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Brown proposes a Tobin Tax as insurance against future bubble bursts


cyberianpan

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Gordon Brown is a noted intellectual pygmy, and he has resurrected the idea of a Tobin tax, out of context , to act as an insurance fund against future bubbles:

Telegraph
The Prime Minister told ministers from the group of rich and developing countries it was time to consider a global financial levy or an insurance fee to be implement by all the world's financial centres.
Addressing the meeting in St Andrews, he said there must be a ''just distribution of risks and rewards''.
...
''And it cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us."
His comments follow earlier calls from former German Finance Minister Peer Steinbruck for a global tax on all cross-border financial transactions.


And the problem is that the suckers will get suckered by his plan. He is of course correct that
1) Capitalism is prone to bubbles
2) The bubble bursts are so awful/systemic that everyone has to muck into fix them
3) We should target the cause, as everyone fixing them is not fair

The issue is that he is proposing that everyone pay for them upfront. That is what his plan of a flat tax would do. Same difference but actually worse (due to liquidity dampening as well as cost of administration)

What is in fact needed is

1) Get rid of institutions that are "too big to fail"
or
2) Something very like a Tobin tax, except targeted at risky transactions, this would take regulatory brainpower & ongoing courage:

In Ireland we were well aware we had a property bubble... the Central Bank said it... yet nothing was done. No it simply wouldn't have been fair to put an insurance tax on all bank activity when we know the bubble risk was in property. What the Central Bank & Financial Regulator should have done was said
"Oi, you lot in the banks, you've to set aside 5% capital for any development further property loans as a rainy day fund"

That is what they did in Spain.

Targeting everyone... when you can see where the likely risk is: is simply unfair.

Brown has taken a dated concept, and applied it out of context, as a blunt instrument.

cYp
 

cyberianpan

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Bump

Gordon Brown is still peddling this nonsense
Global support for a tax on banks is growing, says Gordon Brown | Politics | guardian.co.uk

Even the Guardian letters page recognises it is ill thought out:
Letters: No easy ride for Robin Hood tax | Business | The Guardian

A "flat" Tobin tax or insurance levy... just means everyone pays irrespective of risk taking - see post above for more details.

Brown is going to keep pushing this silly idea, instead of proper reform:

http://www.ft.com/cms/s/0/07141834-1741-11df-94f6-00144feab49a.html
Mr Brown’s supporters now include the banks. A cynic would say that they have calculated that if they must concede something, insurance is the least-worst option. Mr Brown’s idea is interesting, but it must not become a substitute for real structural reform.

cYp
 
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PaddyJoe McGillycuddy

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Its not just Gordon Brown who thinks that banks should pay for their bailouts instead of sending the bill to the taxpayer:

Germany and France have also thrown their weight behind a transaction tax, one effect of which could be to dampen damaging speculation.
Goldman Sachs, Goldman Sachs, clicking in the votes? | Business | The Guardian

But since Barack Obama announced plans for a $90bn levy on Wall Street over the next decade, to help meet the costs of the banking bailouts, Downing Street has shifted towards the idea of taxing banks directly instead of slapping a charge on City transactions.

Tim Geithner, the US treasury secretary, indicated to the chancellor, Alistair Darling, at last week's G7 summit in Canada that America could support the idea of an international bank tax, and the prime minister has since said he hopes the principles of a worldwide levy can be agreed by the summer.
 

stringjack

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The Telegraph article, in particular, is a wonderful reading exercise. See if you can actually find the part where Brown proposes a Tobin tax.
 

cyberianpan

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stringjack

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And so, do we conclude that Brown doesn't know what a Tobin tax is, or that the Telegraph doesn't (not that these are mutually exclusive options)?
 

cyberianpan

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And so, do we conclude that Brown doesn't know what a Tobin tax is, or that the Telegraph doesn't (not that these are mutually exclusive options)?
The both know what it is- the Tobin tax has generalised beyond a specific currency tax - with a more general form being a flat tax on financial transactions. And that same Telegraph article linked to another one :
Joseph Stiglitz calls for Tobin tax on all financial trading transactions - Telegraph... however as I said Brown resurrected it out of context. The original idea was sharply defined ... the generalization less so.... and without Brown giving more context... his proposal is silly.

And Stiglitz does know what he means (even if he is wrong). And of course Dominique Strauss-Kahn is correct that a simple Tobin tax is administratively impossible due to the complexities of financial transactions (for example distinguishing between "real" and fiduciary or netting ones is a nigh on intractable challenge)

However the greatest argument against a flat levy is that if everyone pays irregardless of risk: This just institutionalizes moral hazard. Brown is wally.


cYp
 

stringjack

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The both know what it is- the Tobin tax has generalised beyond a specific currency tax - with a more general form being a flat tax on financial transactions.
First, no it hasn't. Second, even if it had, it wouldn't follow from the fact that one proposes a tax on transactions that one would be proposing a Tobin tax. Third, there always remains the possibility that they both know what a Tobin tax is and that they're lying about it.

...which itself doesn't manage to quote Stiglitz in a manner that supports the claims made in the article. In fact, it does exactly what the first article does; it carefully juxtaposes quotes and claims, in such a manner as it appears that the quotes support the claims, without them actually being so generous as to do so. Please stop reading the Telegraph.
 

cyberianpan

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First, no it hasn't. Second, even if it had, it wouldn't follow from the fact that one proposes a tax on transactions that one would be proposing a Tobin tax. Third, there always remains the possibility that they both know what a Tobin tax is and that they're lying about it.
Any "flat tax" on transactions, to deal with volatility, is taken to be a Tobin tax. My point is a dynamic tax is called for if it is undue risk we are seeking to address.... indeed I'm suspicious that it is see:

...which itself doesn't manage to quote Stiglitz in a manner that supports the claims made in the article. In fact, it does exactly what the first article does; it carefully juxtaposes quotes and claims, in such a manner as it appears that the quotes support the claims, without them actually being so generous as to do so. Please stop reading the Telegraph.
Stiglitz has done fundamental econometric research on the "generalized" Tobin Tax. E.g.
Stiglitz, J., 1989. Using tax policy to curb speculative short-term trading, Journal of Financial Services Research 3, 101–115.
And in 2002 he was peddling it say here for say "re distributive" reasons:
Making a Workable Tobin Tax:
Stiglitz: ...addressing poverty in developing countries. The development issue alone is estimated to meet the minimum millennium goals. The goal is 50 billions dollars more. So we need more revenue to finance these really important global needs that all of us, I think, feel would benefit from. ... The Tobin Tax is one way of raising that revenue.

I think the Tobin Tax has enormous symbolic value.
My point of view on it is, that unlike taxing good things, even if it does not succeed in greatly stabilizing financial markets, it is taxing something that is not going to do any harm. You know if you discourage some of this speculative activities the world is not going to be a worse place.

Global efficiency would not be adversely affected.
And here in 2010 claiming it a) can be implemented and b) will work to address volatility/bubbles
Richard Curtis and Bill Nighy team up in new film urging Tobin tax on bankers | Business | The Guardian
Joseph Stiglitz, professor of economics at Columbia University: "A tax structure that does not reward short-term, very speculative gains would be good. If you were investing for a year or five years or 10 years it would be a small tax but if you were holding it for just one minute it becomes a very high tax. The important question is implementability. It's designed to tackle high frequency activity for which it is hard to find any societal benefit. The only question is, can it be effectively implemented? Will it be circumvented? There's a growing consensus it can be implemented, if not perfectly, effectively enough to make a difference."
The Telegraph did get Stiglitz right - he's being very twisty on this issue... mixing normative political views with what he admits is dubious/unproven econometrics.

In general The Telegraph is an excellent economics & finance news source... oddly it beats the FT (which trounces the Telegraph for economics opinion ... and perhaps shades it on finance opinion )

cYp
 
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stringjack

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3rd part driving insurance may be mandatory ... but it is not flat. It clearly is risk adjusted...
Unless the cost to the least risky participant in the market is zero, one has a de facto flat tax operating in tandem with a risk-adjusted tax, the flat rate being the cost to the least risky participant (and I can't see any obvious reason why a similar structure couldn't be applied to the banking case).
 

cyberianpan

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On foreign currency transactions, to deal with volatility in currency markets, not on transactions in general to deal with generalised economic volatility.

Originally yes - but the generalised form has been extended:

Tobin tax - Wikipedia, the free encyclopedia

My point is that Stiglitz has done econometric modelling on a generalised Tobin tax (and I cited a paper by him on such). That modelling looked at dampening volatility and lowering risk. Also confusingly as per the political economy sources I cited: he also favors it for normative reasons. I take it you now agree the Telegraph was correct ?

That a generalised Tobin tax would act to dampen volatility and thus lower risk is dubious - the empirical modelling is equivocal. Also as Strauss-Kahn points out the implementation of same is way too hard.

One suspects Stiglitz wouldn't be peddling this sans his normative reasons. One suspects Brown is only peddling this because he is a wally. The FT has referred to Brown's proposal as "Unhelpfully unclear" in the past.

cYp
 

stringjack

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Originally yes - but the generalised form has been extended...
If by 'originally' you mean 'accurately'.

My point is that Stiglitz has done econometric modelling on a generalised Tobin tax (and I cited a paper by him on such). That modelling looked at dampening volatility and lowering risk. Also confusingly as per the political economy sources I cited: he also favors it for normative reasons. I take it you now agree the Telegraph was correct ?
None of which is relevant to the claim that the quotes used in the Telegraph article do not support the claims made by the article.
 

cyberianpan

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If by 'originally' you mean 'accurately'.
It got extended - plenty of work published on extending it beyond just currency markets (as you might recall in say the 70's currency markets were much more active by comparison to securities markets.. since then we've moved up the inverted asset pyramid (I'd link to this... except the "gold loonies" have infested the internet with their version ) . The extension is a perfectly valid analogy... however due to the increased uncertainty the econometric modelling is even less certain as to effects.

None of which is relevant to the claim that the quotes used in the Telegraph article do not support the claims made by the article.
Newspaper articles don't give citations - and quite often write narrative text as opposed to quotes. It should be clear now that The Telegraph was accurately representing Brown's & Stiglitz's position(s).

All that said my original criticism of Brown still stands: not giving the context in which the tax will operate is not at all helpful. Further examples of Brown's mendacious dissembling are here:
http://www.ft.com/cms/s/0/aa162054-e65e-11de-bcbe-00144feab49a.html
In a separate initiative, Mr Brown and Nicolas Sarkozy, France’s president, suggested that revenues from the Tobin tax could be devoted to the world’s fight against climate change, especially in developing countries.

They suggested that funding could come from “a global financial transactions tax and the reduction of aviation and maritime emissions and the auctioning of national emissions permits.”

However British officials later argued the main point of a financial transactions tax would be provide insurance for the global taxpayer against a future banking crisis.
cYp
 

evercloserunion

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A Bank of England discussion paper I read proposed a risk-adjusted pre-paid levy. I like that idea.

Is there any strong evidence that Brown definitely favours a flat levy? I can't see any from those articles.

I support the idea of a pre-paid levy but it must be tied to risk. If everyone pays the same amount regardless of risk-taking into a fund which is used to bail out failures, you introduce moral hazard into the equation. Also, a tax-funded guarantee scheme is unfair on customers who have money deposited with banks. It drives down the return on deposits but only on the basis that the bank is guaranteed by the taxpayers--who are, in many cases, the depositors.
 

cyberianpan

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A Bank of England discussion paper I read proposed a risk-adjusted pre-paid levy. I like that idea.

Is there any strong evidence that Brown definitely favours a flat levy? I can't see any from those articles.

I support the idea of a pre-paid levy but it must be tied to risk. If everyone pays the same amount regardless of risk-taking into a fund which is used to bail out failures, you introduce moral hazard into the equation. Also, a tax-funded guarantee scheme is unfair on customers who have money deposited with banks. It drives down the return on deposits but only on the basis that the bank is guaranteed by the taxpayers--who are, in many cases, the depositors.
He originally proffered four options

Speech to G20 Finance Ministers | Number10.gov.uk
There have been proposals for an insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transactions levy.
But based on his past utterances - and what he's spun since - he's clearly in favour of option 4 (the generalised Tobin Tax)

Immediately everyone got a press release which pointed them towards to flat Tobin tax:
Brown Says G-20 Should Consider Tax on Speculation (Update1) - Bloomberg.com
Brown's Tobin Tax Idea to Levy Financial Transactions - TIME

And he's persisted with that:
Tobin tax on banks has support, claims Brown - Business News, Business - The Independent
The Prime Minister said at his regular Downing Street press conference yesterday: "I think the proposals that I made at St Andrews for an international levy ... are now gaining currency around the world. I think you will probably see further moves to get an international agreement about some international levy to deal with the responsibility banks owe to society."
FT.com / UK - Global bank tax near, says Brown
Mr Brown believes that the IMF will endorse a global bank levy before its April meeting in Washington.
He keeps pushing the flat levy... which is dumb.

The administration of any significant transactional levy ... would be challenging in the extreme

As said something targeted at risky transactions is better (not a per transaction levy)

Here's a possible one:

Regulators assess markets for efficiency, considering factors such as transparency, liquidity and neutrality. If they find a market (for whatever asset class) is inefficient ... then put some form of global tax on that market.

cYp
 

stringjack

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It got extended - plenty of work published on extending it beyond just currency markets (as you might recall in say the 70's currency markets were much more active by comparison to securities markets.. since then we've moved up the inverted asset pyramid (I'd link to this... except the "gold loonies" have infested the internet with their version ) . The extension is a perfectly valid analogy...
Stop encouraging them. :-x

Newspaper articles don't give citations - and quite often write narrative text as opposed to quotes. It should be clear now that The Telegraph was accurately representing Brown's & Stiglitz's position(s).

All that said my original criticism of Brown still stands: not giving the context in which the tax will operate is not at all helpful.
If Brown's position were unclear, representing it as clear would be tendentious.
 

cyberianpan

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Stop encouraging them. :-x
It's really annoying actually as the standard version of that chart is very helpful


If Brown's position were unclear, representing it as clear would be tendentious.
Brown's position is sufficiently clear in order to be attacked. He is "waving his hand" and the FT did criticise him for such - however his proposal sounds sufficiently dangerous to deserve attack. He's trying a simple "hand-waving" solution to a complex problem - with the aim of being able to say "I fixed that". And weirdly both Stiglitz and himself seem to veer between two reasons for the proposal - 1) normative redistributive and the 2) empirical "risk-dampening" argument. However the problem we want them to solve is that behind question 2... and they are on very shaky ground to claim it as a solution... which is why they are engaging in obfuscatory actions.

cYp
 
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