FX comment: Robin Hood, Robin Hood, taxing round the bend
The latest populist punish-the-bankers initiative was launched last week.
While most of the figures quoted on the The Robin Hood Tax campaign website are ridiculous, the stated aim of using 50% of revenues to ‘tackle poverty and climate change’ is likely to generate support.
You will very likely have seen the ‘hilarious’ video for the campaign. But if, somehow, it has passed you by here it is:
I like Bill Nighy: a watchable actor and Bob Dylan fan. He can’t be a bad bloke – but he’s no economist. However, Joseph Stiglitz, another supporter of a financial transaction tax is, and a heavyweight one to boot: (joint-)winner of the Nobel prize for economics, chief economic advisor to Bill Clinton and chief economist at the World Bank, among other things. But that doesn’t mean he’s immune to spouting nonsense; especially when he’s got a book to sell.
The Robin Hood Tax campaign (nice branding) is a coalition of aid charities and trades unions and the big idea is to get support for a “tiny tax on bankers that would raise billions to tackle poverty and climate change”. Or, more specifically, by “taking an average of 0.05% from speculative banking transactions, hundreds of billions of pounds would be raised every year.” The site goes on: “Experts suggest that at an average rate of 0.05%, revenues could be as much as $400 billion (£250 billion) every year.”
It isn’t disclosed who these experts are, but they seem to have missed the small fact that $400 billion is, in a good year, quite close to the profit for the whole global banking industry. And “Every year”? I don’t think so. In the unlikely event that such a tax was implemented – even at the mooted “tiny” level of 0.05% – high-frequency and retail trading would cease to exist. Because that’s 0.05% of notional amount, not profit; as in seven pips in EUR/USD. Basically it would be the whole volume-oriented spot model out of the window.
The academics support the proposal, less from an aid perspective and more from a loathing of high-frequency. Stiglitz virtually quotes Adair Turner: “Very little social returns come from short-term trading. It results in extreme volatility and excessive trading”. Stephan Schulmeister, the Austrian economist whose recent work is variously claimed as the academic basis of the campaign, believes the data “suggests that the cumulative effects of increasingly short-term transactions are destabilizing also over the long run”.
The best counter-quote is probably from Burton Malkiel’s book A random walk down Wall Street: “Transactions taxes would make most current high-frequency trades unprofitable since they depend on the thinnest of profit margins. Trading volume would collapse, and there would be a dramatic shortfall in the tax dollars actually collected by the government. Market liquidity would decline, bid-offer spreads would widen, and all investors would pay significantly higher costs on their trades.”
A close second is this, from the head of spot FX at a major player: “You don’t cure world poverty with money – well maybe you do for ONE generation. As for global warming – it’s not being helped by all the hot air coming out of Nighy’s gob. The only losers from a Robin Hood tax would be the customers, via wider spreads.”
The trouble is, of course, that any official response from the heartless bonus-grabbing banking community will be portrayed as a willingness to let the impoverished starve and the planet burn.
The campaign’s main slogan is: “Not complicated. Just brilliant”. Not complicated, certainly. Just brilliant? No, just bollox.