Author Paul Holmes
Are there four more annoying words in the English language than, “I told you so”? During 2011 there appeared to be a mass movement, particularly amongst the UK celebrity culture, that attempted to attach itself to a ’cause célèbre’ suddenly deemed popular and worthy; a financial transaction tax…
The first two rules in fighting for a club is to understand the mechanism and impact of what you’re fighting for, on those first two yardsticks the “what do we want and we want it now” movement failed. Firstly the name given to the FTT in the mainstream media was the Tobin Tax, and secondly the antagonists failed to understand the full impact of introducing a FTT.
The Tobin Tax label couldn’t have been more inapplicable, in short (and I apologise if I’m preaching to the already converted on this) the Tobin Tax was originally introduced/proposed in order to ‘smooth out’ discrepancies in currency fluctuations, courtesy of Wiki here’s a snippet that explains the background behind the mechanism. In short it was never proposed to be a transaction tax, and how the FTT movement have got such a crucial issue so mixed up is baffling.
A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another. The tax is intended to put a penalty on short-term financial round-trip excursions into another currency.
Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system of monetary management ended in 1971. Prior to 1971, one of the chief features of the Bretton Woods system was an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value, plus or minus one percent, in terms of gold.
Then, on August 15, 1971, United States President Richard Nixon announced that the United States dollar would no longer be convertible to gold, effectively ending the system. This action created the situation whereby the U.S. dollar became the sole backing of currencies and a reserve currency for the member states of the Bretton Woods system, leading the system to collapse in the face of increasing financial strain in that same year. In that context, Tobin suggested a new system for international currency stability, and proposed that such a system include an international charge on foreign-exchange transactions.
Who watches the Watchmen?
Quis custodiet ipsos custodes? is a Latin phrase traditionally attributed to the Roman poet Juvenal from his Satires which is literally translated as “Who will guard the guards themselves?” Also sometimes rendered as “Who watches the watchmen?”
The second issue the celebrity culture missed out was the tricky part of implementation. Here’s three more words that have proved to be a bug bear over recent years, “high frequency trading”. How the uninitiated think that an FTT can be introduced into this arena is equally baffling and reveals their total ignorance of the mechanisms used on a daily basis in the modern world of trading. Now it’s fair to say that each trade could still be logged, even if measured in micro seconds there would still be an audit trail, but globally you’d need complete co-operation between fairly disparate, complex trading bodies in order to gather the information on ‘normal FX trading’ and that’s before we’d even begin to calculate the trades made through HFT on equities, commodities, futures, options…
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There was an estimate put together with regards to the implementation of an FTT throughout Eurozone countries and the suggestion made for sobering reflection. The set up cost to oversee an FTT regime was put in the region of €30 billion. The ongoing cost circa €5 billion, ergo the cost of implementation of the FTT and the ongoing administration cost would put a dint in the ‘profits’ the tax would in theory collect. The tax would generate it’s own tax that would directly increase the cost of trading. A cost that many banks (with retail arms) would inevitably socialise.
The ECB report on Hungary’s FTT experiment.
We’ve posted a link to the full analysis by the ECB on the FTT that Hungary experimented with. In summary the prognosis was not good.
On 3 July 2012, the European Central Bank (ECB) received a request from the Hungarian Ministry for the National Economy for an opinion on a new draft law introducing a financial transaction tax (hereinafter the ‘FTT Law’). On 5 July 2012 the ECB received a request from the Ministry for an opinion on a new amending proposal to the FTT Law. On 9 July 2012 the Parliament adopted the FTT Law with the changes introduced by the new amending proposal.
Summary of the ECB findings
The European Central Bank criticised Hungary’s new financial transaction tax stating that it impaired the independence of the country’s central bank, providing a new hurdle in Budapest’s loan talks with international lenders. The ECB’s criticism came hours after Hungary’s central bank kept interest rates steady, deciding against a rate cut as the escalating euro zone crisis poses risks to the forint, which has indirectly been undermined by a lack of confidence in the country.
Investors have concerns with regards to the government’s unorthodox policies and tax changes, including the financial transactions tax. The Hungarian government pushed the FTT through parliament in July in the hope that it would finance social tax cuts in 2013.
The ECB; “The new FTT (financial transaction tax) law impairs the National Bank of Hungary’s functional and institutional independence.” The ECB said the tax could disrupt monetary policy transmission and could be seen as a way to finance the public sector from central bank money, thus violating European Union rules.
Budapest began talks with the International Monetary Fund and the EU last week after an eight-month delay, boosting investor hopes for a deal on a financing backstop which Hungary, with the highest debt in Central Europe, needs to cut its borrowing costs and avert a market blowout. But the ECB statement signalled a fresh conflict with Viktor Orban’s centre-right government, only weeks after Budapest ended a seventh-month dispute with lenders over another piece of legislation that jeopardised the central bank’s independence. Orban has said the financial transactions tax would remain in place even if lenders oppose it. It will be levied on commercial banks as well as on the central bank’s overnight facility and the two-week bills it sells to banks as part of its role in controlling money in circulation.
An IMF/EU mission, which arrived for preliminary talks to Budapest last week, ended its visit yesterday. The negotiations, even before the ECB’s statement on Tuesday, were expected to span several months.