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Transcript of Tobin Tax
(John Maynard Keynes, 1936) A relatively Small tax on
transactions Yale graduate of economics What is the Tobin Tax? Bretton Woods System A tax of
"say... around 0.5%" to make speculators
activies unprofitable Fixed exchange rates by tying their currencies to the U.S dollar.
(Time, 2008) Established in 1944 and named after the New Hampshire town where the agreements were drawn up.
(Time.com,2008) James Tobin [March 5 1918-March 11 2002] Nobel Prize for Economics Science in 1982 To reduce the volatility of floating exchange rates To discourage short-term currency speculation, which makes it difficult for countries to implement independent monetary policies by moving money quickly back and forth between countries with different interest rates.
(FT, 2009) Small enough to make short-term, purely financial, movements uneconomical – without being a burden on trade.
(FT, 2009) Tobin was concerned with how to bring more stability to flnancial markets so that governments could pursue full employment policies. Sharing the ideas of John Maynard Keynes Keynes was concerned about the destabilizing effects of excessive speculation on domestic financial markets, Tobin wanted to counteract the ability of financiers to undermine full employment policies by moving large amounts of money quickly around the globe in search of short-term profits. [1883-1946] Suggested, in 1972, by James Tobin, after the collapse of the Bretton Woods System in 1971. Put an end to the currency wars that took place after WWII Nixon withdrew from the system in 1971 when the gold standard could no longer be guaranteed. United States didn't hold enough gold to meet the dollars held globally Finance and the UK Economy The UK has had a tax on stock trades (trades of derivatives and other financial instruments are untaxed) for decades.
(Guardian, 2010) Currency Wars Governments instigate monetary policy to devalue their currency, making exports cheaper and creating trade imbalances. Making imports cheaper in other nations, comparative to their own produce has knock on effects on their economy. What are the possible effects on Developing Economies? Talk has shifted to Financial Transaction Tax meaning that the focus on currency trading and the possibility of currency wars has become a secondary factor. Much of the pro-tobin tax talk relates to the income that would be generated by the taxes and, potentially, be used to fund projects that benefit the poorer members of society. Robin Hood Tax The focus is increasingly on the idea of the tax as a way of generating funds for developing nations rather than a way to discourage currency transactions. What financial transactions would be effected? Developing Nations Developed Nations Speculators Split into 3 groups
Prepare pros and cons
Debate introduction of Tax Black Wednesday •Prior to 1990 Britain used the fixed exchange rate system where they pegged the value of the pound sterling.
•The Pound Sterling entered the market at 1 Pound: 2.95 Deutshe Mark, despite the fact that British inflation levels that were three times higher than that of Germany.
•Forex speculators became aware of this, and anticipated an devaluation of the British pound against the Deutshe Mark.
•During the fortnight leading to the 16th of September 1992 speculators sold billions of Pounds hoping to buy them back at a depreciated rate hence pocket the difference.
•The Government authorized expenditure of Billions of Pounds to buy back the pounds that were being frantically sold and put interest rates up to 12%. (In effect the government was pumping out massive wealth to speculators and had little effect of what was in progress or even made it worse).
•During the evening of September 16, 1992 the British government announced its exit from ERM and reverted back to the pegged Pound sterling.
•This episode shows that the free market truly exists. The traders of that time continued relentlessly gambling against the Pound despite government measures because they knew that market forces would prevail and they could make massive profits.
•Once these forces push a currency one way it is almost impossible to intervene and this is where the problem lies.
China Buys dollars to keep its currency weak The People's Bank of China has bought up trillions of dollars in order to keep its currency weak against the dollar.
And the US is not happy, saying that it helps keep Chinese exports artificially cheap.
China's critics complain that the country runs a huge trade surplus, even though China is booming, while much of the world - notably the US - remains economically weak.
In June this year, Beijing finally agreed to loosen the peg - marginally - after months of US pressure. But the US says it is not enough.
The Chinese point out that - unlike many other exporting nations - they did not let the yuan fall against the dollar during the financial crisis.
BBC News It has been 30 years and Tobin Tax has never been implemented........... But........ The issue is with excessive leverage, not excessive transactions. Recent Events New impetus in an old idea.
Fed publicly by current resentment for bankers, and academically for more stability in the finicial markets. Competitive Devaluation Derivatives Foreign Exchange Markets Bonds stocks EU Vote has Increased political momentum.
Debate over other financial constraints go on. Charity Starts at home The foreign exchange market is unique because of:-
* its huge trading volume, leading to high liquidity;
* its geographical dispersion;
* its continuous operation: 24 hours a day except weekends.
* the variety of factors that affect exchange rates;
* the low margins of relative profit compared with other markets of fixed income Alternatives Capital Requirements Financial activies tax Bank levy Common stock
Preferred Stock - Bond is a type of debt security Parliment backed tax would raise upto €200bn.
Uk Alone would raise £3bn (0.05%) George Osborne has not been a supporter of such a tax, saying in the past that it was difficult to see how it could work in practice. However, he has said that he is prepared to consider a financial activities tax – if other countries do the same – that is levied on profits and pay. Treanor (2011) Basel III in september 2010 proposed to set capital requirements at 4.% by 2015. Spain Sets its at 8%. Lord Turner wants 15-20% in an "ideal" world. UK Introduced levy in january 2011, raising around £2.5Bn Will the revenue stay with the poor at home or abroad in the long run? Will the tax rate rise in the future? Requirements for Success Public Drive
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International Backing Reduces volume, helping countries defend currencies and discourages speculators. The Swedish Experiment Only Living example of the tax. Taxes Lasted 7 years. Trade Did move away Futures
- Puts - shorting position held
- Calls - going long
Swaps Tax did increase. Other challenges "Today the European parliament threw its weight behind a tiny tax on financial transactions that could help us fulfil our commitments to tackling poverty and climate change, and help prevent such huge cuts in public spending.” Makefinancework [online]. (2011) Competitive devaluation.
The devaluation of a country's currency to make its economy more competitive in international trade, rather than to correct an ongoing disequilibrium in the exchange rate. More Modern Issues and Examples New Instruments Going agaisnt recent thoughts and a powerful sector. The problems within the EU, one size doesnt fit all! Extent of Economic Dependency on Financial Sector Any Questions? Thanks for listening! Guido Mantega, the Brazilian finance minister, attracted global headlines when he declared in September that the world was in an “international currency war” as governments across the planet fought to weaken their currencies in order to promote economic competitiveness.