The Corner

Framing the Narrative

Writing in the Financial Times over the weekend, John Dizard takes apart the Financial Transactions Tax now in the process of being introduced by eleven euro-zone countries.

The FTT is far more encompassing than other transaction taxes, such as value added tax, or the UK stamp tax. It will be applied on gross value at each stage of a financial transaction, through each intermediary, with the exception of official institutions and clearing houses, but including market makers. So if a US bank sells a French company bond to a UK insurer, and each, as is customary, uses a bond broker, the tax on the one transaction adds up to 60bp. With low overall rates created by worldwide quantitative easing, that is a substantial fraction of the yield on any fixed income instrument. The effect on liquidity is even worse for sovereign issues, since these are frequently repo-ed, and the repo-ing also attracts the tax.

There can be little question that this will reduce liquidity in corporate and sovereign bond markets, raising the interest rates that European companies and governments have to pay to finance themselves. It pushes the extension of credit away from market-based transactions, such as bonds, back on to the banks’ loan books, at a time when the authorities say they want to reduce bank leverage.

“None of this makes sense”, concludes Dizard, correctly. And, economically speaking, he is quite right. But, as he also clearly also appreciates, the FTT is not about economic logic — or even raising badly needed revenue — but, rather, something else:

The idea of an FTT that raises lots of money and punishes the financial sector [in the US and UK (check out its extraterritorial angle)] goes to the political authorities’ developing mythology that their activities at the national and European level had nothing to do with the sovereign debt, property or peripheral euro member consumer debt bubbles. It was all the financial intermediaries’ fault. In truth, there were a lot of financial people who got a lot of money for their complicity and silence in implementing unsound public policies. In the end, though, they were overpaid servants, not masters.

Indeed they were. The core of Europe’s economic woes is the euro, the unsound (to use Dizard’s  kindly adjective), reckless speculative experiment dreamt up by a European political and bureaucratic class that has yet to be held accountable for the disastrous consequences of this arrogant gamble – and has yet to admit that it did very much that was wrong

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