The Unfinished Business of Financial Reform

As senators prepare to fight their way through a blizzard of amendments to the financial reform bill, it’s hard to predict exactly what we’ll wind up with when the storm is over. But it’s important to view this as merely round one in what will likely be a long struggle to rein in Wall Street.

Looking back at the last great financial crash in this country, it took New Deal reformers seven years to enact the six landmark bills that helped stabilize the financial industry for many decades. We’re less than two years into this crisis.

It’s already clear that one piece of unfinished business will be the need to curb excessive short-term speculation. As John Fullerton, a former managing director at JPMorgan, put it at a recent press conference, “At the heart of the financial crisis and the ills of our economic system is a malady known as ‘short-termism.’” Over the past three decades, we’ve seen an explosion of stock-flipping, high-frequency trading and other gambling tricks that produce no real economic value but raise the risk of dangerous bubbles.

Around the world, there has been growing momentum behind proposals to address this problem through a tiny tax on trades of stock, derivatives, currency and other financial instruments. Such taxes would make trading more costly the shorter its time horizon, thereby encouraging more long-term, productive investment. They could also raise a lot of cash. The Center for Economic and Policy Research has analyzed the likely impact of a set of taxes, ranging from 0.01 percent on currency transactions to 0.25 percent on stock trades, and estimated potential revenues at more than $175 billion per year in the United States alone.

With financial speculation taxes excluded from the pending financial reform bill, this will be a critical piece of unfinished business to target in the next round. And many activists are already gearing up for it. On May 17, U.S. community-based economic justice groups, led by National People’s Action, will join with labor unions and others in a rally targeting the K Street lobby groups that are working to block financial reform. Financial speculation taxes will be among their key demands.

The K Street protest will be part of an international week of action to “Make Finance Pay,” with rallies, press stunts, petitioning and other events planned in many of the world’s major financial centers. At the forefront of the global campaign is the UK coalition that’s succeeded in making what they’re calling the Robin Hood Tax a key election issue, endorsed by two of the three major candidates for Prime Minister — incumbent Gordon Brown and rising Liberal Democrat Nick Clegg.

The idea also got a recent boost from a highly unlikely source — the International Monetary Fund. In a draft report to the G-20 finance ministers, the IMF asserted that such taxes, known as “financial transaction taxes” (FTT) internationally, are feasible: “The FTT should not be dismissed on grounds of administrative practicality. Most G-20 countries already tax some financial transactions…Collecting taxes on a wide range of exchange-traded securities (and possibly derivatives) could be straightforward and cheap if withheld through central clearing mechanisms, as the experience with the U.K. stamp duty shows.”

Although the IMF came out in favor of two alternative taxes on the financial sector, the fact that an institution known for its financial deregulatory fervor said anything positive about speculation taxes is nothing short of remarkable.

It took the deregulatory zealots a couple of decades to break down the protections that sensible lawmakers worked so hard to build up in the wake of the 1929 Wall Street crash. We need to accept that it will take more than a couple of years to build the infrastructure needed to tackle our out-of-control 21st-century financial industry. Let’s hope the pending bill passes, with the most progressive amendments included. And then let’s roll up our sleeves for the next round: financial speculation taxes.

Sarah Anderson is the director of the Global Economy Project at the Institute for Policy Studies.