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Is It Time for Financial Institutions to Give Back?

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Posted on Dec 1, 2009

By William Pfaff

It seems plausible that payback time has arrived for the international financial community. The principal obstacle to this happening is, at the moment, the Barack Obama administration’s Treasury Department, which thus far in the financial crisis has been mistaken for the executive committee of Goldman Sachs in disguise. It has opposed every proposal to force the financial institutions whose reckless behavior has been responsible for a crisis that wiped out the jobs, homes and savings of millions to assume financial accountability for what they have done.

What they can do is pay back the public funds that rescued the international economy by paying off part of the enormous debts now assumed by the major nations. All or nearly all the EU states are now over the deficit limit imposed by their Stability Pact—or way over as in the Greek case. U.S. external debt is 94.3 percent of GDP and rising.

Politicians talk about the supposed need to raise taxes now that the emergency funds injected into the world economy are drying up. But how do higher taxes pay for economic recovery? U.S. Treasury Secretary Timothy Geithner’s solution is growth. But where is this growth to come from when the stimulus ends, as all agree that it must?

Let the bankers give back what they have been given. A proposal rapidly gaining international political support and a grudging acceptance in the financial community is to place a very small tax on international financial transactions to pay back what governments gave the banks.

The proposed tax rate has ranged from .002 percent to 0.4 percent of the transaction’s value, depending on the nature of the transaction.

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Estimates of the amount this tax could bring in annually go as high as $650 billion. In Washington, Democratic Rep. John Larson has proposed 0.25 percent on such innovations as over-the-counter derivative transactions.

Others in Congress have proposed that same rate for ordinary stock transactions, but with individual retirement accounts and educational and health savings accounts exempted, as well as all transactions under $100,000. The seven Democratic representatives who are co-sponsoring this bill say that half the revenue would go to pay down the federal deficit and the rest into job-creation programs. They claim that their bill would raise some $150 billion a year.

However, single-nation proposals are not taken very seriously because of the competitiveness issue. Bankers insist, not very plausibly, that the entire international financial industry will flee from country to country to stay ahead of any taxes, just as American corporations flee from one tax haven to the next to avoid contributing anything to their nation’s well-being. Any financial-transaction tax would have to be uniform internationally, or at least incorporate the principal exchanges.

However, it may be necessary to go beyond exchanges since big financial operators increasingly trade directly or through unregulated mechanisms. While still in office in September, former German Finance Minister Peer Steinbruck argued the following: “A global financial-transaction tax, applied uniformly across the G20 countries, is the obvious instrument to ensure that all financial-market participants contribute equally.”

German Foreign Minister Frank-Walter Steinmeier and I suggest the G20 take concrete steps toward implementing a tax of .05 percent on all trades of financial products within their jurisdictions, regardless of whether these trades occur on an exchange. Retail investors could be exempt.

Steinbruck adds: “There is a clear-cut case for a global financial transaction tax: It would be just, would do no harm, and would do a lot of good. If there is a better idea for fair burden-sharing, let’s hear it.”

The reason for Treasury Secretary Geithner’s skepticism (the tax, he has said, is not something the U.S. would support) has not been made clear, but could simply be evidence of the inveterate hostility of America’s financial community (whence Geithner comes) to taxes in general, and a particular dread of the precedent of an international tax.

However, Larry Summers, director of the Obama White House’s National Economic Council, has written in favor of a securities transaction tax. Britain’s Prime Minister Gordon Brown is for a tax. So is France’s Nicolas Sarkozy.

The idea is not new. It was given renewed attention in 1971 by the economist James Tobin as a way to curb currency speculation, and was taken up by many, particularly on the left, as an all-but-painless way to generate development funds for poor nations. It has been advocated for many years by a private economic adviser, Carolyn Cleary, as a noninflationary way to generate for new uses the equivalent of the “Brady Bonds” of 1989, which restored sovereign debt liquidity in Latin America.

The conceiver of the idea was John Maynard Keynes, the author of neoclassical economic theory and the man who more or less invented the modern international economic structure at the Bretton Woods Conference in 1944. Keynes suggested the transaction tax during the Great Depression as a means to supply needed liquidity. Like many of his other ideas, it is being resurrected amid the wreckage of monetarism and neoliberal capitalism that surrounds us today.

Visit William Pfaff’s Web site at www.williampfaff.com.

© 2009 Tribune Media Services Inc.


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Trailing Begonia's avatar

By Trailing Begonia, December 3, 2009 at 7:46 pm Link to this comment

Payback has arrived, eh?  Wanna bet on that one?

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By sam, December 2, 2009 at 7:43 pm Link to this comment
(Unregistered commenter)

I have to point this out since it is missed by so many: the root cause of the recent financial crisis was real estate speculation, not stock market speculation.  Home prices bubbled up as a result of Dr. Greenspans easy money and lack of credit underwriting standards.  My neighbor is now BOA, because the former resident razed his old house to build a 5,500 sq ft monster he could not afford.  He was unable to flip it, or pay for it…so back to the bank it goes.  Equities got clobbered because of the mess in the credit markets, not the other way around (granted, the OTC markets DO need tighter regulation and there is corruption on Wall Street).  People are losing their homes (and I am truly sorry for them) because they bought something they could not afford, not because of High Frequency Trading or equity day traders.  It may not be politically correct to say so, but the people ultimately responsible for the mess our economy is in reside on main street, not wall street.  And no, I do not work on Wall Street; I work on main street.

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chaztv's avatar

By chaztv, December 2, 2009 at 4:05 pm Link to this comment

Let’s take the “Wisdom of The Market” stick it up Big Banking’s rectum, twist, turn and otherwise shove vigorously and often.
Face it, the cavalry is not coming to the rescue if your name is not Goldman Sachs.
A simple plan to get change:
Deprive banking and other financial businesses of the income they gain from credit and debit card services, fees, penalties and interest.
By taking a simple action: Use Cash
http://www.UseCashMovement.org

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By jonathan, December 2, 2009 at 1:08 pm Link to this comment
(Unregistered commenter)

I wonder if the floor specialist will taxed too. If they are taxed, they cannot survive and the stock market cannot function. If they will be exempt, then the question is why? Day trader just provide the same function as the floor specialist.

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By Sasha, December 2, 2009 at 7:16 am Link to this comment
(Unregistered commenter)

Sorry to quibble, but Keynes is most definitely not a neoclassical.  The role of “father”, reviving classical liberal economic theory in the post-WWII period, was played by Hayek in the 1940s and Friedman in the 1950s.  While certainly capitalist, Keynes departs from the neoclassicals in his emphasis on prudent government intervention in the economy, full employment and macroeconomic stability.

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By ftf, December 2, 2009 at 6:22 am Link to this comment

As a concerned investor, I have read more than a few hundred articles concerning the Tobin or financial transaction tax over the past year. The small circle of proponents of the tax simply repeat what another has said. I have found many studies and real applications of the tax conducted by country’s governments finding the tax to be unworkable with job and economic growth destruction and net negative revenue. Even James Tobin dismissed his own theory later in life which few authors of articles point out. Theories are based on a lot of hope of getting what you want. Reality disappoints hopes and dreams.

The reaction from the middle class will be its greatest failure. The exemptions will be worthless as the cost of the tax itself is minor in comparison to the increased costs. Liquidity or trading activity reduction of 95% will result in the spread cost increasing to a 2% yield reduction on each purchase or sale. Most brokerages will fail resulting in lower competition and higher fees. There goes another one or two percent. Over a lifetime, the average investor’s retirement will be easily reduced by one third to one half.

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By ardee, December 2, 2009 at 3:52 am Link to this comment

You missread the article in regards to Summers position:

“However, Larry Summers, director of the Obama White House’s National Economic Council, has written in favor of a securities transaction tax.”

Which he did, in 1989 in two articles. You seem anxious to read only what proves your own point rather than what the intent of the author may have been…..Speaking of a loss of credibility…

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By alan, December 1, 2009 at 11:51 pm Link to this comment
(Unregistered commenter)

Your comment that Larry Summers is for the tax is simply not true. At one time, when serving in the Clinton administration, he supported it, but once he began working with the Obama administration, he came out against a Tobin Tax. Looks like you just lost any ounce of credibility you may have had, huh???  lol

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