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He had the right idea, just in the wrong centuryRobin Hood was an outlaw who stood out from among his peers by virtue of his financial policy: in stealing from the rich and giving to the poor, he was a champion of asset redistribution. Change “poor” to “people” (and apart from the aristocracy, by far the majority of people in those times were poor), and he becomes a paladin of social justice – or a communist bandit, depending on how your ideological blinkers lie.
Now the legendary name has been appropriated by a campaign for a so-called Robin Hood tax.
Launched in February by comedy writer Richard Curtis, and supported by a string of organisations such as Oxfam, Save the Children, the Association of Corporate Treasurers of South Africa, ActionAid and others, it has a simple but attractive premise: by taxing speculative banking transactions at an average rate of 0.05%, “hundreds of billions of pounds would be raised every year”, which could be allocated to embattled public services such as health and education, not to mention combating global poverty and
climate change.
(Do not miss the entertaining campaign video with actor Bill Nighy at www.robinhoodtax.org).
One high-profile backer of the campaign is Nobel Prize-winning economist, Joseph Stiglitz.
Last year, he spoke scathingly about the financial sector’s unseemly rush to return to ‘business as usual’. “In one night, we passed $700 billion to the banks. Global foreign aid has really been $60-70 billion a year. So in one hour, we passed all the foreign aid of all the developed countries to all the developing countries for a decade.
“And you ask: who is more needy? The American banker or developing countries? It’s hard not to come up with the conclusion that our values got destroyed,” he said.
Regarding the mooted Robin Hood tax, Stiglitz told the London Evening Standard, “The benefits are twofold. In general, the tax philosophy should be to tax bad things rather than good – so pollution should be taxed more than savings.
Very little social returns come from short-term trading. It results in extreme volatility and excessive trading. So that anything that discourages short-termism is to be encouraged.
“At the same time, the money collected can be used to perform a socially useful function.
“Does anybody seriously believe that anything happens because of the sort of micro-second trading we’re now seeing? It’s a function of speed. No investments are being made as a result of it, no jobs are being created.
“Finance has a vital socially important role to fulfil, which is to raise capital, to run payment systems, to oil the wheels of everything society does,” he said.
“But the bankers fail to perform that socially useful function – and because of that, the world’s economy has suffered.”
Imagine a very large cauldron, of the folkloric cannibal type, an extremely volatile liquid inside the cauldron, and a crowd of business suits ululating louder and louder as they stir the contents of the cauldron faster and faster. There you have a graphic equivalent of the behaviour that Stiglitz deplores, with its signature motifs of churning, volatility
and noise.
Churning is the practice, widespread among brokers and fund managers, of gaining higher client fees by generating as many transactions as possible in the short term rather than investing for the long term. With software-driven algorithmic or black-box trading, shares change hands in nanoseconds.
This super-fast automatic share trading undermines the traditional investor-company relationship: as the investment horizon shrinks and transaction volumes multiply, the role of capital markets in terms of information exchange, capital provision and investment oversight is undercut.
Volatility is when the market starts to bubble (pun intended). In recent years, financial markets have shown a disjunct between macro-economic information, which emerges relatively infrequently, and price volatility.
When Vodafone stock is traded 90 times with 72 price changes in less than a minute on one day, one suspects that economic fundamentals are not the prime determinant of
trading prices.
Indeed, two-thirds of foreign exchange market traders regard speculation, herding and technical trading as crucial factors in time horizons below six months. As technical traders say, “the trend is your friend”.
Churning and volatility produce noise: the informational efficiency of financial markets is distorted seriously. Price swings are exaggerated, markets overshoot, and boom-bust patterns are amplified; things fall apart.
As Stiglitz puts it, “Bankers make money in a way that encourages them to undertake risk-taking in a shortsighted way. They claim their industry rewards them with incentive pay, but it’s an incentive to behave badly.
“As a matter of public policy, we allowed deep problems to open up in corporate governance – so that at Goldman Sachs and others, shareholders and bondholders have not done well after their holdings are adjusted for inflation and the risks they bore, but a small group of people, the senior executives, have walked off with a lot of money.”
Enter Robin Hood right on cue, waving his tax legislation.
A number of benefits are claimed for a financial transaction tax (FTT). First, it would be cheap and easy to collect. More and more, financial transactions are being done electronically; collection would be a matter of adding a line of code to existing messaging and settlement software. By way of example, collecting Stamp Duty in the United Kingdom costs 100 times than the same amount of income tax.
Second, it would be progressive. In the United States, for example, 1% of the population owns over 25% of the financial assets.
Third, it would be difficult to avoid and evade. Financial transactions leave an electronic trail or are settled at a central clearing centre: since financial transaction taxes are collected automatically at the point of the initiation of the transaction or at the point of their settlement, they are next to impossible to avoid.
(As an unexpected benefit, the Brazilian government was able to use the information generated by the financial transaction tax to reduce the evasion of other taxes.)
Fourth, an FTT would not affect market efficiency adversely. The proposed rates are negligible by comparison to transaction costs incurred from brokerage fees, exchange fees and short-term price volatility.
Fifth, significant revenue would be generated – potentially $50-100bn each from the stock, bond, currency and derivate markets.
Finally, being a turnover tax, an FTT could help stabilise the markets by penalising shorter term trading, while leaving longer term transactions virtually unaffected. Under a tax of 0.2%, a daily trader effectively would pay 20% tax; a pension fund with a five-year turnaround would pay only 0.02%.
This is perhaps the chief merit of the FTT policy. The Robin Hood factor – the ‘billions of pounds’ for public services, poverty alleviation and global warming – is perhaps less important than the cost savings and efficiency gains that FTTs could generate, coupled with the incentive to create more stable and durable investments.
Not everyone is thrilled with the idea. When the Robin Hood Tax campaign went live with an online poll, it seemed that the British public was overwhelmingly against it, with some 5 000 no votes recorded within 20 minutes.
However, it soon turned out that the rejections were coming from two particular computer servers: one registered to a personal address, the other to investment bank, Goldman Sachs.
Of course, the likes of Goldman Sachs are accustomed to having things their way (“doing God’s work”, in boss Lloyd Blankfein’s words).
With profits returning to pre-crisis levels, their attitude is understandable.
But entrenched ideological resistance notwithstanding, the idea is gaining traction.
In September 2009, the Aspen Institute policy document, “Overcoming Short-termism”, signed by Warren Buffett and ex-World Bank president James Wolfensohn, among others, called for an excise tax on financial transactions.
In the UK, Prime Minister Gordon Brown sees a financial transaction tax as a means of restoring the ‘social contract’ between the public and the banks.
Elsewhere, the European Parliament stated that an FTT “would be a fair contribution from the financial sector to global social justice”.
As Stiglitz says, “In environmental economics, we have a principle called ‘polluter pay’. If you cause pollution, you have to pay for the clean-up. The financial sector polluted the global economy with toxic assets and now they ought to clean up that.”
Greg Penfold
