Sunday, July 29, 2012

President Hollande of France leads the way with a Tobin tax

At last we see a serious move in Europe to start the much needed process of reining in the many useless financial transactions that are part of the unregulated morass that landed us in the 2008 financial meltdown.
James Tobin

Hollande's first budget is introducing a Tobin tax on trading and swap transactions:

The 0.2 percent tax, loosely modeled on the ideas of the U.S. economist James Tobin, will be applied to the purchase of shares in 109 French companies with market capitalizations of more than 1 billion euros ($1.2 billion). A similar levy will be imposed on high-frequency trading and so-called naked sovereign credit-default swaps.
The Tobin Tax concept is aimed at curbing transactions that disturb financial markets, and making those entering into such transactions pay for the damages caused by the resulting much-needed rescues of banks and countries' currencies:
A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another. The tax is intended to put a penalty on short-term financial round-trip excursions into another currency.

Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system of monetary management ended in 1971...

In 2001, in another context, just after "the nineties' crises in Mexico, Southeast Asia and Russia,"[2] which included the 1994 economic crisis in Mexico, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis, Tobin summarized his idea:
The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations

The idea is very simple: at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. 

This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. 

But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. 

My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets.

Let's hope that Chancellor Merkel follows suit, and then Italy and Spain, and Canada.

It is a modest beginning towards removing unbridled financial piracy and making destabilizers pay for the damages they cause by their greedy actions.

1 comment :

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