Yes Virginia, 1,000 cretins can be wrong

Hands up everyone who thinks we should raise interest rates?

Right now, today?

OK, how much should they rise by? 0.25% maybe, like the ECB has just done? 0.5%? Shake that inflation out of the system?

How about let\’s raise them from the current 0.2/0.25% level straight up to 12.5%. That\’ll be good won\’t it?

No chance of inflation rearing its ugly head at that rate. Won\’t do much for the bascent economic recovery, that\’s true, but as we\’re going to do it in a good cause we should all sign up immediately.

We write to you as the call for a Financial Transaction Tax is now gathering global momentum, and the French government has made it a key priority for their G20 presidency.

This tax is an idea that has come of age. The financial crisis has shown us the dangers of unregulated finance, and the link between the financial sector and society has been broken. It is time to fix this link and for the financial sector to give something back to society.

Even at very low rates of 0.05% or less, this tax could raise hundreds of billions of dollars annually and calm excessive speculation.

So, there\’s this thing called LIBOR. It\’s the rate that banks lend to each other at. Lloyds takes in a little more over the counters than it pays out one day, HSBC the reverse. So Lloyds lends the cash to HSBC so their books balance overnight.

This is quiet a big thing actually. In normal times (ie, not now perhaps) the volume, in sterling and in London alone, is around £20 trillion a year.

Current rates on this are around 0.2, 0.25% on an annual basis. With 250 banking days (is this correct? Or it it 360?) that means that an overnight loan will earn you 0.0008%. So, let\’s add a 0.05% tax to this trade shall we?

I think we\’ve rather changed this market, haven\’t we?

Yes, we have. In fact, what we\’ve done is to make short term interest rates 12.5% (0.05 x 250). Just what we need in a recession eh? Mindbogglingly high real interest rates.

Yes Virginia, there really are 1,000 cretins who are wrong.

14 thoughts on “Yes Virginia, 1,000 cretins can be wrong”

  1. wow, one might almost think that banks would avoid financing themselves via the overnight wholesale market

    really, what are you asserting here. How large a change in the interest rates charged on mortgages and loans are you predicting as a consequence of the introduction of a Tobin Tax?

  2. Would it also apply to me when I pay for a meal with friends and they then pay me back by electronic transfer? Because that could get rather messy. There are two obvious results of a Tobin Tax: either the economy crashes overnight or the economy becomes 90% grey or black.

    Didn’t Sweden try a Tobin Tax for about a month?

  3. This is also interesting

    ” The financial crisis has shown us the dangers of unregulated finance, and the link between the financial sector and society has been broken. ”

    Sorry, but when was finance unregulated? You can possibly say that it was deregulated and maybe you can even argue that that was a bad thing but saying that it was unregulated is just mindboggingly ignorant

  4. “wow, one might almost think that banks would avoid financing themselves via the overnight wholesale market ”

    Such as?

  5. Would it be 0.05% * 500, not 250, as presumably Lloyds are lending, not giving, the money and would expect it to be returned, so 2 transactions?

    Tim adds: Umm, yes, it would, wouldn’t it?

  6. Speaking quite selfishly, I would happy if the money I have on deposit were worth the same at the end of the year as it was at the beginning.

    Given that we have about 5% of monetary debasement happening every year just now (inflation, to most people), a numerical interest rate of around 5% would be just dandy.

    Whereas in fact, I am getting 0.1% and am essentially being robbed blind in order to get the State and its over-indebted clients off the hook.

    So nothing new there, then.

    And please don’t tell I should have money on deposit, I know that, I have plans…

  7. Argh! That last sentence should read “…don’t tell me I SHOULDN’T have money on deposit…”

    Tim, edit if you can be bothered. Humblest.

  8. Andrew, I just took out a Goldmoney account for exactly that reason. It’s not an investment, but I’ve got a few hundred quid sitting around doing nothing anyway so at least they’re inflation-proofed if I hold them in gold instead.

  9. Tim,

    I agree with you that a Robin Hood Tax would not work, (because IMO, it requires international agreement, which is not forthcoming), but there is no reason why all financial transactions need be taxed.

    Also, I agree that such a tax would make financial markets less efficient, but then again, so does all tax. It’s a question of where it can do least harm. If the tax raised were used to reduce taxes elsewhere, that might be better.

    I also don’t think you have demonstrated how the banks would be able to pass on all the tax to the ordinary consumer, especially where they are acting on their own account, so I am still unsure of the validity of that point.

    I’d be very interested in any response you may have.

    Kind regards

    Nick

    Tim adds: The banks aren’t “passing on” the tax. As an example, FX markets.

    On a well traded pair, (say, $/€) spreads are around 0.5 basis points. Now someone comes in and taxes it at 5 basis points either side. Liquidity of course declines (should be able to work it out actually, when were spreads at 15 bps and what was volume then?) and spreads rise. Absolutely certainly, the spread won’t be 0.5 bps plus the tax. More like 10 bps plus the 10 bps tax.

    So, everyone changing money (meaning every consumer in the world, for we all consume items produced in other countries and thus, even if at a distance, make FX transfers) is now paying 20 bps instead of the previous 0.5 bps.

    The economic incidence of the tax is thus on consumers. Nothing to do with any plans by the banks…heck, even if the banks themselves think they are paying the tax, those wider margins have just put it onto consumers anyway.

    And there’s no guarantee that the burden on consumers won’t be greater than the amount actually raised in tax, either.

  10. Philip Scott Thomas

    Emil has touched on the real issue: Sorry, but when was finance unregulated?

    That is what we really need to challenge. Rather than countering current thought, we need to start saying, “OK, prove it.”

    That is to say, rather than countering such positions, we have to put then on the defensive and say, “OK, prove it.”

  11. Do these people really think you can tax away hundreds of billions of dollars without any negative impacts?

  12. Surreptitious Evil

    Ian – yes. Clearly most of them do.

    Some of the brighter ones, however, see the negative impacts as positives (because ‘rich’ people / capitalists / bankers / political hate object of choice will be hammered – they just haven’t realised just how dependent activities of ‘normal’ people are on the systems they are planning to meddle with.) Or they don’t care.

  13. “Or they don’t care.”

    They don’t care. They are all proto-Mugabes. So long as they live well everyone else can starve. If impoverishing a billion people will get them a new car, well, hard cheese on you billion losers.,

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