ACI: liquidity and stability - or taxation and changing the whole financial system?
25 February 2010
The President of ACI is calling for more responsibility and rational thinking in the current debate on financial transaction tax. In Manfred Wiebogen’s view, what the markets now need is trust, but trust was lost in 2008 when Lehman was allowed to collapse.
For over a year, many European politicians have been calling for options on how the financial sector could make a contribution to pay for government interventions during the crisis, how to raise future tax income and even to use such funding to fight poverty in the developing nations. The discussion itself became more colourful when back in August Lord Turner supported the idea. Gordon Brown recently shared the FSA head’s views and presented his proposals at the G20 meeting in November.
At this stage the discussion around the so-called Tobin tax is supported by some groups (e.g. by Dominique Strauss- Kahn at the IMF) but was also, for instance, rejected by the US Treasury Secretary Timothy Geithner and Yves Mersch, European Central Bank Governing Member, who, according to a Dow Jones news wire, called the initiative a ‘scurrilous idea’.
What to tax?
Today’s call for a financial transaction tax includes a wide range of products: foreign exchange markets, transactions in bonds, stocks, commodities and all kind of derivatives. But the talks are just beginning.
The original idea of Tobin’s tax was on currency speculation, one per transaction. In 1971 James Tobin proposed such a tax on currency trading to reduce or avoid speculation in the wake of the collapse of the Bretton Woods system. His proposal was for a tiny percentage tax (suggestions range from .1 per cent to .5 per cent these days) – on speculative transactions only. For this idea (which was never implemented) and his work on financial markets, Tobin won the Nobel Prize in 1981. One of the main arguments for such a tax is the debacle of the past two years in the financial markets.
But stop – aren’t Tobin’s backers mixing up all the financial markets? Is the reason for this new initiative really fighting future crisis or just simply a mechanism for raising money? Many arguments are aimed towards the enormous volume traded in the daily FX markets.
Wiebogen said that, in his view, foreign exchange didn't cause the current financial crisis nor was it guilty in any way for causing the crisis, As President of the ACI, the Financial Markets Association, Wiebogen called for more rational thinking and responsibility in all discussions about financial markets and taxation.”What the markets now need is trust”, he said “But let’s face the truth: and that’s definitely our problem – trust was lost on 9/15 in 2008, when politics let Lehman collapse”. -
A new tax will not bring back trust.
“Fall of mankind To understand the numbers involved I shallbreakdown some official figures from the past:Considering a 0.1 per cent transaction tax at daily Global FXtraded volume of USD 3.2 trillion the daily taxincome could equal USD 3.2 billion a day! – (or justhalf the amount by a reduced rate to 0.05 per cent or so).”
“This of course is just a simplified demonstration of the discussed topic. As this chart and matrix illustrates, over the counter interest rates (OTC IR) and the Foreign Exchange business are totalling around 84 per cent of the overall above figures. Again, both product groups absolutely have nothing in common with the current financial crisis but should they be forced to pay for it? FX is a class on its own and the OTC IR, mainly the short term products, helped solve the crisis by providing the markets and the banks balances with short term liquidity. If they are to be targeted by politics, there is something wrong”.
© ACI
