A blog against the tax from November 8 referencing a number of studies by others (I don't think this has been posted before, but apologies if it has):
http://stumblingandmumbling.typepad...bling/2009/11/against-a-transactions-tax.html
(NOTE: I've pasted the article below but it's not including the reference URLs. Click the article above if you want the references )
Against a transactions tax
Gordon Brownâs proposal for some sort of transactions tax seems to have been rejected by Tim Geithner, which means the idea is, in effect, dead: such a tax is only remotely feasible if applied globally. This is good. There are (at least) three arguments against such a tax.
1. It would have done nothing to have stopped this financial crisis, and might even have made things worse. The two markets upon which a tax would impinge most - FX and stock markets - played little role in this crisis; they were, as near as dammit, innocent bystanders. The tax would not have stopped RBS overpaying for ABN-Amro, would not have stopped HBOS making bad loans, and probably wouldnât have stopped Northern Rock funding its mortgage lending by borrowing in wholesale markets.
What the tax might have done, though, is reduce the liquidity of mortgage derivatives. But this was, for many banks, precisely the problem. As Alistair Milne describes in The Fall of the House of Credit, the problem with many âtoxic assetsâ is not so much that they were devalued by defaults, but rather that they became illiquid, untradeable. A transactions tax might have exacerbated this problem.
The only way such a tax might have helped is that it might have deterred mortgage securitization in the first place.
2. A transactions tax does not necessarily stabilize markets. It might do the opposite. As Andrea Terzi points out (pdf), such a tax doesnât so much reduce short-term trades as trades with low expected gains. However, these trades are often stabilizing trades - those done by arbitrageurs hovering up pennies.
If the tax bears more heavily upon these than it does upon noise traders, then it might make bubbles more likely, not less.
Note that short-term measures of volatility donât help us decide how great his danger is: if prices rise 1% a day, then daily volatility is zero - but weâll soon have the mother of all bubbles. This paper (pdf) discusses the issues here
3. Tim is right. The burden of a transactions tax doesnât necessarily fall upon evil bankers. If people anticipate lower liquidity when they come to sell, theyâll not pay such high prices now. The effect of a tax will then to be depress prices now, as Bank of England research suggests.
In this sense, a tax bears upon people sensitive to current share prices - such as those coming up to retirement - rather than traders.
If these objections are valid, you can draw two possible inferences. Standard libertarians might say that interventions in markets are (often) ineffective or counter-productive. Leftists, though, might show that it just shows that the financial system needs much more radical change than merely new taxes.
November 08, 2009
