G20 Breakdown

Proponents of the global bank levy tax (distinct from the Financial Transaction Tax or ‘Robin Hood Tax’-background here-which was already off the G20 table) suffered a major setback this past weekend in Busan, South Korea. The G20 finance ministers decided to drop the tax, under pressure from its chief opponent, the Canadian government, as well as Australia, Japan, and Brazil.  The decision was based on the usual argument that the levy would punish banks that had acted responsibly, and that other mechanisms such as increased capital requirements were more appropriate for dealing with future bank crises.

The pronouncement does not preclude countries from creating their own bank tax, and the G20 has stated that it is even willing to provide institutional support for countries to do so. However, without the buy-in across the board that a G20 agreement would have provided, it is difficult to see how a bank tax within one nation could work.  If taxed with in a given country, banks would have an incentive to begin shifting investment towards those countries that rejected the tax.

Instead, the focus must continue to be on building the global tax across the G20.  It is possible it will be discussed at the November G20 meeting in South Korea, especially if, rather than folding from this setback, civil society continues to amp up the pressure.

Instead of accepting defeat, activists can use this time before the Seoul summit to clarify issues and address concerns that were raised in the past few of months. Public awareness of both the levy and the financial transaction tax has increased significantly, and it moved further up the G20 agenda than anyone could have imagined even a year ago. Though the bank tax has been dropped off the agenda for the Toronto summit, the fight will continue.

One additional thought, and this is all speculation.  It seems to me that the levy probably never had any chance of passing at the G20 meeting in Toronto, but that the debate served at least two purposes for the G20 leaders.

First, Canadian Prime Minister Stephen Harper can say he was a strong crusader for Canada, was up against much opposition, stuck to his principles, and then won against all odds!  The papers even wrote about it in this manner – as a victory for Canada [though it actually isn't].

Second, the UK and French governments, under great pressure from their electorate to do something about the banks (and dealing with a much stronger bank tax movement), can say they fought hard and fought to the wire, but were unable to convince enough countries to join them to get the bank tax going.  They look good, and can now get at the business at hand: gutting social spending and fighting deficits at all costs.  The UK’s David Cameron already began the process this week.

Again, this is speculation and I will dig for more info, but it makes some sense, no?

More bank tax background here

[Photo from: www.flickr.com/photos/oxfamsol/sets/72157623566580145/show]

G20 deficit cutting wrong approach to fix crisis

A major turn took place at the G20 finance ministers meeting in Busan, South Korea over the weekend, as the G20 reasserted deficit and spending reduction its top priority, marking the final step in the (re)triumph of neoliberalism as global economy’s modus operandi. Britain and Canada were the major proponents at the meeting of this deficit warrior approach to recovery while China has cautioned against too rapid an end to stimulus efforts.

This deficit reduction approach is extremely significant given that, following the economic crisis, the neoliberal model itself underwent an identity crisis, as many began to openly question the orthodoxy of deregulation, cutting spending and deficits at all costs, etc…   Even the most conservative governments, as a means to help build an economic recovery, advocated for fiscal stimulus (lower interest rates, increases in government spending to help bolster demand and reduce unemployment, etc…), and the G20s stimulus approach continued right up to April of this year, where  called for continued stimulus until the recovery becomes “more entrenched”.  With the G20 announcement, that approach appears to be over.

What is wrong with this switch to austerity?

There is an argument that this austerity is just bitter medicine that must be taken to cure the economy of its ills.   However, even if you are one to accept the idea that austerity is necessary at times to right the ship, Nobel economist Paul Krugman points out that this is clearly not one of those times.  The economy, though there are signs of recovery, is still depressed – bogged down by high unemployment in most of the largest economies, including the EU and the US.  And when the economy is depressed, slashing spending to reduce debt is both “an extremely costly and quite ineffective way to reduce future debt” because it depresses the economy even further and it reduces the tax dollars received (which could be used to pay down the debt in the future).

Krugman is not saying deficits should be ignored, just that it is wrong and counterproductive for deficits to be the sole focus.

Also, the austerity simply hurts poor (working or unwaged) and middle class people, and we can not lose sight of that. Having started with Greece, it seems that the plan is to go country by country, one-by-one, and force these measures which will diminish social programs, decimate the public sector and dramatically increase poverty and unemployment.

In fact, the G20 pointedly told indebted nations that they must ‘speed up’ their austerity drives.  And, just today, British PM David Cameron brought the point home, announcing his drive to cut the deficit in the UK through massive cuts.  He warned that Britain’s ‘whole way of life’ will change due to the most drastic public spending cuts in 20 years.

It is worth reflecting on the value an economic system that can continuously and callously demand more from its population, undermining their futures in the process, to pay for the sins of financiers whose risky speculation made them billions of dollars before the bubble burst.

Now it is on the people’s backs to clean up the mess.  It is post-crisis shock doctrine for all of us. A clear reason to challenge the G20 agenda.

[continued from Part I]

[PDF of full article]

Is Canada really an inspiration for the world’s troubled banks?

A great deal of Canada’s authority on these bank tax issues is based on the perception that the country’s traditional banking sector was able to withstand the financial crisis. The historical record is murkier – there is much more to the story than mainstream media accolades of bank prudence and wise Conservative government policy.

In the late 1990s (and again in the early part of the new millennium) the five Canadian banks aimed to merge into three institutions to obtain the capital base to compete internationally with banks such as Citigroup, UBS, and Royal Bank of Scotland. They hoped to enter the “major leagues” of investment banking and non-traditional speculative banking: the very markets that were at the heart of the crash. The banks were unsuccessful in their quest, as the Canadian government blocked the mergers.

Many critics have argued (here and here, for example) that it was not a prudent fear of systemic risk, or the Liberal government’s foresight that stopped the mergers. Rather, it was news of the banks’ ambitions and public outcry about branch layoffs and closures and increased service charges that forced the Canadian government’s hand, pushing it to block the banks from joining together. Canadian financial elites and the business class harshly criticized the government.

Yet it may have been fortunate for bankers, and the current government, that the Canadian public was not swayed. Otherwise, Canadian banks likely would have needed a US or UK style bailout in the 2008 crisis.

According to political commentator Murray Dobbin, the current Conservative government actually has offered a great deal of money to banks in the past two years, and he questions whether this was a form of bailout in itself. The Canadian government spent $70 billion to buy up risky mortgages from the big five banks (Dobbin wonders, if Canadian banks are so wonderful, why does the government need to buy these mortgages?), created a $200 billion fund called the Emergency Finance Framework to insure banks when they need it, and currently ensures 100% of all mortgages through the Canadian Mortgage and Housing Corporation – eliminating risk for banks.

The fiscally sound Canadian bank appears to be more fable than fact.

US position key

Unsurprisingly, the US position leading up to the June G20 meetings is likely to be a major determinant of the success or failure of the G20 bank tax talks. The enormous US bank bailouts have made it difficult for the US government to point to their strong financial sector as a reason to oppose bank taxes. Nevertheless, the US, ever averse to taxation of any kind, has also come out strongly against the Tobin tax and has reacted ambiguously to the idea of an international bank levy.

On the other hand, the Obama administration has made public statements over the last few months about a domestic bank levy proposal. This may lead the US to be more open to an international levy given that it would shield them from capital flight if all nations bought in.

Conclusion: is consensus on a bank tax possible at the G20?

Because consensus is required for G20 policy decisions, the growing Atlantic divide leaves any tax or levy plans up in the air. Meanwhile, the positions of the other 15 G20 countries are still being developed and do not seem to be getting much attention from the major players.

Though tax watching might seem like a dull sport, it is worth observing the developments both during Harper’s trip to Europe this week and this June at the G20 summit. The European powers backing these taxes have been shaken by the crisis and pressured by their electorate to do something about the banks. The taxes are not radical solutions to more fundamental systemic problems, but at least they point in the right direction: towards the banks.

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Darren Puscas is the editor of the G20 newsblog www.g20breakdown.com. He is currently a researcher on a multi-country project on women and unionization at McMaster University in Hamilton, Ontario. He lives in downtown Toronto, not far from the summit fence.

[This is an updated version of a bank tax backgrounder that first appeared in The Dominion in its Special Issue on the G8/G20]

–> Further information on the bank tax at G20 Breakdown

–> Plug-in to the campaign against the tax

This article gets away a little bit from my usual short post approach to the site.  I feel that a broad overview of the bank tax, including the Canadian  government position, is quite needed right now – so it is here in full!  It’s still only 4+ pages and it’s broken up into two parts. Or you can read a printable PDF of the full article.  Enjoy (and share) it!

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The bank tax & the G20 summit: An overview

Canada fiercely against tax on banks aimed to curb financial speculation.
Prime Minister Harper flies to Europe this week to pressure the UK and France.

by Darren Puscas

A confrontation is brewing at the upcoming G20 summit in Toronto, pitting Canada against European countries that are promoting a global “Robin Hood” bank tax which could raise hundreds of billions of dollars for social programs, food security or debt payment.

On Thursday June 3rd, Canadian Prime Minister Harper will be traveling to London and Paris to meet with new British PM David Cameron and French President Nicolas Sarkozy. He will try to convince them that the bank tax, which proponents say would help curb risky speculation at the heart of the economic crisis, is a bad idea. The US, while still uncommitted, is leaning towards Canada’s position.

Opposition from one country would undermine the consensus required for the adoption of the multinational bank tax.  With these crucial meetings and the G20 summit on the horizon, it is a good time to reflect on what this tax is all about.

The lines are drawn: Pre-summit bank tax discussions

In early February, then British Prime Minister Gordon Brown suggested that a deal on a potential tax levy could be reached at the Toronto G20 Summit. A few days later, the Canadian government publicly opposed any such agreement. “We’re not going to impose capital taxes on our financial institutions,” Canadian Finance Minister Jim Flaherty told journalists. “We’re against raising taxes and I hope to be able to convince my colleagues that these are unwise moves.” The Conservative government has also argued that as the only G8 country whose banks did not require bailouts it should not have to enter into a bank taxation plan.

The Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) has criticized the Canadian Conservative government for rejecting financial regulation, accusing it of being beholden to financial interests. “The Conservative government is opposed in principle to any new form of tax,” said Claude Vaillancourt, co-president of ATTAC-Québec. “The Conservatives are blinded by the non-interventionist principles of neoliberal economics, to which they adhere with ideological fervency.”

In April, the Harper government put on a full court press in opposition to the tax. During the G20 Finance Ministers meeting in Washington, D.C., Canada pushed hard and got what it wanted – the bank tax idea fell to the bottom of the June summit’s economic regulation agenda and was openly opposed by a few of the G20 countries.

Nevertheless, there have been renewed European calls on the issue, including German leader Angela Merkel recently stating she wants the Financial Transaction Tax on the agenda at the Toronto G20 meetings. And there are bank tax campaign organizations (such as At the Table) that continue to work very hard to get it back on the agenda. Despite Canada’s efforts to the contrary, there is no question that the bank tax issue is still up for debate during the June summit in Toronto.

Why is Britain so strongly behind the tax?

Prior to the economic crisis, London was a preeminent banking centre and over the past 20 years has been steadfastly opposed to most regulation of financial services.

The crisis changed all that.

After the insolvency of several British banks, a $1.38 trillion US bank bailout, and an election looming ahead, then Prime Minister Brown was suddenly talking tough about banks “giving something to society,” telling the media he was “interested in how support is building up for international action.” The election of David Cameron presumably should not change this (if he sticks to his word), as he campaigned in support of the bank tax. It will be interesting to see his position at the summit now that he has been elected (and after he talks to Harper on Wednesday).

The two types of bank taxes proposed

Britain’s proposals include a tax on bank transactions and a levy-style tax on bank assets.

Option 1: The Financial Transaction Tax (or Tobin Tax)

The transaction tax, often called the ‘Robin Hood tax’ or the ‘Tobin tax’ (after the US economist James Tobin, who first proposed it in 1972), is the more ambitious. It would focus on the trillions of transactions that take place in financial markets every day, including speculative ones such as derivatives [explained clearly here], which were a key part of the financial crash.

Precipitating the crash, these assets, including bundles of sub-prime mortgages, became overvalued due to speculation. When their values fell rapidly in 2008, the collapse began.

The transaction tax would put a very small tax (from 0.05 per cent to 1 per cent) on each of these transactions. Critics of unregulated banking argue that had such a tax been in place a few years ago investment banks would have thought twice about performing these transactions, thus lessening the likelihood of the crash.

“A low transactions tax…has little or no impact upon useful, longer term transactions, but limits ‘noise trading’ and very short term ‘in and out’ speculation,” argues Canadian Labour Congress economist Andrew Jackson. “Progressive economists who have advocated a financial transaction tax…believe that it would reduce speculation and volatility, without interfering with normal and useful activities including stock and currency trading and even hedging for legitimate purposes.”

A 2009 study by the Austrian government (pdf) showed that a 0.05 per cent tax on UK financial trades could raise about £100bn a year, paying for the expansion of social programs, paying down debt, and providing insurance funds against future bailouts.

Grassroots organizations like ATTAC-Québec take a stronger position, suggesting that any new funds from a tax should not go to banks, which might only encourage them to take more risks, potentially leading to new crises.

“The tax should simply be a fee for assisting citizens across the world,” said Vaillancourt. “This tax could, for example, give all citizens basic services–quality health care or free education.”

Despite its current opposition, Canada was one of the first G20 countries to consider adopting the Tobin tax. In 1999 the Liberal government passed a resolution to “enact a Tobin tax in concert with the international community.” However, the Reform Party (later the Conservative Party) opposed the resolution and it did not gain enough international support to be enacted.

Option 2: The bank Levy

The other proposal promoted by European countries is a tax or levy on the assets of banks. It would not bring in sums on the scale of a Tobin tax, though some financial analysts believe it would restrain banks and raise some bailout money. As it stands now the levy has gained support from Britain’s key European counterparts, France and Germany, both of whom are strongly promoting it.

From the perspective of the banks this is a more acceptable proposal than the Tobin tax as it would be either a one-off or infrequent fee based on a bank’s worth rather than a tax on its every transaction. From the perspective of advocates of the FTT, this is an inferior choice both because of its nature as a one-time fee and because it is more likely to be used create an insurance fund to bail out the banks after a crash rather than build a tax which could stabilize markets by discouraging risky speculation.

Continue reading Part II

You’ve all surely heard a lot about the sound cannons they will be using at the G20 (and beyond), so I’ll just add a couple of tidbits here:

The truck-mounted model of sound cannon can emit an ear-splitting 143 decibels, far above the pain threshold of 110 to 120dB.

The Council of Canadians put out this press release on the sound weapons, and they are planning on handing out earplugs during the G20. Good idea.

Here is what the Council had to say about the ear-piercing devices: “Saying a sound cannon is a tool for communications is like saying waterboarding isn’t torture, just a tool for encouraging dialogue,” Mark Calzavara, a Council of Canadians organizer, said in a statement. “This is meant to intimidate people and make them too scared to protest. They have spent over a billion dollars on security for this event now and it is clearly violating our charter rights.”

Here’s how they used them in Pittsburgh (it’s loud, prepare your ears if you listen!).

Also, getting back to this site’s focus on the issues the G20 itself is talking about, Canadian Prime Minister Stephen Harper will be continuing his globetrotting next Wednesday with a trip to convince the UK and French leaders that the bank tax, which proponents say would help curb risky speculation at the heart of the economic crisis, is a bad idea. On Monday, I will be putting up a primer on the bank tax history and a critique of the Canadian government’s position. Hopefully that will be enough time for Harper to read it and still have time to cancel his trip without penalty.