Helping Haiti by Taxing Speculators

January 20, 2010

HELPING HAITI by TAXING SPECULATORS

“On this, as on other issues, the Obama administration needs to free its mind from Wall Street’s thrall.”
Paul Krugman, Nov. 27, 2009

Editor’s Note: This little brief for a Financial Transactions Tax was written the week before the Massachusetts Senatorial election. There are early indications that, like centrist Democrats before him, the President will tack even more to the Right, as shown by accounts of his design for a budget-balancing commission. Keynes might well be turning over in his grave over the timing of the concept; the unemployed and foreclosed upon can take it up with their neighborhood tea bagger. This paper offers him a different course of action, and a chance to accomplish a number of policy objectives at the same time. We shall see.

Dear Citizens and Elected Officials:

By now, we are all mesmerized by the scope of the disaster and human suffering in Haiti, a land which has seen too much of it since being the first nation to achieve a successful revolt against slavery in the 1790’s.

For the next several weeks, all efforts will be focused on burying the dead, setting up basic sanitation services, and getting food, water, and medical care to the survivors. Next they will need shelter from the elements, so we are likely to see a million or more people living in some form of displaced person camps for…how long? And it is over the next month to six months that we are likely to see even bigger troubles arise, if that is possible, when speaking of this horrific situation. What I envision happening is something along these lines.

As it becomes apparent that a third, if not more, of Port-au-Prince must be bulldozed and rebuilt from scratch, the cost facing the US and the Western world – the developed world - is likely to climb into the tens of billions of dollars. The more President Obama puts our country and himself on the line for the good humanitarian cause of the Haitian people, the enormous scope of the housing/infrastructure task is going to run into increasingly shrill opposition from the American Right, of course; but it is also likely to run into more widespread troubles, and anger, from the millions who are in the middle of, or about to undergo, foreclosure and eviction right here in the US. (As well as the tens of millions who are jobless.) This is not hard to foresee, and it could get quite ugly.

At the same time, the US is facing a chronic condition of inadequate public revenues, and a “discredited state,” which historian Tony Judt has reminded us resembles the situation which faced the Ancien Regime in France in the last quarter of the 18th Century.
Also running on a simultaneous timeline with the Haiti disaster and U.S. domestic revenue problems is the failure to reform our financial system, which also touches upon the repayments for the aid already extended to Wall Street. Is there something that can help address all these problems at the same time?

The answer is yes and the name of the revenue package is a Financial Transactions Tax (FTT), also known from the 1970’s as the Tobin tax, after the economist, Nobel Prize winner James Tobin, who proposed it, about 40 years after John Maynard Keynes suggested one in the 1930’s. Tobin’s limited version was intended to put a damper on speculation by going after just one type, currency speculation, which was becoming a growing international problem after the U.S. abandoned the gold-backed dollar between August, 1971 and March, 1973, thus unmooring all the world’s currencies from a fixed standard. By the first decade of the 21st century, myriad types of financial transactions run into stratospheric figures like these, which I saw in a November article on the FTT from Bloomberg News: $900 trillion in annual stock and currency transactions, and $625 trillion in derivatives. With a financial base that large, it doesn’t take a heavy assessment to raise a lot of money.

Much of this financial turnover is purely speculation, now carried out by high speed programs with closely guarded proprietary status. These programs mean the transactions are occurring in just fractions of a second, about as far from “long-term patient investing” as one could imagine. But that phrase, so “conservative” sounding, comes from a world view prior to the financialization of the American economy and the “virtual reality” markets that have evolved. And, as Paul Krugman has reminded us, much of the leveraging and borrowing occurs in the secretive “repo” (“Repurchase”) markets; long-term in this important, but exotic realm is measured in days or a week…not months. These markets froze during the 2008-2009 crisis but other than Krugman’s November column, there has been little public discussion. They are as about as anti-egalitarian as one could design, because they are only for wealthy players, and these players are allowed to borrow at rates better than the average citizen can obtain on any type of “ordinary” loan. And over the past five years, the quality of “collateral” allowed would put some pawn shops to shame. Next time you hear the “populist line” from your neighborhood right winger, why don’t you ask them to explain why you can’t borrow and play in the “repo” market too, just like the wealthy folks.

So here is some background about a financial transaction tax: a world-wide tax at just .05% would bring in an estimated $750 billion dollars annually. (Yes, that’s three-quarters of a trillion annually). At that rate, the cost for a $100,000 transaction is still only $50.00; for a $20,000 stock sale, an amount more likely to come from a middle class U.S. citizen, the cost is only $10.00. Your friendly checking account bank does more damage to your wallet with its fiendish fee and penalty system.

The support for such a tax has gained considerable traction in Europe, and even in the U.K., where the Chairman of Britain’s Financial Services Authority, Adair Turner, has backed the idea. President Sarkozy of France, Chancellor Merkel of Germany and Prime Minister Brown of Britain have given it traction, as have investors George Soros and Warren Buffett and Le Monde, the New York Times and the Guardian newspapers. Nobel Prize winning economists Joseph Stiglitz and Paul Krugman support it, as do Jeffery Sachs and Paul Volcker. Of course Wall Street opposes it, as do The Economist and the Financial Times publications. And I suspect that much of the American Right will too because, of course, it is a tax, even if it is one designed to discourage the short-term risky behavior one would think “conservatives” would naturally be inclined against.

Wall Street will raise a range of objections: that it will be passed along to consumers, reduce the efficiency of markets by curtailing “liquidity,” and stifle innovation. Economist Dean Baker’s take is that “a small increase in trading costs would be a very manageable burden for those who are using financial markets to support productive economic activity. However, it would impose serious costs on those who see the financial markets as a casino in which they place their bets by the day, hour, minute.” Paul Volcker, the former Chairman of the Federal Reserve, was even more caustic over what the great financialization of the American economy has brought us over the past 30 years, especially all the “innovative” derivatives which contribute to those transactions figures in the hundreds of trillions of dollars. Reading the riot act to bankers gathered at a conference in December, Volcker cut their touted financial inventions down to size by declaring that the “biggest innovation in the industry over the past 20 years had been the cash machine.” He then went on to declare that “‘I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth – one shred of evidence.’” (From the TimesOnline, December 9, 2009: “‘Wake up, gentlemen,’ world’s top bankers warned by former Fed chairman Volcker,” by Patrick Hosking and Suzy Jagger at http://business.timesonline.co.uk/tol/business/industry_sectors/banking_...

In Dean Baker’s new book, False Profits, he points out that these transactions taxes were more common decades ago until pressure from the financial sector rolled them back. The U.K, however, still has one, a .5% tax on stock trades on the London Stock exchange, and it raises “almost $40 billion” annually when translated in to dollars. Dean indicates that stocks can’t be legally transferred without the official seal showing that the tax has been paid, and the dealer is responsible for collecting it, just like in the U.S. where dealers collect a “very small transaction taxes that are charged to finance the Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC).” I was also surprised to discover more FTT history in the Findings Section of H.R. 4191, a scaled back version of this tax, introduced in December of 2009. It states that “The United States had a transfer tax from 1914 to 1966. The Revenue Act of 1914…levied a .2 percent tax on all sales or transfers of stocks. In 1932, Congress more than doubled the tax to help finance recovery and job creation during the Great Depression.” (More on this bill below.)

While the basic idea behind the tax is simple, it’s easy to get distracted by the range of variations on its extent – geographical and transaction types – and how the money collected is to be spent, because the causes supporting the tax are as diverse as the unmet human and global needs. But with the G-20 mechanism, the European Union and the future support of the US, this is doable. William Pfaff, long-time columnist for the International Herald Tribune, wonders if it isn’t “Payback Time for the Masters of the Universe.” He quotes Germany’s former Finance Minister, Peer Steinbruck, who stated matter-of-factly that “‘a global financial-transaction tax, applied uniformly across the G20 countries, is the obvious instrument to ensure that all financial market participants contribute equally…there is a clear-cut case for a global financial transaction tax: It would be just, would do no harm, and would do a lot of good. If there is a better idea for fair burden-sharing, let’s hear it.’” At http://www.williampfaff.com/modules/news/article.php?storyid=448

The broad indications are that European nations would spend a portion of the money to reduce the deficits caused by the bailouts of their banking systems, while the non-profits would target the infrastructure, environmental and health needs of the poorest nations, as well as contingency funds for exactly the type of natural disaster which has struck Haiti, and the great Indian Ocean tsunami of December of 2004, which killed 230,000 people and devastated coastal infrastructure in 14 nations.

So here is an actual mechanism to raise significant sums towards all the humanitarian goals we have heard so much about over the past ten years, including the Millennium Project from the UN Summit in 2000. Yet there is another aspect to the Financial Transactions Tax which has an even sharper edge to it. And that is that the proposal gives citizens a chance to exact some fair monetary justice from all the high costs implied in the term “globalization,” especially since there is a deliberate and close association between that phenomenon and the international financial system, with Wall Street seen as its primary driver and defender. Can we refresh some memories here? Of the cruel, one-sided terms of the “Washington Consensus” driven by the IMF and the World Bank, imposed as a cost of help to the poorest of nations (and still being imposed on prostrate Haiti; see the new Nation article at http://www.thenation.com/blogs/notion/517494/imf_to_haiti_freeze_public_... ); of the drive by these institutions, as well as all the American presidents since Reagan to remove national restraints on rapid capital and currency flows – opening the floodgates to the Asian financial crisis of 1997-1998, which led to the Russian bond crisis and the failure of Long-Term Capital Management; to the pure free-market “shock therapy” which was so disastrous for the Russia trying to emerge from the former Soviet Union; and finally, to all the tax-dodging, income sheltering, evading-their-fair share corporations, hedge funds, private equity groups and wealthy citizens who will scream about any new tax while employing every means available, legal and otherwise, to evade paying up, thereby shifting the burden to the middle class and working class in the US, primarily, but also in many other places.

If this sounds too tough for Chevy Chase and Bethesda…let me further refresh some memories with a brief selection from Matt Taibbi’s famous July Rolling Stone article on Goldman Sachs, which we first brought to your attention in September’s Look Back in Anger posting, well before polite society discovered this piece. After Goldman paid out $10 billion in compensation and bonuses in 2008, and with $2 billion in profits to boot, what did it pay in US taxes, asks the indignant Taibbi? “Fourteen million dollars,” that’s what, “less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million…” How did they do that, asks the author? “The bank moved its money around so that most of its earnings took place in foreign countries with low tax rates.” But it’s not just those famous Goldman Sachs smarts; nope, “A GAO report, in fact, found that between 1998 and 2005, roughly two-thirds of all corporations operating in the U.S. paid no taxes at all.”

Now some in the current Congress want to do a scaled back, U.S. only version of the financial transaction tax via H.R. 4191, the subtly named “Let Wall Street Pay for the Restoration of Main Street Act,” introduced by Rep. Peter DeFazio, Democrat of Oregon. It would tax stock transactions at .25%, futures, swaps and credit default swaps at .02%, and applies a more complex formula to options on these instruments, all to “fund job creation and deficit reduction.” It has picked up three Maryland co-sponsors: Representatives John P. Sarbanes (MD-3), Donna Edwards (MD-4), and Elijah Cummings (MD-7) to go along with 25 other co-sponsors; however, the Democratic leadership is missing from the bill. But like the Obama administration’s own narrowly targeted “clawback” tax to raise only $90 billion over ten years from the biggest banks, this initiative seem inadequate in scope and reach – and revenue generation, although H.R. 4191 does much better at $150 billion annually. By focusing just on the U.S., and not the international nature of the financial system, they are missing a rare political opening to join with Europe and beyond to rein in some of the speculative excesses that threaten the financial security of every citizen on the globe. And I suspect that based on what I’ve read from an OxFam policy expert (see below), the U.S. should be able to get near $150 billion for our own purposes from the international tax.

But that’s not all. The international “FTT” offers President Obama a great political opportunity, because his own Secretary of the Treasury, Timothy Geithner, has refused international calls to support it. So here is a clear test for the faltering Obama administration to give itself some genuine populist credentials – and to do it with the sound technical economic blessings of Paul Krugman, and Paul Volcker. It’s a rare day that a conservative former Federal Reserve Chairman would ever offer his support for something like this. It’s the seal of approval that it represents good economics – and it’s also good populist politics. It’s also a tool for activists to test where their local Democrats stand on the current financial system and who pays for the risks and carnage it has caused. If your local Blue Dog Democrat won’t support it, the devil can take him, he’s no Democrat, he’s a Wall Street apologist. This is far from the only reform that’s needed, but it’s a great issue in and of itself, a revenue generator on a large scale and something that could shrink the speculative trading by, in some estimates, 14%. It will also be a great test of the faux populism of the tea baggers and their sympathetic libertarians in and out of Congress: here’s a real simple way to restore some of the lost justice and revenue caused by the excesses of Wall Street: what’s your vote? So you won’t tax speculators but you’re going to cut Social Security with a special commission immune to citizen input and congressional accountability?

My recommendation is to call the Democratic leadership, especially Majority Leader Steny Hoyer and also the three Maryland Reps and urge them to get behind the broader international effort, and to get the President to push Secretary Geithner; get Geithner to push the broader international tax – or give Geithner a push out of his job. The Congressional Switchboard is at 202-224-3121.

And here are some links for folks who want to go a bit further:

Max Lawson, a Senior Policy Advisor at the non-profit Oxfam, has a very readable seven page outline of more of the details, objections and answers than we have room for here, it’s called “Financial Transaction Tax – the Time is Now!” from Dec. of 2009 at http://rethinkingfinance.org/documents/financial-transaction-tax-time-no... ;

And here is the link for the Krugman column on November 27, 2009, “Taxing the Speculators,” at http://www.nytimes.com/2009/11/27/opinion/27krugman.html

Until the next post, all the best to my readers.

Bill Neil
Rockville, MD
w.neil@att.net

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future