Dear SAP Banking community members.
Apparently, some political leaders are starting to be aware that Capital Optimization is the most critical activity and try to reinforce new regulations against speculation.
Playing their roles as European leaders, Mrs. Angela Merkel and Mr. Nicolas Sarkozy are pushing for the implementation of a new Tax penalizing short-term speculative investments in foreign currency.
But calling this Tax something new is, at least, an irony. In fact this kind of tax was named Tobin Tax after the economist James Tobin who analyzed the risk of foreign currency speculation after the end of the Bretton Woods System on the 70’s.
Some years later Tobin described this anti-speculation tax with the following words;
“The basic idea of this tax is the following; at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets”
But in fact, concerns about inefficient allocation of capital by speculators are much older. One of the first economists in describing this concern was John Maynard Keynes, one of the parents of the New Deal which took the world out of the 30’s Great Depression. He was very aware that in not growing economies the effects of speculative investments are very dangerous.
I cannot deny that the introduction of this Tax would potentially have two “positive” effects.
1) Reduction of short-term speculative movements on foreign currencies, as many of them would become unprofitable with the introduction of the Tobin Tax.
2) Increase public revenues in a historical moment in which developed countries are confronting huge solvency issues, represented by falling rating of Government debt.
But in my opinion, reality of current economic world is more complex and the effects of the Tobin Tax will be very limited, at least under its current proposed configuration.
- First, we’re in a global world, and speculators can easily transfer their operations to countries in which this tax is not implemented. It’s not by chance that British Prime Minister David Cameron has firmly opposed to the implementation of the Tobin Tax.
- Second, the proposed Tax will have a linear effect, penalizing both, speculative and non-speculative investments. Probably, penalizing investments is not the best idea on the current economic environment.
We shouldn’t forget that this is a systemic crisis and the exit strategy of a systemic crisis requires changing and reshaping the system with the implementation of new business models. By the way, those who must know, they do know this; look at the title of this year World Economic Annual Meeting in Davos http://www.weforum.org/events/world-economic-forum-annual-meeting-2012
We’ve seen recently several examples of new models for Capital Optimization in this forum (P2P Foreign Exchange hedging with Kantox, Global Assets and Liabilities Management with In-House Banking, Porfolio Optimization with In-Memory Computing/HANA).
In my opinion all of them represent more efficient methods of Capital Allocation than the implementation of a Foreign Currency Investment Tax, but implementing new business models is an slow process, that’s why we are in a systemic crisis.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
Apparently, some political leaders are starting to be aware that Capital Optimization is the most critical activity and try to reinforce new regulations against speculation.
Playing their roles as European leaders, Mrs. Angela Merkel and Mr. Nicolas Sarkozy are pushing for the implementation of a new Tax penalizing short-term speculative investments in foreign currency.
But calling this Tax something new is, at least, an irony. In fact this kind of tax was named Tobin Tax after the economist James Tobin who analyzed the risk of foreign currency speculation after the end of the Bretton Woods System on the 70’s.
Some years later Tobin described this anti-speculation tax with the following words;
“The basic idea of this tax is the following; at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets”
But in fact, concerns about inefficient allocation of capital by speculators are much older. One of the first economists in describing this concern was John Maynard Keynes, one of the parents of the New Deal which took the world out of the 30’s Great Depression. He was very aware that in not growing economies the effects of speculative investments are very dangerous.
I cannot deny that the introduction of this Tax would potentially have two “positive” effects.
1) Reduction of short-term speculative movements on foreign currencies, as many of them would become unprofitable with the introduction of the Tobin Tax.
2) Increase public revenues in a historical moment in which developed countries are confronting huge solvency issues, represented by falling rating of Government debt.
But in my opinion, reality of current economic world is more complex and the effects of the Tobin Tax will be very limited, at least under its current proposed configuration.
- First, we’re in a global world, and speculators can easily transfer their operations to countries in which this tax is not implemented. It’s not by chance that British Prime Minister David Cameron has firmly opposed to the implementation of the Tobin Tax.
- Second, the proposed Tax will have a linear effect, penalizing both, speculative and non-speculative investments. Probably, penalizing investments is not the best idea on the current economic environment.
We shouldn’t forget that this is a systemic crisis and the exit strategy of a systemic crisis requires changing and reshaping the system with the implementation of new business models. By the way, those who must know, they do know this; look at the title of this year World Economic Annual Meeting in Davos http://www.weforum.org/events/world-economic-forum-annual-meeting-2012
We’ve seen recently several examples of new models for Capital Optimization in this forum (P2P Foreign Exchange hedging with Kantox, Global Assets and Liabilities Management with In-House Banking, Porfolio Optimization with In-Memory Computing/HANA).
In my opinion all of them represent more efficient methods of Capital Allocation than the implementation of a Foreign Currency Investment Tax, but implementing new business models is an slow process, that’s why we are in a systemic crisis.
Looking forward to read your opinions.
Kindest Regards.
Ferran.
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