Stock Turbulence an Argument for Financial Transaction Tax

JAMES HENRY, jamesshelburnehenry at mac.com, @submergingmkt
Henry is former chief economist at the international consultancy firm McKinsey & Co. He is now senior fellow at the Columbia University Center for Sustainable International Investment.

He said today: "This stock turbulence is a great example of why we need a Financial Transaction Tax. As brilliantly portrayed in this video by the British actor Bill Nighy, a tiny tax on financial translations carried out by institutions would raise hundreds of billions of dollars."

See Henry's just-released remarks from The Real News: "The Sky Is Not Falling? China's Stock Market Impact." Says Henry: "This was an example, I think, of the way stock markets have been structured. About 84 percent of the trades that went on on Monday in the first couple hours, when the Dow plunged ... were run by so-called automatic trading programs. No humans involved, they're just looking at computers, basically looking at momentum and stop order limits that they've put in place. And this was just a completely arbitrary kind of decline, way out of proportion to any real economic factors.

"Take a look at the Shanghai stock market that set all this off, and it's like a casino. Fifteen, twenty million people. Many small investors trading on margin, which means they borrow to buy the stocks. There's no active insider trading regulation. It's the $28 billion dollar market cap that the rest of the world is reacting to as if it's a huge center of finance.

"We have a real breakdown in terms of macroeconomic consensus in terms of the kind of stimulus programs that countries should be engaged in. I think that's a first priority here, to maintain growth. We can't just do it on the basis of the Federal Reserve's low interest rates forever. Fed's been talking about raising interest rates like 0.375 percent in September. That won't have any real impact on our economy to speak of. It's certainly not responsible for this meltdown on Monday.

"But the other thing is when we look at countries like China, they have tremendous problems of domestic kleptocracy and corruption, and basically the kind of legal systems that we take for granted are just really a work in progress in China. So if you're an investor there, you're worried about taking your money out of the country. There's been massive capital flight from China. A lot of the arguments about what's going on in China today have been talking about their debt. But the debt problem in China is really a domestic debt problem, and from a global balance sheet perspective, they have a lot of capital flight offshore."

Henry is senior adviser with the Tax Justice Network, which last year in their report "The Price of Offshore Revisited," estimated that total wealth in tax havens was between $21 trillion and $32 trillion.