For Responsible Investor, October 19th, 2010
Despite the special pleadings of high frequency traders (HFT), the SEC’s initial report on the May 6, 2010, “flash crash” shows them as bogus. “Providing liquidity” claims for HFT turned out to be false – liquidity disappeared when needed. Price discovery was hampered by the additional “noise” of thousands of trades per second – obscuring the fundamental value of companies’ shares. Such revelations of the social costs of HFT bear out the calls for financial transaction taxes (FTT) – growing ever louder since proposed in the 1970s by James Tobin and, yes, by Larry Summers in his 1989 paper “When Financial Markets Work Too Well: A cautious case for a securities transactions tax” (Journal of Financial Services Research vol. 3(2-3) 1989) and by UK FSA head Adair Turner in 2009.
In 1995, I co-organized the NGO, Global Commission to Fund the United Nations with many proposals for taxing commercial uses of the global commons: atmosphere, climate, oceans, biodiversity, the electromagnetic spectrum, space and the newest commons: the global financial system. The Commission’s report The UN: Policy and Financing Alternatives, eds. Harlan Cleveland, Hazel Henderson and Inge Kaul (Elsevier Science 1995), examined such taxes to help provide global public goods: health, education, access to clean water, food and basic human needs – later codified as the Millennium Development Goals by the UN General Assembly in 2000.
We members of the Global Commission thought FTTs would not only curb the mushrooming of currency speculation since the end of the fixed rates under Bretton Woods – but also, even at below 1% rates, such taxes would provide hundreds of billions for meeting human needs and global public goods. Thanks to Juan Somavia, Director-General of the ILO who in 1995 headed the UN’s Social Summit in Copenhagen, the Global Commission’s report was launched there – to the surprise of the 102 heads of state in attendance. Choruses of opprobrium to FTT came from economists and other apologists for financial players, the IMF, the World Bank. A further spate of critiques smothered FTT until it re-emerged in the crises of 2007-2008 as an antidote to the reckless speculation of financiers.
While NGOs re-doubled their historic campaigns for FTT as the “Robin Hood Tax,” academics began switching sides and offering more nuanced, carefully targeted FTTs to address HFT, commodity speculation (as opposed to legitimate commercial hedging) and the issuance of socially useless or harmful derivatives: from naked credit default swaps to CDOs. The Euro sovereign debt crises of 2010 caused some EU governments, terrified by bond vigilantes, to switch sides toward FTT. Having tapped out their own citizens in their eagerness to placate their financial sector clients, politicians faced the righteous anger of voters at the unfairness of bailing out TBTF banks at taxpayers’ expense.
The Information Age morphed into the Age of Truth. No one can hide the growing inequities, job losses, pay cuts, lost homes, savings and pensions, as central bankers continue to bail out their financial system colleagues with ever more “quantitative easing” and other euphemisms for re-inflating unsustainable debt bubbles rather than forcing write-downs on bondholders and other creditors to share their citizens’ pain. Governments’ austerity cuts face the writing on the wall from Iceland, Greece and Ireland: unless new sources of revenue can be found to provide basic government services, citizens will strike, revolt or emigrate.
Suddenly it’s FTT to the rescue! This small tax is one of the easiest to collect electronically, does no harm, indeed benefits markets, and curbs socially harmful financial products and practices, is progressive and targets a wealthy and privileged sector which caused catastrophic harm to many millions of innocent bystanders. Rather than desperate attempts to goose GDPs through hyping exports via currency devaluation wars, politicians now see that FTT, like a stamp tax, is a much easier way to fill budget gaps and repair their national economies.
NGOs will be disappointed that desperate politicians will use the revenues from FTT to reduce their deficits and stabilize their currencies rather than directing FTT proceeds to their real economies or financing global public goods. Yet, we can all support the new “smart FTT” proposals which can go a long way to re-structure and downsize bloated, dysfunctional financial sectors from Sony Kapoor, John Fullerton, Angus Cunningham and others reported on www.ethicalmarkets.com. Institutional investors should join reformers in supporting FTT as a top priority. These large players, particularly public pension funds, charities and endowments have no business seeking alpha returns by dabbling in derivatives, HFT, speculating in oil, food, etc., and other short-termism strategies which FTT can help curb. Institutional investors are universal investors for long-term asset preservation for their beneficiaries. All responsible investors can also heed the 10 principles advanced by the Paul Woolley Centre for the Study of Capital Market Dysfunctionality which targets the agent-principal problem in corporate governance and sensibly extends this to financial practices (see review “Future of Finance”).
Runaway financial markets and HFT, if not curbed, will produce more financial crises. Their expansion was justified by assumptions in the Arrow-Debreu model of “market completion,” i.e., extending “efficient markets” to enclose ever more of our global commons: forests, water, biodiversity and carbon emissions. Humans are not always rational actors and excessive trading is an addiction, similar to gambling. While the politicians agonize and the BIS, the IMF and the G-20 deliberate on fragmented additional reforms, capital reserves, bank levies, “cocos,” etc., the most systemic, available, popular and commonsense action is for the G-20 in Seoul, November 2010, to agree to impose, to the widest extent, an FTT. A patented computer program for reporting trades and collecting FTT is the Foreign Exchange Transaction Reporting System (FXTRS) now in the public domain.
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Hazel Henderson, D.Sc.Hon., FRSA, futurist and author, co-created the FXTRS, the Calvert-Henderson Quality of Life Indicators (regularly updated at www.calvert-henderson.com), the Green Transition Scoreboard® and convened the Transforming Finance group. She is President of Ethical Markets Media (USA and Brazil), the independent, multi-media social enterprise “to reform markets and grow the green economy globally” and is a signatory of the UN-PRI.