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.
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.