A flaw in the TUC masterplan | Tim Worstall | Comment is free | guardian.co.uk .
Worstall makes a fool of himself in the Guardian on the proposal by the TUC for a bank transaction tax in the UK. As I noted in response:
Worstall seeks to make a point and fails to do so
First, the interbank market seems to work on SWIFT, not CHAPs.
Second, the interbank market has dried up - that was what precipitated the crisis.
Third, transactions through the Central Bank - which is how this market functions right now - could be exempted from the tax.
Fourth - as the TUC note - there will be a behavioural response. Actually, one is desirable. Far from the paranoia about their being too little liquidity in the market - as was the mantra pre 2008 - the reality, as the likes of Roger Bootle and many others realise - was there was far too much. So massive short term speculation was the order of the day then - and we all saw where that led to. Reducing that liquidity is a major requirement of any banking reform. This one helps that.
Fifth, if Swift was included the rate could be much lower
Sixth, most important of all - Worstall misses the point of making such suggestions. They are put forward to stimulate constructive debate. Worstall is committed to snide and pedantic commentary based on a belief in the efficient market hypothesis (now so bankrupt that it's hard to credit anyone with giving it the time of day) with the aim of a) suppressing debate and b) bolstering the myth of market supremacy.
Worstall needs to accept that markets will change, massive change in banking is required, banks will need to contribute significantly - and disproportionately to raising the revenues need to eventually fill the fiscal deficit and that the TUC has by opening this debate made clear that there are payment mechanisms for finance within the UK economy that could be taxed for this purpose.
Worstall might even need to recognise that long termism - even 30 day lending - may be what is needed to create stability in financial markets - with benefit for us all and an end to profiteering for the few.
No one submitting such a proposal expects the idea to be taken on board by the Treasury without considerable further work and due diligence. And as the TUC and others will show in their submissions prior to the Pre-Budget report ? this is just one of a raft of progressive options available that mean that cuts in public services can be altogether avoided in the UK economy.
This though is something Worstall ignores. From his UKIP perspective government is bad and taxes are an evil. Read in this perspective Worstall?s analysis is pure neo-liberalism ? and precisely the narrow minded analysis that got us into the mess we?re in now.
Disclosure: I advise the TUC on tax matters
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“First, the interbank market seems to work on SWIFT, not CHAPs.”
SWIFT is a multicurrency payment instruction system not a payment clearing system.
CHAPS is a clearing house that operates in sterling or euros.
SWIFT is often used to instruct a bank to make a CHAPS payment, but may also be used to initiate other types of bank transfer.
If a UK bank that is a member of CHAPS wants to make a payment to another member bank, including the BoE, in sterling (or euros) it will do so generally through CHAPS.
If a non-member bank wants to make a sterling payment to a customer at its correspondent bank, it will instruct its correspondent bank, usually by SWIFT, to credit and debit the relevant accounts at the correspondent bank. If on the other hand the non-member bank wants to make a sterling payment to another CHAPS member, it will instruct its correspondent bank (by SWIFT) to make the payment.
If a UK bank wants to make a non-sterling and non-euro payment and it isn’t a member of a clearing house for the relevant currency, then it will send a SWIFT message to its correspondent bank to make the payment in the same way as above.
“First, the interbank market seems to work on SWIFT, not CHAPs.”
You might want to check that with the BoE. I did. Which is why I stated that the interbank market works on CHAPS, for that’s what the BoE told me.
“Sixth, most important of all – Worstall misses the point of making such suggestions. They are put forward to stimulate constructive debate.”
I entered exactly that debate. Your problem with this is what? Surely not simply that I disagree with you?
Tim
Yes, I did too. Speculation is the source of the vast majority of payments through CHAPs I learned
Maybe you asked the wrong question
You ask about a mechanism – I asked for a reason – quite different
And on six – you knowingly distort what I said – as is always your stock in trade. a) I was making clear that a proposal of this sort is not cast in stone – that’s not the intent b) I implicitly dismiss your pedantic and intimidating style – which like other right wing bloggers is, I am sure, deliberately designed to suppress debate – because your arguments 89such as they are) can’t withstand it
Richard
Fine
So we’ll change behaviour as a result of this
Great news – don’t you think
Long term thinking
Better planning
Less volatility
Less liquidity, better managed
And yes, much less speculation – which will drive very large parts of this (my sources say well over 80%)
All are things we need to make sure banking is put back in its place
And, as I’ve mentioned, I’m happy to exempt BoE payments
All of which says you’re backing the wrong horse Alex
Argue with the rate if you like – I’m happy to see it cut and make this a smaller part of a package – there are many more ideas to come – but I don’t think we’ve got this wrong at all
The fact that you’re so worried without actually proving anything suggests to me the exact opposite – that we may be well on target
Richard
“Less volatility”
Ah, you’re assuming that speculation increases volatility there. Interesting assumption which almost certainly isn’t true.
“First, the interbank market seems to work on SWIFT, not CHAPs.”
“I implicitly dismiss your pedantic and intimidating style”
Given that you now agree that the statement about SWIFT not CHAPS is wrong, how is my insisting upon facts either pedantic or intimidating?
Tim
How could short term speculation decrease volatility in flows? It could be argued by hedging it decreases volatility in outcomes – but that requires an assumption that markets price risk correctly so making hedging worthwhile – but of course if they did there would be no need to hedge in the first place – so that argument would not work and the hedge simply becomes a less than zero sum game where a cost is imposed for no likely net benefit – and flows will always increase to achieve this result, whatever the outcome.
So impeding flows of this sort of flow is likely to net benefit society
And as such I present an argument whilst you confuse facts with debate. Not the same thing at all Tim.
Richard
But we’re not talking about volatility of flows. We’re talking about volatility of prices.
Quite famously the volatility of onion prices rose in the US when the trading of futures and options in them (ie, speculation)was banned.
Or think of Bob Shiller’s work on the US housing market. He blames part of the bubble on the fact that you couldn’t speculate on house prices: more specifically, that you couldn’t speculate short. Thus we should create a futures and options market in housing (ie, create a speculative market)so as to dampen future price movements.
There’s a very large body of evidence to show that speculation reduces price volatility, not increases it.
Tim
I think you’ve lost the plot
I am talking flows
And speculation does increase them
And the sort of research you rely on shows the situation we’re in can’t happen
Do you honestly think I should take your opinion on this seriously/
No credible person I know does
Left or Right
Richard
Speculation reduces price volatility ? You have not paid attention to petrol prices during the last year, did you ? It went from 80$ to 140$ to 30$ and back to 80$.
Speculation is a parasitic behaviour, and a transaction tax aims to reduce that (and to bring money into the State’s coffers, thus allowing to lower taxes elsewhere)
Do What? Speculation is a perfectly normal activity – hedging works off the back of it. If you are a commodity supplier in a market where price is volatile depending on external events, then hedging is something you do to secure your future – you let others live with the risks. Insurance works in a similar manner. The hedging that banks do is no different in concept.
I can’t see anything parasitical in that – provided the market is free. Of course, if it is a forced transaction then that is something else.
BTW Zolko. I think that if you study it properly you will find that oil price volatility has little to do with speculation and more to do with the various cartels that are able to distort the market.
I am also struggling to see how a transactions tax will have any impact on price volatility – indeed, as far as I can tell that is not the reason underlying the tobin proposals
Alastair
This proposal did not have that objective
It did have the objective of reducing liquidity
Tim Worstall introduced the red herring
You introduced the notion that you “can’t see anything parasitical in that – provided the market is free.”
Markets aren’t free – and should not be because they impose externalities you ignore
At which point all your arguments – like those of Tim – fall completely apart
And that’s why mine also stack
I work on the basis of reality – you are working on assumptions
Which do you think might deliver results in the new paradigm where the lack of reality in your assumptions has been cruelly exposed?
Richard
Markets – free or not free – discuss. To the extent that a) there are no monopolistic factors in play, b) government are not interfering in the price, and c) participants are free to trade or not trade as they choose, then yes markets in this country are free.
In the case of externalities they impose then tax and regulation is the likely policy solution, but there is still a free market.
And I am not making an argument – I am pointing out a relatively simple truth.
“Disclosure: I advise the TUC on tax matters”
That accounts for a lot.
Andrew
Indeed it does
Some seem to think, quite amazingly, that Worstall has scored points in this debate
Alastair Harris may be among them. You too, perhaps
But to believe that you have to assume:
a) Markets work and what is priced is good
b) Government is per se bad
c) Tax is an interference
d) State provision is wrong
Now, this may come as a shock to you – but the vast majority of voters in the UK do not seem to accept these hypotheses
And all have, of course, been proven wrong.
Worstall and his ilk promote a dead model for organising society and his agenda has been to preserve a status quo that is beyond redemption
The progressive Left is now sufficiently confident – and winning such widespread support – that it is time to promote what would have been unthinkable and see what may be workable
The suggestion made by the TUC is timely, appropriate, has clear mainstream support, and could work – without a doubt
There seem to be questions on whether we have pitched the rate right – and if we need to balance the equation with a lower rate and introduce other alternatives to raise revenue (cutting not being a politically viable option for any party in the UK – as the Tories will discover) then so be it
But is now the time to tax banks? Yes.
Is a tax on transactions of this sort vastly more equitable than VAT increases? Undoubtedly
Can this tax work? I have no doubt
And if because of favourable behavioural consequences the yield is not as high as forecast or if it was considered to phase a tax in to allow for the impact to occur over time – so be it, other taxes are available to make up the difference
But so far no one has said why this tax won’t work or is wrong as far as I can see. the argument is just that it will change things as they are
But that is the intent
As things are is undesirable
And I’m more than happy to be associated with that challenge to the way things are
Richard
Alastair
A tax on a transaction is an interference with the price
Rightly so
But your assumption is wrong in that case
And that’s because your assumption that the market can set a proper price is wrong too
In some cases it can set an approximation to price
In others it massively misprices – even using all available data
face reality: markets are the best mechanism we have for distribution – but only so long as we recognise and counterbalance their massive inherent weaknesses
That’s the virtue a proactive government that recognises the weakness of markets can bring to well being
Richard
Alastair: “hedging is something you do to secure your future – you let others live with the risks. Insurance works in a similar manner.”
Why not just have insurance then? Surely far less distortionate than futures, hedging, derivatives.
“Why not just have insurance then?”
The fate of AIG Financial Products might point to a reason there. We would like the “insurance” to be provided by widely dispersed market participants rather than concentrated into systematically important insurance institutions perhaps?
Carol,
You do know one of the key concepts behind hedging is to provide insurance on investment positions?
Georges
Insurance is in effect a form of put option. Insuring a house for £100,000 is economically equivalent to buying the right to sell the house to the insurer for £100,000 whatever its condition (i.e. even if burnt to the ground). Not a great example but writing residual value insurance is probably closer.
From that options theory tells us that with appropriate combinations of buying and writing put and call options we can simulate just about any standard derivative, swap or future. It just happens that some derivatives are more appropriate than others. If a farmer wants to sell his wheat at a fixed price he sells it forward or shorts the future. That hedges his downside risk but at the risk of losing some upside if the price goes up.
If a company borrows at a floating rate from its bank but has a fixed income stream – for example a project with a contracted off-take agreement – it makes sense to enter into an interest rate swap, which again protects against the floating rate interest rate going through the roof, but at the same time giving up the value of any falls in interest rates.
It would be much more complicated to do that with insurance because insurance buys downside protection, but to make it economically equivalent to the interest rate swap the borrower would effectively have to write an insurance policy for a third party that would pay out to the third party in the event that interest rates fall. Understand that? Probably not, which is why swaps are simpler.
Richard,
If, as you say, the vast majority of voters do not accept my (putative) hypotheses, and the progressive Left is winning such widespread support, how will the Tories be able to discover that cutting is not a viable option, as clearly they will not be elected into office?
“That’s the virtue a proactive government that recognises the weakness of markets can bring to well being”
And there was I thinking that market prices were determined by the price at which supply matches demand. Good old proactive governments eh, deciding what demand and supply should really be? Funny that you should mention it in this week of all weeks, the 20th anniversary of the destruction of the Berlin Wall.
Remind me again, how many West Germans were shot trying to escape to the planned economic wonderland of the GDR?
Perhaps I am not understanding you? To my mind a market is a shorthand for buyers and selling reaching a trade. They are free to trade or not, at whatever price they choose. If I’m a seller I want the best price I can get – if I’m a buyer I want to pay the lowest price I can. etc. There is nothing intrinsically right or wrong about the price – it’s just that number that makes traders trade. I think the problem with your statements here is that you think price has some other intrinsic value – perhaps even a morality. But whether I agree opr disagree with that, I don’t get what it has got to do with the tax the TUC suggest and you support – accept my apologies, as I get you advise the TUC but am not clear if this tax was your advice or whether you simply support it.
The other thing I don’t get is its intent. Either it changes behaviour and it raises nothing, or it does not and it raises £40bn, or whatever. You seem to be suggesting both that it changes behaviour and it raises £40bn. I don’t think you can have both.
Carol, I think others have answered the why question, but where is the distortion? Sorry but I don’t get that.
“Some seem to think, quite amazingly, that Worstall has scored points in this debate”
Perhaps I am wrong but I don’t think that is the point. To my mind this tax would damage the economy. I’m not trying to score points, but rather I am trying to explain why I think that.
Sorry, but I don’t buy it that all this financial activity is rooted in the real economy. Much of it is aimed at finding somewhere to move extreme concentrations of wealth (something like half that invested in hedge funds is for the benefit of individuals/families).
Alastair and Alex
Your comments on markets shows just how naive the whole basis of your thinking is
Get over first year undergraduate economics
There are no supply and demand curves
Firstly – they don;t slope consistently, if they exist
Second – advertising, monopoly power and externalities destroys them for most commodities
Third, you assume the existence of homo economicus – which is sweet but utterly ridiculous of you – maximisers aren’t out there – so the market you think exists is simply a fiction
I could go on, and on
I don’t need to – all you prove by your comments is that all you and your like say is based on a profound fallacy – and therefore irrelevant
Richard
[…] is simply gorgeous from Mr. Murphy. Your comments on markets shows just how naive the whole basis of your thinking […]
The bid/offer spreads in the money and forex markets imply that the market is priced to the satisfaction of most participants. In many years in finance I have yet to hear bank, borrower, depositor, currency buyer, currency seller or regulator complain about the inefficiency of the money markets. The usual question is how market makers can stay in business with the fine spreads.
Then I suggest you spend some time in a bank and find out that it is all rather prosaic. The reason that half the money invested in hedge funds comes from individuals is that many regulated institutions are restricted from investing in unregulated vehicles. On the other hand investors with large amounts to invest don’t necessarily want to invest in vehicles that are constrained by regulations and want their investments managed by some of the most experienced hedge fund managers. That isn’t to say that all hedge-fund managers are brilliant, merely that many of the best investment managers end up managing funds for a limited number of large investors rather than for a fund with a large retail investor base.
Alex
Ah….the wonder of the financial markets
The case that proves that markets work, eh?
So why did they fail so spectacularly?
You (and Worstall) seem to have noticed in your love of theory that the reality is not how you wish it to be
And that however prosaic the theory you claim to follow might be it’s actually the simple assumptions on which it is built that are the fundamental fallacies within it
Start with the fact that no sane person maximises and all you write, think, prescribe and believe in falls apart
And nothing you can do with it can change that
Yes, I am saying you’re wearing no clothes
And much as you’d like to ignore that fact the entire edifice on which you build your belief system is so utterly discredited the only choice we now have is throw it out and start again
Homo economicus does not exist
In which case your models don’t work
End of story
Richard
Hm, I really see how essential hedge funds are now. And what banking is all about. And there was me thinking that banks are there to provide a home for personal savings and loans to businesses and individuals.
The markets “failed” because of poor ratings and inadequate/inacccurate information on the creditworthiness of counterparties (banks, bond issuers), and in the case of structured products, bad models. Arguably the markets did exactly what they were supposed to do given the inputs that they had.
It’s not my belief system that is built on markets, it is the entire world, with the notable exception of North Korea and your brain.
I am sure that all the willing sellers and willing buyers who do business on Monday will give your views the consideration they deserve, particularly in light of your demonstration of your understanding of the banking system in the Guardian in recent days.
“Ah….the wonder of the financial markets
The case that proves that markets work, eh?
So why did they fail so spectacularly?”
Government interference. I don’t see how any sane person could look at an industry which is more heavily regulated and supported than almost any other and conclude that its problems must stem from a non-existent free market.
Paul
Thank you so much
Your comment is so bizarre, so obviously shows that you and those like Alex, Alastair, Tim Worstall and others of the ilk are a) so dogmatically driven b) so far removed from reality c) so plainly unaware of the dangerous excesses that markets can create d) so unaware of the socially useless activity that markets can price e) so utterly indifferent to the externalities they ignore f) so contemptuous of the cost they impose on the majority for the benefit of the few that you prove why the view of economics (I stress, just a view, not a reality – for it clearly fails to explain that reality) has to be consigned to history
And it will be
Which is precisely why a tax of the type the TUC has suggested is so important – because it will began to price the excess you promote out of finance to the benefit of society at large
Which is why i also have no doubt it will happen
And what is curious to note is not one person has said it should not happen. All you have argued about (if I recall correctly) is the rate
So it may be introduced at less than the proposed rate – even at one fifth of that rate it could make a valuable contribution to closing the fiscal deficit – and it could be ratcheted up from there
But has the case for the tax been made? Yes, undoubtedly. And why? Because the only counter argument is that the neo-liberal view of markets must prevail. Nothing more, or less
And that’s not on anyone’s agenda
Neo-liberals have lost the argument
Time to face it. Now
Richard
PS Comment on this issue is now closed
[…] so when closing comments on this issue on my blog I said: [W] is curious to note is not one person has said [the tax the TUC propose] should not […]
[…] so when closing comments on this issue on my blog I said: [W] is curious to note is not one person has said [the tax the TUC propose] should not […]