT.

In short Stewart demonstrates what a no-brainer the introduction of the proposed FTT represents. Given the substantial advantages that can accrue to societies from the FTT in terms of sustainable growth and the creation of opportunity for wealth creators that have been massively inhibited by bloated financial sectors, it is difficult to understand why any thinking person would oppose its introduction.

Granted that those, who represent the looting wealth destroying elements in the financial sector, will oppose any steps that restrict their destructive racket as they themselves in a curious admission of its likely effectiveness claim the FTT will.

It is imperative that Europe moves swiftly to an immediate implementation of the FTT. The hysterical noise that is being generated in opposition to the FTT from the looters and their apologists - most of whom have financial and other links to the looters, should be dismissed for what it is viz. self-serving nonsense.

Anonymous said...

I heard Prof Stewart's colleague Prof Lucy on Morning Ireland last week ranting and railing against the tax. Why has Morning Ireland -a public service broadcaster - [is it?] not had Prof Stewart on its show for balance against the banking lobbyists?

Anonymous said...

The comments ( http://www.ft.com/intl/cms/s/0/21795954-ef59-11e0-918b-00144feab49a.html#axzz1ZnZg7CuZ ) from the leader of the Irish Labour party and Tanaiste Gilmore in today’s Financial Times which in effect dismiss the proposed Financial Transactions Tax are shameful.

That the deputy PM of a country which has suffered such devastation from the bloated financial sector should buy into the faux self-serving opposition to the proposed Financial Transactions Tax (which is after all a no brainer to any thinking person) does little to inspire confidence that any lessons have been learnt on the part of our professional politicians from the recent past.

It also unfortunately indicates that politicians are still enthralled by the looters and their apologists and are still intent on serving their interests rather than the interests of those who elected them to represent them.

Robert Sweeney said...

Extensive video debate on the issue here:


Michael Burke said...

Here's a quick discussion of the benefits and problems of an FTT- and a suggestion about how it could be supplemented by more radical policies.