We know that a large number of people would like to impose a financial transactions tax in order to prevent something like the Great Financial Crash ever happening again. At least they say that's why they would like to impose such a tax. The problem is, at least as far as the UK is concerned, as the various reports come out about what actually happened and who is to blame, the evidence that an FTT would have prevented matters is vanishing.
The first story has been told in pedantic detail by the Financial Services Authority in its 450-page report on the failure of RBS. Today, the FSA released the first chapter of the second tale and painted an even more damning picture.
HBOS’s mistakes were simpler than the complicated books of toxic assets and acquisition errors at RBS. HBOS failed because it had terrible corporate governance, a neutered risk control function, and an odd personality cult around a rather quiet Scottish banker.
The RBS failure was indeed in part because of "toxic assets". But these were not frequently traded exotica at all and would thus be entirely unaffected by an FTT. Similarly with the ABN Amro takeover: they simply did it at the top of the market and paid too much. This is not something an FTT would cure.
This second, new, report on HBOS shows that the disaster happened through the commercial property division. This is simply plain vanilla lending to developers. It's an area that has caused problems to banks before (the secondary banking crisis of the early 70s was entirely due to this) and it will no doubt do so again. But given that such loans aren't traded an FTT will have no effect in this field either.
Of the others that went down, Northern Rock, as we've just heard for the government expects to just about squeak a profit from the rescue, wasn't even insolvent, it was merely illiquid. It was simply a run on the wholesale funding of the ban that did it: again, not something likely to be prevented by an FTT. Dunfermline Building Society showed that, as it was a mutual, this wasn't all about shareholders either when it went bust over commercial property loans.
The evidence from the UK is therefore that it wasn't foreign exchange, derivatives, options, futures, "excessive" trading, High Frequency Trading, in fact, it wasn't trading at all that brought down those banks which did fail.
In fact, it wasn't even investment banks which failed, it was commercial banks.
Yet the solution proposed is that investment banks and their activities should be taxed to make sure that it doesn't happen again. That the entirely blameless foreign exchange, derivatives, options, futures, "excessive" trading, High Frequency Trading, should all be taxed when none of them had anything to do with the Crash at all.
But why?
All I can think of is that no good crisis should be allowed to go to waste and as there are some who just don't like markets, trading or investment banking now's a great time to cripple such markets through taxation. It doesn't actually have to work, doesn't have to achieve anything useful, but, you know, markets are bad M'Kay?
