Re: Tobin tax

[Trond Andresen <trond.andresen@xxxxxxxxxxx>]

At 21:39 13.04.99 +0200, Henry C.K. Liu wrote (forwarded to pkt by me)::

>If Norway adopts an unilateral Tobin tax, or even a regional one, with no
>loopholes, its trade will shrink and therefore its economy.

What is meant here by 'trade'? Norway exports oil, gas, fish, metals,
maritime equipment - and we import cars, wheat, consumer electronics etc.
Why should real-economic activity be hampered by a Tobin tax? We are talking
about a tax in the <1% range, which will have a negligible impact.
Furthermore, this small impact can, if called for, be offset by a slight
decrease in domestic taxes for export/import businesses.

There is one sort of 'trade' that will obviously shrink, however: Currency
transactions and trade in securities involving NOK. But that is one of the
secondary goals of the reform (the primary goal is to stabilize the
financial system), to channel society's economic resources away form the
'Casino' towards real-economic endeavor - in the spirit of Keynes.

>A water tight regime is not that easy.

I have seen this type of argument many times, and my answer is: Who has
proposed a *water-tight* regime? It is sufficient that a regime reduces
circumvention and speculation to a manageable level. We have speed limits on
the roads, and they are broken all the time. Should we then abolish them,
because they are not 'water-tight'? We all know what happens if we remove
speed limits altogether. In fact, hardly any legislation in society may be
said to work perfectly, but it is needed and useful all the same.

>In a world of multinationals with
>worldwide subsidiaries and joint ventures, foreign exchange transactions can be
>done off the books, with no direct cross border transfer of funds or
>instruments.

For short-term speculative activity to be worthwile, you have to have
markets with broad participation and intense activity. Many agents must be
given the option of interacting with many other agents - so they need banks
and other types of financial trading firms. And these firms must continually
be visible and announce their presence, to attract activity. Therefore they
will neccessarily also be visible to the central bank, and cannot escape
abiding by its rules and regulations.

I do not say that circumvention-type transactions will not happen. But
today's destabilizing activities will be drastically reduced, and that is
sufficient.

The destablilizing character of the international financial system
(regardless of what sort of esoteric 'instruments' that are traded) may be
traced back to TWO phenomena: Buying and selling

(1) on a very short-term horizon

(2) based on predictions of and reactions to what OTHER agents (will)do.

This implies a positive feedback system, perpetually on the border of
instability. It may be explained through first-semester control theory.

If my two points above capture the essence of the problem, I cannot see a
scenario where large-scale circumvential speculative activity in NOK
currency or paper can continue if my regime is implemented.

Henry says

>Parallel loans and swaps are designed to achieve exactly that purpose.

Please elaborate on how this will work to enable continued intense
speculative activity, under my proposed regime.

>Schemes will be created to cause drops in cash flow or profit or asset
>in foreign parents with subsidiaries in Norway in favor of Norwagean parents
>with foreign cubsidiaries, and vice vera, in ways that do not involve cross
>border transfers of funds or instruments.  It will be all virtual.

Please elaborate on this  too. I may be dense, but how can speculative
financial activity continue on today's scale, when agents have no organized
public trading places any more where this is profitable - and where
such deals may only take place *within* a given
multinational firm, or in secrecy between a couple of firms? I would be
thankful if you could construct some detailed and pedagogical hypothetical
cases.

>So we now are back to step one, except with more complexity.

A system where trade in NOK-denominated securities and currency have to
involve CB-licensed and monitored Norwegian institutions is very simple. It
is today's state of affairs that is overwhelmingly and unneccessarily complex.

Trond Andresen