Bank insurance levy gaining support

The BBC is reporting a story titled “Bank insurance levy gaining support at Davos“, noting that politicians and bankers have supported the idea for an insurance fund that would bail out banks instead of taxpayers.

While such a solution is ripe for abuse unless the fund is carefully drafted, and worse probably pointless unless the reserves are stored someplace unlikely to be affected by the next bust, in my opinion it is superior to the so-called Tobin tax. The devil of such insurance is in the details: Who pays? How much is paid and on what basis? How is the money paid out? Where is the money stored? How much interest is made on the insurance reserves – and where does the interest go? What would be the calculation of the reserves – would the reserves could cover all potential liabilities of all countries in a systemic meltdown?

The Tobin tax is proposed to be a small tariff imposed by states on currency transactions. While such a scheme could reduce the abuse of currency trading by large entities (which is indeed a problem), the Tobin tax causes me great concern. Such a scheme enables (notably large) states to violate the equivalent of the GATT principles with different levies on different currencies. For example, the U.S. and Euro could have near-liquid levies, but Jamaica – Euro transactions could have heavy currency levies. The GATT and WTO have been undoing – with great effort – 50 years of tariffs. The principles of most favoured nation and national treatment apply equally to currency transactions, and while we now take for granted the fair treatment of all states with fairly open liquidity of currency transactions, a Tobin tax threatens to undermine such fairness.

That being said, a levy on transactions only of sufficient gravity may be deter currency trading and concurrently not reduce to a mechanism of foreign policy and protectionism. However, in my opinion it would be impractical to impose such transactions, and such an imposition would give rise to a plethora of clever workarounds – such is the incentive of the clever currency trader. Regardless of the impositions, the Tobin tax risks becoming a dangerous tool of foreign policy, in my humble opinion.

As an alternative, it may be adequate to simply delay large transactions by a day or two (or even hours) – delay creates risk, and risk cuts into profit over a sufficiently long period of time. The risk caused by delay does not pain transactions of large amounts of currency that are incidental to other profits (i.e. the purchase and sale of goods and services), though the risk – and occasional unpredictable loss – would pain currency traders riding high on short-term, predictable spreads.