When an industry is all but begging you to tax it, maybe it's time to pay attention.
Dozens of financial executives, including expats from Goldman Sachs and JPMorgan Chase, have signed a letter suggesting to policy makers in the G20 and Europe that maybe they should impose a small tax on some of the reckless casino bets that banks and hedge funds are constantly making. Not because these people love taxes so much, but because they are apparently not giant fans of financial crises.
"As individuals with first-hand knowledge and significant experience in the financial industry, we urge you to introduce small financial transaction taxes (FTTs)," they wrote. "These taxes will rebalance financial markets away from a short-term trading mentality that has contributed to instability in our financial markets. They also have the potential to raise significant revenue."
They point out that the amount of trading in the world is now 70 times the size of the actual economy. So maybe not all of that trading is quite as beneficial to the world as opponents of transaction taxes, or any other curbs on the economy, would have you believe. In fact, tapping the brakes on financial markets with a tax could loosen high-speed traders' grip on financial markets, making something like a Flash Crash less likely.
"Concerns have been raised that FTTs could damage growth. But a growing body of evidence suggests that by reducing volatility and raising much needed revenue, the overall effect would be positive," the executives wrote.
They also confront the notion that curbs on trading would hinder "liquidity," which the financial industry always trots out whenever you want to regulate it. Liquidity, or the ability to trade stuff quickly and easily, is like a delicate unicorn, according to the anti-regulation view. Tweak its environment even slightly, and we'll all be eating cat food until the world ends.
The executives in the letter point out that enhanced liquidity has not really done the world many favors lately, and it certainly has not stopped investors from becoming ever-less trusting of financial markets.
"Critics have also wrongly associated trading volume with efficiency-enhancing liquidity and failed to sufficiently take into account market resilience and trust that are undermined in a world where very short-term trading dominates the financial system," the executives wrote.
The idea of a financial-transaction tax has been floated repeatedly in the wake of the latest crisis, as a way to maybe put the brakes on the sort of runaway market speculation that tends to end badly, while raising revenue to help pay for the next crisis. Democrats in Congress have proposed a tax that could raise $350 billion in new revenue, according to the the nonpartisan Joint Tax Committee. As you'd expect, Congress isn't exactly rushing to embrace the proposal.
There were hopes last year that President Obama might embrace the idea of a "Robin Hood tax" as a way to highlight his support for Main Street over Wall Street. But so far he has been silent.
The idea has gained a little more traction in Europe, where it is more politically popular. But the trouble is that nobody wants to be the first to impose such a tax, as it risks driving business overseas. So Europe is sort of waiting for everybody else to do it, too. This despite the fact that the U.K., China, Hong Kong and other locales already have small transaction taxes without turning their financial services industries into ghost towns, as John Fullerton of the Capital Institute, a nonprofit group lobbying for reform, has pointed out.
The idea of a transaction tax was most notably raised by John Maynard Keynes in the wake of the Great Depression. He wrote at the time that speculation isn't necessarily bad, but "the situation is serious when enterprise becomes the bubble on a whirlpool of speculation." One of these days the world might actually take his advice. Maybe after the next crisis?