Ottawa’s war against bank reform

TheStar.com – Opinion
Published Wednesday May 19, 2010.   Thomas Walkom

Canadian cabinet ministers are fanning out across the planet in an effort to derail one of the few concrete international proposals aimed at reining in the global financial system.

Finance Minister Jim Flaherty was in India Tuesday lobbying against plans, supported by both the U.S. and Europe, for a globally coordinated tax on banks. Treasury Board president Stockwell Day took the government’s sparethe-banks message to Shanghai while Trade Minister Peter Van Loan blitzed Washington.

All were part of Ottawa’s effort to create a coalition of the self-satisfied among nations whose banks, like Canada’s, didn’t fail during the global financial crisis. Essentially, Canada’s pitch to countries like India and China — both of which are members of the newly powerful G20 — is that a little jiggling at the margins will suffice to set the world financial system right.

This would be welcome news if true. Unfortunately, it is not. What has become clear over the last two years is that the global financial system doesn’t work. It is remarkably efficient at providing huge salaries and bonuses for its practitioners. But it does not do what a financial system is supposed to do — which is make capital available for productive uses.

But it will only work if most countries agree — otherwise banks will simply move their operations to low-tax jurisdictions. Ottawa’s attempts to actively sabotage any such agreement are not just misguided. They are malevolent.

The reasons are many. Much has to do with the failure of states to regulate their banks and near banks. Thanks in part to the clubby nature of its banking system, Canada did better here than most.

But much has to do with the fact that finance has grown too large relative to the real economy. Put simply, there are far too many smart people trying to figure out ways to move money around and far too few trying to figure out how to use that money productively.

The British, by the way, understand this. During the recent election campaign, all parties — including the victorious Conservatives and their coalition partners, the Liberal Democrats — promised to reduce the country’s reliance on financiers and pay more attention to manufacturing.

The International Monetary Fund, which was asked by the G20 to come up with financial reform plans, also understands the problem. That’s one of its stated reasons for proposing that member states levy two new financial taxes.

The first would be a tax on speculation. Banks that are more conservative in their lending habits (including presumably, Canadian banks) would pay less. The second, a levy on excess profits, would eliminate a tax bias in most countries that encourages the financial system to become too big.

Under the IMF proposals, individual countries would keep the proceeds of their own taxes. Canadian money would not be used to bail out U.S. banks. Nor would the reverse occur. In fact, the IMF suggests that revenues raised could be used for any purpose — including paying down the debts that governments have incurred over the past two years to keep their struggling economies alive.

By itself, the global bank tax would not prevent another meltdown. Clearly, more regulation is needed.

But a tax would help. Done correctly, it would create a better balance between the financial and real sectors of the economy. It would certainly aid cash-strapped governments and lessen the danger of a Greek-style debt crisis. It would even help Flaherty meet his target of eliminating the federal government’s $54 billion deficit.

But it will only work if most countries agree — otherwise banks will simply move their operations to low-tax jurisdictions. Ottawa’s attempts to actively sabotage any such agreement are not just misguided. They are malevolent.

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