Tobin tax

Henry C.K. Liu hliu at
Sun Apr 11 08:16:19 PDT 1999

> Henry C. K. Liu wrote:
> > 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.
> >
> I agree, to impose a Tobin Tax would mean to do too little too late. But
> Henry, what do you think, could be a "real effective solution"?
> Harald Schumann

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 sytemic risk.

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 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

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