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Saturday, 1 October 2011

The Importance of the Lottery

Unless a person has an outstanding artistic or sporting talent - which can bring about a meteoric rise to the Premier League, the Top Ten or the Turner/Booker Prize - the chances of anyone gaining significant net wealth [or even a high income] from conscientious work are negligible. Hence tens of millions of people participate in the National Lottery, which has enabled thousands to fulfil or to exceed their dreams and is seen by the unsuccessful millions as the only way out of the trivial round of work or the dire attempt to remain optimistically human in receipt of benefits. The apparently-conspicuous exception to this rule of modern life, which has been selected for vituperation from almost all other segments of the population, is so-called 'banking' where bonuses and incentive payments, rather than conventional salary-and-pension packages, have provided a minority of staff the 'telephone number' annual remuneration to which so much publicity has been given
Most of the activities for which the huge incentive payments are made are various forms of gambling: using cyberspace betting-slips known as derivatives, options, futures and swaps. The players in these heady games do not bet with their own money. The bets are mostly entered 'on tick' in the names of the employing firms and they can be supported by the funds in the 'real-world' sections of the banks; and in the pension funds, sovereign investment funds and other sources from which the City derives its 'working capital'. Although the punters are awarded their bonuses according to the reported profitability of their punts, they are actually paid in deferred shares in their employer company [which dilutes the value of all pre-existing shareholders' assets] and in cash which is drawn from the profits that are taken in worldly money by the real-world banking business.
No betting tax is levied on these activities in which trillions of dollarsworth of bets are placed [and accepted]: while people of modest means must pay the appropriate duty on their lottery tickets and all their other bets in which they risk their own funds.
The complex of activities whose over-development enabled the financial crash of 2007-8 to take place has been described as 'casino banking', and regulators all over the world have belatedly acknowledged this simple fact. In the United Kingdom the Vickers Committee was established in 2010 to advise the government on what preventative measures would protect real-world, economically-necessary banking from the other, higher-risk activities that proved so ruinous.

 To nobody's surprise the committee has proposed the separation of essential banking from the other activities that financial services complex organisations undertake. This can be achieved by the separation of the two streams of business into separate companies, but most commentators expect a less dramatic solution whereby the different segments of a complex financial services organisation each perform in their own specific trading areas, with each trading unit sufficiently capitalised so that it will not become a drain on the reserves of the other sectors of the company.
This is a necessary first step towards ensuring that no bank would ever again be too complex to be transparent or too big to  be allowed to fail. But such separation is not enough to overcome the inherent risk of contagion from one unit to the others within a company, and thence on to other companies.
And even before the government has announced any programme for the implementation [or partial implementation] of the Vickers recommendations the focus of bankers' and regulators' attention is being diverted by the proposal from the European Union that there should be a tax on all banking transactions - in the widest sense of that term, so that derivatives and futures trade would be levied at the same rate as retail banking transactions, mortgage contracts and initial share sales. If such a tax were imposed throughout the European Union, including the City of London, it is believed that Europe would loose a massive amount of trade to jurisdictions where the tax was not imposed. The attention of the UK government immediately focussed on how to counteract this threat to the volume and profitability of the sector, with a consequential weakening of the focus on separation of 'real' and 'casino' activities.

A transaction tax on financial transactions was first proposed many decades ago by the US Economist Tobin, who suggested that the increasing volume of foreign-exchange transactions could be curbed by a small tax on each transaction. Putting a restraint on currency transactions was popular among governments and regulators because money-trading was increasingly being undertaken as a punt for profit rather than to make currencies available to 'real' businesses to fund their purchases. To impose such a tax on all finance transactions would make access to banking business and mortgages more costly for ordinary people and small businesses: which could push some of them into insolvency in the hard times that followed the credit crunch.
A Tobin tax could be appropriate for 'inessential' foreign-exchange trading: were it possible practicably to differentiate transactions that supported the real economy from 'casino transactions'. It is not possible to do this simply and clearly.

Another, more realistic, possibility is to charge the ordinary rate of betting tax on all categories of casino transactions [derivatives, swaps, futures, etc]. Betting tax has the huge advantage that it is payable when the contract is made, so the state would receive the revenue regardless of the outcome from the deal. It could be provided in the regulations that if the parties to any transaction could demonstrate that it genuinely enabled a real-world non-financial firm to spread properly-identified risk, the contract could then be exempted from betting tax. These cases could be dealt with retrospectively, with the tax repaid after any successful appeal.. This proposal directly tackles the need to differentiate the casino from real-world banking, and to discourage excess. So I will refer to it on future occasions

1 comment:

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