German Finance Minister Schäuble Calls for a Eurozone Tobin Tax

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.

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  1. psychohistorian

    How does forcing banks to redesign their institutions in a major way benefit the 99% ?

    Why does the term “tilting at windmills” come to mind?

    I think we need to change the incentives from pure greed to social stability and health.

    If you funded a social safety net with a Tobin tax, investment would come to an abrupt halt.

    I don’t want to keep throwing shit at a wall to see what sticks. I want a plan to move society from a class based structure to a totally secular one in which the commons are our pride and none are allowed to accumulate enough money to effect social policy, anywhere.

    I can tilt as well as the next one, “but at least I know right from wrong”.

    1. Yves Smith Post author

      What gives banks their power is that they control the plumbing at the heart of the financial system. As a result of deregulation and regulators tolerating, even promoting regulatory arbitrage that increased leverage across the system, banks no longer keep many of the loans they originate on their balance sheet. You can run a system with much smaller banks if they retain the loans they create.

      But the effect of policy was to move more and more credit products into the capital markets. Debt is traded over the counter. There are strong network effects and other factors that greatly favored the industry moving into a highly concentrated and highly interconnected format.

      The MOST IMPORTANT THING in a tightly coupled system is to reduce the tight coupling. If you don’t reduce the tight coupling first, measures intended to reduce risk often have the reverse effect.

      A Tobin tax would have the effect of reducing the tight coupling by making OTC trading less attractive relative to other sources of profit.

      This sort of move is thus not ancillary. It gets at the heart of the problem.

      1. Ignim Brites

        Why not just call it a sales tax? Why should the ordinary person pay 5 to 9% for day to day needs when the haute bourgeoisie pay nothing for accumulating capital for future needs. Seems kind of grotesque to me.

      2. Lidia

        Yves, don’t you think that banks only have the power that we give them?

        As in my previous comment, I don’t believe that “the heart of the problem” is too-tight coupling (although that certainly doesn’t help). The problem is, and always has been, the nature of banking itself.

        During the many pre-euro Italian banking crises people invented their own forms of money and IOUS which circulated freely, along with things like stamps and candies; there’s even a film about the vagaries of one such IOU (“La Cambiale”, 1959) featuring the great comic actor Totò.

        As such informal promises or commodity exchanges may not be generally possible for large enterprises, it behooves us to question the nature, then, not only of large inter-connected banks, but large inter-connected businesses of any kind. “Too big to fail” is an anchor of our own creation, tied around our own necks.

        Again, psychohistorian recognizes the need to completely re-think the underlying assumptions of our economic structures and civic relations.

        1. Lidia

          [I do think the Tobin tax is a good idea. It will certainly not bring true investment to a “screeching halt” (bmeisen, below), but dampen the appetite for gamesmanship over substance. It was probably on NC that I read about some multi-hundred-million-dollar cable being planned across the Atlantic, funded by some banksters merely to shave a few milliseconds off of their trading executions. All resources robbed from the 99%.]

        2. F. Beard

          Yves, don’t you think that banks only have the power that we give them? Lidia

          Agreed. To a consistent believer in free markets, a lender of last resort, government deposit insurance and legal tender laws stink a mile off.

          Banks have been giving us trouble since at least 1694. Why do we still tolerate them? They should mean no more to the economy than pawn shops. Instead, they hold world peace and prosperity in their grubby, greedy paws.

        3. Yves Smith Post author

          With all due respect, you don’t understand the nature of capital markets, and how much activity has moved over to capital markets.

          Imagine a community that gets over half its electrical power from a nuclear plant. Further assume that the ONLY people who know how to operate a nuclear plant are the employees of the company.

          Even though the nuclear plant may have licenses from the locals that it needs to operate, and gets tax breaks, etc., the community now depends on the nuclear plant. Shutting it down to show who is in charge will do massive damage to the community and be very unpopular politically.

          You may not want to believe it, but there are VERY large barriers to entry to capital markets businesses: very large infrastructure (IT, back office, locations around the world) and specialized know-how which is not accessible to people outside the industry.

          The big dealer banks (JP Morgan, Citi, Barclays, Soc Gen, Deutsche, etc) do control a crucial economic choke point. That’s why they are able to extract rents.

          I’m not saying the authorities can’t push back. But simplistic analogies greatly underestimate the complexity of the problem.

          1. The Heretic

            Nonetheless, we should emphasize that banking, capitol markets and money are all man made systems with man made consequences; as such if the people change the legal architecture of the situation, the institutions will follow (either willingly or with the threat of jail terms… or at gun point if in China). A Nuclear reactor meltdown will release radioactive contamination that can never be re-captured, the environemntal damage and loss of sea life due to the BP deepwater horizon disaster cannot be mitigated by any action of humanity; but the Imposition of the Volker rule, the combined power of the FDIC and the Federal reserve to guareentee all deposits, plus the political will to nationalize any bank that attempts to deliberately botch the transition of damage the payment system of the company, and legal threat of the Justice system to fully investigate any bank that fails (plus perhaps more covert ‘threats’ to key personal courtesy of the IRS ), I believe would be ultimately successful in enacting whatever necessary changes to the banking system.

            However, I acknowledge the correctness of your position, which is to give voice to important changes but to couch them in methods and language that would sound ‘reasonable’ to the pundit class, with the hope of evenutally gaining their agreement to the solution. My proposed solution requires a ‘storm the bastille’ mentality among the pundits and a majority of the population (the OWS is a hopeful sign, but still not big enough); a political condition that is still perhaps at least 10 years away (assuming continued liquidation of the middle class).

          2. Lidia

            The nuclear power plant is an interesting analogy: I’ve been following the case of VT Yankee wherein it’s the people granting the license who have chosen not to allow it to be renewed and who don’t want the plant’s power which is being offered at twice the market rate, a far more expensive rate than renewable energy in that state.

            The average European uses 1/2 the energy of the average American, so if a nuclear plant provides half of a region’s electricity, well then I would say that region could probably get by fine with half the electricity.

            You’re saying “we can’t”; I’m saying not only that “we can”, but “we must”… and not only that “we must”, but “we will”… whether we like it or not..

            Saying that there are a lot of sunken system costs which mandate maintaining the globalized status quo and thus it behooves us to prop up these systems and to continue throwing good money after bad doesn’t make a lot of sense to me.

            If I’m being simplistic, so be it. Sophistication hasn’t been all it’s cracked up to be, that I can see.

          3. Lidia

            In thinking on it further, I have to agree with you: I guess I don’t understand the nature of capital markets…

            From my admittedly simplistic point of view, it seems as though most “capital” does not actually exist, so the effect of a “market” in something that does not exist cannot be anything other than -in and of itself- an irrational expression and a futile attempt to leverage something out of nothing. A collective insanity, if you will.

            This puts me in mind of the Woody Allen joke “”Doc, uh, my brother’s crazy; he thinks he’s a chicken.” And, uh, the doctor says, “Well, why don’t you turn him in?” The guy says, “I would, but I need the eggs.””

      3. Lafayette

        {But the effect of policy was to move more and more credit products into the capital markets.}

        The reason for that was that “securitization” allows a bank to make the loan (or give the credit), then sell the debt forward thus earning both a commission and reimbursing themselves of the initial capital.

        Which they lent out once again.

        It makes good sense and typically is done without much concern for Prime and Alt-A loans. The slip-up came with the fraudulent SubPrime Loans, meaning the crucial lack of creditworthiness checks.

        Of course, it should be obvious that any creditworthiness check of the mortgagor would likely have indicated that they should not be offered the loan. And yet, the credit institutions offered loans at a predatory “sucker interest rate” only to be ballooned at some point in the near future – when (abracadabra) the mortgagor found themselves unable to make the monthly payments.

        The SubPrime Fraud was tantamount to giving a blind-person a license to drive. (Excuse me for being “politically incorrect” but the analogy is most apt.)

        1. F. Beard

          The SubPrime Fraud was tantamount to giving a blind-person a license to drive. Lafayette

          Either everyone deserves credit equally or no one deserves it at all. The purchasing power for credit comes from the entire population, including and especially the poor who are usually not considered “credit-worthy” themselves.

        2. Jerrydenim

          You’re still missing the simple crux of the very elementary sub-prime mortgage scam was all about. The people originating the mortgages never intended to keep the mortgages and recoup principle plus interest thereby turning a profit. They only wanted to generate the bare minimum amount of paperwork necessary to SELL the mortgage to the Wall Street securitiztion machine. That is why the mortgage orginator’s didn’t care if the people taking out the mortgages would ever be able to make a single payment on the mortgage, because it didn’t matter to their bottom line if they did or did not. Credit worthiness and future repayment of the loan was completely irrelevant to the “lend to securitize” business model. They got paid when Wall Street bought the mortgage as raw material for one of their securitized debt products. The Subprime lenders may have been predatory and fraudulent, but stupid or bad businessmen they were not.

          1. Lidia

            Yes, the demand for “paper” CREATED —conjured up— the supply of crappy mortgages, as recounted here:

            …the traditional way to think about financing is “OK, I find an investment opportunity, that on its face, I think, is a good opportunity. I want to deploy capital on that opportunity. Now I go look for funding. So I think that making mortgage loans is a good investment, so I will make mortgage loans. Then I will seek to fund those, to fund that activity, by perhaps issuing CDO paper, issuing the triple-A, double-A, A, and down the chain.” But what happened is, you had the creation of so many vehicles designed to buy that paper, the triple-A, the double-A, all the CDO paper… that the dynamic flipped around. It was almost as if the demand for that paper created the mortgages.

            n+1: Created the loans?

            HFM: Called forth the loans, because it became a really profitable business. You saw where you could issue these liabilities. Say, I could issue these liabilities at a weighted average cost of LIBOR [London Interbank Offered Rate] plus one-fifty, and I know all I have to do is just push that money out the door, push that money out the door, LIBOR plus three hundred, and I’ll make a huge amount of money from doing that origination activity or just on the equity piece that I keep, which is highly, highly leveraged.

            This is not some isolated pocket of freak behavior. It is a necessary, foreseeable, and unavoidable consequence of the need for a “market” in SOMEthing… ANYthing!… to grow exponentially in an interest-based monetary system.

        3. Yves Smith Post author


          That is more or less correct. This in theory was not a bad system until it started being abused. I was opposed to it because the structures were complicated, instinctively I was sure that people did not understand the risks. But for the first 10-15 years of securitization, skeptics like me looked like idiots.

          The reason was it allowed banks to do a lot more lending on the same capital base and weirdy the regulators were on board with that. I was at McKinsey, which had the biggest market share of financial institutions, in the 1980s when this trend started. It was very clear what the rationale was, you heard the same story everywhere.

        4. Skippy

          Whilst I agree with the_on paper_mathematical validity of your credit observations, the missing data was always job / wage volatility. This was a self inflicted wound, it was only a matter of time till securitizations Achilles Heel was exposed. Did the hired help and some close relatives pilfer the liqueur cabinet, watering down the contents to hide the deed, you bet your CDS!

          Skippy…its all about the weather now.

    2. bmeisen

      What happens to investment in a society where “none are allowed to accumulate enough money to effect social policy, anywhere”? If a Tobin Tax brings it to a screeching halt, what will the prospects of mandated flat returns do?

      And what is a totally secular society compared to a class-based one?

      If secular means flat hierarchies serving the public good, i.e. a tidy commons, remember that the flatest form of government is a dictatorship, and dictators tend to make loud claims about serving the public good.

      1. Yearning to Learn

        that’s quite a stretch, equating a Tobin Tax with a dictatorship.

        remember that the flatest form of government is a dictatorship
        untrue. Look at the wealth inequality of the world dictatorships. also look at political influence inequality under dictatorships, where those who are a part of the dictator’s inner circle amass hordes of power (and wealth) and the commoners suffer.

        The rest of your argument falls apart, since the first claim is incorrect.

        What happens to investment in a society where “none are allowed to accumulate enough money to effect social policy, anywhere”?

        Investment does not suffer due to increased regulation. Just ask an investor of the 1950s to 1970s. Investment suffers when there is not enough future demand to pay for that investment… which happens in times when there is massive wealth inequality and a destabilized banking system… such as in the 1930s and now.

        Giving the banks and shadow banks everything they want on a silver platter did not work, and will not work. we’ve already tried that. it was called 1999-present, and led to the largest credit bubble and collapse in modern economic times.

        1. bmeisen

          Did you read psychohistorian’s comment to which I asked a couple of clarifying questions? Where do you get the idea that I equated a tobin tax with dictatorship?

          In practice dictatorships depend on relatively informal hierarchies. In theory they tend to be spectacularly flat. Proportional democratic government depends in theory on relatively elaborate hierarchies. Pluralistic democracies are a bit less formerly hierarchical and devolve more easily into oligarchy or dictatorship.

          1. Yearning to Learn

            my apologies for the misunderstanding.
            due to the formatting of the webpage it was not apparent to me that you were replying to psychohistorians original post.


      2. kievite

        If secular means flat hierarchies serving the public good, i.e. a tidy commons, remember that the flattest form of government is a dictatorship, and dictators tend to make loud claims about serving the public good.

        Claim about flat hierarchies under dictatorships is not supported by historical evidence of neither Nazi Germany nor the USSR as two most recent form. In both cases there was huge, bloated government apparatus which in both cases constituted privileged class of the society(in USSR it was called “nomenklatura”).

        In any case it is important to cut oxygen to banksters as excessive trading is not only a powerful method of redistribution of wealth (leaching on 401K and pension funds, essentially) but is is destabilizing society as banks seize o perform any useful function and convert themselves into completely parasitic, mafia style institutions with the only difference that they have much greater level of control of government.

        Casino capitalism has no future and whether is should be elimiated by Tobin tax or other measure is the matter of tactic not strategy.

        1. bmeisen

          As above: in practice dictatorships depend on relatively informal hierarchies. In theory they tend to be spectacularly flat. Proportional democratic government depends in theory on relatively elaborate hierarchies. I suggest that pluralistic democracies are a bit less formally hierarchical and devolve more easily into oligarchy or dictatorship.

    3. Jerrydenim

      Good luck building your revolutionary and utopian finance system from scratch. Maybe you can laugh rampant speculation out of the marketplace and into the Hague while you’re at it.

      For everyone else who is a little more realistic there are various iterations of a Tobin tax on financial transactions, which as Yves was pointing out, is actually being proposed by a European Finance minister from a large and powerful country. A very finance-unfriendly regulatory proposal such as this could go a long way towards cutting down on some of the worst speculative practices. A proposal of this sort deserves the support of all of us who think the economy at large is adversely affected by speculators. Questions of whether or not the proposal goes far enough or is effective in it’s aims can be discussed once there is actually a discussion taking place.

  2. Kiste

    Tobin Tax will never happen because the Brits are too desperate to keep that Casino cum Oligarch Exile they call an “economy” running.

    The true cancer of the world’s economy is the anti-social financial transaction based Anglo-American raptor-capitalism. A Tobin Tax would likely but a damper on this abomination and the Anglo-American world will never, ever go along with it.

  3. Mikey M

    A tobin tax is a ridiculous idea, especially when it’s advanced as a way for banks contribute the tax in order to fund their own future bailouts. It just promotes moral hazard, and the idea that the financial system will never be properly fixed and regulated.

    It also appears that Yves is going to totally ignore that this tobin tax discrimates against major finanical centres like London and Wall St.

    Ringfencing banks is a much better idea, but funnily enough i hear the Germans and French dont like it much. If they were really genuine about trying to clean up the financial system they would be in favour of ringfencing, not the silly and politcially motivated tobin tax.

    Being a Canadian I’m very pleased our government has taken a big stand against the tobin tax. Why should purdent nations be penalised for the errors of the Yanks and euroweenies?

    1. Knut

      Thank you mr. Harper. Now, back to your books and learn a little financial economics before you come back here.

    2. stickyfeet


      How about dropping the myth that there was no bank bailout in Canada? Canada Mortgage and Housing Corp balance sheet ballooned up by several hundred billion at the order of Harper and cronys, where now it holds MBS guaranteed by us Cdn taxpayers equivalent to 33% of GDP, and those mBS are probably filled with the most toxic crap. Of course we wont know because few up here have figured out enough to ask questions.

      1. Mikey M

        So what? We did not have the wholesale destruction of our banking sector as has occured in US and Europe.

        Why the hell should Canadians be forced to pay for the casino gambling of US and Europe?

        The tobin tax is a joke, a total misreading of cause and effect, and typical strategy of the corrupt EU to make others pay for its folly in ever setting up the stupid euro.

    3. Yves Smith Post author

      Did you miss my point that either the Fed or the ECB can enforce rules on all the really big players in their currencies, the ones that need direct access to their payment systems? This isn’t discriminating against any financial center, this is an action taken to make the huge institutions that depend on crucial services from central banks precisely because they engage in big securities transactions operate in a more safe manner.

      This has nothing to do with London and New York and everything to do with the size and nature of the institution.

  4. Lafayette

    {A tobin tax is a ridiculous idea, especially when it’s advanced as a way for banks contribute the tax in order to fund their own future bailouts. It just promotes moral hazard, and the idea that the financial system will never be properly fixed and regulated.}

    I beg to differ.

    The Tobin Tax was originally intended to moderate exchange-rate fluctuations of round-trip (in and out) currency conversion transactions.

    In its most modern form it has been suggested as means of moderating computer trading. And finally, it is also proposed as a nifty-idea to raise revenues of national treasuries that would help pay for the mess that the banks are responsible for creating.

    I agree with the latter definition and was dismayed to hear the Our Boy Timothy rejected the idea out-of-hand when he was last in Brussels, invited to attend an internal meeting of EU Finance Minister (which was quite strange since foreigners are not typically offered an invitation).

    Anyway, the thrust of the matter is to see whether the G20 will go ahead in Cannes, this week, on the matter of the Tobin Tax. There was some feeling that Europe would introduce it unilaterally and Uncle Sam be damned.

    We shall see …

      1. Lafayette

        OK, Enlightened One, I read your Web-Page.

        I suggest you take a course in EC101.

        The alpha and the omega of any economy is the market mechanism that allows Demand to meet Supply. The heart of that mechanism is ordinary people who act as consumer-agents.

        We’ve made of it a monstrous mess, but, still, we all go shopping to meet our daily needs. In fact, we cannot survive without the market mechanism.

        1. Lidia

          And it’s the “market mechanism” which strives to make it such that we cannot survive without it.

          1. Lafayette

            In a way, yes.

            But that Market Mechanism has given Americans, since post-war years, a lifestyle that is admired by a great many other countries. Even Europe, until recently … that is, the past twenty years.

            Reagan’s arrival in the Oval Office opened Pandora’s Box of rapacious greed, under the title “The Sky’s the Limit”. Ayn Rand must have rolled over in her grave with glee.

            Excess is something that all economies have known throughout history. Americans don’t like to learn history, so they have very little idea how what is happening now is merely a repetition of what came before both here (the Great Depression) and elsewhere in the world.

            George Santayana: Those who refuse to understand the lessons of history are condemned to repeat it.

  5. Rodger Malcolm Mitchell

    Ah yes, the old “it’s all the fault of the speculators” bugaboo. No, Germany. No eurozone. Your problems are not caused by speculators. Your problems are caused by you.

    For reasons of ignorance, you voluntarily surrendered the single most valuable asset any nation can have: Your Monetary Sovereignty ( You have no control over your money.

    Now, you are looking for a whipping boy, and have dragged out the speculators. Forget it. You have two and only two long term solutions: Either the EU (which is Monetarily Sovereign) gives (not lends) euros to member nations as needed, or you re-adopt your own sovereign currency, and become Monetarily Sovereign.

    That’s it. No other solutions, so forget blaming the speculators.

    Those who do not understand Monetary Sovereignty do not understand economics.

    Rodger Malcolm Mitchell

    1. F. Beard

      Rodger is 1/2 correct. The 1/2 he is missing is the need for genuine private currency alternatives.

    2. Lafayette

      {You have no control over your money.}

      Sorry, but that is an untruth.

      Any country with a Central Bank willing to print money can control its supply. Of course, it must use that source wisely.

      The problem with the EurZone are some nostalgic Germans who think the Weimar Republic must be avoided at all costs. In a sense, they are right – rampant inflation is a no-no.

      But they are letting their fears get the best of them. In fact, most of the world knows that they are Dead Wrong. Meaning that sooner or later, kicking and screaming, they’ll drop their silly-nonsense about printing money.

      And the ECB will start some serious Quantitative Easing, just as the Fed has done … and will likely continue to do.

      Monetary Sovereignty is the ability to print as much money as is deemed necessary. Neither more, nor any less. But, that last rule is the hard part …

  6. Knut

    The ‘Tobin Tax’ is misnamed. It was actually proposed by Keynes in the General Theory as a way of lengthening investor’s time horizons with a view to making the allocation of capital more efficient, or at least less subject to the ‘beauty contest.’ Yves is exactly right. The purpose of the Keynes-Tobin tax (Tobin clearly got the idea from Keynes) is to reduce the incentive to short-term trading, the benefits of which in added liquidity are far offset by the costs in misallocated capital and talent.

  7. Jonas the Bold

    Short term trading is a symptom and not the problem.

    How about the corrupt relationship between politicians and banks?

    Fix that, and you have a chance at stopping the world’s slippery slide to anarchy.

    Diddling around the edges, is just a corollary to the “kick the can” theorem.

    1. Lafayette

      Indeed, short-term trading is not the problem. We got down that rat-hole because of the Tobin Tax.

      The newest version of that tax is on International Transactions Tax – and that is not a bad idea for raising some new revenues from a market-base that is rife with profits.

      So, why not? Because the banksters will think the tax is “nasty”? Do we really care, at this point, what any banker thinks?

      Methinks not … but, of course, I am not a politician up for reelection next November. So, perhaps my view of the matter is somewhat … uh, “naive”?

  8. Jack Parsons

    And once again, the secret problem: drug money. Drug money must be processed and processed endlessly to make it clean and minty fresh. High-frequency trading is the latest system for this. A Tobin tax kills this money-laundering technique and thus is a Very Very Bad Idea.

    1. Lafayette

      So, let’s institute a Tobin Tax to stop cross-border money laundering!

      Do we really care what the base reason is? The result is evidently very good, because it generates new tax revenues at at time when most countries are ravenous for them.

      Anyway, more on this from the G20 that opens in Cannes on the 3rd of November. This meeting is in Sarkozy’s back-yard and it will be impossible for him not to push his agenda. The Finance Transaction Tax has been on that agenda for quite some time.

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