As for the transaction tax, I don't know how practical that is. But if it can be made to work, it's a good idea. Not only would it raise some money, but it would put a crimp in some of the most highly leveraged investment schemes, which fundamentally depend on tiny returns multiplied by billions of dollars. A transaction tax would make a lot of them unprofitable. So it's a twofer.
I'm not precisely clear on what Lord Turner means by a Tobin Tax, which is technically a tax on currency transactions. Once you get beyond there, it's sort of vague as to how and where you would apply such a tax.
But any sort of feasible tax is not going to reduce highly leveraged investment schemes. I mean, if you're taxing debt issuance, it will increase your interest rate or the points on the loan, which might put some pressure on leverage. But I don't think by that much. You're talking about forcing someone to reduce their leverage from 20-to-1 to 19.8-to-1.
What a transaction tax makes less profitable is a portfolio strategy that relies on lots of quick trades. I suppose there's a valid question about how much social value those folks provide, though you have to admit that they do at least increase the speed of the price information available in the markets, and to some extent their liquidity, which most people regard as a good thing. But that's not going to stop anyone from borrowing vast sums and plowing them into highly illiquid assets like complex mortgage-backed securities. That being approximately what everyone is complaining about in the current crisis.
What such a tax would also do is make a lot of people freak out. If you tax debt transactions, you've suddenly got more points on your mortgage, your money market account stops paying much of anything, your credit card comes with a hefty annual fee, and businesses small and large have more trouble borrowing short money to cover temporary cash flow issues. If you don't tax debt transactions, the largest effect of the tax will be to punish actively traded investment funds. The academic literature indicates that this is stupid behavior that already is punished by sub-par returns, but it's not a social threat that looms large.
Lord Turner undoubtedly knows a lot more about finance than I do, so it is possible, even probable, that I am missing something. But until I hear some more convincing explanation, I am officially skeptical. If his quite sensible preferred strategy of higher capital requirements doesn't reduce the amount of unhealthy leverage in the system, I fail to see what a tax will add except, well, a tax.
The only real money in investing is in microtrading by the investment banks using computers to get in front of legitimate orders for just a few miliseconds.
Goldman Sachs is stealing billions of dollars this way and it's the only profitable part of their business, essentially.
This tax is just an attempt by the mafia to get a piece of that action.
Cite?
Why are you asking for a cite?
http://www.nytimes.com/2009/07/25/business/25trading.html?_r=1&scp=1&sq=High%20speed%20trading&st=Search
I assume this is the kind of transaction they're really talking about taxing.
Plinko -
Thanks for the link. Allowing anyone to trade ahead of these flashes is ridiculous! It sounds like front-running to me.
But this should be banned, not simply taxed, and I don't think that Turner is advocating something as specific and well-based as this. As I said below, it sounds more like Turner simply wants to engage in soviet-style management of the economy.
Precisely
"When buy or sell orders are submitted to marketplaces like Nasdaq, they are sometimes flashed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — before they are routed to everyone else. In that half-second, fast-moving computer software can gain valuable insights regarding growing or declining demand in certain stocks, and can trade ahead of other market participants, pushing prices up or down.
Although anyone can gain access to flash orders by paying a fee, they are useful only to traders who have computers powerful enough to act on the data within milliseconds. In recent years, some of the largest financial companies, including Goldman Sachs, have earned enormous profits with such computers, which are very expensive and often housed right next to the machines that power the marketplaces themselves."
It's legal theft on the grandest of scales.
Goldman Sachs though has protection. The mafia protecting it (your government) wants its cut of the take.
I think you're giving Turner too much credit. It sounds like he's just playing to the masses, suggesting things that the 'man on the street' will think he understands.
It's one thing to focus on specific problems and another to simply claim that the financial sector as a whole is "too big" (similar to what Obama is doing with regards to healthcare?). What makes politicians think that they should be choosing the size of an entire industry? Next they'll be proposing 5 year plans. That kind of top-down central planning has worked so well elsewhere, hasn't it?
Megan, I bet you know more finance than he does.
Tax = deadweight loss. This fundamental economics concept is lost to all those who propose taxes.
Also, a transaction tax will make the markets so much less inefficient. The financial markets depend on market makers that provide liquidity to the market, and 50% of the time, they earn no spread between the bid and ask and earn money based on rebates that the exchange gives them for trading. This rebate gives market makes incentive to trade on that exchange, therefore providing liquidity. If there is a tax, the rebate will be eaten up and liquidity will decrease because market makes will have no profit. This will then lead to a more inefficient market in the UK. Given that nowaways, there are other venues to trade and most banks/brokerages are connected to each other, what will happen is that the UK will cause a massive exodus of its finance industry. Trading in UK stocks will massively move away from UK exchanges, and move to other exchanges.
Yes, the chairman will get his wish for sure, and drag the economy down with it. Its like cutting off your nose to spite your face. Brilliant!
IMHO, I think there are several governments that are deathly afraid of runaway inflation in their soon-to-be-worthless currencies. This is a bid to try and slow things down.
Although I certainly favor cutting spending to raising taxes, I think small taxes on financial transactions are one of the more palatable ways to raise revenue and certainly superior to taxing wages or profits, which should be encouraged as much as possible. Dean Baker has proposed a financial transactions tax which sounds much like what Mr Turner is proposing.
I liked the Tobin tax. But then as a Canadian, it's a bit frustrating seeing our national currency get bounced around like a ping-pong ball by speculators who are in one day and out the other with amounts that swamp the daily exchange needs for actual commerce.
The only thing such speculation adds is a headache for the country involved. If such a tax managed to cut the speculation significantly, then it's a good thing for just about everyone, except a few speculators. And possibly good for them, considering how many lose their shirt doing so :-).
Let the fundamentals determine the exchange rate.
I'm Canadian too, and it was my understanding that most of the ping-ponging for the last few years has been oil-based. In other words, it's based on real commerce, just a form of real commerce prone to volatility.
Speculation tends to take a real world trend and exaggerate it. While oil is an important part of our export economy, it is not any where near the sum total of it. However, as our total trade position has deteriorated our dollar has been going *up* simply because oil is the only thing that the speculators are paying attention to.
The C$ has become a petro-currency, when the reality of the Canadian economy doesn't support it. Sadly, while one could claim that 'economic reality' will eventually have to triumph, the truth is that the actual exchange needs are getting close to negligible compared to the speculation. You don't hold C$ because the Canadian economy is going to improve wildly, justifying the new price - you hold C$ because *another* speculator is going to think they're worth even more as the price of oil goes up.
It kills me to see people in support of a transaction tax. I actively trade from home and have managed to secure an income to pay the bills and take care of my family. I already pay a large portion in income taxes. Such a tax as what's been introduced in the House would amount to a 0.5% tax on a roundtrip trade, which would essentially kill my trading. But what exactly are you accomplishing? All the daytraders do is take advantage of an arbitrage opportunity at a narrower timeframe than other arbitrageurs. As Megan had already mentioned, daytading is not what caused the meltdown of the markets. Daytrading didn't cause the real estate bubble. If anything blame overleveraging, both at the financial market level as well as the individual homeowner level. Daytrading may cause more volatility when news comes out on a given equity, but volatility has always been a factor of publicly traded markets, and the technological advances in information dissemination and internet trading has made it possible for stock prices to more quickly absorb breaking news. Plus, for each daytrader that jumps on one side of a trade there is another daytrader trying to jump on the other side. The result is added liquidity that, as Megan also mentioned, is generally regarded as beneficial to the markets.
If Congress were to enact the 0.25% transaction tax, it would first and foremost cause a massive fall in liquidity, which would make it all the more difficult for institutional investors to move large orders, causing a loss on profits for the pension funds and 401(k) holders that they represent. Secondly, for those mutual funds that have a high annual turnover (which is most of them), they will get a 0.5% haircut on their annual return. If you assume an avg pretax annual return of 8-10%, that turns into a huge compounded hit on the potential profits for mutual fund investors.
I understand the anger focused on Wall Street for playing a significant role in the current financial problems of the country, and in the case of Goldman potentially frontrunning orders through high frequency computer trading should absolutely be considered unethical and illegal, but a straight transaction tax on all short term equity trades would be a foolhardy way of trying to address the wrong problem while simultaneously trying to build a new revenue stream for the government.