Proponents of the financial transaction taxes (FTT) are happy that the tax is in the news again. However they can’t help but wonder if it is just another false dawn. It is not.
The financial crisis, the biggest in living memory, has massively titled the political and financial landscape in a direction that makes such taxes not just more desirable also much easier to implement.
Keynes was an early proponent of FTTs and the idea got a new lease of life when James Tobin extended it to currency markets. The Asian crisis helped revive the discussion and after falling off the agenda yet again the idea was brought back to life as a potential source of revenue for funding development. Each time it died a slow death. The opponents of FTTs won those battles but are about to lose the war. Here is why.
This recent policy brief from Re-Define is a very important contribution to the curent policy discussions on financial sector reform. It lists, discusses and critiques the proposals put forward by governments in the US and Europe.
This policy brief written in April 2009 discusses what financial sector reforms are needed in order to bring about a system that is more stable, more competitive, fairer and that better serves the need of the real economy
The smooth functioning of the financial system is critically dependent on a sophisticated and evolving infrastructure comprising of payment, clearing, trading, information, settlement, messaging and legal systems which is often taken for granted. However, glitches and gaps in this ‘invisible’ part of the market have the capacity to seriously disrupt the financial system as was highlighted yet again through the problems caused by the lack of proper settlement in the Credit Default Swap market in the current crisis.
More often than not both financial institutions failures as well as financial system wobbles are driven by bad housekeeping which has become ever more important as the financial system has become more complex and inter-connected. Especially because such ‘back office’ systems are hidden from sight, governments and regulators need to be proactive in ensuring that such systems do not lag behind market innovations and are resilient.
The current financial and economic crisis owes party to the outdated model of regulation where governments tried unsuccessfully to regulate a global financial industry with a nationally focused and highly fragmented regulatory system. As a consequence of this, large swathes of the financial industry hid in the ‘regulatory cracks’ and was not being supervised.
This lack of supervision was reinforced by an ideologically driven deregulation based on a misplaced faith in the ability of markets to always self correct. Furthermore, even when regulations existed, they were not applied.
It was in this poorly regulated ‘shadow financial system’ comprising SIVs, Hedge Funds and other off balance sheet exposures that the crisis originated and its intensity was reinforced by the risks hidden in ‘shadow financial products’ such as Credit Default Swaps which were also unregulated.