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Sunday, 14 May 2017

'Robin Hood' Taxes and Bitcoin

Yesterday, the Labour Party added to their repertoire for the coming election the concept of a 'Robin Hood' tax; so-called because it can be represented as a tax on 'the rich' [financial institutions] to aid 'the poor' [HM Treasury]. It was explained by the BBC as a tax on bonds and on complex financial instruments, such as those called 'derivatives', and it was projected that at the outset it would raise over £20 billion for the national budget.

If any such tax were to be introduced, we can be certain that it would regularly be increased both in its rate and in its extent; as has happened with Insurance Premium Tax. During this election campaign, some Labour figures have suggested that Insurance Premium Tax should be increased on private health insurance premiums, to provide funds either for the NHS or for social care. The direction of travel is obvious, when any new tax is dreamed up.

The original concept that gave rise to the idea of 'Robin Hood' taxes came from the American Economist James Tobin, who proposed that there should be a tax [perhaps of 1%] on 'spot' trades in currencies. Thus if a trader went into the market and swapped dollars for yen, either the seller or the buyer would have to pay the 1% tax: and thereby disclose the transaction formally to the authorities and accept the liability for the tax to be paid. The spot trade in currencies was seen as potentially disruptive to business generally; and potentially disastrous to a government's management of its economy. The reality of this threat was made clear when Britain was forced out of the ERM [the European Monetary Regime, which was the precursor to the Euro] by the weight of speculation against the pound in international money-markets. Thus it was shown that the market could be more powerful than the government that supposedly controlled the world's most sophisticated financial system.

The speculative international monetary system has never been brought under control; and it almost overwhelmed the global economy in the 'crash' of 2007-8. To prevent that collapse from becoming fatal, the US, UK and other major governments whose banking systems were closest to bankruptcy in effect nationalised the banks' debts, putting an indefinitely great taxpayer guarantee behind all the banks' contracts with each other and with their customers - except in the cases of Bear Stearns, which the US authorities steered into the arms of a much bigger bank that was rich enough to absorb its liabilities [and, eventually, to cash in on them], and Lehman Brothers which was allowed to fail but which over the next decade was revealed to have had enough assets to meet all its liabilities [when they were unscrambled slowly over the next ten years; though they could not meet their immediate obligations on the day before they were declared to have failed].

Since 2008 there have been recurrent proposals, especially within European Union institutions, for a sort of Tobin Tax to be imposed on various types of transaction. Often these have been mooted by continental interests that are envious of the London market in finance.

I have several times advocated that the Tobin concept be developed along a different route, to mark out clearly the difference between banking [the essential function of conserving customers' money, and lending it judiciously to worthy borrowers] and betting [which everyone understands, in essentials; it is always a voluntary action in which a person or a firm stakes money in the hope of making more money: while accepting the downside risk that the stake - at least - may be forfeit if the bet fails].

Despite the near-meltdown of the entire legitimate banking system in 2008, regulators have continually backed off making this distinction, between banking and betting; which I believe is fundamental to understanding and controlling high finance. Real bankers accept savings into their safe [state-guaranteed] institutions and lend a permitted proportion of the deposits to worthy borrowers. That has been the essential mechanism for funding trade and industry for millennia, and it remains so today.

But betting is mere speculation, and the daily global turnover of that business now greatly exceeds legitimate banking. The most advanced and incomprehensible class of bets, as far as the general public is concerned, is called 'derivatives': they are simply bets: however complex may be the data on which the bet is formed and the contract in which it is expressed. Other forms of bets are many kinds of 'swaps', most 'futures' and 'spread bets' and 'options'. Very clever men and women have devised an impressive range of bets, and some of them can be dressed up as means by which the risks facing a real-world business [such as the basic rate of interest changing unexpectedly or a sudden and dramatic change in the price of some essential commodity like oil or iron] can be compensated to a greater or lesser extent. Sensible regulation can be framed to distinguish genuinely prudential purchases of options or futures by firms that function in the material economy from merely-financial bets. Both are classes of bets, but it would be possible to classify them such that different rates of betting-tax would be applied.

The segment of the financial market that Tobin would target first with his tax is the trade in currencies. Now, in a world context that the good professor could not have envisaged, computers responding to highly sophisticated algorithms trade billions of dollarsworth of imaginary currencies every minute; and even a 1% tax on those transactions [if it could be levied] would fund all the national budgets in the world. But if any national authority demanded 1% of the notional transactions, to be paid on a specific date in a specific currency, that would kill the business stone dead; because collecting 'real' money that features in a state's banking statistics in respect of fanciful transactions in the cybersphere would require a link to be opened up between two universes that cannot be conjoined. The real world remains under threat for so long as the megabetting industry masquerades as part of 'finance' [or even, in some cases, as 'banking']. The financial establishment would act quickly and effectively to see off any proposal for a UK Robin Hood tax, however big a parliamentary majority Corbyn's people could round up from their flying pigs.

Meanwhile, a global attack of 'malware' [aka ransomware'] that locks up computer files against a demand for ransom, has affected over 100 countries, including much of the NHS in this country. The ransom demands ask for payment in bitcoin. Bitcoin is a wholly pernicious invention of unnamed computing geniuses, which purports to be a form of money that can exist without the sanction of any government and without control by any central bank [or an international agency such as the International Monetary Fund]. From the day it was established, it has been agonisingly obvious that it is perfect for many sorts of criminal settlements. Nevertheless, some licensed bankers and traders have seen themselves being able to add to their business portfolios by trading in bitcoin; and hitherto they have been able to persuade their regulators and the central banks to let bitcoin payments develop. The catastrophic criminality that has been evident in the past 24 hours must, surely, set the thing in true perspective. All use of bitcoin - or of any clone or derivative of bitcoin - must be criminalised

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