The Tobin Tax as Fund for Financial Stability A s globalization challenges national borders, governments are discovering that their ability to conduct their public business is eroding. This lesson struck sharply in southeast Asia in 1997 and 1998 when financial capital, which had entered in a burst of euphoria, left in a rush to the exits, leaving in its wake financial devastation akin to a typhoon that blasts onto a land mass from across the oceans and departs into some mysterious ether. Specula­tive movements of liquid finance is the technical term used to describe this. The history of the modern era has seen this before, summarized admirably in Charles Mackay’s title of his 1841 book as»Extraordinary Popular Delusions and the Madness of Crowds«. What globalization brings to this is a new dimension of speed, mass, and reach over extended space, threatening the sovereignty and policy-making capacities of the nation state. To deal with this problem of hot money stinging its holders, a proposal has been resurrec­ted from the early 1970 s, the Tobin Tax, named after its originator, the Nobel Prize winning eco­nomist James Tobin of Yale. He proposed levying a small tax on foreign exchange transactions. Each time a Deutsche mark would be sold for a dollar, for example, or vise-versa, a tax would be charged. As with all taxes its intent is to reduce the volume of such exchanges without interfering with the necessary function of buying and selling currencies in order to allow trade, travel, and financial trans­actions to take place. If the tax is calibrated care­fully enough only a portion of pure speculation would be reduced, leaving intact the important and necessary requirements for financial liquidity on global markets. Tobin describes this as throwing »some sand in the well-greased wheels« of financial speculation to restrain financial markets from devia­ting too much from fundamental values. He was writing at a particular historical moment and his scheme was designed to address the problems in financial markets of the late 1970 s: currency instability following on the collapse of the Bretton Woods system, the OPEC oil price shock, a collapsing dollar, intense speculation in other currencies and gold, and a difficult after-birth for the system of privatized flexible exchange rates that replaced a market that had been operating as more of a publicly controlled market since 1946 . Speculation in financial markets further destabiliz­ed what was already a fragile balance in financial markets. Such a tax he thought would restore a degree of lost control over monetary policy for central banks, particularly during financial crises. His idea became current once again after the Asian financial crisis of 1997–98 . Starting in 1993 short term money poured into these markets at a rate that eclipsed previous inflows. Dubbed emerging markets to make them attractive for financial speculators and to distinguish them from their former characterization of less-developed­countries, this followed the classic speculative script identified in 1841 by Mackay: naming some­thing valuable when it may not be(like Tulips in the 1634–35 Dutch Tulip crisis), attracting investors on the basis of flimsy research and analysis, and finding a willing host who would be foolish to turn away from such largesse. The key modifying adjec­tive in all this is»short-term«. Financial flows into Asia were not about long-term investment in any­thing tangible that would produce wealth. To pro­vide some sense of its dimension, from 1988–1992 the typical size of these inflows amounted to about 7–10 percent of Gross Domestic Product( GDP ) of the receiving country. From 1993 to 1995 they grew by a third for some countries and nearly doubled for others to 13 percent of GDP , and 86 percent of this was of the short-term variety. Starting in Thailand the speculative bubble burst and then circulated to most of the countries in Southeast Asia, spreading beyond this region like a contagious virus as far as Russia, Brazil, and Argentina. It was the financial equivalent of hoof IPG 4/2001 Kommentare/Comments 363