Retribution by tax

A tax on financial transactions is no longer the pipedream of an unreconstructed Keynesian economist of the 1970s called James Tobin. Celebrities such as George Soros and Bill Gates have declared themselves in favour. The Archbishop of Canterbury wants a transactions tax. So does the Vatican, a recent paper advocating “taxation measures on financial transactions through fair but modulated rates with charges proportionate to the complexity of the operations, especially those made on the secondary market” to fund a new global reserve fund to replenish the depleted firepower of the IMF. Less predictably, a financial transactions tax (FTT) has even attracted the support of a hedge fund manager, in the shape of David Harding, CEO of Winton Capital, provided the proceeds were invested in a better system of international financial regulation.

With enemies like that, advocates of an FTT scarcely need friends.  A levy on share, bond, swap and currency transactions is now a serious possibility, especially in Europe, where there is widespread and bi-partisan support for the idea among the political classes in France and Germany in particular. Whilst only the European Union (EU) has a concrete legislative proposal under consideration, it is no longer unthinkable that an FTT will be implemented on a global scale. It has appeared on various national and supranational policy agendas for ten years now, including that of the G20 summit in Cannes in November 2011 (where Bill Gates, of all people, presented on the issue). The final communique from Cannes acknowledged the value of “initiatives in some of our countries to tax the financial sector for various purposes, including a financial transaction tax.”

Indeed. Both the French National Assembly (in 2001) and the Belgian Federal Parliament (2004) have in the past voted in favour of an FTT. The German Chancellor Angela Merkel and the French President Nikolas Sarkozy have now campaigned for an FTT for well over a year. They pushed for it at meetings of the G20 in Pittsburgh in 2009 and Toronto in 2010. Shortly before the Cannes summit, Wolfgang Schäuble, the German minister of finance, argued that the European Union, or even just the euro area, should go ahead with an FTT irrespective of what other countries chose to do. He thinks it is “in the interest of the financial sector itself that it should concentrate more on its proper role of financing the real economy, and ensuring that capital is allocated in the most intelligent way, instead of banks conducting the bulk of their trading on their own account.”

By the time he spoke, the European Commission had already published (on 28 September 2011) a formal legislative proposal for an FTT in the 27 member states of the EU, complete with a draft Directive, an impact assessment and a timetable for implementation.  But European advocates of an FTT have their supporters even in North America. The first member-state of the G20 to formally accept the idea of an FTT was actually Canada, whose House of Commons passed a resolution as long ago as 23 March 1999 calling for "a tax on financial transactions in concert with the international community" (albeit one disowned by the Canadian government ten years later). Nancy Pelosi, minority leader of the House of Representatives, expressed interest in a global FTT in 2009.  In November 2011, Senator Tom Harkin and Representative Peter DeFazio introduced to Congress legislation that would impose a 0.03 per cent tax on financial transactions in the United States.

Three basis points are lower than the rate proposed by the European Commission which, if enacted, would from 1 January 2014 levy a minimum of 0.10 per cent on the gross market value of all equity and bond transactions. A lower rate of 0.01 per cent would be levied on the notional value of all financial derivative transactions. The tax will be imposed on repo, stock loan and structured products as well as equities, bonds, futures and options and OTC derivatives, with only physical commodity transactions being exempt. Such a comprehensive tax, especially on derivatives and structured products, is seen by the European Commission as essential to minimise avoidance of the tax through the use of synthetic alternatives.

Synthetics are not the only means of avoidance. It is to avert the risk of transactions moving to less onerously taxed jurisdictions - “delocalisation,” to use the Commission jargon – that the EU, like the Canadian House of Commons before it, is pressing the G20 to endorse a global FTT. For the same reason, though member-states of the EU are free under the Commission proposal to charge higher rates than 10 basis points on cash instruments and one basis point on derivatives, none is likely to do so, unless they want to export their financial services industry to another jurisdiction. Nor will that be the only concern of member-states. The Commission proposal is also structured in ways designed to ensure it does not increase the cost of borrowing money or raising capital for savers, mortgage-holders, issuers and even governments themselves.

This is why the proposed FTT is limited to secondary market trades between “financial institutions.”  The definition of a “financial institution” in the Commission proposal includes banks, broker-dealers, fund managers, hedge fund managers, pension funds, mutual funds, insurance companies, SIVs and SPVs. It excludes central securities depositories (CSDs), international central securities depositories (ICSDs) and central counter-party clearing houses (CCPs), as “non-trading” financial institutions. The Commission has of course also excluded EU institutions, such as the European Central Bank and the European Investment Bank, from paying the tax. The aim is to levy the tax on intermediaries rather than end-investors or end-lenders or borrowers.

More importantly, the Commission proposal makes clear that the tax will be levied on both buyers and sellers at gross value, stating it is payable on “the purchase and sale of a financial instrument before netting and settlement, including repurchase and reverse repurchase and securities lending and borrowing agreements,” where at least one party to the transaction is located in the European Union (EU), even if the trade is executed at an execution venue outside the EU. The tax will be payable “immediately” on trades executed electronically, and within three working days otherwise, whether they are conducted on a principal or an agency basis.

This sounds straightforward, but it raises a series of challenging technical issues. First, it is hard to see how tax can be collected efficiently except by self-declaration, which creates scope for mischief, unless vast trade information repositories are created. This sounds like an obvious role for the CSDs, until it is remembered that an increasing proportion of trades are netted before being passed to the CSDs for settlement. Secondly, the draft legislation implies that a trade between two banks based in the EU will be taxed on both sides at 10 basis points, while an equity trade between one bank based in the EU and another in North America will be taxed on one side at 10 basis points.

This will create scope for debate about the location of counterparties, and about whether a trade is genuinely secondary and between financial institutions. For example, will the parties to an agency trade (i.e. on behalf of others) between two non-EU investors be liable to the tax if it is intermediated by an EU-based broker-dealer? Or, to take another example, is an end-investor that manages its own money a financial institution liable to the tax? It seems that the proposed European FTT will exempt them from tax on shares acquired in an IPO, but tax them on any securities sold to raise the funds to subscribe to the IPO.

This is a consequence of attempting to restrict the FTT to secondary market trades between financial institutions, which is itself a consequence of trying to reassure issuers and national treasuries that the cost of borrowing and raising capital will not be increased, and retail borrowers and investors that neither their mortgages nor their savings will be taxed. Pointed promises to exempt governments and voters from a tax make it hard not to be cynical about the political origins of the apparently widespread support for an FTT.  After all, as a source of pain-free tax revenue, “financial institutions” are as mythical a Santa Claus as “the rich.” If they pay more tax, they will pass its cost on to their customers.

But politicians rightly hold that most voters believe that somebody else will pay any higher taxes that are proposed. The European Commission proposal even boasts that the FTT will be “progressive” in its incidence because “higher income groups benefit more from the services provided by the financial sector.” In other words, the Commission knows that savers and borrowers will be affected adversely by the tax but, because it is the rich ones that will be affected the most, that it is not only politically expedient but morally right. In Europe, of all Continents, there ought to be more respect for the rights of minorities. And more concern about the way in which politicians are scapegoating another minority - namely, bankers and their coevals in fund management – to distract public attention from the fact that they are presiding over the greatest series of avoidable man-made catastrophes in international monetary policy since the return to the gold standard in the 1920s.

But diverting blame is not the only political dividend paid by an FTT. Governments on both sides of the Atlantic see the financial services industry as the ideal milch cow as they seek to restore public finances. The G20 has called for the financial services industry to make a “fair and substantial contribution” to fixing the charge it imposed on public funds in 2008-09. In its explication of the proposed FTT, the European Commission impact assessment promises a “double dividend” from taxing it: plentiful tax revenues plus less dangerous behaviour by banks. In the United States, Senator Harkin has promised not only an end to “speculative” high frequency trading but billions of dollars of tax revenues. “It is hard to argue with this substantial revenue – derived from a tax of $3.00 on $10,000 of Wall Street trading,” as he puts it.  “Our country needs every dollar possible to invest in infrastructure, job creation, the education of our children and reducing the debt among other priorities.  This common sense tax provides a viable solution.”

In fact, the EU Commission reckons there is a triple pleasure to be had from an FTT. It punishes bankers (“ensure that financial institutions make a fair contribution to covering the costs of the recent crisis and to ensure a level playing field with other sectors from a taxation point of view”), reduces the amplitude of the credit cycle (“create appropriate disincentives for transactions that do not enhance the efficiency of the financial markets”)  and earmarks a new source of tax revenues to fund the Commission in perpetuity (“This Proposal also aims at creating a new revenue stream with the objective to gradually displace national contributions to the EU budget, leaving a lesser burden on national treasuries”).

This is a slightly more plausible list of three than the promise of the Robin Hood Campaign in the United Kingdom - a group sponsored by charities, trade unions, religious leaders, environmentalists and celebrities fronted by a popular actor called Bill Nighy – that a tax of 0.05% on all equity, fixed income and derivative transactions will raise enough money (its guesstimate is £100 billion) to solve world poverty, halt climate change and eliminate the need for cuts in public services. But in highlighting an FTT as an independent source of revenue for its own activities, the Commission has revived an idea first put forward by the United Nations in 2001 (with the support of Fidel Castro). That year, the unloved body advocated a classic Tobin tax as a source of funding divorced from national governments, and levied on a minority (FX traders) unpopular enough for its protestations to be disregarded.

History, and especially the history of Europe, argues for caution on these grounds alone. But there are less apocalyptic reasons to question the wisdom of an FTT. In principle, untold numbers of untaxed arbitrager transactions are a less wrenching way of keeping prices in alignment with reality than a small number of large and heavily taxed transactions that occur irregularly. Principle is not a virtue much admired in politics, but even politicians ought to be humble enough to recognize that it is impossible in practice to distinguish between transactions which are desirable (because they provide liquidity, information or financing) and transactions which are undesirable (because they are “speculative”). The framers of the tax have clearly subscribed to the mistaken doctrine that reductions in liquidity increase price stability, rather than price volatility.

The most charitable explanation is that they have chosen to make a deliberate error. Even the slightest acquaintance with housing markets, where transactions are large and infrequent and transaction costs extremely high, should be enough to convince anyone that taxing transactions  is a singularly ineffective way of suppressing the amplitude of a credit cycle whose origins lie in the structure of the banking system. In financial markets, the source of systemic risk is not investment banks or hedge funds or specialist dealing houses that trade algorithmically. The real source of risk is large, inter-connected banking institutions that are not even 100 per cent cash-reserved, and funded in large part not by equity or term debt but in the short term money markets.

In this very area – the repo market - the proposed FTT is taking an enormous risk without first considering the financing structure of the European banking industry. The draft Directive makes clear that the tax will be levied “on the purchase and sale of a financial instrument before netting and settlement, including repurchase and reverse repurchase and securities lending and borrowing agreements.” Yet the repo market, and its associated stock borrowing and lending markets, is an important source of finance for European banks, including foreign banks based in Europe. Of €34,126.4 billion of assets reported to the European Central Bank (ECB) by the domestic banks of the 27 member-states of the EU in June 2011, only 50 per cent is funded by deposits from other banks or retail and corporate depositors. Equity and debt makes up another quarter or so.

The balance has to be found in the money markets, and especially in a European repo market whose size was measured by the European Repo Council at €6.2 trillion in June 2011. In principle, the FTT will add 10 basis points to both sides of every repo transaction – and it will be difficult for EU-based banks to avoid the tax by booking repo transactions offshore. If the repo market becomes more expensive to use, some banks may have to shrink their balance sheets further than they have already. Others will have to increase the cost of lending. There will be a return to uncollateralised borrowing and lending in the inter-bank markets of precisely the kind the central banks of Europe have sought to reduce in recent years.  The only alternative is the provision of funding by the ECB itself. An inflation of the balance sheet of the ECB, to support the balance sheets of commercial banks, would be a deliciously ironic consequence of an FTT.

If the cost of bank financing does increase, lending to securities trading houses will go down, or be less in demand, or both. So they will trade less, because there will be less leverage. This is of course one of the goals of the FTT, but it is also one reason why the tax will almost certainly raise less money than its proponents believe. If financial transactions are taxed, there will either be fewer of them, or they will migrate to a jurisdiction where the tax can be escaped, or synthetic alternatives will be devised (CFDs, or contracts for differences, interestingly, are not mentioned in the draft Directive), or some combination of all three will occur.

As a minimum, an FTT will undermine the regulatory efforts of recent years to drive OTC trading on to regulated exchanges underpinned by CCPs, and reduce liquidity by making high frequency trading less profitable. Financial activity as a whole would fall. Fewer would be employed in the industry to intermediate, execute, clear, settle and service financial transactions, reducing employment, output, and taxation. The damage to the national income will not stop there. Financial institutions will pass the tax on to their customers (such as issuers, whose cost of capital will increase as investors anticipate higher tax payments) who will in turn pass it on to theirs. The tax will cascade throughout the entire length of the chain of production, distribution and exchange, inflating costs and distorting business decisions at every point along it.

Whatever happens, the tax will fall most heavily on the member-states of the EU that host financial centres. This means primarily London and Luxembourg. Over 1 million people are employed directly in the financial services industry in the United Kingdom, even before taking account of the various support services that are sustained by it. If even a tenth of the industry migrated abroad, it would be a major blow to the economy of the United Kingdom. In Luxembourg, one worker in eight is employed in financial services. The number that would be necessary to provide financial services on a fully taxed basis for a population of less than half a million is probably a few thousand. The Commission understands this risk, and welcomes it. Its proposal predicts that the long run negative effect on European GDP of an FTT will be between 0.5 per cent and 1.8 per cent. Expressed like that, it sounds trivial. But even 0.5 per cent of an EU-27 GDP of €12.268 trillion in 2010 is €61.34 billion. With a population of 502.5 million people, that amounts to over €122,000 a head, or nearly five times per capita GDP. It is quite a price to pay for vengeance on the banking industry.

This loss of taxable activity actually exceeds the €57 billion a year the Commission expects the FTT to raise, making it a more than usually ridiculous tax. Since it will destroy real economic activity, the FTT is also bound to yield less than its proponents would like. Indeed, in its own estimates of revenue from an FTT, the Commission makes large downward adjustments to account for the loss of some business altogether, and the migration of other business to lightly taxed jurisdictions or alternative instruments.

Strangely, although the €57 billion a year estimate appears in both the Proposal and the accompanying press release, this figure cannot be found in the accompanying Impact Assessment.  That document says instead that, if all financial instruments are taxed, the revenue could vary from €400 billion at the top end to €16.4 billion at the low end, depending on the tax rate chosen and the impact of avoidance (through product substitution) and re-location. Even in its least ambitious scenario, where a single basis point is charged on all instruments, the revenue ranges from €17.9 billion to €36.2 billion. According to the Commission, an FTT on equities and bonds only might yield as little as €1.8 billion.

The degree of uncertainty in these projections is astonishingly wide. Yet, all seem remarkably low, ceteris paribus. This is, admittedly, an unlikely assumption. But, according to the European Central Bank, the total value of delivery instructions through the 26 CSDs and ICSDs of the 27 member-states of the EU (Ireland uses Euroclear CREST) in 2010 was €920,738 billion. On the naïve assumption that all buyers and sellers behind these delivery instructions were EU financial institutions, a 10 basis point tax on both sides of the trades would yield over €1.8 trillion in the course of a year. This number is of course vitiated by the heroic assumptions, but it does not even take full account of the value of fixed income and derivatives trading, most of which does not take place on organized exchanges or pass through the CSDs – yet it is still 32 times the value of the revenue predicted by the Commission in September 2011.   What explains the difference?

An explanation is hard to deduce from the information published by the Commission, but clearly rests upon pessimistic estimates of the impact of an FTT on taxable activity. For example, the Commission reckons derivatives trading might decrease anywhere between 70 and 90 per cent under the impact of a 5 basis point tax. That helps to explain why the Commission opted for a one basis point charge instead. But there is no need to rely on theoretical projections. Europe actually has concrete experience of the impact of an FTT on market activity. In January 1984, Sweden introduced a 50 basis point tax on the purchase or sale of equities, so a round-trip transaction cost 100 basis points in tax alone.  In July 1986, the tax on each side was doubled to 100 basis points, and it was later extended (albeit at lower rates) to professional trading (50 basis points) and fixed income securities (2 basis points on short term debt and 3 basis points on long-dated bonds). A tax on stock options was introduced the same year, levying 1 per cent on the premium and 1 per cent on exercise.

What were the effects? Share prices fell immediately, as investors subtracted the tax from anticipated future cash flows. The cost of government borrowing went up, as liquidity in the bond markets dried up. A tax of just 0.003 per cent on five year government bonds was sufficient to cut trading volumes by 85 per cent in the first week after implementation. Futures trading volume fell 98 per cent, and the options market effectively ceased to exist. Market volatility increased, chiefly because the tax led to fewer, larger trades. There followed a massive exodus of trading to London, because only trades via brokerage houses in Sweden were taxed.  60 per cent of trading activity in the 11 most liquid stocks in Sweden moved to London, and a third of all trading followed suit. By 1990, half of all trading in Swedish securities had moved to London.

In short, the transactions tax imposed in Sweden raised the cost of borrowing, reduced equity returns, inflated the cost of corporate capital, increased volatility and shifted transactional activity elsewhere. As a result, the tax projections proved wildly optimistic. In the case of the tax on fixed income trading, an impost expected to deliver SEK 1.5 billion actually yielded a thirtieth of that amount (SEK 50 million). Even in its best year, when it raised SEK 80 million, the sum was just 5.3% of the amount projected. Worse, as trading declined and stock prices sank on the back of higher tax expectations and reduced liquidity, the yield from capital gains tax on share transactions also went down, to the point at which it offset completely the gain from the turnover tax.  In other words, the eventual net revenue from the tax was zero. The Swedish government accepted reality in 1991, abolishing the levy on fixed income trading in April 1991, after just a year in operation, and the taxes on inter-dealer trading and equities by the end of that year.

Unsurprisingly, the Swedish government is opposed to the proposed FTT: they have tried it, and found it does not work. Czechs and Bulgarians have also joined the British in questioning the wisdom of an FTT. Not that there is any great issue of principle in the British stance. The United Kingdom is one of 30 countries – including Switzerland, Hong Kong and Singapore, all of which expect to benefit from an influx of European business once the EU imposes an FTT - to levy a tax on financial transactions. In fact, UK Stamp Duty is a global tax on transactions in UK stocks, wherever they are executed, and whoever is trading. Transactions in UK equities are not legally enforceable unless the Stamp Duty is paid. The tax raises the not insignificant sum of £3 billion a year.

However, UK Stamp Duty, unlike the proposed FTT, is paid by investors, not intermediaries, all of which remain exempt. In fact, thanks to the lively CFD market, most equity business in London manages to avoid Stamp Duty anyway. Importantly, it was also for many years the ambition of the UK government to eliminate Stamp Duty. It came down from 2% to 0.5% in the mid-1980s precisely because of the fear of driving business elsewhere, leading - according to one study - to a 70 per cent jump in equity turnover. Ironically, what eventually sank the stated government ambition of abolishing Stamp Duty was making it contingent on the completion by the London Stock Exchange of TAURUS, the settlement system abandoned in 1993 – the challenge of programming for Stamp Duty being among the many problems that doomed project encountered.

The lesson of the British and Swedish experiences is important. The British experience proves that turnover taxes dampen liquidity, not volatility, while the Swedish experience shows that an FTT in one country is not a viable option. This is why countries most in favour of a tax (France and Germany) are so irritated by the member-state most opposed to it (the United Kingdom) and so eager to persuade the United States to join in. Even if it did, business would likely migrate to Singapore and Switzerland instead. This would create further expensive complexity. In such a highly mobile and fully internationalized industry, co-ordination between countries that levied the tax and countries that did not would still be necessary to avoid the risk of double taxation. A transaction tax cannot, for example, justly be levied in both the country where the counterparty resides and the country where the transaction is levied. It cannot even be levied at different rates in separate transactions, without running the risk of sparking a shift of business between countries.

What is clear is that, if the EU imposes an FTT unilaterally, financial transactions will migrate. If the Swedish experience is repeated, and a third of all trading migrates to other destinations, the tax take from the €920,738 billion would fall to perhaps €1.2 trillion. (The Commission is sanguine about this, arguing that “such disappearance could be seen as positive if the activities targeted are considered as harmful.”) This number is still far higher than €57 billion. (Interestingly, the Joint Committee on Taxation of the US Congress has also come up with a relatively conservative yield for the Harkin-DeFazio proposals of $352 billion over the decade to 2021, or just $35 billion a year.) But even if it is assumed that another 20 per cent of the value of delivery instructions relates to trades in which neither party is a taxable institution, the tax take in exchange business alone still remains as high as €859 billion. Assuming a shift of trading towards non-taxable substitutes reduced the tax take by another 20 per cent, the revenue would still be worth €490 billion, even before adding on additional revenue from fixed income and derivatives trading.

In short, it is hard to see how such a tax could raise less than €500 billion. One European organization that has estimated the revenue from a European FTT came up with just under €600 billion at the low end and nearly €900 billion at the top end, without counting fixed income or derivatives trades or trades netted through a CCP either. In fact, it can plausibly be argued that a European FTT might raise not €57 billion a year, but anywhere between €400 billion and €1 trillion.  At €1 trillion, the annual tax revenue would be worth seven times the 2011 operating profits of the European banking industry – which is one measure of how much damage such a tax might do. As it happens, the Commission documents look at taxing those profits instead of imposing an FTT. They estimate that a 5 per cent tax on profits would yield somewhere between €9.3 billion on the most pessimistic assumptions about re-location to €30.3 billion on the most optimistic. This is a much lower margin of error than the one found in the FTT projection.

This is scarcely surprising. Most of the profits in the banking industry come not from trading, but credit intermediation, which a transaction tax would not touch but a profit tax would. Taxing the profits of credit intermediation as “abnormal” even has a respectable basis in fiscal theory. Banks do enjoy a lucrative economic rent – the amount banks, and indeed bankers, earn relative to the next best employment of their capital or talents – because of the privileges governments grant the industry. Chief among these are protection from competition, the tax deductibility of debt payments but not equity, exemption of net interest margin from VAT (a privilege the European Commission estimates is worth 0.15% of GDP), the right to re-use the property of customers, and the near-certainty of being rescued by taxpayers when investments go wrong.

In the good times, banks enjoy what Roy Thomson once said of an independent television licence in the United Kingdom (“a licence to print money”) while in the bad times they are rescued from their own folly (“too big to fail”). Ten member-states of the European Union have levied specific taxes on banks since the crisis, in large part for this reason. Even the British government, which poses as the friend of the international financial services industry, has imposed special taxes on the economic rents earned not only by banks (first in 1981 and then again this year) but also television broadcasters and oil companies.

In its impact assessment, the Commission endorses this line of thinking. In its estimates of the impact of taxes on the financial services industry, the Commission assumes that a tax on profits will do less damage than a tax on transactions. The Commission estimates suggest that, if all investment is assumed to be intermediated by securities markets, a transaction tax could reduce the GDP of the 27 member-states of the European Union by as much as 1.8%, more than three times the long run impact of a levy on bank profits. In other words, even the principal advocate of an FTT reckons a profits tax would do les damage to the standard of living.

Banks, central banks and the IMF oppose an FTT, partly on grounds such as these. But the advocates of an FTT are the same people who created the euro. Their track record shows that they are indifferent to the consequences of their decisions for the standard of living of Europeans. It is therefore hard to see how the introduction of an FTT, at least within the euro-zone, can now be avoided.  Banks, recognizing this is not an argument they can win, are likely to put forward tax proposals of their own, rather in the manner that victims of totalitarian injustice used to demand that they be punished for their errors. Cynically, banks also know that a tax on the riskier forms of funding adopted by banks, as introduced this year by Germany and the United Kingdom in the guise of encouraging banks to strengthen their balance sheets, is rich is possibilities for avoidance by window-dressing.

But even taxes on the profits of particular industries – even, for that matter, on the economic rents enjoyed by particular industries - are ultimately undesirable, and not just because any increase in the tax burden will be passed on by banks in the form of wider interest rate spreads, but because they are objectionable in principle. Industry-specific taxes are inequitable. They represent the arbitrary use of political power, most reprehensibly when used against an unpopular minority. Besides, the exceptional profitability of the banking industry in the booms of the 1990s and the Noughties was actually a reflection of the exceptionally high levels of risk they were taking, encouraged by perverse capital adequacy rules and lax monetary policies.

It is because so much of the apparently excessive profits turned out to be nothing of the kind that, instead of taxing transactions or profits, it would be far wiser to dismantle and reconstruct the entire financial services industry, starting with the banks. Regulators are already encouraging banks to alter the way they fund themselves, away from the wholesale money markets, and towards deposits, collateralised funding, long term debt and equity. They could go further, and normalise bank funding, by insisting on full cash reserving. The reason that solution is not even on the agenda, let alone being discussed, is that governments find highly leveraged banks politically useful for pump-priming consumer demand ahead of elections. The reason an FTT is on the agenda, although it will distort economic decision-making throughout the chain and does not reduce systemic risk, is that politicians find banks useful for even less reputable reasons. These include appeasing factions whose votes they seek, and the provision of cover for their own mistakes.