Fueled by lingering post-financial-crisis resentments, populism is upending conventional political assumptions. How far-fetched it seemed even a year ago that the British public would vote to exit the European Union or that the host of a reality television show would win one major American political party’s presidential nomination and a socialist from the small state of Vermont would contend strongly for the other’s.
Populism takes aim at centers of money and power, and that means banks. Both U.S. parties adopted platforms at their conventions this summer that called for reinstating the Glass-Steagall Act, which from 1933 to 1999 required separation of commercial banking from investment banking. Such an endorsement might have been expected of the Democrats, perhaps as a nod to the “break up the banks” refrain of Senator Bernie Sanders’ pesky campaign against eventual nominee Hillary Clinton. But the pro-business Republicans? Candidate Donald Trump, who has a populist streak and has been through bankruptcies, appears to be wary of the financial establishment, though he also wants a moratorium on new regulation and to dismantle the Dodd–Frank Act of 2010.
Platforms, of course, are largely symbolic and rarely commented upon after Election Day. But, as Steven Lofchie, co-chair of the financial services group at Cadwalader, Wickersham & Taft, has stated, “they do influence the parameters of the debate that is to come, and thus it seems appropriate to treat the documents as significant.”
And if that is the case, something else is brewing that could give the establishment further pause. Although the Republicans haven’t gone this far, the Democrats are on record in support of a financial transaction tax (FTT), a small levy that could generate tens to hundreds of billions of dollars for government coffers and causes. Also known as a Tobin tax, after the late Yale University economist and Nobel laureate James Tobin, the FTT is seen by advocates — billionaire Bill Gates among them — as a tantalizingly simple and relatively painless progressive tax enabling some degree of wealth redistribution. Loaded though that term may be, a group called Robin Hood Tax is active in at least 13 countries and claims millions of followers; the headline on the U.K. website, for example, says, “Small change for the banks, big change for the world.”
Tobin posited the tax as a check on the excesses that produce market bubbles. Jared Bernstein, senior fellow at the Washington-based Center on Budget and Policy Priorities, asserted in a New York Times commentary last year that a 1-basis-point (0.01 percent) tax on securities transactions could raise $185 billion over ten years — he suggested it go toward prekindergarten programs and college aid for low-income students — while putting a significant damper on high frequency trading, which “does nothing to help ordinary investors and can destabilize financial markets.”
The concept has made some headway in Europe, with expressions of support from many EU country leaders, but agreement on a legislative consensus has been elusive. During the July G-20 Finance ministers meeting in Chengdu, China, Wolfgang Schäuble of Germany conceded that European efforts were faltering but vowed to take the proposal to a “global level,” hoping for a broader consensus over a period of years.
In the U.S., Representative Peter DeFazio has been leading the FTT charge. The Oregon Democrat introduced in July a bill that would tax stock, bond and derivative trades 3 basis points, raising a projected $417 billion over ten years.
Nothing like this will ever come to pass if the banking and securities industries have any say about it. Illinois legislation to close the state budget deficit with an FTT brought a dire warning in June from CME Group executive chair and president Terry Duffy. “Customers will take their business to where they don’t have to pay a financial transaction tax to manage their risk,” he said. “Not only will our customers leave, but we will be forced to do the same.”
Dean Baker, co-director of the Center for Economic and Policy Research and a supporter of DeFazio’s bill, dismisses such “scare stories.” He has said that, after decades of cost-reducing automation, an FTT “would just raise trading costs back to where they were ten or 20 years ago; they won’t shut down financial markets.”
There is certitude on both sides of the debate, but the political climate is in flux, and strange things can happen.