A Wee Question About Financial Transaction Taxes

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.


Financial transaction taxes are getting some attention again, and Megan McArdle is against them:

Myself, I don’t really see the charms. Tiny taxes on high-volume transactions raise a lot of money, but they also cost money to record, collect, and audit, which is why few jurisdictions have 0.25% sales taxes. And I’m not clear on what problem taxing financial transactions is supposed to solve. It’s not as if our woes were caused by legions of high-frequency traders wrecking the markets with their tiny, tiny spreads.

I’m going to take this opportunity to write something potentially really ignorant. But hey — how else do you learn new things aside from putting yourself in a position to get viciously called an idiot in the blogosphere?

So then: when we talk about FTTs, the usual topic is, as Megan implies, high-frequency traders who make money by executing millions of computerized trades that each produce only a tiny profit. Introduce an FTT and they’d become unprofitable and high-frequency trading might go away. I’m perfectly fine with this, since I’m on record as having a dim view of high-frequency trading, but by itself I agree that it isn’t enough of a reason to mount an FTT. Besides, if we really think high-frequency trading is dangerous, we should just ban it and move on.

So here comes the possibly ignorant part. One of the most dangerous aspects of the financial system of the aughts — not the only one, but one of them — came from the virtually frictionless nature of modern money flows. That prompted traders to follow a strategy similar to the one that blew up Long Term Capital Management in the 90s: seek out trades that are only barely profitable, and then lever them up enormously. Even a spread of a tenth of a percent is a money spinner if you can lever it up 30:1 or 100:1 with mountains of cheap money.

My question, then, is whether an FTT would slow this down. Basically, any trade with a spread of less than 0.25% would automatically be unprofitable. There would still be plenty of marginally profitable trades, of course, but they’d tend to be a little less exotic. Lots of people can spot an arbitrage opportunity of 0.4%, so they wouldn’t last long. The real problem lies in the clever, minuscule trades that stay hidden long enough to be profitable at high levels of leverage but that blow up spectacularly when they go bad. If we had fewer of them, the entire system would be a little more stable.

I can think of several reasons why I might be wrong about this. I don’t know, for example, how this would affect big banks, or how it would affect the construction of rocket-science securities like the subprime CDOs that brought down Wall Street in 2008. Maybe the small-spread trades I’m thinking of aren’t really as widespread as I think. Or maybe the danger would simply get transferred wholesale from trades with 0.1% spreads to trades with 0.35% spreads.

Hopefully someone who actually knows how high finance works will see this and provide some kind of definitive answer. I’ve long thought that aside from limiting leverage, which is clearly Job 1 for a more stable financial system, we also need to throw just a little bit of sand in the gears and slow things down slightly. Capital controls, for example, might be a good idea for a lot of countries if they’re kept small: just enough to prevent massive hot money flows but not big enough to seriously affect capital formation. An FTT seems like something along these lines.

But I’m open to being swatted down. I’m looking at you, Economics of Contempt.

We've never been very good at being conservative.

And usually, that serves us well in doing the ambitious, hard-hitting journalism that you turn to Mother Jones for. But it also means we can't afford to come up short when it comes to scratching together the funds it takes to keep our team firing on all cylinders, and the truth is, we finished our budgeting cycle on June 30 about $100,000 short of our online goal.

This is no time to come up short. It's time to fight like hell, as our namesake would tell us to do, for a democracy where minority rule cannot impose an extreme agenda, where facts matter, and where accountability has a chance at the polls and in the press. If you value our reporting and you can right now, please help us dig out of the $100,000 hole we're starting our new budgeting cycle in with an always-needed and always-appreciated donation today.

payment methods

We've never been very good at being conservative.

And usually, that serves us well in doing the ambitious, hard-hitting journalism that you turn to Mother Jones for. But it also means we can't afford to come up short when it comes to scratching together the funds it takes to keep our team firing on all cylinders, and the truth is, we finished our budgeting cycle on June 30 about $100,000 short of our online goal.

This is no time to come up short. It's time to fight like hell, as our namesake would tell us to do, for a democracy where minority rule cannot impose an extreme agenda, where facts matter, and where accountability has a chance at the polls and in the press. If you value our reporting and you can right now, please help us dig out of the $100,000 hole we're starting our new budgeting cycle in with an always-needed and always-appreciated donation today.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate