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Public Sector Informant : PSI - September
[SEPTEMBER 2010] THE PUBLIC SECTOR INFORMANT 15 first Tuesday of the month STAY INFORMED . . . Market inefficiency: Super-fast computer-based trading can cause prices to deviate substantially from what they would be if trading was based on economic fundamentals. taxes fair share. This matters on equity grounds, but it matters more on efficiency grounds. If there is a sector of the economy that pays too little tax, resources will logically flow into it. And this is what we have seen. The assets under the management of hedge funds in Australia increased 30-fold in five years earlier this decade. Savings that could be put to productive use are in large measure going into socially useless and purely speculative trading. The standard counter-argument is that these trades provide liquidity to the market and arbitrage out price differences; in fact, most markets have excess liquidity and these trades are far more likely to generate price inaccuracies than iron out differences. Financial markets are out of kilter with the real economy. Australia's financial markets turnover is 81 times greater than our real economic turn- over (our gross domestic product). Before the global financial crisis, the ratio was 98 times. Speculation has become the dominant form of market activity and works against productive investment. Short-term speculation distorts and damages the critical price-setting function of markets, and it consumes financial assets that could be invested long-term in the real economy. The idea that we need to reweight our markets in favour of longer-term investment and away from rewarding short-term speculation is not a radical one. Last year, the Aspen Institute in the US issued a paper, Overcoming Short- termism, signed by a who's who of corporate America, including Warren Buffett and Peter Peterson, together with the former chairs of IBM, Goldman Sachs and others. As Buffet has pointed out, the globalisation of finance has benefited the financial markets far more than anyone else. The incredible rise in profitability of investment banks, hedge funds and private equity funds has translated into enormous political power, opposed to any regulation of the markets from which they profit so handsomely. We need to reclaim those markets for their real functions: to serve the real economy that provides our livelihoods. The fact is that a transactions tax, or other measures designed to get markets trading on fundamentals, will only be introduced when there's a strong groundswell of public opin- ion in favour of action. At the moment, I suspect, global public opinion is insufficiently strong for the G20 nations to act. The politics of the bank levy are different, however, and relatively clear. Although European Union nations are divided on a transactions tax, they all support a bank levy. Britain is reportedly drafting bank levy legislation but its coalition Government appears to have dropped the idea of a transactions tax, which was part of the Liberal Democrats' policy platform before the election. The US Administration supports a bank levy but is silent on a transac- tions tax. Indeed, if international media reports are correct, the only voices consistently raised against a bank levy are those of Canada, Russia and Australia, which argue it would penalise the banks of nations who came through the financial crisis unscathed. If our government is arguing against the bank levy in international fora, it is wrong to do so. It indicates the political influence of the big four banks rather than good policy. The bank guarantee charge earned the government a large amount of money, far more than Treasury had anticipated, though it will not dis- close exactly how much. As the banks wean themselves off using the formal guarantee of their borrowings, that revenue is declining, rapidly. But an informal guarantee remains in place, as it is manifestly clear that no Australian federal government, of either persuasion, would allow a major bank to fail in this country. If Australian taxpayers are, in effect, going to stand behind the banks, strengthening the sector's credibility in the marketplace, they should be compensated for doing so. The issue is not whether a levy would penalise banks that navigated the shoals of the financial crisis. The issue is that we, through our govern- ments, confer an extraordinary ben- efit on a company when we grant it a banking licence. We confer an even greater benefit when we imply that the public purse will be a backstop if the bank should fail. And so we are entitled to ask for fair compensation for these massive benefits conferred upon one sector of industry. A bank levy would be that compensation. The Australian government needs to reverse its opposition to the idea, and now. And then it should throw its weight behind the campaign for a financial transactions tax. Ross Buckley is professor of international finance law at the University of NSW. This article first appeared in Inside Story (inside.org.au). email@example.com
PSI - October