In an interesting, but ultimately flawed, blog post, Colin Talbot says:
Today I heard a Lib Dem MEP say something to the effect of “what are we going to do, stop the markets from doing certain things”? Well, er, yes. We stop ‘the markets’ from trading in human body parts, or in whole humans for that matter. We don’t allow them to freely trade nuclear weapons, or other WMDs. In other words there are all sorts of moral and practical restrictions placed upon the markets, for our own protection.
Markets don't "do" anything. They're merely a place where people interact. And, as ideas go, the idea of the free market is fundamentally unobjectionable. Why shouldn't people be able to buy and sell things to each other without interference? Markets are inherently a good thing.
Now, sometimes the outcome of a free transaction is inconsistent with society's norms. For example, the case of nuclear weapons given above. Although there may be a willing seller of nuclear weapons and a willing buyer of nuclear weapons, we collectively don't want the technology behind these weapons - or indeed the weapons themselves - to spread. So we intervene to forbid such transactions taking place in our free market.
There are a load of other examples . We don't allow buying/selling of slaves, some drugs, sex and children because these (rightly, in my view) offend our moral sensibilities. But that's not the fault of the market. It's just a place where people buy and sell. It has no ethical sense at all. The ethics of a market transaction depend on the buyer, the seller, and society's interpretation of it.
Blaming "the markets" for stuff society doesn't like is an unacceptable cop-out. We should regulate sellers of stuff we don't like, or we should regulate buyers of stuff we don't like. It's not the fault of "the markets". What we consider acceptable or not is, after all, a societal construct.
So, with that in mind, let's turn to Talbot's three suggestions for fixing "the markets":
You should not be able to sell stuff you don’t own.
The whole basis of ‘short-selling’ is you sell something you don’t own now, in order to drive down the price of the things you don’t own so you can later buy them for less than you just sold the things you don’t own for.
I can’t for the life of me see how this generates any value to anybody except allowing the short-sellers to rip everyone else off. Their ‘bet’ that the price will fall is not based on anything ‘real’, like the value of the item, but simply on their ability to manipulate the market. On the contrary, if the thing being sold is something like a companies shares it is doing a lot of damage. What is it good for?
Nope. Totally wrong. There are all sorts of legitimate reasons for short-selling. And, indeed, plenty of businesses sell stuff they don't own. At the risk of reiterating material I already wrote in an earlier blog post, here are some instances of short-selling in business:
- Just-in-time manufacturing. Efficient manufacturing businesses sell goods they don't own, then manufacture them quickly once they've been ordered. This helps businesses by reducing their need to hold significant quantities of inventory (which might fail to sell, go bad or get stolen).
- Bespoke printing. I understand that Amazon will print up books for you 'to order'. They don't exist at the time of ordering, but they'll print them, bind them and send them to you.
- Airlines. Airlines don't actually have "a seat on a flight from London to New York at 8:50am on 23 February 20X2" when you order it. But we don't seem to have a problem with allowing people to buy one.
- University courses. Similarly for university courses. Professor Talbot doesn't actually have any of the courses his university is selling. Nor, to the extent that they're examined courses, have any of the exam papers yet been written.
- Writers. Publishers often provide advances to authors, sometimes before even a single word has been written. What's that, if not short-selling?
In all of these cases, while the seller doesn't actually have what he's selling in his grubby little hands at the point of sale, he does have the capacity to provide it. And, if he fails to provide it, he is liable to breach of contract. That's as true for these cases as it is for short-selling of shares. A short-seller of equities has the capacity to acquire the shares in question. If, for any reason, he fails to do so, he must pay the financial consequences.
If you need an introduction to how short-selling works, and why it's not problematic, you should acquaint yourself with three girls, two cups.
You shouldn’t be able to insure things you don’t own either.
If I were to insure a camera I didn’t own, but actually belonged to my mate, and then he had it stolen whilst on holiday, I don’t know any insurance company that would pay me. Au contraire, I’d probably get a visit from Sgt Plod asking me why I was trying to rip off the insurance company. As with so much else, this doesn’t seem to apply in the topsy-turvy moral universe of finance capital.
Anyone can purchase a CDS, even buyers who do not hold the loan instrument and may have no direct “insurable interest” in the loan. The buyer of the CDS makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, receives a payoff if the loan defaults.”
Again, I fail to see any utility in this transaction for the real world the rest of us inhabit and if I tried to pull this stunt with a car I’d end up in prison.
Well, I have some sympathy with this line of thinking, and I take great solace from the fact that Frances Coppola does too, However, Talbot's reasons fail the basic standard that we set out in the beginning. He's saying that we should ban CDSs because he "fail[s] to see any utility" in them. But there are plenty of other things that he probably can't see any utility in; say the selling of marmite-flavoured chocolate. Should we ban that too?
No, the only reason to ban something is if we can point to the specific way that it offends society. Beyond the fact that it just feels 'iffy', Talbot fails to make the case.
You should pay tax on every transaction that supposedly ‘adds value’.
One of the main reasons for financial systems running amok is the volume of trades – these have spiraled to unprecedented levels. When the rest of us buy and sell things we (mostly) pay VAT on the transaction, which, in case you have forgotten is “value added” tax. So if these financial transaction as ‘value adding’ as their proponents claim, why don’t they have to pay tax on them? When a car component manufacturer sells a car widget to the manufacturer they have to pay a whopping 20% VAT. Why doesn’t this apply to financial ‘products’?
This betrays a fundamental understanding of how value added tax works. VAT is a tax paid by consumers on the value added to a good or service during its manufacture. So the car component manufacturer doesn't pay "a whopping 20% VAT". The VAT, if any, will be paid by the purchaser, not the seller. And, in turn, the seller will account for that input VAT when it sells the final product on to customers. Customers are the end of the chain: they cannot reclaim their input VAT so ultimately they must pay VAT .
Businesses do, of course, have a sort of 'value added' tax of their own. It's called corporation tax, and is payable on the taxable profits made by businesses. So our car component manufacturer (presuming they're incorporated) will pay corporation tax on the profit it makes between buying in metal, shaping it into widgets and selling those widgets to other companies.
Contrary to popular belief, financial businesses do pay corporation tax on the sum of all those little profits they make from super-fast transactions. So Talbot's desire to see added value being taxed is already reality.
And, again contrary to popular belief, financial services businesses don't dodge VAT. The provision of financial services is VAT-exempt, which means financial services businesses cannot recover their input VAT. Their prices therefore effectively include VAT already to allow them to recover it in an economic sense .
There may yet be a case for introducing a financial transaction tax. I don't buy it, myself. But inaccurately stating that financial transactions aren't subject to a tax on the value added isn't the way to make the case.
Filed under: Ethics, Regulation with tags colin talbot, corporation tax, financial transaction tax, frances coppola, free markets, marmite, short selling, vat
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