I already mentioned here that I do not favor a tax on financial transactions. Although I did not get into specifics my concerns were that the tax will be passed onto consumers and in the end is just one more tax for us.
But this morning I ran across an opinion of a Romanian Economics professor who has 4 reasons to support this tax.
Here they are:
1) Banks were at the center of the current crisis
2) Governments have to find a way to limit banks transactions with “toxic assets” (my own quotation marks)
3) Governments need to get back the money spent to save the banking sector
4) Such a tax would prevent the next financial crisis from happening.
Out of global context these reasons do bear some logic. However, the motivation for almost all is revenge. The guilty must pay.
I have always been a supporter of policies that will favor the strong and profitable and allow the weak and non-performing to be pushed out. In other words pure and simple capitalism. What we witness today is just Socialism 2.0.
Yes, the financial crisis today has to do a lot with banking sector stretching beyond its means. Without defending the sector “it takes two to tango”. The financial sector would not been able to create this mess if it were not for the consumers’ desire to have more and more but pay in the future. But that was just the beginning. Financial sector did use the upper hand (asymmetric information) when selling hedging products to the customers. When a client enters such a transaction the only advice is only from the bank. You would not go into a court room without a lawyer or buy a car without a mechanic etc. But when it comes to investing it seems everyone is an expert. Banks loved to make you feel like an expert as they were always at least cashing in a margin.Thus banks were at the center of the financial crisis but were put there by us.
Moving to reason two. What are toxic assets? Is buying a TV with a loan without collateral a toxic asset? What if the price of the TV is twice your annual salary? Going down this road is just not efficient. Governments will never know a priori which asset will be toxic.
Reason three does not make sense to me as a free market supporter. Governments did not have to spend money to save the banking sector. It was their choice, a choice that I am afraid will be punished by the voters in the next election round. I know the reasons put forward by officials for spending all these money. And they needed to make these reasons pretty serious but it does not mean that they were.
Moving to the fourth reason, I am not aware of any instances when taxes stopped a crisis from happening. In fact it could have the opposite effect as businesses that are taxed but have a high marginal profitability will find a way to avoid paying taxes.
The only reason I picked this article is because the views expressed here are found today in the minds of the majority of general public and politicians. What is interesting of the whole debate since 2008 is that for every problem we find the solutions pushed forward are either regulation or taxes. Somehow the public believes, at the sugestion of politicians, that these are the only viable solutions for the current crisis.
Of course there are other solution which would imply less government. Let’s look at at the banking sector. Is this sector resembling perfect competition? Are the banks price takers or price setters? Are banks already too big to fail? Those are important questions that need answers. To me the banking sector has been pushed to the center of the economy and through legislation and regulation made vital to the economy. Today banks resemble more an utility monopoly then a competitive market. This is one reason not to favor taxes on financial transactions as banks have the power to transfer the costs to consumers (everyone needs a checking account, a credit card, etc).
Furthermore allowing banks to become too big to fail has given them a great advantage in the relationship with customers and governments. When utilities become too big the solution used so far and which has worked was to break them into few parts. With banks we go the opposite way. Instead of taxing them more we should see how we can strip away the monopoly power.
Increasing taxes and micromanaging banks will not solve the problem. The role of taxes is to redistribute income to sectors of the economy that would not otherwise be funded in the short term: army, education, healthcare, infrastructure. We cannot use taxes for revenge or punishment. It did not work for Germany after the first world war, is not working for Greece or Romania today, and it will not work for the banking sector.
The problem with banking sector is the size of few inefficient banks that are now acting like monopolies. The only viable solution here is to break them apart and let them compete. There is role of regulation but only when it comes to insider trading, conflict of interest etc. There the watchdog should do its job.
I am sure the subject of taxes will come up again. It is just unsettling to see how easy we give up the power of markets to governments. Historically periods of government interventions are not known for high growth. Something to think about.