Archive for April, 2010
As the general election approaches in Britain, polls reveal that the economy is foremost on voters’ minds. Economic journalists tell us that the most serious slump since the 1930s has discredited the financial sector, that neo-liberalism and Thatcherite monetarism is dead and that Keynesianism is the norm again. To put it mildly, this view is grossly misleading. In truth, the bankers still rule.
Keynesianism and Monetarism
Bailing out the banks was as much a monetarist policy as a Keynesian one. Milton Freidman agreed with Keynes about the need to immediately throw money at a banking crisis. The two men differed about the long term effects of a crisis on the private sector. Freidman recommended expanding the money supply and letting capitalists do the rest. Keynes though that capitalists would be reluctant to invest, and therefore that the state must act as investor of the last resort.
What has all this got to do with the present crisis? Simply that Keynes argued for ‘investing’ one’s way out of recession, hence the need for a big stimulus; eg, state investment in infrastructure as in China today. Although Obama’s 2009 stimulus package amounted to $800bn over three years, the EU has failed to match the US in providing the prolonged stimulus that some Keynesians would have recommended. Britain’s package—largely temporary VAT reduction and a car scrappage scheme— has been proportionately smaller than that of either the US or Germany.
Indeed, what we see today is the very opposite of stimulus. Much of today’s press is filed with ‘budget hysteria’. Political parties on all sides call for major cuts in state expenditure and bicker only about the timing of such cuts. Why this change? The answer is simple. For the past three decades, the financial services sector has grown ever more powerful—and so too has the influence of ‘bankers’ economics’.
Professional economists tend to forget that terms like ‘Keynesianism’, ‘monetarism’, ‘rational expectations’ and so forth have little purchase on bankers. Nor do bankers have much time for discussing the pros and cons of the social market or the discontents of globalisation. The main business of commercial banking is—or at least used to be—that of making prudent loans and keeping the books balanced.
Bankers worry in essence about three things. First, they are concerned about customers, particularly governments, who borrow excessively. Such customers may be unable to pay back their loans, hence leaving the bank with non-performing assets. Such borrowing may drive interest rates too high, squeezing bank profits.
Secondly, bankers worry about inflation, which erodes the real value of a bank’s assets. In this their interest are opposed to those of householders who hold debt, the value of which is comfortably eroded by mild inflation. Remember, every time a bank lends you money for, say, a mortgage, it appears on your balance sheet as a liability but on the bank’s as an asset. Bankers don’t like to see their assets inflated away.
Finally, bankers believe in a strong currency, particularly when banks borrow from international money markets in order to lend to domestic customers. ‘Leveraging’ means engaging in more borrowing; banks typically pay a risk premium to borrow more and more on the money market. The credit crunch has made borrowing more difficult. So the last thing bankers want is to incur an extra risk premium for having a weak currency.
The woes of the EU
At present, Britain and the other the core economies of the EU are emerging from the most serious downturn in the world economy since the 1930s. Under such circumstances—and much as in 1930s—to argue that EU countries must pursue ‘sound money’ is bad advice. Both monetarists and Keynesians agree that extreme monetary prudence can plunge our economy into deeper recession.
Depressed aggregate demand provides no incentive for private capitalists to invest. To raise aggregate demand, Keynes argued, the state must do what private capitalists cannot. The relevance of this argument should be obvious. A large state-led investment programme is needed to build new infrastructure and to develop alternative energy generating capacity. But no major political party in Europe dares stand up for this principle. Instead, what we are seeing is a return to bankers’ economics: low inflation, prudent public finance, strong currencies and wage compression.
The financial sector has given us the worst crisis since the Great Depression—-it now dictates the terms on which to emerge from the crisis. Balancing the budget is not the answer—rather, it is a recipe for prolonged stagnation and increased social conflict.
Most readers will have heard of the ‘Robin Hood tax’—now under study at the Commission—a well-chosen term for what economists refer to in their jargon as a Currency Transactions Tax or ‘Tobin tax’ (see my earlier piece on this blog). The basic idea is that the word financial market is now so large that taxing it at some miniscule rate (0.05%, or 50 euro cents in every €1,000 traded) would rake in billions.
How much would it raise?
Just to give you some idea, the Bank of International Settlements (BIS) estimates that in 2007 the world’s yearly currency transactions totalled US$800tr (that’s fifteen time world GDP, or nearly a quadrillion dollars) of which 80% is purely speculative. A 0.05% tax on this annual turnover would yield 400 billion dollars (about €250bn) each year, enough to fight poverty, deal with global warming and have shedloads of money left over for repairing our government budgets. Because almost all such trades are computerised, software already exists for collecting such a tax wherever it takes place.
And even if financial markets were able to avoid tax on half that sum, we’d still be getting US$200bn per annum. It’s a no-brainer, really.
The pros and cons
Or is it? A lot of bankers and financial journalists oppose it. In essence, the ‘devil’s advocate’ argument against such a tax consists of four questions: (1) will the proceeds reach the right people? (2) is 0.05% high enough to stop speculative activity? (3) will the bankers find a way of ‘passing it on’? and (4) can it work unless the US supports it?
‘Will it reach the right people?’ is always a concern, but to reject a Robin Hood tax on those grounds is a bit like rejecting aid to the victims of the Haitian earthquake on the grounds that some small percentage of them are thieves.
Is 0.05 high enough? That’s a good question: James Tobin originally proposed 1% in the 1970s, then decided two decades later than 0.1 would be enough to ‘place grit in the wheels of the speculators’. If not, there are at least two remedies. First, the tax could be varied according to the type of trade involved, with higher rates on, say, short-term derivatives than long term futures contracts. Secondly, to avoid foul play, such a tax could be complemented by a new bankruptcy regime requiring unsecured creditors and other counterparties to be forcibly and swiftly converted into shareholders, until the failed institutions are adequately recapitalised.
Will bankers ‘pass it on’? The answer is that where the tax is low and the market highly competitive, it probably won’t be worth their while? After all, Britain levies a stamp duty of 0.5% on everyday share trades, and nobody argues that that banks and brokers ‘pass it on’ to the average citizen. Banks and brokers ‘take a fee’ on such trades, just as they do on currency trades, but the fee is paid by the counterparty.
What if the US doesn’t play ball?
Finally, can it work if the US is opposed? But who in the US is opposed? Tim Geithner, Obama’s Treasury Secretary, seems opposed, but he’s an ex-banker who has worked closely with Bush’s Treasury Secretary, Hank Paulson. Larry Summers, Obama’s chief economic advisor, was an early advocate of a Tobin tax. Obama himself is keeping quiet for the moment because he’s anxious not to make any more Congressional enemies.
If Germany, France and Britain—all of whom support some form of Robin Hood tax—were to proceed unilaterally, it is hard to see how the US could oppose it. Moreover, with the US budget deficit approaching 10% of GDP and much of the US press calling for budget balance, a Robin Hood tax is Obama’s lifeline.
Who’s betting billions against the euro at the moment? The big financial speculators, that’s who! A Robin Hood tax is both quite feasible, and it imaginatively reflects the public’s desire to make the speculators pay for the havoc they have caused.