– Peer Steinbrück is Germany’s Minister of Finance.
by Peer Steinbrück
BERLIN – What went wrong with global financial markets? In a nutshell: the implosion of the brave new world of modern finance, and the economic crisis that followed, was rooted in the idea that free and unregulated capital markets always work for the public good, and are all that is needed for economic prosperity. The prologue to the crisis was a combination of cheap money, deregulation, and a race for returns by executives undeterred by the associated risks.
When the housing bubble burst and financial markets collapsed in its wake, growth slumped worldwide as never before since the Great Depression. GDP in the advanced economies is expected to shrink about 4% this year. Total financial-sector losses in the world’s advanced economies stand at around $1.6 trillion. The IMF estimates that losses of more than double this total are yet to come. Jobs will continue to be shed. Future generations are being saddled with an explosion of public debt. It will take years before we recover fully.
Despite all this pain, the remaining financial-market participants gained significant benefits from government bailouts. The G-20’s average headline support for the financial sector is more than 30% of GDP (including capital injections, guarantees, treasury lending and asset purchases, liquidity provision, and other central bank support). In our political response to this crisis, new forms of financing and fiscal burden-sharing will have to play a role. It is in this context that German Foreign Minister Frank-Walter Steinmeier and I have advanced our proposal for a global financial-transaction tax (FTT).
Remaining financial-market participants are not pulling their weight in this crisis. But “Main Street” sees what happens on Wall Street – and in London and Frankfurt. Citizens are aware of the hundreds of billions of euros and dollars that have been used to prop up banks. Bonus payments in the financial sector now go hand in glove with massive job losses in the real economy.
I came to realize that the political answer to this crisis must encompass more than improved regulatory regimes, risk-management strategies, and capital requirements. How governments handle the burden-sharing between Wall Street and Main Street will determine social cohesion, financial-market stability, and political leaders’ reputations for years to come.
Of course, compensation payments and fees for government guarantees are being levied on banks participating in taxpayer-funded stabilization schemes. But that’s not enough. Financial-market participants need to demonstrate that they understand their role in causing the crisis, and that they are willing to significantly contribute to preventing its recurrence.
A global financial-transaction tax (FTT), applied uniformly across the G-20 countries and covering all financial transactions at a very low rate, is the obvious instrument of choice to ensure that all financial-market participants contribute equally. Foreign Minister Steinmeier and I are suggesting that the G-20 take concrete steps toward implementing an FTT of 0.05% on all trades of financial products within their jurisdictions, regardless of whether these trades occur on an exchange. National governments could establish a personal allowance to exempt retail investors.
Based on calculations by the Austrian Institute of Economic Research, which studied the possible effects of general FTTs on behalf of the Austrian government, a global FTT of 0.05% could yield up to $690 billion per year, or about 1.4% of world GDP. Such a tax would not unduly burden financial-market participants, yet it would raise a significant amount of money to finance the costs of this crisis.
Financial-market participants are fighting tooth and nail not to pay their fair share, putting forward a number of arguments against an FTT to camouflage their resistance. Some of them argue that such a tax would lead to evasive reactions by market participants and have distorting effects. But such evasive actions by market participants would be almost impossible if the G-20 stood united.
Trading volume on G-20 and European Union exchanges accounts for roughly 97% of total global trading in exchange-traded equities, and about 94% of total volume in exchange-traded bonds. As the tax would be very low and would include transactions in exchange-based spot and derivatives markets and OTC markets, as well as all asset classes (equities, bonds, derivatives, and foreign exchange), there would not be much of a distorting effect, either. I don’t think such a tax would significantly impact market liquidity, but even if it did, a nudge towards buying and holding might not be such a bad thing.
The debate among finance ministers in London in the run-up to the G-20 meeting in Pittsburgh revealed a basic agreement that the burdens imposed by the financial crisis ought to be shared in a fair manner. At the G-20 summit, we should discuss what fair and equitable burden-sharing between taxpayers and financial-market participants should look like. German Chancellor Angela Merkel has registered initial support for such an idea from British Prime Minister Gordon Brown and President Nicolas Sarkozy of France. We are receiving a wave of interest and readiness for further dialogue on this topic within the EU and beyond.
There is a clear-cut case for a global FTT: it would be just, would do no harm, and would do a lot of good. If there is a better idea for fair burden-sharing between the world’s Main Streets and its Wall Streets, let’s hear it. If there isn’t, let’s have an FTT now.