What could possibly be a more coherent, convincing and above all evidence-based argument than this?
SIR – You were wrong to attack the financial-transactions tax (FTT) that is being implemented by 11 European Union states (“Bin it”, February 23rd). You dragged up the bad experience of Sweden, which ditched its own FTT in 1991. But even the IMF has accepted that the Swedes had simply failed to design their tax well enough. As Algirdas Semeta, the EU commissioner on tax, recently said, Sweden invented a bicycle with square wheels.
We are campaigning to get the financial industry to pay for some of the damage it has caused. There are sensible arguments to have over the impact of an FTT on volatility, liquidity and the cost of capital. But the real issues at the heart of the matter are whether democracies control the capital markets or not, and whether finance serves the real economy or vice versa. The people are on our side. There comes a time when even The Economist should stop defending the indefensible.
Basically it amounts to "shut up, witches, or we burn you".
Mind you, that's not as Orwellian as "Exorbitance cannot be allowed in a free and socially minded society..." (my bold). Guess who.
"Basically it amounts to “shut, witches, or we burn you"
is simply vilification without argument.
Is that what you have sunk to now?
[Sorry, that was a typo, it should have been "shut up", not "shut". I really didn't think it needed further explanation. You know what I mean, its all been said before. You disagree, I presume, but do you really want more words, or do you just want me to change my mind. Or keep quiet? -W]
Well there are two issues there.
1) The Swedish argument is a bad example. (Unless the IMF is being misrepresented.)
2) The financial system should have some democratic constraints.
You channeling Osborne again or what?
As someone who works in financial IT, may I say that there is already an FTT in terms of application development costs, post-trade database storage, trade-level reconciliation effort, position and risk aggregation, compliance surveillance, throughput and capacity management reporting/review/remediation, and the like.
These are not "free" trades.
Could you describe this as "the cigarettes most smokers prefer" argument?
I do think that democracies whould exert a degree of control and regulation on banking. Unfortunately, arguments by bankers against banking regulation are not all that convincing either.
[Which args do you mean? Links are good - W]
There are sensible arguments to have over the impact of an FTT on volatility, liquidity and the cost of capital.
That part is true. But then the letter declines to engage in sensible argument, preferring "bankers bad, tax on them good".
[Agreed. One could perhaps argue that a letter is too small for those arguments, but they could at least be sketched out and perhaps one of these new fangled "hyperlinks" given to the fuller arguement -W]
William, I don't know what you mean except that your have caricatured the letter in a way that misrepresents the argument therein, and added a bit of vilification on top ("we'll burn you"?) There is no threat, explicit or implicit, in the letter - but the threat is central you your caricature.
[I disagree. The people are on our side. There comes a time when even The Economist should stop defending the indefensible. is a threat - deliberately not an explicit one, even those folks aren't dumb enough to think they can be explicit, but certainly implicit -W]
On the evidence to date, it is possible to have a rational conversation with the authors of the letter about the FTT. On the evidence of the OP, it is not possible to do so with you., .
[Again, I disagree. You certainly haven't attempted to have a rational conversation with me on the subject. Conversely, many people have attempted to talk with the authors of the letter, and rational argument just bounces off them.
But lets have a go: a FTT will increase volatility. Do you agree? -W]
The irony here is the complaint about lack of evidence-based argument followed by an accusation that the letter amounts to “shut up, witches, or we burn you” which is not in any way backed up by any evidence or arguments.
[I thought we all knew this stuff already.
OK, I'll try the same gambit I did with TC just above: a#n FTT decreases the overall tax take. Do you agree? -W]
A FTT makes sense when you consider the arrival of http://en.wikipedia.org/wiki/High-frequency_trading on the scene.
[Indeed. You mean Members of the financial industry generally claim high-frequency trading substantially improves market liquidity, narrows bid-offer spread, lowers volatility and makes trading and investing cheaper for other market participants I presume. <sarc>I can certainly see why you'd want to discourage all that<s/arc> -W}
A FTT has to cover a large enough area that the transactions don't just move abroad or you may lose tax income. How to avoid that is a technical question I'm not competent to answer, but it's clear to me that financial institutions have gotten way too powerful:
""I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy," he said. "And I think that is a function of the fact that some of these institutions have become too large."
- Attorney General Holder
We may even have to take a short time economical hit in order to bring them back under some sort of control.
["Too big to prosecute" is bad, as is "too big to fail". OTOH, perhaps Holder is just making excuses for his poor performance. But in either case, why is FTT the answer? -W]
High Frequency Trading is a zero sum game where the companies with access to really fast information (there are special fiber optic cables used to shave off a few milliseconds to gain an advantage) profit from those who don't. Those who participate in it will obviously emphasize its virtues, but it also brings instability to the system when you have computer algorithms trading far faster than any human can follow. One little programming error and a whole market can go crazy.
[Well, its certainly possible for firms doing HFT to lose lots of money very quickly if they get it wrong. And you care about this because... you don't like to see HFT traders losing money? I think I've missed the logical thread a bit here. Perhaps you could expand?
is a zero sum game where... Isn't that an argument you could use with all trading? It seems to me that it is, therefore its wrong (assuming you disagree that all trading is bad).
I don't really know much about HFT. The wiki article we've been pointed to say High-frequency traders compete on a basis of speed with other high-frequency traders, not long-term investors (who typically look for opportunities over a period of weeks, months, or years), and compete for very small, consistent profits. Who knws, it may be wrong -W]
William, My example with "to big to prosecute" was to illustrate a disease in the way our current system works. You can't prosecute the banks because they are too big and powerful,
[Ah, no, that's not really right: you're implying that they can't be prosecuted because they are powerful enough to squash prosecutions, perhaps via political contacts. That's not what the article says: it says it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy which is very different. Its saying that prosecuting them would be bad for the economy. Now you may argue that they should be prosecuted anyway, but in these parlous times pols may not.
And of course, all that ignores the fact that banks *have* been prosecuted / fined recently -W]
you can't tax them because then they just move transactions elsewhere.
[Bank profits are taxed just like everyone else's profits -W]
I don't have a good solution, but having financial institutions that are above the law is clearly not optimal.
[Agreed; addressing the "too big to fail" part is what's needed. The FTT does nothing to help that, of course. This is a "*Something* must be done. Oh looks, here's something. Therefore it must be done" style of illogic. Its great with pols, it fools the public, it doesn't help -W]
I don't care about a company doing HFC losing money, unless it loses so much that the government has to go in and bail it out, but I do care about the stability of markets, because a lot of other people can be dragged along and lose a lot of money too when those glitches happen. Worst case you can trigger a whole market crash.
[Well no. They are glitched. Short-term traders may get hit; the long-term (aka "good", no?) traders that we all love don't even *see* the problem. I agree a market crash would be bad. But it hasn't happened, not is there any real sign of it happening. Designing the FTT around preventing something imaginary, whilst definitely damaging the present is hard for me to understand (other than along the "burn, witches" school of logic) -W]
The basic idea with shares is that they are a way to finance companies. Long term trading based on the actual profit and estimated future of a company is useful because it ensures that companies can attract money. This doesn't really apply to HFC. Your earlier quote about narrowing bid-offer spread etc may have some merit, but I'm not sure it outweighs the risks.
[Well, how would you know? I certainly don't. You'd want to find someone who does know. Clearly that person isn't Bernadette Ségol. You wouldn't want to form your opinion on this from nothing but FUD, would you? -W]
I think your quote from wiki is misleading. If HFC only competed against HFC it would all even out and none of the participants would profit in the long run, and given how much money it attracts there clearly are profits to be made.
Looking only at volume, HFC is dominant today so most of the money will be shuffled back and forth between different HFC-traders, but there will also be a small influx from "normal" traders, and that influx is what makes the business profitable. Call it a transaction tax normal traders pay to HFC.
[That is plausible (I don't know if its true or not). Obviously if you did believe it, it would be important for you to know whether this "implied tax" was bigger or smaller than the FTT, no? Otherwise you'd risk cutting off your nose to spite your face -W]
To make a climate analogy, there are those who claim that almost all CO2 fluxes are natural and that our emissions are insignificant in comparison and thus doesn't matter, but that misses the point. If the large fluxes are in balance but the small addition isn't the latter can be very significant.
"you're implying that they can't be prosecuted because they are powerful enough to squash prosecutions, perhaps via political contacts. "
No, that wasn't really what I was implying, even if I'm sure big contributions from banks to election campaigns help. I was just making a summary of what Holder said: you can't prosecute banks because they are too big. Oh, sure, you can give them some minor fines, maybe even jail someone far enough down in the hierarchy, but you can't go after them the same way anyone else would be prosecuted. We're talking about large scale money laundering, fraud in fixing interest rates, perjury, in effect theft of untold number of houses that were foreclosed based on forged documents etc. There ought to be directors and board members spending the rest of their lives in prison, but that just ain't gonna happen. Nor is Holder's explanation really good, they could go after the people responsible without threatening the banks as institutions. (which makes the theory that the banks have bought the politicians more plausible)
[Agreed with that last point. He's just making excuses. As to the rest: I think you're over-egging the pudding on the bank's sins (foreclosures, for example. People lost houses because they couldn't pay their mortgages, not because of intrinsic fraud). As for the rest: well, we could argue it, but how much does it really matter to the basic point? -W]
" the long-term (aka "good", no?) traders that we all love don't even *see* the problem. "
What do you base that claim on? Long time traders have to trade too at some point, and some will make bad decisions based on short term artificial trends. Did you read about the 2010 Flash Crash?
How large such an event can become is unknown. HFC is a fairly recent phenomenon in rapid development so we just don't have much knowledge about how sensitive it is.
[I knew that was coming. Look at the pic on the article you cite; it was a brief blip. Vair exciting for those trading then, but long-terms folks would have a very low probability of trading then. I don't think we should be basing policy on such rare blips -W]
"Obviously if you did believe it, it would be important for you to know whether this "implied tax" was bigger or smaller than the FTT, no? "
Why should that be so important? There is a difference between paying a tax to a government that can use the money for the public good or to a private company.
[Come now: that's a point, but not a major one. If you've got absolutely no idea at all whether the FTT or the (possibly existant) "implied HFT tax" is larger, then you haven't got an argument.
It looks to me like you dislike the banks, and realise that the FTT is supposed to hurt them, so you're in favour of it. But the arguments you bring up are thin; they just buttress a pre-formed opinion; they didn't make that opinion -W]
Tax isn't a market-based or fair system - it's a balance between raising money to do government-supported stuff and "fixing" the economy to encourage "good" business and discourage "bad" business (not a step to Soviet-style economies). What's totally fair about VAT, oil royalties, income-based tax and vehicle excise duty.
If democratically elected governments choose to change the tax system, they are liable to their electors.
[You've now talked yourself into the position that *anything* a democratically elected govt does is OK, as long as they remain liable to their electors. I doubt you really mean that -W]
What's that got to do with burning witches?
There were no decent arguments in the article the letter was criticising which was classic "denialist" fair. Some of the arguments could be used to *support* the tax.
William, in most, but not all cases, I suppose people really hadn't paid their debts, but there have been instances where people have been foreclosed without any mortage whatsoever on their house based on fraudulent claims. The sad truth is that the banks after selling and repackaging all these debts have their papers in such bad order that they don't really know, which is why they have to cheat:
(On the other hand, there have also been people who understood the limits of the system who simply refused to pay their mortages unless any bank could prove they had the right to the money and got away with it).
" it was a brief blip. Vair exciting for those trading then, but long-terms folks would have a very low probability of trading then. "
It doesn't work quite like that. Traders, even those who really are in it for the long run, may panic when the see the market crash. Index funds may have little choice depending on their exact rules. Some people still buy and sell based on the market price rather than specify the price, which, if the market crash between when they place their order and it goes through may mean a huge loss. And the long time loss of trust also has a cost.
"If you've got absolutely no idea at all whether the FTT or the (possibly existant) "implied HFT tax" is larger, then you haven't got an argument."
Sure I do, even if you chose to ignore the difference between a proper tax and loss to some predatory companies.
[Indeed. You mean Members of the financial industry generally claim high-frequency trading substantially improves market liquidity, narrows bid-offer spread, lowers volatility and makes trading and investing cheaper for other market participants I presume. I can certainly see why you’d want to discourage all that -W}
We do have to protect you against yourself if you insist on drinking the Kool Aid.
[Insert silly here]
Trades at High Frequencies? Sounds like they might give you cancer. And truthfully, HFTs couldn't be far behind Nuclear Power Plants in actually causing it. No surprise the Germans want to slow down that trading. HFT? Nein, Danke.
[You've now talked yourself into the position that *anything* a democratically elected govt does is OK, as long as they remain liable to their electors. I doubt you really mean that -W]
No. You have talked yourself into the position that *anything* the free market does is OK, and anything that intervenes is the first step to "a full Soviet-style command economy".
Claiming that balance is required is not saying what politicians do is all "OK".
> [Indeed. You mean Members of the financial industry generally claim high-frequency trading substantially improves market liquidity, narrows bid-offer spread, lowers volatility and makes trading and investing cheaper for other market participants I presume. I can certainly see why you’d want to discourage all that -W}
Why would anyone encourage anything based purely on what the members of the financial industry claim?
Anyway that wikipedia article is rubbish:
"which has lowered volatility and helped narrow Bid-offer spreads, making trading and investing cheaper for other market participants."
Ref 21 says nothing of the sort but does say that HFT interferes with proper management of trades (i.e. those based on direct application of human planning and intelligence).
> brief blip
Circuit breakers worked that time. But "velocity" of money can't increase forever -- can it?
"High-frequency trading firms are described as placing 'thousands of orders simultaneously, only to cancel the bulk of these and replace them with another set' within fractions of a second. According to the brief, high-frequency trading accounts for approximately 70% of the volume on US equities and lies in the hands of about 2% of the 20,000 or so trading firms operating in the U.S...."
Stupid argument about a stupid discussion, which should not be on this blog in the first place, since it is not about since but about Opinions...
If we accept that the current banking system represents a market failure, the rationale for a FTT is quite straightforward: financial transactions in the current system don't adequately account for the costs incurred by third parties (ie us, when the financial system collapses). Therefore we should tax all financial transactions and the government can use the tax receipts to correct these negative externalities.
Given that no one seems to understand how the system works, the externalities are impossible to quantify, the level at which the tax is set will be arbitrary- and anyway receipts will just disappear into government treasuries without necessarily being reallocated to those harmed by the financial crisis, then yes, it's all a little academic.
But still- if (and for William, I suspect it's big if) we accept that the banking system is fundamentally flawed, the reasoning behind FTTs is sound, no?
I'm not particularly convinced by FTTs either, to be honest, but I can see why people are suggesting 'em. REady to be persuaded either way.
[I think this is just a variant of "*somthing* must be done, this is something, therefore it must be done". Even those who think the system is broken aren't arguing that all transactions are bad (unlike CO2 emissions, where all emissions are equivalent).
The problem with we should tax all financial transactions and the government can use the tax receipts to correct these negative externalities is that the EU's own modelling shows the total tax take *decreasing* with the introduction of FTT, so your argument falls of itself -W]
Don't feed the Throll.
Don't try to argue with Mr. Connolley on the topic. He is just trying to push a political agenda. He is little else then a fraud on this topic.
Where's the science? How about stopping to use your blog on enviromental science to promote your politicaly green views?
[Its my blog, I write what I like. But I'm puzzled that you think this post is promoting politically green views: the Green Party tends to push even more enthusiastically than my commentators the "bash the bankers" kind of stuff that I'm arguing against -W]
> [The problem with we should tax all financial transactions and the government can use the tax receipts to correct these negative externalities is that the EU's own modelling shows the total tax take *decreasing* with the introduction of FTT, so your argument falls of itself -W]
You missed my mild sceptism- certainly not my argument, but an argument and the best I can think of in favour.
[Oh, OK. I can meet you somewhere vaguely in between, in that case -W]
Correcting negative externalities with the tax system is pretty standard European postwar consensus economics, I'm not sure it's the right answer here either but I don't see any witch-burning malice in it.
[Do you think so? I'm rather dubious, though also rather ignorant. I'd have said they tend to go for regulation, not tax. Do you have examples? (Don't say UK fuel duty, that's just for money-raising). As for witch-burning: no, I think I'm right on that. This is a "here is a group of people that we don't like, and here is something we can do that we think will hurt them" kind of attitude -W]
Of course it's a "something must be done" but it's an obvious something, almost inevitable that it was going to get suggested. Slapping on a tax is about the easiest thing government(s) can do, much easier than wholesale re-design/restructuring the way the financial market works. However you do that.
Well, there's cigarettes and alcohol, although the money-raising argument applies there too.
[I'm dubious that these are correcting externalities. I think they are sin taxes. I think pols now might well claim in justification that these are externality corrections, but are they? Fags kill old people thus avoiding pension costs, I'm sure I've read that they actually save money overall -w]
But the point is that the correcting externalities is a well established justification governments use for introducing taxes- see Pigovian taxes. Perhaps more in UK than continental Europe. The principle also applies in a general sense, not necessarily specific taxes for specific harms ie one of the reasons we tax industry is because not all of its costs are accounted in internal transactions, the govt needs income to fund the infrastructure required to support businesses, healthcare for employees, envtl cleanup if pollution etc.
No doubt a proper economist will come along and correct me in the detail. But the principle of Pigovian taxes has been around for decades (even if not everyone agrees if or how well they work), so it's not as if the idea of taxing financial transactions to correct the harm the financial system has done/will do has just come out of nowhere.
As for the witch burning malice, we'll have to agree to differ there. If you know bankers personally, and they're nice people, they'll inevitably feel victimised given the circumstances of the last few years and tone of the media coverage. Wrong people at the wrong time. I;m not sure it's the underlying reason for the FTT proposal though- you'll need harder evidence to persuade me on that.
In so far as high-frequency trading is not a zero-sum game - and it isn't, or there wouldn't be so many big players - it works because the algorithms discover the price at which low frequency traders - investors - are willing to buy and sell, and take a small spread between them. The spread is small because it's a very competitive market, with many HFT engines competing to do the trades.
If HFT did not exist, the same brokerage function would be done by humans. Human brokers are more expensive to operate, the market would be less competitive, and spreads would be wider. Investors would therefore make smaller returns, and be willing to pay less for share offerings. The cost of business capital would increase.
But, on the other hand, if there had been no HFT in the USA, there would probably have no flash crash there either, and the harm to the European financial system - precisely zero, because European markets were closed at the time - would have been avoided. And an FTT in Europe would prevent HFT in the USA because...
As for the effects on volatility, I wrote something about it a year or so ago.
PaulB --- Your link refuses to let me view that page.
[Me too. I think PaulB may mean http://pb204.blogspot.co.uk/2011/11/financial-transactions-tax-and.html -W]
Apologies for the broken link. This should work (it includes the link WMC found).
PaulB --- Thank you.