Re: Bundesbank Rejects Tobin Tax

[Paul Davidson <pdavidson@xxxxxxx>]

At 06:45 PM 9/26/01 -0400, you wrote:
> Tobin's dangerous remedy
> A tax on speculative flows on capital would hinder trade and do
> nothing
> to avert financial crises, says Ernst Welteke
> FT Published: September 26 2001 19:56 | Last Updated: September 26
> 2001
> 20:00


Those interested in seeing why the Tobin tax will not even stop
short-term round trip speculations in foreign exchange should look at my
article "Will Grains of Sand In the Wheels of International Finance
Do The Job when Boulders Are Needed?" in THE ECONOMIC JOURNAL, 
1997.  BTW Professor Tobin admitted that my criticism of the Tobin
Tax is correct.
Paul


> It is tempting to opt for an easy
> way out if the solution to obvious
> problems is too complex or too protracted. The Tobin tax is once
> again
> being extolled as this kind of cure-all. Proposed 30 years ago, it
> was
> debated briefly before falling by the wayside. Now, as then, its
> advocates promise a cure without side-effects; a fairer world.
>
> In concrete terms, it is supposed to be about stemming speculative
> capital flows, these purportedly being the cause of financial and
> monetary crises; a Tobin tax on speculators would suppress exchange
> rate
> fluctuations and monetary crises could be avoided. Some even see it as
> a
> way of turning the tide of globalisation.
>
> James Tobin, who came up with the idea, had a narrower focus:
> taxing
> currency trade so as to "throw a spanner in the works" of the
> financial
> markets. The funds raised were to be credited to the World Bank.
> That
> was Professor Tobin's original idea - its extension, advocated by
> the
> anti-globalisation camp in particular, gives him little pleasure
> (FT,
> September 11).
>
> Speculators often target what they expect to be small price swings.
> But
> not all short-term transactions are harmful. Currency trading,
> which
> tries to exploit price differentials, has an important role to play
> in
> terms of the functional viability of the markets. This arbitrage
> ensures
> uniform prices. A tax on currency trades would jeopardise its role
> and
> undermine market stability.
>
> What is more, the real problem, the risk of financial and monetary
> crises, would still exist. The hallmarks of crises are severe losses
> of
> confidence, highly volatile share prices and nosedives on the
> equity
> markets. A Tobin tax would do nothing to damp these violent swings.
>
> The Tobin tax falls short of the target but its side-effects are
> even
> worse. In currency trading, it is not possible to distinguish
> between
> the supposed evil of speculation and the benefits of external trade.
> A
> tax on currency trading would affect all its forms and make
> international trading more expensive. That would be a disadvantage
> in
> terms of the worldwide division of labour. The less developed
> countries
> would be the ones to suffer.
>
> Moreover, reduced trading on the currency markets means decreasing
> liquidity and, consequently, potentially greater volatility.  There
> are
> also practical reasons for rejecting the Tobin tax. It functions
> properly only if it is effectively implemented worldwide.
> Difficulties
> are likely to be encountered not only with regard to countries'
> political will, but also in terms of determining the instrument's
> ideal
> technical form.
>
> If we want to avoid crises, we must tackle them at their source:
> poor
> economic and financial policy, banking difficulties or unsound
> developments in the real economy. Speculative capital flows are
> merely
> the symptoms of suspected imbalances.
>
> The foundations for stable and well-functioning financial markets
> have
> to be laid in various different areas. To begin with, a central
> banker
> needs to put his own house in order. Of course, price stability is
> the
> most important criterion for well-functioning markets. A credible,
> stability-orientated monetary policy enhances the meaningfulness of
> prices and builds confidence. We also need sound fiscal policy and
> an
> accountable economic policy, both of which help to stabilise the
> markets.
>
> Dependable institutions, and especially dependable financial
> systems,
> also make a contribution to stability. Banking supervision and
> financial
> market supervision have to rise to this challenge in all countries.
> The
> more open a country's capital market, the higher are the standards
> set
> for its national financial supervisory systems. This makes it even
> more
> essential for the national authorities to work closely with
> international bodies.
>
> Enhanced international co-operation helps to stabilise the markets
> and
> systems. The criteria for a viable world economy are open markets
> for
> goods, services and direct investment, open capital markets in
> keeping
> with the state of the national financial systems and political
> co-operation, which underpins the workings of the markets without
> attempting to replace them. In addition, bail-outs by international
> organisations may not be used as a means of increasing private
> investors' risk  propensity. The International Monetary Fund and
> the
> World Bank should focus less on distributing money and more on
> stable
> systems.
>
> Furthermore, up-to-date, informative data are vital for market
> participants. Changes in expected earnings or risks have to be
> reflected
> in prices immediately.   If they are spotted too late, prices
> swing
> abruptly, as feared. And that is why market participants need more
> transparency. More widespread use of standards and  best practices
> could
> help to increase transparency worldwide. In particular, compliance
> with
> the 12 standards identified by the Financial Stability Forum should
> be
> encouraged.
>
> The path towards stabilising the financial markets is not an easy
> one.
> But unlike "easy" routes such as the Tobin tax, it is one
> worth
> pursuing.
>
> The writer is president of the Bundesbank

Paul Davidson

Editor, JOURNAL OF POST KEYNESIAN ECONOMICS

Economics Department - University of Tennessee

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