European businesses criticise Tobin Tax proposals

Tobin Tax - help or hinderance?

In attacking the Tobin Tax on financial trades by derivatives the Prime Minister seeks to protect the sizeable market in London dealing in these products, which is commendable for the British economy. But! And it is a big but it also has to be recognised that the trades that he is trying to protect are in fact the perpetrators of much of the current Global Financial Crisis.

The trading in mortgage CDOs led to the first banking crisis, the trading in commodity derivatives has distorted in particular the prices of gold, fuel and coal. Even now the Eurozone crisis is in part created by market traders for the very reason that they are described as Free Markets and it is the derivative section that has overwhelmed and distorted the true manufacturing and commercial section of what holding shares should be supporting.

The problem is that in creating virtual markets that are far larger than the real markets the underlying world finance becomes unreal. As a result there is an overwhelming Tsunami of derivatives that are distorting real values.

In the past a company or group share price was supported by the investment in an active company supplying a service or product for sale. Therefore the total market value reflected the total share value of the market. However nowadays with options, derivatives and pure gambling on futures the true value represents only about one quarter of the money in the market and thereby a real imbalance is created.

In the first banking crisis this was seen in the value of CDOs, compared to the true value on mortgaged housing and the total amount that should realistically have been loaned against that housing stock. The options were the market tool that upset the apple cart.

In commodity prices the total value of options and futures is far greater than the available stocks and reserves to fulfil the orders placed creating false values and trading markets.

Finally in the stock markets the options and futures (particularly those bet on a falling market) are greater than the value of the shares they are gambled on. It is the lack of tax on these derivatives, options and futures that means the market is too small to balance the costs by the normal taxes of the past. Originally in a real stock market Stamp Duty was the tax that covered the necessary funding, but no longer. The Tobin Tax is one way to replace this and build up the central reserves to cover future crashes. It also has to be recognised that with electronic trading and tracking, profits are being made by breaking a market (ie falling) as well as by gaining value and the traders do not care about the long term prosperity only the instant profit, they can make a further profit when the markets rebalance themselves in due course. Taxing such trades should firstly lower the number of times a share is traded and secondly prevent too much profiting on marginal prices changes with large volume trades that so imbalance the system in a daily fashion. If this were implemented then the markets could return to real values rather than trader created ones that the average shareholder struggles to keep up with.

Of course it would be welcome if such taxes were worldwide but they have to start somewhere and it is best in London, since fortunately if traders and financial institutions moved abroad the local markets could never sustain the liquidity to balance the daily swings in value that London can. Australia for instance would be completely overwhelmed within eight months if a large number of companies tried to move there and possibly only China could handle the size of liquidity required (at the cost to the local people suffering from the inevitable surge in inflation) and the likelihood of China giving in to foreign manipulation is small. This is why worldwide stock exchanges are merging but still not effectively enough to match New York or London. So the real alternatives are small and the Prime Minister should be strong enough to support a Tobin Tax.

Posted by: Robert White, 24 Nov 2011 | 11:11

Nonsense Tax

Being from Australia where our economy is stable, our banks well regulated and never in doubt, and our financial sector expanding into Asia, I can tell you one thing. The Asian region is waiting to pounce on London's exiting business. Countries who are vehemently opposed this nonsensical, widely discredited tax, e.g. India, Japan, Australia, China, Indonesia, Singapore, Hong Kong, S. Korea would be the beneficiaries of such folly. And that's without mentioning USA, Canada, Mexico, Sweden, Ireland, Russia and the others. So how do you tax something that no longer exists?

This would be foolishness at an incomprehensible level.

This is one of those dangerous cascading taxes that would hurt not only England's economy, driving some of the highest employment sectors to foreign shores, but it would be paid by British taxpayers. There is not one bank CEO who would pay it, yet it would seriously damage pension funds, harm innocent retirees and its flow-on effects would close many thousands of exponential jobs. England should not capitulate to Germany. That would mean London would be decimated, without any EU country putting one foot across the Channel. British pensioners and employees should be grateful that they have a Prime Minister strong enough to say NO to Germany. After all, other sane nations have said NO and I'm sure they are tired of domineering Germany promoting something that would be so destructive, particularly to our English friends.

Posted by: Su Sim, 24 Nov 2011 | 21:50