The TUC’s massive report on how we can raise $200bn or so annually from the banks without any cost to our economy can be found here.
I am running low on time and political capital at home, so this has to be brief. The nicest thing I can say is that not every sentence in it is rubbish. For example, it is true that this has been a crisis centred on banks. Hedge funds and private equity are not much to do with it.
First some problems with numbers
As the TUC have pointed out, the charge on FX and swaps etc is meant to only be half a basis point. So, who could complain, huh? And look how much it raises: $33bn from the $900trn of currency trading, if the latter falls by a mere 25%, and similarly $118bn from the $3150trn of other trading. I mean, WOW!
Unfortunately, how much profit is there to take from these areas? Let’s see. From the Bank’s latest FSR:
Hmmm, the average for FICC trading and US banks is something like $40 bn. If these US banks made up a third of the global banking that might be stung with this, they are still proposing taking over 100% of the profits.
Now onto shares
The UK is held up as an example here, because we already have a stamp duty of 0.5%, and it apparently has no costs. Not according to the IFS who found this wrong with it in 2002:
• it reduces the efficiency of the stock market for UK listed companies;
• it lacks any investment allowances and therefore imposes a disproportionately large burden on marginal investment projects compared with a corporation tax;
• it distorts merger and acquisition activity, producing a bias towards overseas rather than UK ownership.
And others also found that the costs of this tax ended up on ordinary pension funds. Read this story.
The LSE and NAPF say stamp duty, which levies 0.5 per cent of the value of a share trade, costs individuals about twice the sum most people receive as their annual pen-sion payout.
The groups have calculated that the average stamp duty cost to a person’s pension fund is £93 a year, which, if held for 25 years and allowed to appreciate, would create a windfall of £8,000
Stamp duties on shares in the UK still raise about £4bn – or $6.5bn. The report hopes to raise loads more worldwide. How much? Well,
Estimates of total spot share dealing per annum are cautiously estimated to be US$60 trillion. On this basis, and assuming the fall in the value of share trading in 2009 was aberrational, it is estimated that if a tax of 0.5% was applied and trading volumes fell by 25% revenues raised might amount to US$225 billion per annum.
Hmmmm. So they hope to raise about 35 times as much as is raised in the UK. Do they think that the UK only houses 1/35th of the share trading in the world? It doesn’t seem likely.
But my more substantive problems are with liquidity, the major cost of this scheme. Do they address this? No: much of the report seems to be taken with counting the profits from their imaginery escapade, rather than properly thinking through the consequences. In terms of the question of liquidity, the key cost to the scheme, here are the attempts to prove it is not a problem:
- “as providers of liquidity to markets banks play a key macro-economic role in all economies”
- “Of particular note is the fact that the market has not collapsed despite a fall in the value of trades undertaken by more than 50% in less than two years. For those who fear that the imposition of financial transaction taxes will destroy market liquidity and end functioning markets this is a clear indication that this is not the case.” (Me: Huh? Where have you measured that the liquidity has not gone worse? Have you not noticed the high profits the remaining banks have been able to make? How are you measuring ‘things have not gone badly’?)
- “as the London Stock Exchange has shown in the last two years, trading volume can fall by more than that amount without any threat to liquidity or viability.”
- “financial transaction taxes should only eliminate marginal trades but leave markets intact with ample liquidity,
That is it. A proposal that would somehow remove $200-400bn (in theory) from providers of liquidity, and those assertions are the reason we should not worry. SO much of the report is devoted to counting how big the banking sector and its transactions are – you can almost feel the salivating – and so little to the unintended consequences. I find it quite amazing that they think they can raise over $200bn from banks that have capital of $455bn or so – and yet only see volumes fall by 25%. That is as far as they have thouht about it. Forgive me if I continue to worry about this topic.
The other thing that really bothers me about this report is that I agree we have a problem with banks. It is just that I don’t think the problem is with the number of transactions they do. In fact, the high-transaction side of banking is a part of what they do well, and is valuable to the community – offer ready liquidity in a variety of useful areas. This earns them profits – very small ones, per transaction, but the quantity of the transactions makes the liquidity. And these profits over the next few years are needed to make them stable and address what was the real problem – too high leverage, insufficient equity, and being trapped in illiquid positions that crashed them. Read ‘Too big to Fail’. What bothered people about Wachovia or Lehmans? Not their many liquid trades. It was their illiquid, stinking property-related untradeable toxic waste.
For political reasons, we have one good shot at fixing banks. This is a good way of firing that shot in the wrong direction, and injuring innocent passersby.*
*I have skimmed this piece. A longer reading may find merit in the other things they discuss, like the question of tax evasion. This post does not constitute a commentary on that side of things.