A key German finance leader is talking tough about financial reform. But will his peers follow?
Wolfgang Schäuble, in a Financial Times interview, called for a Tobin tax to discourage speculation. Schäuble urged the EU to proceed with the idea even if England balked.
That’s a sound move, since in too many markets, transaction costs have gotten to be so low that the ratio of real-economy related activity to mere opportunistic trading has gotten badly out of whack. The classic example is high frequency trading, where speculators add liquidity when it isn’t particularly needed, and withdraw it in a destabilizing manner at the first sign of trouble.
Readers may argue that banks will innovate around such a tax, but they miss crucial chokepoints that regulators have and have not yet used. All major banks that play in the Euro need direct access to payment facilities, and ultimately, payment systems controlled by the ECB. The big payments are almost all related to securities transactions; Perry Mehrling, in an interview, estimated the securities-related volumes as over 50X the real economy activity. A major bank can’t afford to go through correspondents; both the transaction costs and the detrimental impact as far as corporate customers are concerned would be too great (I looked into this issue over two decades ago for a major Japanese bank; these issues would be even more acute now given the much greater importance of capital markets related activities to all banks). And Mehrling claims (and I haven’t yet found any evidence to the contrary) that banks can’t innovate around the need for direct access to central bank payment facilities. Since any global bank worth its salt has to do business in the euro, the ECB could well impose global rules relating to activity in the euro, including a transaction tax. That is not how we have tended to think of regulatory reach, but recall how the Fed acted as the dollar dealer of the last resort by extending currency swap lines during the crisis. No banking authority should be in the position of backstopping activity or institutions (in the Feds’ case, Eurobanks) that it does not supervise.
I doubt the Schäuble proposal will go far; there are too many well placed bankers who will have their knives out. But I hope he and others push hard on this idea, particularly since the odds of a Euro-centered financial crisis are high. It is important to keep pushing proposals for serious reform so that they will have been debugged via having objections raised and dealt with, and will gain legitimacy through greater exposure. The most important ones are those that have the potential to change the architecture of the financial system, and a well-designed Tobin tax would force banks to redesign their institutions in a major way.