Evil speculators

I'll bet that it is possible to find people asserting that speculation was anathema to the solid Victorian capitalist investors, who put their money into ventures looking for long-term dividends and profits. Moreover, I'll bet they say that speculation was bad for economic growth and deprived solid industries of capital. It would be dangerous for me to assign a political colour to that opinion, not least because anti-speculator populism can be found throughout the political spectrum.

Many Victorian investors, of course, were long-term in their point of view, and that investment theory has echoes in my own approach to investing which emphasises what one might term a 'get rich slowly' attitude: buy shares in good, reliable companies paying a decent dividend and wait for the money to roll in. Nevertheless, it is amusing to read the following conclusion of a review of investment in late Victorian mining stocks, given the evils which are laid at the door of modern speculators.

There is clear evidence in the mining sectors that as the metropolitan capital market emerged as a national and international force in the late nineteenth century, many of its leading players were more interested in the short-term manipulation of wealth, through speculation and share-dealing, than in long-term wealth creation, through careful investment in legitimate enterprise. (p. 731)

Truly, there is nothing new under the sun! Speculation has been in the capital markets for as long as they have existed (of course, the South Sea Bubble proves this amply well), and far from ruining us it appears to have been helpful. Certainly, it did no lasting harm to our industrial prospects:

Undoubtedly, far more money was lost in this [speculative] market than ever was made from it, but it was not necessarily lost to the industry. (p. 723, emph. orig.)

Speculators were, and remain, an important part of a well-functioning market for getting capital to enterprises. Mind you, as the latter quote makes clear, you have to be foolhardy to try it, but be glad! there is a market even for fools. For every so often, the speculator hits on a decent proposition and makes a small fortune. After all, this is pretty much the only way that speculators can be encouraged to enter the market; and without the speculator, far fewer investment propositions would be funded than are. We would have far fewer success stories without speculators and venture capitalists, and the stories of failure which accompany them are necessary by-products of the experimental laboratory which is the capital market.

So next time you read populist of left or of right bashing speculators for doing the economy down, remember: they may be fools, but they're the sort of fools we need.

Quotes come from "Segmented Capital Markets and Patterns of Investment in Late Victorian Britain: Evidence from the Non-Ferrous Mining Industry", Burt, R: Econ. Hist. Rev., 51/4 Nov. 1998, pp. 709–733. (link)

The liberal editors at the Guardian

The other day, the Guardian ran a piece by Ha-Joon Chang and Duncan Green, arguing for the extremely bad idea of a financial transaction tax, and claiming that it is 'obviously' the right thing to do (link). The first comment below the line came from a commenter called SoundMoney, who raised some very powerful points. I shall replicate them in a moment, but for the moment, consider this. One of the commenters responded, saying

@SoundMoney

Thanks for that. It's good to see the counter-argument developed.

Hopefully an advocate of a FTT will respond to you at some point.

The response from the Guardian has been to make SoundMoney's comment to read, 'This comment was removed by a moderator because it didn't abide by our community standards. Replies may also be deleted. For more detail see our FAQs.' Comment is free?

For the record, here is a duplicate of the original comment, reposted later (src). It is rather baffling to me as to which community standards it breached. I assume, for the sake of charity, that the Guardian does not think disagreeing forcefully, with argument and reason, are breaches of community standards. It's worth reading and bearing in mind, since this idea still maintains some sort of zombified existence in the weirder fringes of leftonomics.

This argument is flawed beyond all reason. The two "main" objections you cite are minor ones. Complexity is indeed a non-issue.

Mobility of capital is a serious matter - not least because Obama has said America will have nothing to do with it. One major centre opting out will attract funds from all around the world. [The Glass Steagall Act post the Great Depression severely damaged New York as a financial centre and handed global dominance to London, where it remains. Food for thought for anyone crying "break up the banks"].

The remaining objections to a Tobin tax are:

1. It will raise nothing. Those millions of transactions per minute are generally computer generated - moving £1m from A to B overnight in search of 12p interest, then back again. A Tobin tax would take £500 on the move to B and £500 on the move back to A. So the transactions will never happen. And some retail depositors somewhere will lose 12p.

2. Whatever it does raise will be easily avoidable and/or will impact adversely on less sophisticated bank customers. A tax is a tax: it's not free money. Depositors will pay. The rich won't pay it; the small savers unable to arrange their affairs to avoid it will. It will increase inequity. It is, in fact, a Sheriff of Nottingham tax.

3. That bank paying an extra 12p overnight - it's offering it because it needs to borrow inter-bank funds. All banks do this to maintain liquidity: they can never guess with 100% accuracy how much cash to hold to meet expected withdrawals. Taxing the mechanism whereby banks maintain liquidity is dangerous and possibly suicidal. Lack of liquidity, more than lack of assets, is pretty much what nearly drove the entire banking system over a cliff in 2008. It is insane to increase the probability of a recurrence.

4. If a Tobin tax is introduced, arguably the Chancellor should in fairness repeal his new "windfall tax" bank levy (taxing bank profits being a far more sensible way of proceeding - and we have done so). You are not going to convince any sane Chancellor apprised of the facts that a Tobin tax will raise more money. Why throw away something workable, predictable, and only just introduced in favour of a chimera which will probably raise next to nothing?

5. There is no international body capable of requiring 200 nation states to introduce it. Those that opt out will perceive (probably rightly) some competitive advantage to be gained from not joining in. If you doubt that, consider the fact that there are more hedge funds in the Channel Islands than London. Regardless of any change of heart by America (none is now an offer), enough places will opt out to make avoidance easy and legal. My own self-administered pension fund can be offshored in a day.

6. The loss of business from Tobin-taxed Britain to opt-out jurisdictions will threaten Britain's pre-eminence in financial services, our largest source of taxes after retail, and threaten the 2,000,000 people whose jobs the sector maintains.

7. The "goodies for the developing world" argument is bullshit. The tax will go to national government who choose to impose it. Those governments may or may not modify their aid spending, but any decision to do so will have nothing to do with a Tobin tax. Very few transactions now take place in the developing world, so their own governments will gain little or nothing from the tax should they introduce it. Many developing countries do business in the major western financial markets however. They too will be victims of the tax. They will be funding, say, the UK's health service. Again, for them, it's a Sheriff of Nottingham tax; a (typical) smash-and-grab raid by the rapacious west on their fragile economies.

Now can we please lay this nonsense to rest?

Labour: only 95% as evil as the Tories

It being May, there are council elections. It's the turn of the city of my choice to go through the rather bizarre ritual of seeing about a third of us vote in a popularity contest between the national parties, and locally, Labour is doing its level best to make the contest as national-popularity-ish as possible.

York is a very Lib Dem kind of a place, even though it doesn't have a Lib Dem MP. (York Outer was, supposedly, a hypothetical new marginal; but somehow the Lib Dems threw it away. It's probably a Zionist conspiracy [ref].) Notwithstanding, the outskirts are classic Lib Dem/Tory, while the inner bit is solidly Labour, as seen in the MPs for the respective constituencies. The local council is minority Lib Dem. This, of course, is where Labour as the second party comes in.

The great charge Labour wish to make stick is £21mn of cuts to local services, allegedly agreed by the Lib Dems and Tories, who between them just about have enough votes to keep control of the council. (York's situation is almost an exact mirror of Westminster's: the Lib Dems are the powerful force, with the Tories as a small supporting act.) That sounds like a lot, £21mn. Actually, it's about 5% of the 2009–10 expenditure (pdf). And if the council hadn't been running a surplus, the cuts would have been worse.

So that's the context. What is Labour's great claim for votes? They will rescue £1mn of York's public services. Or, put another way, Labour would cut £20mn of public services. In the context of a £444mn budget, that's scarcely worth sneezing over. But the problem is deeper than that. For York Labour want us to believe that cuts are wicked, evil, nasty things, and they'd make £20mn of them. Now, I don't agree with Labour's characterisation of public spending cuts. But let's take it at face value: York Labour's advertisement is that they are only 95% as evil as the Lib Dems and Tories.

Me? Well, as I say, I don't buy Labour's approach to the public finances. But even if I did, I'd have to wonder why I'd bother getting semi-skimmed when full-fat evil was on offer.