The Stabilizing Potential of a General FTT in Financial Crises

1. Financial Crises and the stabilizing Potential of a general FTT Stephan Schulmeister Presentation at an Oxfam Workshop in Berlin on September 20, 2011

2. Systemic causes of the recent crisis • Dynamic epicenter of the 2008 crisis: • Simultaneous devaluation of stock, housing and commodity wealth • Coincidence of three "bear markets“ (as 1929-1933) • “Built up” during the preceding “bull markets” > • Long swings in asset prices > “trading as usual” • Essential feature of finance capitalism • Crisis = Beginning of the end of this regime • Bottom phase of long cycle

3. "Bulls" and "bears" in the US stock market

4. S&P 500 futures pricesJuly and August, 2000

5. Dynamics of the dollar/euro exchange rate

6. 5-minutes dollar/euro rateJune, 6-13, 2003

7. Technical oil futures trading 2007- 2011

8. Greece

9. Portugal

10. High-frequency flash trading

11. Overall financial transactions in the world economy

12. Dollar exchange rate and oil price dynamics

13. World market prices:Crude oil, Gold

14. Dollar/euro exchange rate and purchasing power parity

15. Stock prices in Germany, the UK and USA

16. Wealth of US private households

17. Asset prices 1921-1938

18. Finance capitalism:The long way to the crisis • 1970s: Transition to unstable exchange rates > • Dollar decline, oil price shocks, recessions • 1980s: High interest rate policy, financial innovations > • Change in accumulation of non-financial (big) business > unemployment & public debt • 1990s: Savings policy against welfare state, unequal distribution > weak consumption & atypical employment plus boom of finance • 2000s: After stock crash more finance alchemy (CDOs, MBSs, CDSs, etc.) > 3 big bull markets > • 3 bear markets > crisis > austerity policy

19. Some conclusions • Growing discrepancy between real and financial transactions • Speculation on derivatives exchanges grows fastest. • Asset prices fluctuate in a sequence of „bulls“ and „bears“. • Due to the accumulation of short-term price runs. • A FTT would affect specifically very short-term transactions with high leverage > • Dampens long-term asset price fluctuations.

20. Concept of a general FTT • Taxbase: (Notional) valueofthetradedasset • All assets (spotand derivatives) treatedequally • Three tax rates: 0,1%, 0,05%, 0,01% • Fastertrading & higherleverage > highertax relative to cash requirement (margins, premia) • Case 1: Shares for 10.000 € > FTT (0.05%) = 2.50 € • Case 2: Interest future, value 1 mill. €, margin 10.000 € (leverage = 100), FTT = 250 € • Implementation through electronic settlementorpaymentsystems

21. Effective reduction of trading in % due to an FTT (2010 data)

22. Hypothetical FTT revenues 2010 at a tax rate of 0.05%/medium trading reduction

23. Centralized FTT implementation I • FTT is collected at settlement/”territorial principle” • Debtor is the settling institution • Exchanges : Electronic platforms • OTC markets: Central Counterparty Platforms (CCPs) • All important countries in a trading time zone participate, e. g., EU27 • Mandatory clearance of OTC transactions via CCPs • “Standard Classification of Financial Transactions” (SCFT)

24. Centralized FTT implementation II • Distribution of revenues from exchange transactions: • Home country of exchange • Country of origin of transactions • Supranational institutions/projects (EU and/or ODA) • Distribution of revenues from OTC transactions: • Country of origin of transactions • Supranational institutions/projects (EU and/or ODA) • Centralized FTT implementation ideal, in EU only feasible if also the UK participates

25. Decentralized FTT implementation I • FTT is deducted by banks (and brokerage firms) • “Personal principle”: Debtor is the resident of an FTT country • Customer or proprietary trading • Example: Germany introduces an FTT • Tax base: Transactions of German residents • At home (~15% of Eurex transactions) • Abroad, e. g., at London market place

26. Decentralized FTT implementation II • No discrimination of German exchanges > • 85% of transactions would not be taxed • Against tax evasion: • FTT substitution levy (FTTSL) on transfers abroad • E.g., equivalent of 40 “round trips” i.e., 2% • OTC transactions: A bank is always involved > • Tax deduction at/by banks • Decentralized approach: Pragmatic, accounts for • Political and institutional differences

27. Objections to an FTT I • FTT raises capital costs like a tax on future dividends • Hampers arbitrage and price discovery • Most trading is not driven by speculation but by risk management (“hot potato”) • Derivatives should/could not be taxed • Would increase hedging costs in an incalculable manner • Example: The lower an options premium relative to the notional value, the higher the “effective tax rate”

28. Objections to an FTT II • FTT does not help against misvaluation of collateralized debt obligations (CDOs) • The same holds for misallocation of risk in the CDS market • FTT induces a huge relocation to tax havens/offshore markets • Many hedge funds as forerunners • Uneven distribution of FTT revenues, in particular within the EU

29. Comparison to FATs • FATs = Tax on income of financial institutions independent from which activities they stem • FTT: Tax on transactions (activities) independent from who carries them out • “Boring banking” versus FABs • FABs and hedge funds can shift profits easier to non-FATs-countries than smaller banks • Trading by non-financial corporations and amateurs remain tax-free • Tax base: FTT ~ 100 * GDP/FATs ~0,04 GDP

30. Final remarks • Coincidence of short-term trending, long-term swings, speeding-up of trading, transactions volume and trading profits of FABs > • Excessive liquidity = destabilizing overtrading • FTT would specifically dampen (ultra)fast transactions unrelated to fundamentals • Cognitive dissonance > FTT as “provocation” • Crisis in economy and in economics > chance for learning > reconsidering the dominant paradigm > dislearning • Next crisis might help

31. Building up the potential for the next crash?