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Tobin Tax

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Bring On the Tobin Tax – But Only After Making This One Key Fix

By , Global Investing Specialist, Money Morning -

The European Commission (EC) on Sept. 28 proposed a Tobin tax for the European Union (EU). It's likely to pass, in one form or another, but it won't stop there.

The United States will be next - and as investors we should be grateful. I just hope policymakers make one key change first.

I'll explain.

I penned a column for Money Morning almost exactly one year ago that said major world economies should adopt a "Tobin tax" - a small tax on financial transactions, named after its inventor, Nobel laureate James Tobin.

It's always nice - albeit unusual - when politicians take my advice. And I'm certainly glad that the EC is doing just that. But the commission still hasn't gotten it quite right.

A Promising Proposal

You see, the Tobin tax I proposed would be at a very low rate, perhaps 0.01%. Apart from raising revenue, its main effect would be to inhibit speculation. By that I specifically mean "high-frequency trading," or HFT, where computers trade bonds, stocks, and derivatives in milliseconds.

High-frequency trading is objectionable for two reasons.

First, its proponents claim it provides liquidity to the market, but that's not really the case. In periods of turbulence, the liquidity that HFT supplies is quickly withdrawn, as the institutions operating the trading systems shut them off for fear of large and destabilizing losses. Indeed, liquidity that switches off when it is most needed is of no use at all. To the contrary, it destabilizes the market rather than stabilizing it.

The second reason high-frequency trading is bad is that it uses machines to get trade information before competitors. Of course, trading based on extra-fast knowledge of the trading flow should qualify as inside information, and thus be illegal.

Unfortunately, it can't be made illegal, because market-makers do it all the time. And what's more is that stock exchanges make huge sums of money by renting space within feet of the exchanges' computers to high-frequency traders.

And that brings us to the tragic flaw of the EC's proposal.The Tobin tax proposed to the European parliament by EC President Jose Manuel Barroso would impose a 0.1% tax on stock and bond transactions and a 0.01% tax on derivatives trades.

It's backwards.

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Money Morning Mailbag: Tobin Tax a Healthy Solution to Wall Street Greed

By , Associate Editor, Money Morning -

Last week Money Morning Contributing Editor Martin Hutchinson presented an open letter to U.S. President Barack Obama and members of Congress regarding passage of a Tobin tax.

The simple solution of a Tobin tax handles three of the U.S. government's biggest challenges: It resolves the controversy over expiring Bush tax cuts, helps reduce the federal budget deficit, and offers more regulation over controversial Wall Street profits.

Hutchinson said a Tobin tax – a tax on financial transactions – is the one tax increase that would not damage the already fragile U.S. economy.

Read More…

Money Morning Mailbag: Tobin Tax the Only Solution to Problems Posed by High Frequency Trading

By , Associate Editor, Money Morning -

An episode of the television news program "60 Minutes" that aired Oct. 10 highlighted investors' fears over the growing trend of high frequency trading (HFT) run by a world of "supercomputers."

The "60 Minutes" piece prompted this letter from a reader wondering if the technological shift means it's time to readjust investment strategy.

Sunday night on "60 Minutes" they had a story about high-speed computers that are out-trading humans. Is it time to refocus on the world stage and find tangible rather than paper investments to put your money in? A partnership in a retail or manufacturing venue surely is more transparent than the stock market.

--Roman

Money Morning has been examining the effects of high frequency trading for years. In August 2009 Contributing Editor Martin Hutchinson said high frequency trading systems were front-running the market.

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The Tobin Tax: The Deficit-Busting Levy Wall Street Hates

By , Global Investing Specialist, Money Morning -

After the Nov. 2 midterm elections, the Obama administration and Congress are going to have to scramble to fill a trillion-dollar hole in the U.S budget, and tax increases may be the only option.

A tax increase won't be good news for an already wheezing economic recovery that seems to get weaker with each new report or indicator that's issued. But the type of tax that's chosen will go a long way in determining just how much damage the U.S. economy will have to endure.

With a deficit in excess of $1 trillion, there aren't a lot of options. One possibility would be to allow the 2001 and 2003 Bush tax cuts to expire, which would have a depressing effect on the economy and most people's pocketbooks.

But a better option would be to devise some new taxes that may prove less damaging. Indeed, there's even one possibility that might even do some economic good if it's implemented correctly.

It's called a "Tobin tax."

To see how a reasonably set "Tobin tax" could help U.S. leaders to fix the nation's finances, please read on...

To see how a reasonably set "Tobin tax" could help U.S. leaders to fix the nation's finances, please read on...

The Tobin Tax: The Fix-It Plan Wall Street Hates … But Can't Seem to Kill

By , Global Investing Specialist, Money Morning -

German Chancellor Angela Merkel recently came out in favor of a "Tobin tax" - a small tax on financial transactions, proportionate to the size of the transaction. The Tobin tax idea also has been proposed by Britain's former prime minister, Gordon Brown, and was proposed in Congress by U.S. Rep. Peter DeFazio, D-OR.

Every time a Tobin tax is proposed, it has failed to gain traction - which isn't surprising: Wall Street, with its international affiliates and legion of lobbyists, hates the idea.

Even so, the Tobin tax idea just refuses to die - which is a good thing, since it is probably the best way of curing some of Wall Street's pathologies.

To understand how the Tobin tax can benefit investors, please read on...

Thursday's Wild Stock Market Ride Spotlights 'High-Frequency Trading' as the Latest Worry For Investors

By , Executive Editor, Money Morning • @privatebrief -

Back on April 14, U.S. stocks advanced for the fifth day in a row, causing the U.S. Standard & Poor's 500 Index to close above the 1,200 level for the first time in more than 18 months.

Traders said that a growing confidence in the strength of the U.S. rebound was a key rally catalyst.

But Money Morning's Shah Gilani was worried.

Read More…

Financial Reform: Three Ways to Fix Wall Street

By , Global Investing Specialist, Money Morning -

The financial-reform bill introduced by U.S. Sen. Christopher J. Dodd, D-CT, seems likely to pass both houses without all that much alteration.

And that should immediately raise our suspicions. After all, the U.S. financial-services business has a very effective lobby, so if there isn't huge opposition to the legislation, it probably won't achieve all that much.

It won't fix Wall Street.

But there's another issue here: It's also not clear to me that we know just what we want the financial-reform initiative to achieve. By that, I mean: What banking-sector reforms would we implement in an ideal world, to reduce the danger from the sector while preserving the essentials of a free market?

To see Martin Hutchinson's blueprint for fixing Wall Street, please read on...

Why the Volcker Plan Doesn't Go Far Enough

By , Global Investing Specialist, Money Morning -

I don't often agree with the Obama administration. So I have to say that I was surprised when I heard it had a plan to reduce the risk of another banking crisis. It wants to prohibit banks that are protected by deposit insurance from engaging in risky, proprietary trading, and it wants to break up some of the very largest banks.

I made both those recommendations in my forthcoming book "Alchemists of Loss" (Wiley 2010). The book, written jointly with Kevin Dowd, a British finance professor, should debut sometime late this spring(we sent the manuscript to the publisher last weekend - what a relief!). But after I studied the Obama plan further, I realized that I shouldn't have been surprised - the idea's sponsor was former U.S. Federal Reserve Chairman Paul A. Volcker.

Why Volcker's plan doesn’t go far enough...

Why You Should Mark January 13 on Your Calendar

By , Managing Editor, Money Morning -

Next Wednesday, Jan. 13, won't be just another hump day. It's a key date for regulators in both the United States and Europe who are preparing to launch the largest overhaul of global financial regulation since The Great Depression.

On that day, at least two seminal events are scheduled to take place:

  • The U.S. Congress' Financial Crisis Inquiry Commission (FCIC) - the ten-member commission appointed with goal of investigating the causes of the financial crisis - will begin its first public hearing.
  • And the European Parliament will hold a confirmation hearing for Michel Barnier - the French politician who has been appointed to oversee the regulation of the European Union's (EU) financial services sector.
Both of these events will have significant implications on the global financial reform that is set to go into effect this year.

Read More…

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