How
To Fix The World Bank
By Mark Scaramella
Counterpunch
08 December, 2003
The
estimated total yearly value of worldwide currency transactions -- and
this is a BIG number even if you're a corporate CEO -- is over $1.2
trillion a day. (No one knows the exact number). Or almost $500 trillion
per year. These are guesses made by practitioners of the dismal science.
For comparison,
the US annual federal budget these days is up to about $2 trillion (in
spite of the recent "tax cuts"), of which about $800 billion
or so, or about 41%, is funded by personal income taxes. So all federal
personal income taxes in a year in the United States, huge as they may
be, are only about 0.16% of annual global currency transactions.
Behind our backs
worldwide currency transactions have invisibly exploded in the last
few decades. These transactions are almost entirely unregulated and
untaxed. Again, we're talking here only about international currency
(or monetary) transactions, not the value of global trade in goods and
services, which is "only" about 10% of the currency transactions,
or "only" around $50 trillion a year.
The United States
total foreign aid budget is about $13 billion. Sounds generously big,
right? (Only about half of foreign aid is for humanitarian purposes.
The rest goes for "national security assistance." )
US annual humanitarian
aid is only about $7 billion a teeny-tiny fraction of the $500,000 billion
(7 out of 500,000) in currency trading, or 0.0015%. (Of course other
countries contribute to humanitarian aid at somewhat higher but still
comparably stingy levels.)
In other words the
humanitarian aid that is "generously" doled out by the United
States every year is less than one-and-a-half-thousandths of a percent
of worldwide currency transactions. (0.0015% of an annual income of,
say, $30,000, is 45 cents.)
Here's another way
to think about it. $500 trillion per year in currency transactions is
about $1 billion a minute. So the total US humanitarian aid budget for
an entire year is roughly the same amount of money as eight minutes
worth of global currency transactions each year.
Big banks do most
of these unregulated trades, not individual private currency speculators.
And 60% of the $500 trillion is traded in only three large first-world
countries: The United States, Britain and Japan.
In November the
subject of foreign exchange activity became a brief blip on the international
news radar screen when the Manhattan US attorney's office announced
fraud charges against 47 US currency traders in New York who were said
to have defrauded investors and banks of "tens of millions of dollars."
Manhattan US attorney James Comey called the crime "a staggering
array of criminal conduct."
One of those charged
was Stephen Moore, 55, chief executive of Itrade, a foreign currency
trading company, who had previously served on the Foreign Exchange Committee
for the Federal Reserve Bank.
The charges stemmed
from the undercover work of one lone FBI agent who, according to Comey,
"infiltrated" a Manhattan boiler room currency trading operation
for 18 months, and video/audio taped the defendants doing their dirty
work.
"It wasn't
fancy," said Comey. "It was fraud."
In all, prosecutors
charged traders from 18 firms. The "victims" of the fraudsters,
many of whom were international bank employees, included some large
(but mostly unknown, at least in currency trading) international banks
such as UBS AG, J.P. Morgan, Israel Discount Bank, Societe Generale,
and Dresdner Kleinwort Benson.
Besides Itrade,
the boiler rooms had fancy sounding names like Tullet Liberty, Tradition
North America, Madison Deane and Associates, First Lexington Group,
and ICAP Plc.
Yes, ye olde Deane
ploy. Works every time.
Of course, no one
would ever suspect the large banks themselves of playing any games with
their part of the rest of the "largely unregulated" $500 trillion,
especially the US attorney's office.
In announcing the
undercover investigation, FBI officials described the foreign exchange
markets as "one of Wall Street's most closed and insular subcultures."
FBI Assistant Director
Pasquale D'Amuro said that the undercover agent was told that the illegal
activity had been going on for at least 20 years.
In theory a little
bit of currency exchange activity is regulated by the US Commodities
Futures Trading Commission, but in practice they do very little regulation
because so much of the activity is worldwide and unreported.
Greg Mocek, head
of enforcement for the CFTC, said, "The CFTC does not regulate
the interbank Forex [foreign exchange] market. A lot of this activity
was occurring in the interbank Forex market. However the fact that at
a certain point the money flowed in was transferred in illegal futures
contracts that's what brought us in the fold."
In other words there's
no real regulation of currency trading -- unless it leaks out to other
categories of financial activity -- and only then if an extremely dedicated
lone agent spends 18 months taping it and figuring out what it all means.
The defendants are
charged with making around $650,000 in illegal profits from their fraudulent
trades. After all, all you'd have to do is tell an "investor"
that the exchange rates were only slightly different than what they
really were, and pocket the difference.
But the "tens
of millions of dollars" involved -- say around $30 million -- would
still be only around two one-hundredths of a percent of one day's currency
transactions.
The whole idea of
"currency exchange markets" is a little nutty, you've got
to admit. Imagine the taped conversations of "traders" as
they roam the aisles at the local currency market: "I'll give you
a thousand shekels for those 800,000 pesos and I'll throw in two loans
in the future if you'll promise to fund my friend's internet startup."
Or, "Hey, you got any of them yen left? I have a few extra dinar
and lotsa lira I'm having trouble unloading." Or, "I know
you say you're outta rials, but I think I can get my hands on some new
euros. How many euros do you want for all the rials your hiding out
back? ... No, no. They're not going up -- fuggedaboutit."
In light of these
humongous figures and these recent charges giving us a passing glimpse
into the dark currency subculture (the charges even mentioned "cash
kickbacks" and envelopes full of cash changing hands in New York
City diners), it seems appropriate to again raise what some countries
and some prominent economists have actually proposed -- an "international
currency transaction tax."
The concept was
first proposed in 1972 by Nobel prize-winning economist James Tobin
who originally suggested a tax rate of 0.5%. Subsequent economics research
has determined that a smaller tax, as low as 0.02% to 0.1%, would still
be an effective deterrent to speculative, short-term trading, and would
be the basis for at least a little bit of regulation since transactions
would have to be reported and logged in a computer somewhere. (Tobin's
proposal was originally intended only as a deterrent to short-term currency
speculation, not as a tax or a way to fund humanitarian aid projects.)
But the idea is
getting a little more attention these days from people who are not economists--
and even from some major countries -- who think a tiny transaction tax
would also be a decent, fair, and relatively painless way to reduce
the kind of crushing poverty, starvation and grotesque income inequalities
that produce not only envy and animosity toward the industrialized world
but, in a few crazy extremists, a visceral hatred of the West.
If sized a teensy
bit higher than .1% and applied just to US based transactions, such
a tax could eliminate the US personal income tax and America's big loophole
industry -- i.e., lobbying and corruption -- that goes with it. But
that's probably too much to ask.
Mr. Tobin is no
humanitarian or critic of the international banking system or the World
Bank. He recently told an interviewer for the World Bank's newsletter,
"I don't have the slightest thing in common with these anti-globalization
revolutionaries. I'm an economist and, like most economists, a backer
of free trade. I also support the IMF (International Monetary Fund),
the WTO (World Trade Organization), and all the things this movement
is attacking. In fact, I believe the IMF should be strengthened and
enlarged. Of course, it has made many mistakes, but, as is the case
with the World Bank, it has too few means at its disposal to help above
all poor and underdeveloped economies. The World Bank and the IMF are
not part of some conspiracy called globalization."
Mr. Tobin may be
at least partially right. And, by extension, the anti-globalization
protesters may have it at least partially wrong. To make a better world,
the protesters might want to stop preaching to themselves about the
horrors of globalization, the World Bank and the International Monetary
Fund, and on and on and on.
Instead, using the
magic of mathematics and teeny-tiny percentages of very large numbers,
they could join with countries like Canada and India and other member
nations of the United Nations General Assembly, several leading international
economists, Ralph Nader, Fidel Castro, and even some of the world's
biggest financiers, and work to enact an international currency transaction
tax (on only the world's three richest countries, or with a minimum
transaction threshold, if you prefer). The proceeds of the tax could
be aimed directly at the poor, not the middlemen.
The currency traders
would hardly notice.
According to the
United Nations, there are 1.3 billion people living in extreme poverty
in the world (surviving on less than $1 a day), and that number grows
annually. So if you wanted to get really ambitious, only one-thousandth
of global currency transactions would more than eliminate extreme poverty
worldwide.
Given a choice between
eliminating the World Bank (highly unlikely) or eliminating extreme
poverty USING the World Bank (a real possibility), wouldn't most people
choose the latter, by imposing a simple, tiny, already-on-the-table
tax on international currency transactions, administered by the World
Bank or the IMF? (Remember that poverty eradication is already one of
the World Bank's stated goals.)
Of course any currency
exchange tax revenue given to poverty-stricken people should be democratically
controlled by those people. And the World Bank or IMF must see to it
that it gets where it's supposed to get.
Ambitious? Sure,
but these are more manageable objectives than eliminating the World
Bank and the IMF, much less currency transactions.
Even if you could
eliminate the top two or three big international banks, there will still
be banks and they will still be in the profitable international banking
business. The well-meaning but obviously math-challenged anti-globalization
protesters -- not to mention the world's many poor people -- might discover
that the world's banking system (which is long overdue for regulation
as well as taxation anyway) could become their best source of revenue.
Mark Scaramella
is the managing editor of the Anderson Valley Advertiser. He can be
reached at: [email protected]