Reforming the unregulated global casino must be addressed at the summit of the
Group of 20 (G-20) countries in London next month. The communique from the
November 2008 summit of G-20 leaders in Washington, DC, clearly cited increased
cooperation between nations as essential, particularly oversight of global
banks and other financial players. Cooperation is necessary to avoid
"beggar-thy-neighbor" policies.
Yet, no mention was made at the November summit of the most urgent priority:
tackling the up to US$3 trillion of daily currency trading, over 90% of which
is speculation. Bouncing currencies
have caused much of the turbulence and excessive volatility in world markets as
contagion spreads in minutes in this around-the-clock trading. A small tax
(less than 1%) on all trades has been advocated since the 1970s, when it was
proposed by economist James Tobin. The idea was also floated in 1989 by now US
National Economic Council head Lawrence Summers, who also attended the
Washington summit.
Such a currency exchange tax would be simple to collect using a computerized
system, which can be installed on trading screens, such as the Foreign Exchange
Transaction Reporting System (FXTRS). This system operates like an electronic
version of Wall Street's venerable "uptick rule", enacted in 1934 but repealed
during the George W Bush administration. Today's Wall Street traders themselves
are calling for the rule's reinstatement to curb naked short-selling. The FXTRS
computerized uptick rule would gradually raise the tax up to a maximum of 1%
whenever a bear raid starts attacking a weak currency. Such bear raids are
rarely to "discipline" a country's policies, as traders claim, but rather to
make quick profits.
In the transparent FXTRS system, traders selling falling currencies begin to
see that the rising tax is cascading into the country's currency stabilization
fund and cutting into their gains. Seeing no further profit, traders can
voluntarily exit the market and search for some other currency or arbitrage
opportunity. The funds collected from such currency exchange taxes would raise
hundreds of billions of dollars, which could be directed to health, education,
infrastructure and other public goods. The FXTRS was awarded a patent by the US
Patent and Trademark Office, but it was allowed to expire in 2008.
It is clear that the new global contagion and volatility can no longer be
addressed by nations acting alone. The problems lie beyond the reach of
domestic policymakers' unilateral efforts, and long-term solutions are to be
found at the global systemic level - through harmonizing standards for
disclosure, accounting, and risk-assessment, and via international agreements.
The G-20 summit on April 2 at last will discuss concerted action.
Other familiar proposals have been advanced or tried: trading bands, crawling
bands, currency pegs, crawling pegs, fixed parity, raising interest rates,
traditional currency intervention, early warning disclosures, currency boards,
as well as versions of Chile's successful use of partial controls on short-term
inflows. China has more options, with its huge internal market and the limited
convertibility of its currency.
These tightly linked, real-time globalized financial markets and the contagion
they create should have come as no surprise. These markets were deliberately
deregulated during the 1980s and 1990s on advice of [now former Federal Reserve
chairman] Alan Greenspan, Treasury secretaries Lawrence Summers and Robert
Rubin, and Senator Philip Gramm.
Few heeded the admonition encoded in the 1962 Mundell-Fleming model, still
valid today: Countries wishing to interlink their economies in world trade
cannot simultaneously achieve fixed exchange rates, autonomy of monetary
policy, and free global capital flows. Since 1972, when the (post-World War II)
Bretton Woods system collapsed, national policymakers have been confronted with
this axiom that they can achieve two of these three goals.
Other proposals include investor George Soros' concept of an international
credit insurance corporation to undergird global markets. We agree with Soros'
analysis, but an international credit insurance corporation without additional
restructuring of existing financial architecture might exacerbate current moral
hazard problems. Indeed, Soros offers many other useful proposals to prevent
what he sees as a "disintegration of the global capitalist system and the
evident inability of the international monetary authorities to hold it
together".
Alan Greenspan has said that an increase in volatility is good news for
traders, who thrive thereby. Traders are playing by the rules of the current
game and are not empowered to change it. In systems terms, the global economy,
by virtue of its real-time technological inter-linkages, has become a de facto
global commons, a common resource of all its users. Such commons require
win-win agreements, rules and standards applicable to all users. If normal
competitive behavior (win-lose) continues, the result is lose-lose as
competition between players leads to sub-optimization and the system itself
absorbs risks and eventually can break down, as witnessed in the current
crisis.
The specific function of FXTRS we propose is targeted precisely to the more
efficient, transparent function of foreign exchange trading. Its main advantage
is that it can be developed and begin operation in the short-term, requires no
additional bureaucracy or cumbersome international agreements, and helps
stabilize FX markets. It can be licensed unilaterally to central banks. As it
is installed as a superior operating system, the FXTRS can rapidly become a de
facto technological global standard.
The most important aim of our research has been to present a technological
structure that would reduce the likelihood, scope and force of a massive bear
raid attack on a weak currency. Such attacks have played a role in crippling
the economy of the target, disrupting societies, impoverishing the middle
classes, clogging trade pipelines, damaging international relations, and
toppling governments. Globally, such attacks might play a role in a worldwide
depression or set back for decades the hope for a satisfactory world order. We
are trying in a fair, balanced, and logical manner to reduce their likelihood
and severity.
Bear raids on weak currencies can be viewed as battles. On one side are the
central banks, which are the only market players at times ready to sell low and
buy high to protect their national economies. On the other side are all others,
individuals and institutions, not just speculators or hedge funds but indeed
anyone who is ready to jump into the fray at some point in hopes of buying low
and selling high.
Bear raids were prevalent prior to the 1929 crash. The collapse of the US
market and ensuing depression helped Franklin D Roosevelt's campaign for
president. Investment banker Joseph P Kennedy was appointed by Roosevelt to
head the newly created Securities and Exchange Commission. New regulations
cleaned up the roles of bankers and brokers and made the stock market safer for
investors.
Based on his intimate knowledge of how the US securities markets worked,
Kennedy introduced a number of changes in the transactions process itself. One
was the uptick rule, which prevented a broker from selling short if the last
sale price of a listed stock was lower than the previous transaction price.
This slowed the momentum of bear raids and they largely disappeared. Note that
this rule utilized "ticker tape" action. The ticker was based on transaction
reporting that we place at the heart of the FXTRS.
With technology undreamt of in the 1930s, a much smoother process can be
implemented in the FXTRS to handle bigger foreign exchange markets.
Technological provisions in the FXTRS will enable the relevant standards body
to curb bear raids without impairing the functioning of the market in normal
times, nor depriving the execution of any transaction desired by willing buyer
and seller at a mutually agreeable price. The FXTRS would fulfill some of the
needs cited by central bankers and finance ministers for a new global financial
architecture.
Trade reporting itself in existing markets generally helps stabilize the
market. When a market lacks information, participants can too easily vacillate
between over-caution and recklessness, characteristics exhibited by the global
currency markets and their recent volatility, over- and under-shooting.
Nevertheless, even stock exchanges with last-sale tickers are not immune to
destabilizing forces. Trade reporting will help FXE, but further stabilizing
mechanisms are still needed.
All FXTRS fee rates of less than 1% will be so small as a percentage of the
transaction value that no transaction will be derailed because of fee
resistance. Transaction fees constitute the main source of revenue from the
system's foreign exchange transaction activity. There are potentially four
considerations in determining the net total transaction fee: 1) the base fee,
adjusted for size, 2) adjustment for trade purpose, 3) fortuitous timing
component, and 4) emergency. The base fee, adjusted for size, is the same for
both buyer and seller. The system will have a wide range of algorithms to
handle a variety of fee structure components built into software.
A base transaction fee of a small percentage, such as 0.001% of the value of a
baseline trade of $1 million or its equivalent would yield $10 per trade.
Without any other charges, if all trades were of this size, the total system
revenue, when all major currency countries were participating, would then be
$10 million per day, or about $3 billion per year.
Finally, let us consider the most important case, the emergency. A weak
currency is under attack and falling rapidly, say 50% in two days, and perhaps
accompanied by some rapid gyrations in price during the two days. This
situation illustrates the best case for large fees.
Large fees could slow the attack and at the same time contribute substantially
to funds for humanitarian aid or financial rescue of the country under attack.
Fees might be allowed to rise as high as 1%, a thousand times larger than the
basic fee, not enough perhaps to seriously affect the profits of the successful
bear raider, but perhaps enough to wipe out the profits of a less successful
one.
The total range of emergency fees might be something like 0.01% to 1% of the
transaction value (just above the timing fee range) and would be charged only
to the party buying the B instrument.
The rules by which the fees are chosen should be made publicly and widely
known, with one exception. Some key choices in the parameters of the timing fee
should be revealed publicly only as they apply to trades that have already
taken place. To do otherwise would be to invite game playing irrelevant to the
operation of the market.
The opportunity for central banks to finance the risk capital of authorized
market-makers as part of the agreement should not be overlooked and surely
could accelerate the creation of the best marketplace in the world for the
currency of each central bank and full control on the part of the central bank
to achieve best-marketplace status when it seeks to protect its currency.
The advantages of the FXTRS include: 1) enhancing stability in currency markets
via a technologically state-of-the-art trading system which will be widely
adopted voluntarily; 2) technology that will be a de facto, global standard for
currency trading, reporting, and supervision without legislation or cumbersome
international bureaucracy; 3) provision of central banks with superior
information and reporting, allowing levels of prudential supervision of
currency markets which will be beneficial to all market players; 4) a "ticker
tape" for currency trades; and 5) new revenues to the user-groups and vendors.
Hazel Henderson is the founder of Ethical Markets Media, LLC, and author
of the award-winning book Ethical Markets: Growing the Green Economy
(2006) and eight other books. She co-edited, with Harlan Cleveland and Inge
Kaul, The UN: Policy and Financing Alternatives (UK: Elsevier
Scientific, 1995).
(Published with permission of the Global
Policy Innovations program at the Carnegie Council for Ethics in
International Affairs.
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