http://www.nytimes.com/2009/11/27/opinion/27krugman.html
The New York Times
November 27, 2009
Op-Ed Columnist
Taxing the Speculators
By PAUL KRUGMAN
Should we use taxes to deter financial speculation? Yes, say top
British officials, who oversee the City of London, one of the world's
two great banking centers. Other European governments agree -- and
they're right.
Unfortunately, United States officials -- especially Timothy Geithner,
the Treasury secretary -- are dead set against the proposal. Let's hope
they reconsider: a financial transactions tax is an idea whose time has
come.
The dispute began back in August, when Adair Turner, Britain's top
financial regulator, called for a tax on financial transactions as a
way to discourage "socially useless" activities. Gordon Brown, the
British prime minister, picked up on his proposal, which he presented
at the Group of 20 meeting of leading economies this month.
Why is this a good idea? The Turner-Brown proposal is a modern version
of an idea originally floated in 1972 by the late James Tobin, the
Nobel-winning Yale economist. Tobin argued that currency speculation --
money moving internationally to bet on fluctuations in exchange rates
-- was having a disruptive effect on the world economy. To reduce these
disruptions, he called for a small tax on every exchange of currencies.
Such a tax would be a trivial expense for people engaged in foreign
trade or long-term investment; but it would be a major disincentive for
people trying to make a fast buck (or euro, or yen) by outguessing the
markets over the course of a few days or weeks. It would, as Tobin
said, "throw some sand in the well-greased wheels" of speculation.
Tobin's idea went nowhere at the time. Later, much to his dismay, it
became a favorite hobbyhorse of the anti-globalization left. But the
Turner-Brown proposal, which would apply a "Tobin tax" to all financial
transactions -- not just those involving foreign currency -- is very
much in Tobin's spirit. It would be a trivial expense for long-term
investors, but it would deter much of the churning that now takes place
in our hyperactive financial markets.
This would be a bad thing if financial hyperactivity were productive.
But after the debacle of the past two years, there's broad agreement --
I'm tempted to say, agreement on the part of almost everyone not on the
financial industry's payroll -- with Mr. Turner's assertion that a lot
of what Wall Street and the City do is "socially useless." And a
transactions tax could generate substantial revenue, helping alleviate
fears about government deficits. What's not to like?
The main argument made by opponents of a financial transactions tax is
that it would be unworkable, because traders would find ways to avoid
it. Some also argue that it wouldn't do anything to deter the socially
damaging behavior that caused our current crisis. But neither claim
stands up to scrutiny.
On the claim that financial transactions can't be taxed: modern trading
is a highly centralized affair. Take, for example, Tobin's original
proposal to tax foreign exchange trades. How can you do this, when
currency traders are located all over the world? The answer is, while
traders are all over the place, a majority of their transactions are
settled -- i.e., payment is made -- at a single London-based
institution. This centralization keeps the cost of transactions low,
which is what makes the huge volume of wheeling and dealing possible.
It also, however, makes these transactions relatively easy to identify
and tax.
What about the claim that a financial transactions tax doesn't address
the real problem? It's true that a transactions tax wouldn't have
stopped lenders from making bad loans, or gullible investors from
buying toxic waste backed by those loans.
But bad investments aren't the whole story of the crisis. What turned
those bad investments into catastrophe was the financial system's
excessive reliance on short-term money.
As Gary Gorton and Andrew Metrick of Yale have shown, by 2007 the
United States banking system had become crucially dependent on "repo"
transactions, in which financial institutions sell assets to investors
while promising to buy them back after a short period -- often a single
day. Losses in subprime and other assets triggered a banking crisis
because they undermined this system -- there was a "run on repo."
And a financial transactions tax, by discouraging reliance on
ultra-short-run financing, would have made such a run much less likely.
So contrary to what the skeptics say, such a tax would have helped
prevent the current crisis -- and could help us avoid a future replay.
Would a Tobin tax solve all our problems? Of course not. But it could
be part of the process of shrinking our bloated financial sector. On
this, as on other issues, the Obama administration needs to free its
mind from Wall Street's thrall.