How Much Is Enough, Gordon Gekko?
Published in El Pais
(Spain) on 18 May 2010
by Antonio Roldán Monés (link to original)
Oliver Stone could just have well been inspired by the tribulations of John Paulson and his friends from Goldman Sachs for the sequel he has presented at Cannes: Wall Street, the Hollywood classic about the lights and shadows of the most seductive and dangerous street in America. It’s no coincidence that the latest scandal of the financial world, which has carried with it the prestige and treasures of Wall Street, coincides with the publication of the eagerly awaited IMF report: A Fair and Substantial Contribution by the Financial Sector.
With an eye to next June’s reunion of the G-20, the report has as an objective to offer fiscal formulas applicable at the global level so that “the financial sector internalizes the social costs of its activities.*” The justification is clear: the net cost of direct fiscal support to the financial sector in the G-20 countries has been, on average, 2.7 percent of the GDP; the risk of assumed guarantees, up to 25 percent of the GDP and the public debt is foreseen to increase 40 percent between 2008 and 2015.
The first conclusion to celebrate after the publication of the report is the shock that the crisis has provoked in the theoretical bases of the economic establishment, already predicted by the chief economist of the Fund, Olivier Blanchard, in rethinking macroeconomic policy. Recognizing that we ought to protect ourselves from future financial crisis presupposes the acceptance of the intrinsically unstable character of the financial markets, and as a result, the recognition of Hyman Minsky’s theories, ignored by the neoclassical orthodoxy for more than 50 years.
What does the IMF propose? Firstly, a Financial Stability Contribution (FSC), whose inspiration draws from Obama’s proposal to set fixed bank balances to pay for their recoveries and consists of an applied tax on the liabilities of all financial institutions. The collection of the tax will be destined for a “special recovery fund” and will initially have a fixed type that will gradually be adapted to the level of risk represented by each financial institution to the entire system. The IMF recommends setting the value of liabilities because that is the cost that governments would face in the case of bankruptcy of an institution. Security deposits and capital itself would be exempt, with the objective of discouraging excessive leverage.
Secondly, the IMF proposes a Financial Activity Tax (FAT), a suggestive analogy of the over-sized character of the financial world. The FAT would apply to profits and remunerations, and would most sensibly affect companies with the most earnings and substantial bonuses. This proposal is far from that established in the United Kingdom in 2009 in which variable remunerations were valued at 50 percent. It would be a permanent tax of a much lower sort (around 2 percent) that is already in practice in countries like Canada and Israel. With respect to the ideas on the FTT (Financial Transaction Tax, the current version of the Tobin tax, which taxes foreign exchange transactions) that enjoys the majority of the European Parliament’s support, among others, the report remains brief. Consider that the report will “not exclusively focus on core sources of financial instability” and that the FTT remains ruled out of this analysis.
These proposals contribute solidarity and fresh air to the debate. However, they ought to be plotted out carefully in order to be integrated into the new plans of financial regulation and will be most effective the more coordination there is. Given the level of international financial integration, any new tax or new regulation should guarantee a level playing field for all. In this sense, the flexibility offered by the IMF is positive: “Effective cooperation does not require full uniformity, but broad agreement on the principles, including the bases and minimum rates of the FSC and FAT.” This, we hope, will help bring governments together, always fearful of sacrificing their highly-prized sovereignty in the tax-regulation arena.
In the weeks to come, important decisions will converge in a new momentum of government procedure. To the recent European Commission proposals to advance on the unavoidable path of European economic union is added the most ambitious plan of the financial regulation reform in the history of the E.U., which will be voted on in the European Parliament before the end of the Spanish presidency. Likewise, after the health care reform battle on the other side of the Atlantic, Obama’s second crusade is clear: to achieve the largest transformation of the North American financial system since the Great Depression. The plan, over which multimillionaire pressures of the financial lobby will flutter, remains momentarily blocked by the Republicans in the Senate.
For now, it should be celebrated that the United States regulatory agency, the SEC, has had the courage to meddle in the Goldman Sachs empire, one of the largest beneficiaries of the rescues of 2008 with record-breaking earnings in 2009. We hope that it is the beginning of the end of the fictitious capitalism that was so well described by Gordon Gekko, the inhumane wizard of finances played by Michael Douglas in Wall Street: “The illusion has become real, and the more real it becomes, the more desperately they want it.” To which Charlie Sheen, his infuriated disciple Bud Fox, responded: “How much is enough, Gordon?”
Antonio Roldán Monés is an economic advisor in the European Parliament.
*Editor’s Note: Quote could not be verified.
With an eye to next June’s reunion of the G-20, the report has as an objective to offer fiscal formulas applicable at the global level so that “the financial sector internalizes the social costs of its activities.*” The justification is clear: the net cost of direct fiscal support to the financial sector in the G-20 countries has been, on average, 2.7 percent of the GDP; the risk of assumed guarantees, up to 25 percent of the GDP and the public debt is foreseen to increase 40 percent between 2008 and 2015.
The first conclusion to celebrate after the publication of the report is the shock that the crisis has provoked in the theoretical bases of the economic establishment, already predicted by the chief economist of the Fund, Olivier Blanchard, in rethinking macroeconomic policy. Recognizing that we ought to protect ourselves from future financial crisis presupposes the acceptance of the intrinsically unstable character of the financial markets, and as a result, the recognition of Hyman Minsky’s theories, ignored by the neoclassical orthodoxy for more than 50 years.
What does the IMF propose? Firstly, a Financial Stability Contribution (FSC), whose inspiration draws from Obama’s proposal to set fixed bank balances to pay for their recoveries and consists of an applied tax on the liabilities of all financial institutions. The collection of the tax will be destined for a “special recovery fund” and will initially have a fixed type that will gradually be adapted to the level of risk represented by each financial institution to the entire system. The IMF recommends setting the value of liabilities because that is the cost that governments would face in the case of bankruptcy of an institution. Security deposits and capital itself would be exempt, with the objective of discouraging excessive leverage.
Secondly, the IMF proposes a Financial Activity Tax (FAT), a suggestive analogy of the over-sized character of the financial world. The FAT would apply to profits and remunerations, and would most sensibly affect companies with the most earnings and substantial bonuses. This proposal is far from that established in the United Kingdom in 2009 in which variable remunerations were valued at 50 percent. It would be a permanent tax of a much lower sort (around 2 percent) that is already in practice in countries like Canada and Israel. With respect to the ideas on the FTT (Financial Transaction Tax, the current version of the Tobin tax, which taxes foreign exchange transactions) that enjoys the majority of the European Parliament’s support, among others, the report remains brief. Consider that the report will “not exclusively focus on core sources of financial instability” and that the FTT remains ruled out of this analysis.
These proposals contribute solidarity and fresh air to the debate. However, they ought to be plotted out carefully in order to be integrated into the new plans of financial regulation and will be most effective the more coordination there is. Given the level of international financial integration, any new tax or new regulation should guarantee a level playing field for all. In this sense, the flexibility offered by the IMF is positive: “Effective cooperation does not require full uniformity, but broad agreement on the principles, including the bases and minimum rates of the FSC and FAT.” This, we hope, will help bring governments together, always fearful of sacrificing their highly-prized sovereignty in the tax-regulation arena.
In the weeks to come, important decisions will converge in a new momentum of government procedure. To the recent European Commission proposals to advance on the unavoidable path of European economic union is added the most ambitious plan of the financial regulation reform in the history of the E.U., which will be voted on in the European Parliament before the end of the Spanish presidency. Likewise, after the health care reform battle on the other side of the Atlantic, Obama’s second crusade is clear: to achieve the largest transformation of the North American financial system since the Great Depression. The plan, over which multimillionaire pressures of the financial lobby will flutter, remains momentarily blocked by the Republicans in the Senate.
For now, it should be celebrated that the United States regulatory agency, the SEC, has had the courage to meddle in the Goldman Sachs empire, one of the largest beneficiaries of the rescues of 2008 with record-breaking earnings in 2009. We hope that it is the beginning of the end of the fictitious capitalism that was so well described by Gordon Gekko, the inhumane wizard of finances played by Michael Douglas in Wall Street: “The illusion has become real, and the more real it becomes, the more desperately they want it.” To which Charlie Sheen, his infuriated disciple Bud Fox, responded: “How much is enough, Gordon?”
Antonio Roldán Monés is an economic advisor in the European Parliament.
*Editor’s Note: Quote could not be verified.