Will A Robin Hood Tax Fix The World Economy?
Posted by: Mark Gimein on October 25, 2011 at 12:31 PM
The Robin Hood Tax is a levy on financial transactions that would be charged on trading in instruments from stocks to exotic derivatives. The tax (RHT for short, or, more fondly, “Robin” to backers) has emerged as maybe the clearest agenda item of the Occupy movement.
The idea behind the tax is two-fold: One, it would raise money for social services by taking it from the over-compensated finance industry. Two, it would stabilize the financial system by discouraging speculative trading. It’s particularly gained traction in Europe, where French president Nicolas Sarkozy and German chancellor Angela Merkel have expressed support for a financial services tax—though not one as high as the 1% of every trade that protesters have asked for.
If the goal of a financial transaction tax is to to raise revenue and take money away from bankers (you can list those goals in either order)—well, it will do that, though the “Robin Hood” aspect depends on what’s done with the cash. But It’s worth looking closely about the notion that it would stabilize the financial system.
Will an RHT will make markets less volatile, or more? Thinking on this varies; economist Tim Hartford gives a cogent overview from a skeptical viewpoint. Go back to early 20th century financial history and you’ll see plenty of panics and bubbles in markets with low liquidity and high commissions.
Let’s say, though, for the sake of argument, that the RHT does chase hedge funds and proprietary traders out of some markets. Will that do much to resolve the world’s economic malaise? Doubtful. With just about any financial crisis, the first impulse is to blame dark speculative forces. Economy tanks? It has to be the “hot money” managers pulling out their cash. The problem here is that when speculators and short sellers make money, it’s usually because there’s a real underlying collapse. When Enron’s stock came crashing down, the company blamed short sellers like James Chanos. Last year, Greek prime minister George Papandreou was lighting into speculators for betting against Greek bonds:
Despite the deep reforms we are making, traders and speculators have forced interest rates on Greek bonds to record highs. Many believe there have been malicious rumours, endlessly repeated and tactically amplified, that have been used to manipulate normal market terms for our bonds…Unprincipled speculators are making billions every day by betting on a Greek default.
A year and a half later, it’s very hard to defend the idea that it’s the speculators who brought about Greece’s economic ills. Can financial players hasten a crisis? Sure. Can banks exacerbate a bad situation by bad bets on bad instruments. You bet—see Merrill, Lehman, and the whole U.S. financial industry. But whether it’s Greek debt or mortgage bonds, scratch the surface and right below you find the same kind of rotten economic fundamentals. You can take away hedge funds or derivatives, but you still have the basic problems—bad debts, bad mortgages, bad balance sheets—to deal with.
That’s why it’s not all that surprising that the president of France or the German chancellor would support a financial transactions tax. Blaming speculators and short sellers has always been a refuge of scoundrels. Merkel and Sarkozy are not scoundrels, but governments are prone to a similar impulse: they tend to hope that if they smother the speculators, they’ll make economic crises go away.
(Photographer: Scott Olson/Getty Images)
