Re: A Financial Tax with a different objective

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

The Tobin Tax as proposed by Tobin does not reduce volatility.  It adds cost to
velosity which under some situations can actually increase volatility.  It does
not reduce currency speculation which focuses mainly on arbitrage on open
interest parity.

The Tobin tax, named after James Tobin, Nobel Laureate from Yale who first
proposed it, is a 1/4 of 1% tax on the purchase of national currencies. It is not
a large amount, but it is considerably more than the margins upon which
currencies are often traded. Imposition of such a tax would moderate currency
speculation as it would take larger fluctuations for buying and selling to be
worth while. The tendency would be to encourage money to stay in one place for
periods long enough to
do some good.

Paul Davidson's point that the Tobin tax is not the proper response for the
destructive run-away global foreign exchange markets is on very solid grounds.
The real damage of the Tobin tax, aside from the obvious increase of transaction
cost without any compensating benefits, is the false hope it holds out that may
distract from the urgent need to seek real effective solutions to a very pressing
and serious problem.

Globally, there is an urgent need for a new international financial architecture.

While there is generally no disagreement on this point, there seems to be much
disagreement on what this new architecture should look like.
My view is that the new architecture should aim towards eliminating arbitrage
profits from open interest parity between the currencies of the world's trading
system, so that non-trade and non-development transactions are not profitable.
Currency transactions should be neutral and not be permitted to become the
driving force in transactional decisions. Market fundamentalism should not be
permitted to be the excuse for destructive currency manipulations.
This objective cannot be achieved by mere control, through taxation or
regulation, of cross border capital flow. Rather, a currency exchange system
should be instituted so that the relationship between interest rates and exchange
value is linked between currencies to reduce the arbitrage profit to zero. The
trade value of a currency should be tied to the productivity of an economy rather
to its dollar reserves, since a currency's value represents the current and
anticipated purchasing power. The concept of trade weighted
values of currencies and purchasing power parity adjusted GDP measurements are
already widely accepted in international economics. With instant electronic
transactions, it is quite feasible to institute a foreign exchange regime to
eliminate profits from most market inefficiencies. The enhancement of a
currency's value would provide an incentive for sound monetary policies over
time, rather the current practice of condescending jawboning for sound national
monetary policies to back up artificially pegged exchange rates. The global
pricing system had shifted from one where profit can at times be derived from
ocacasional volatility caused by fundamental causes, to one where the profit
incentive is continuously driving a perpetual high volaitity, in the currency,
credit and equity markets.

Regionally, Asia should adopt, within allowances for Asian characteristics, the
EU regime governing the exchange rate of national currencies to the euro, and
move toward a Asian currency.

Theses problems of structural volatility and short teerm speculative dominance
have solutions, but the solutions threaten the built-in advantage that the US
dollar has enjoyed since WWII as the sole currency of choice in world trade.
Therefore the US, in the name of free market fundamentalism, is opposed to any
real and meaningful reform. America wishes to impose on the world's government's
a monetary and fiscal discipline that it itself has not observed since the end of
WWII. The post WWII strength of the dollar came not
from American discipline, but from a tilted playing field in favor of America
peculiarities.
There is no global free market. Any economy that wants to prospers must adopt a
strategy that first enrich the American economy and eaccept the American export
of systemic risk.  It is a condition known as dollar hegemony.

Greeenspan said in a speech on Financial derivatives before the Futures Industry
Association, Boca Raton, Florida on March 19, 1999: "We should note that were
banks required by the market, or their
regulator, to hold 40 percent capital against assets as they did after the Civil
War, there would, of course, be far less moral hazard and far fewer instances of
fire-sale market disruptions. At the same time, far fewer banks would be
profitable, the degree of financial intermediation less, capital would be more
costly, and the level of output and standards of living decidedly lower. Our
current economy, with its wide financial safety net, fiat money, and highly
leveraged financial institutions, has been a conscious choice of the American
people since the 1930s. We do not have the choice of accepting the benefits of
the current system without its costs."

It is an amazing statement for the central banker of the kingpin of the global
economy. The "benefits" and "costs" Greenspan referred to is a that of a
speculative bubble and the continuing risk of sudden systemic collapse of the
global economy. It is a TINA (there is no alternative) argument which we all know
is as unsupportable as NAIRU.

Henry C.K. Liu

Harry Veeder wrote:

> Actually Paul did not show it will have more negative consequences
> than positive consequences. (He has not done a cost benefit
> analysis on such a tax.) He showed the Tobin Tax will not achieve Tobin's
> objective of reducing volatility.
>
> Since "Tobin"  in the term "Tobin Tax" means a tax on international
> financial transactions with the objective of reducing volatility,
> then it is time to propose a tax (with a new name) which is similar
> in implementation to the Tobin Tax but has a different set of objectives
> which are achievable.
>
> Personally I believe currency speculation should be taxed in particular,
> so that the beneficial effects of speculation flow to all people,
> instead of just the professional speculators.
>
> Harry Veeder
>
> ----------
> >From: "Federico Todeschini" <todeschinisat@xxxxxxxxxxxxxx>
> >To: <pkt@xxxxxxxxxxxxxxxx>
> >Subject: Re: Bundesbank Rejects Tobin Tax
> >Date: Fri, Sep 28, 2001, 1:14 AM
> >
>
> >I dont think that´s the issue here. I think that Paul try to demostrate that
> >the Tobin Tax would bing more negative than positive consequences, and
> >therefore it should not be adopted.
> >
> >Federico