A Critical review of European Union financial transaction tax

10258726 Financial economics & the banking crisis Professional report Myles Mackey





MSc: Economics and Finical Analysis 1 " Page 15/03/2015

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% of total financial cricies



Time Period Percentage Contribution of Financial Cricies




Severity and Frequency of financial crises globally 1720 - 2008

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Severity




Critically review the extent to which you believe that The European Union financial transaction tax (EU FTT) originally proposed by the European Commission in 2011 will deliver a levy to buffer the financial system against future similar crisis to that experienced in 2007-2009.





Myles Mackey
Manchester Metropolitan University
2015



Contents
Introductory Elements 5
Introduction 5
Summary 5
Context of the Proposal, for a Financial Transaction Tax Across the EU. (European Commission, 2011) 5
Evaluation of the Financial Transaction Tax's effectiveness 6
The Feasibility of Obtaining an International Implementation Agreement 6
Expert Opinions Supporting the EU FTT 7
Critical Evaluation Regarding Support for the EU FTT 8
Expert Opinions Against the EU FTT (Including Critical Analysis) 9
Alternative Solution 10
Alternative Mainstream Political Solution (Different Tax System) 10
Alternative Non-mainstream Political Solution (Strong Regulation Changes and Controls) 11
Hypothetical/theoretical Non-mainstream Consideration (Changes in Educational, Regulations and Standard Practice) 13
Additional Considerations (relevance and Assumptions) 14
Does the Frequency and Severity of Future Economic Crises Change the Effectiveness of the FTT? 14
To What Extent is GDP a Good Economic Indicator? 15
Alternative Financial Indicators 16
Conclusion 17
References 18
Appendices 24
Figure 1 Significant Political and Economic events (1933 – 2009) 24
Figure 2 Expected changes in demand, after the EU FTT is implemented (or globally). 26
Figure 3 Global number of trades in equity shares 27
Figure 4 Over the counter daily volume trades 28
Figure 5 Marginal Propensity to Consume 29
Figure 6 Diversification 30
Figure 8 Wealth inequality in America 32
Figure 9 USA Income 33
Figure 10 USA income over time 34
Figure 11 USA Net worth 35
Figure 12 Frequency of financial crises 36
Figure 13 Regulations controlling speculation and investment markets 37
Figure 14 Government FTT Revenue and financial crisis bailout analysis 38
Figure 15 FTSE 100 performance in the last 10 years 39
Figure 16 Severity and Frequency of financial crises globally 1720 - 2008 40
Figure 17 Severity and frequency of financial crises globally chart 2 41
Figure 18 Severity and frequency of financial crises globally chart 3 42
Figure 19 Time period of financial cries pie chart 43
Figure 20 Time periods of financial crises Analysis 44
Figure 21 GDP and happiness 45
Figure 22 GDP per capita and life expectancy 46




Abbreviations
EU FTT European Union Financial Transaction Tax
EU European Union
EC European Commission


Introductory Elements

Introduction
The purpose of this report is to critically review the European Union financial transaction tax (EU FTT). Additionally, the report will evaluate and critically analyse if the FTT will deliver a levy to buffer the financial system against future crisis, similar to the Great Recession (2007-2009). The document will include the following topics and issues: EU FTT scheme, reality of international agreement, expert opinions, alternative solutions, frequency and severity of future crises, and additional considerations regarding GDP and alternative measures. After gathering a wide variety of information, it will conclude all of the main elements and make some possible suggestions for the future that aim to best protect the EU economies.
Summary
After critically reviewing the EU FTT, the main findings and conclusions are that there are serious concerns around negative growth and if it is able to meet its objectives (Culp, 2010) and (Devereux et al, 2011). There is significant evidence to suggest that the frequency of financial crises are increasing based on the number in the past (The economist, no date). The most recent development regarding the EU FTT, is that the initial 11 counties implementing a FTT are pushing for a renewed effort to gain collective EU approval, but are faced with strong opposition, especially from the UK (European Commission, 2015). After considering all available data in the allocated time, the recommendation is for the EC and EU to consider alternative solutions that are better focused on their objectives. Additionally, to consider alternative solutions and measures to GDP that are far more focused on quality of life and the limits to consumption (Jackson, 2011).

Context of the Proposal, for a Financial Transaction Tax Across the EU. (European Commission, 2011)
The European Union (EU) financial transaction tax (FTT) was first proposed in 2011 by the European Commission (EC) to its member states. The proposed tax level for financial transactions related and unrelated to derivatives was 0.01% and 0.1% respectively. The initial proposal in 2011, which was amended in 2013, indicates that the premise for implementing the EU FTT is firstly, based on the financial sector being one of the main cause of the 2007 crisis that had a serious negative impact on many of the EU economics. Figure 1 (Ref.30-62) lists some of the significant events that predominately occurred in the US because of the financial sector that spilled over into Europe. Secondly, based on James Tobin's theory (1972), who proposed a small tax aimed at discouraging short-term currency speculators, this same method could be applied for financial markets and help prevent the initial premise from reoccurring. The reasons for applying a FTT at an EU level is firstly that it will help to avoid the fragmentation of financial markets. Secondly, to insure that financial institutions are contributing towards the costs of the financial crisis. Finally, they hope to create a new incentive structure, by diminishing the disincentives on transactions that distort the market, or are inefficient, aiding current regulations. This 2011 proposal was planned to apply across all markets, transactions and financial institutions (European Commission, 2011) & (European Commission, 2013). The conclusion being that the FTT is the best solution for the above reasons and that further action should be taken to avoid future crises. However, there is much debate over the effectiveness the EU FTT could have provided between experts and counties.

Evaluation of the Financial Transaction Tax's effectiveness

The Feasibility of Obtaining an International Implementation Agreement
One of the major concerns is the feasibility of all the EU states agreeing on the proposal. The EU FTT proposal by the EC said 'it is important to avoid distortions caused by tax rules conceived by Member States acting unilaterally' (European Commission, 2011: online), indicating that without an international implementation agreement the strength of the FTT becomes significantly weaker. In 2012 the EU finance ministers concluded that they would not be able to form a united decision for the FTT implement over the EU states, not even in the foreseeable future (European Commission, 2015).
There could be numerous reasons why the EU countries failed to acquire a unanimous decision. It is possible that many of the EU representative ministers follow some of the neoclassical economic behaviours, advocating that people tend to be: independent, selfish and utility maximisers (Baddeley, 2013). This could explain why it would be very difficult to reach a unanimous decision, considering they all probably have certain preferences that may have conflicting interests to the FTT objectives. A specific example could be, countries acting risk-adversely regarding economic growth based on the tax reducing consumption and thus GDP (Hubbard & O'Brien, 2015), and the funds being stored away for a number of years, compiling a large bank that could not be invested or used until the next crisis. Additionally, the countries could have the perception that it could become very risky to impose a tax. Countries would be exposed to potentially losing consumption, or even important firms in the financial industry if they move to other EU countries given the disincentive from an additional tax. Research on the EU GDP indicated that growth is expected to be between the range of -1.76% (minus €286bn) and -0.53% (minus €86bn) with an average of approximately -1.15% (minus €186bn) according to the report by the European Commission (AIMA, 2012). Alternatively, due to many others not accepting the FTT, more might follow the crowd (herding behaviour) and do what they think others will do (beauty contests concepts) based on Baddeley (2013) or even out of loyalty to other counties. Furthermore, there has been a number of problems arising from the UK by challenging the legality of the council's decision to apply enhanced cooperation of the FTT in 2013 (European Commission, 2015); this could further diminish the chances of the FTT acquiring an international agreement in the future, although it has been dismissed by European judges (Barker, 2014).
However, after further research (European Commission, no date) since the initial proposal and the FFT renewal attempt (KPMG, 2015), there could still be a change in the perspective of many countries. If the initial eleven countries that proceeded with the FTT prove that it works effectively over time, then this could open the possibility of the FTT being implemented in the future by more EU states. The EC (no date: online) have conducted research - over a nineteen-month time period, with twelve months before the introduction of the tax and six months after - on the 'French tax on financial transactions influence trading volumes, price levels and/or volatility on the taxed market segment.'. The transaction tax was set at 0.2% on the transfer of shares, and 0.01% tax on cancelled high frequency orders. Additionally, the EC used and compared the same performance indicators in the French mid-cap market, Italian MIB and the German DAX that did not implement any new taxing policies. The evidence and interpretation of the EC report states that after the implementation of the FTT there did not appear to be any distortions within the market share prices nor did the volatility levels increase. However, they did find significant evidence of a liquidity drop within the market by approximately 10% soon after the FTT implementation (European Commission, no date).
Although, there are a number of issues regarding the EC research conducted in France, diminishing its validity. Firstly, the study only had six months of data collected after the tax was implemented. This could mean that over a long time, the change in the liquidity of shares and available profits diminished by the tax could later cause a drop in price. This could be supported by the general understanding of primary and secondary markets. The increase in liquidity in secondary markets provides a higher initial primary market price (Mishkin, 2013). Secondly, there is an assumption that there were no other significant factors distorting the price that occurred at a similar time. Examples could be bubbles, herding, and other behavioural economic factors that could cause financial instability (Baddeley, 2013) offsetting what could have a drop in prices. Thirdly, the EC only used three other markets for a comparison and could have been a biased sample selection (Heckman, 1979). Furthermore, they assume there are no distortions affecting these markets, which may only have been evident by using more of the EU markets, or additionally incorporating the US market; this diminishes the validity of the findings and therefore could lower the support of the FTT, which in turn effects the chance to expand in the EU and potentially globally.
Synthesising the current information and considering the failure to acquire a united agreement - which remains unforeseeable by many of the countries representatives in the near future - and the limitations of the current research, there is no indication that countries will not be open to implement the FTT any time soon. Furthermore, it is highly unlikely that countries will potentially compromise their own counties priorities or interests as indicated by both classical economics (Sloman and Wride, 2009) and behavioural economics (Baddeley, 2013) which may explain their current decisions. Nonetheless, if new research is conducted to reinforce the EC's proposal in multiple other countries with significant evidence showing overall positive long-term outcomes or little short-term economic disruption, then there could be a dramatic shift in opinion, primarily if they can demonstrate little loss to growth in the long-term. Additionally, if a few key countries that have strong influence over others supported the FTT, mixed with the herding and beauty contests concepts (Baddeley, 2013), then there remains the possibility to acquire a united international implementation agreement in the long-term given the current push by the initial countries that did implement a FTT policy (KPMG, 2015). At the same time, it is extremely unlikely in the short run based on the current information and the view of the majority of EU countries (European Commission, 2015). Given the expectation that the EU will not have a collective approach in the short and probably the medium-term, it is quite possible that the market will be distorted and could even lead to the opposite of the desired effect. This could mean that the implementation of the FTT with the current eleven countries will not provide a buffer for future crises, could diminish growth and even distort markets; this is indicated by the proposal itself given the importance it placed on obtaining an EU collective movement on the FTT (European Commission, 2011).

Expert Opinions Supporting the EU FTT
The expert Manfred Bergmann, (Director for Indirect Taxation and Tax Administration, European Commission) supervised and guided the initial proposal for the FTT. Bergmann indicated and stated that the EU FTT would be effective; it is expected to raise fifty to sixty billion euros with two thirds from derivatives without harming the effectiveness of financial markets (European Commission, 2012). This is supported by, the Center for Economic and Policy Research stating that the benefits of the FTT include it acting as a source for generating substantial revenue and improving the operation of financial markets (Baker, 2010). Furthermore, Bergmann advocates that this approach only failed previously in other countries before because it did not apply to all markets, transactions, and intuitions with the expectation of no negative impact on growth, jobs, or pensions (European Commission, 2015). Moreover, the EC research (as described in the previous section) in France did not see a drop in market prices, indicating there would be less risk of losing growth after implantation (European Commission, no date). This is additionally supported by 'finance ministers from Austria, Belgium, Estonia, France, Germany, Italy, Portugal, Slovakia, Slovenia and Spain' after releasing a joint statement to help restart the FTT proposal for other EU countries (Bloomberg, 2015: online). As well as being supported by Oxfam (2014) and nearly a million people on their support page. Although, they have no real evidence to support their views.

Critical Evaluation Regarding Support for the EU FTT
It should be noted that it was extremely difficult to find much supporting evidence or research for the EU FTT of any significant value. Furthermore, there are some controversial elements to what Bergmann has stated from his interview (European Commission, 2012) and the FTT proposal (2011 & 2013). Primarily, the initial premise was that James Tobin's theory is the correct theory to solve the problems caused by the financial sector. Both aim to discourage short-term trading and mitigate the level of speculation within the market. Nonetheless, Tobin's research was in a tax for currency speculation (Canadian Centre for Policy Alternatives, 2011) and not in shares, bonds, and derivatives over an EU or global scale (a much wider financial market). This means there might be situations that do not apply to all transactions, markets, and intuitions. Secondly, even if Tobin's work was on the collective financial market, the three underlying objectives of the FTT are not entirely concrete when applying it to the EU given the expectations of Bergmann and the EC (European Commission, 2011).
The first objective is that it will discourage short-term high frequency trading (European Commission, 2011) on a large enough scale to change the market heading behaviours, especially during upward booms and downturn recessions preventing future crises. The solution may not be as simple as a tax, despite financial instability becoming a self-perpetuating global problem. The FTT is focused on the assumption of traders having rational expectations (Baddeley, 2013) and reacting to the disincentive of the tax.
Secondly, that it will reduce speculation and improve inefficient market transactions (European Commission, 2011) that create the initial surge of price inflation leading to bubbles that cause the extreme business fluctuations without causing negatives effects on growth, jobs, or pensions. Given the EC view that the financial sector was a major cause in the 2007/2008 crisis fuelled by sub-prime mortgages demanded by investors globally (Inside Job, 2010) indicating the logic behind the FTT. Although, it is unrealistic to believe there will be no negative impact on growth. One of many theoretical examples would be from the loss of investment funds available to expanding firms offering company shares or bonds. Given the basic theory that the tax would reduce liquidity, and then reduce the price offered to the company (Mishkin, 2013) there would be less funds available to invest and grow. If this is then multiplied out across the entire EU, then future industries potentially lose growth, leading to less potential long-term profits over future years all compounding year after year. Furthermore, Bergmann and the 2011 proposal actually are inconsistent regarding the growth matter. In his FTT interview, Bergmann sates there will be no negative growth but the proposal sates that there would be a 0.5% loss compared to the baseline scenario under the impact assessment section (2.2). Neither the interview, nor the proposal's impact section (2.2), specifies the feasibility for different countries given their various economic circumstances, or dependence on the financial market, and is very general.
Thirdly, that the tax will act as a disincentive for transactions that do not contribute to the efficiency of markets (European Commission, 2011) and at the same time encourage, or at least not negatively effect, transactions that do contribute to the market efficiently, thus in itself not cause market distortion. It is almost impossible to separate the good behaviour and trading from the bad (Atkins & Stafford, 2013). This reinforces the point of possible negative growth as mentioned previously, meaning if the tax reduces bad trades, it will also diminish good trades in unison. Moreover, the proposal itself advocates the need for a united EU application across all markets, but with only 11 counties accepting an FTT, it is potentially now causing a distortion, that it aimed to diminish.
Finally, the research conducted by the EC in France (European Commission, no date) supporting the proposal (mentioned in the previous section) has only used six months of data. The long run may produce a very different outcome to the short run and can be illustrated by figure 2. Furthermore, extracting evidence from theory of Purchasing Power Parity (PPP) can illustrate this point further. Although in general PPP is accepted to be true, there is a big difference between the short run, with sometimes huge deviations in various countries. Only over the long run does it appear that PPP tends to converge, emphasising that it can take time for markets to adjust (Buckley, 2004). Bearing this in mind, it does not mean the study was wrong, rather, there is currently just not enough evidence to support the FTT for all EU countries and that it would create a buffer for the next financial crisis.

Expert Opinions Against the EU FTT (Including Critical Analysis)
On the other hand, other experts would argue that certain elements make the FTT unfeasible, and potentially will cause negative economic effects. Rebecca Healey (senior analyst at Tabb Group) said 'This measure has the potential to do so much damage it's a disaster.' (Holley, 2015). Additionally supported by Elliott Holley (2015) who said that the FTT would have harmful effects on the securities market and additional other negative effects on countries such as the UK who have not agreed to participate in the FTT program. This perspective also appears to be aligned with George Osborne who said it would hurt individual saver and not the banks (Watt, 2011) although it did not explain how it would impact pensioners more than the banks overall; however, it is supported by Allen & Overy (2013) who said that impact assessment suggests that the FTT costs will be passed on to end investors.
After researching further into the competing opinion of Healey, there is a clear bias regarding her view. The firm she works for is a financial markets research and strategic advisory company (Tabb Group, 2015). If the market shrinks, there could be less scope for company profits, unless taken from competing firms. In any case, it will most likely mean negative consequence for her and her firm. Secondly, the source itself had very little supporting evidence from other sources, and appeared to have a very narrow perspective with an unbalanced argument, diminishing is validity.
However, Capital Markets editor Ralph Atkins and the Trading Room editor Philip Stafford (2013) from the Financial Times stated there were a number of flaws and problems when applying a FTT that would support the views of Healey. Primarily, there will be a strong pushback from the banks and financial sector because of the theory in figure 2, the fall in trade in figure 3 since 2008 and implementation of a FTT in Italy in 2013 (figure 4). A second argument they follow up with is the complexity of tax collections, especially in different countries. Lastly, they advocate the implications to the financial market, expanding on topics of: Critical market functions, Liquidity, the REPO market and derivatives (hedging or speculation). Furthermore, they emphasise how difficult it is to separate good financial transactions, with low risky behaviour and risky (speculative) transactions (Atkins & Stafford, 2013).
Both Atkins & Stafford (2013) should not be biased, and have clearly illustrated good and logic reasoning for their view on why the FTT might be problematic. However, they only use data based on trading volumes, and show no information proving the reduction in prices in general. Furthermore, they have no supporting evidence to illustrate that there will be a greater loss of market function, than the benefits of reducing risky behaviour, nor vice versa, indicating that there is not enough current information. In 2008 the banks received Billions of bailout funds (Inside Job, 2010) as seen in figure 1, and they did not make any alternative suggestions that would be better than the current FTT to insure the financial sector contribute fairly based on their involvement in the previous crisis. Conversely, they make a valid point that certain EU countries, do not have a good record of tax collection, and may pose problems in the future as supported by Heath (2015).
Tim Heath (2015), an expert on UK taxes said that there are two main types of taxes: income or transaction tax and that he would expect that implementing an income tax would be far superior to a transaction tax. Additionally, Tim Heath (2015) suggested the major concerns of a new FTT being successful are: primarily the EU or global adoption, the structure for implementation in each country, public compliance to pay, enforcement systems, and a time before penalty. Tim Heath (2015) concluded that if all the EU countries had the same taxing system, then it would be easy to implement, but certain counties don't have a good reputation for collecting tax. Due to the poor implementation systems in the EU, it would reduce the FTT effectiveness in reality, but would be easy to implement in a countries such as the UK that does have a good taxing system, with a prime example being the stamp duty (European Commission, 2014). Additionally supported by Wasserfallen (2014) who obtained evidence indicating that countries with small taxes and poor taxing systems would suffer severely from diminished benefits of the tax revenue due to the higher costs.
Overall, there would appear to be little evidence to support the FTT and a significant amount of evidence that contradicts its proposal (2011). Research regarding the FTT by Culp (2010) concluded that there is very little economic theory or empirical evidence and that it is more likely to have adverse effects on financial markets by distorting asset prices and reducing trade to other products. This is further supported by Devereux et al (2011) who deduced that there would be a high degree of uncertainty regarding the impact of the FTT on market efficiency and financial stability.
Conclusively, the extent to which a FTT can levy a buffer for the EU could be based on the feasibility of implementing it. It will take time and money to be integrated into countries that do not have a system as sophisticated as the UK and is seen to be a serious problem by Heath (2015) and Atkins & Stafford (2013), indicating that the FTT overall would not be able to generate the required or expected revenue to be used during the next financial crisis. Furthermore, this is expected to be at the expense of economic growth, meaning that the FTT should have a net benefit higher than the GDP loss indicated by the EC's report (KPMG, 2015), although there is not enough significant evidence to prove this would work in all EU countries due to much uncertainty (Culp, 2010) and (Devereux et al, 2011) .

Alternative Solution

Alternative Mainstream Political Solution (Different Tax System)
An alternative solution to making markets safer by taxing the financial sector could be based on some mainstream economic ideas. The marginal propensity to consume (MPC) is higher in low income groups (Sloman & Wride, 2009) as illustrated in Figure 5. If the target is to not reduce economic growth (by consumption) and instead to create funds to counteract any future financial crisis by means of targeting the financial sector (European Commission, 2011) then taxing the financial sector's profits and bonuses would accomplish the objectives of the FTT. Additionally, Grahl and Lysandrou (2014) investigated the main methods of generating income from the financial sector and concluded a financial activities tax (FAT) would be better than a FTT, as it will be far more effective in generating funding from the financial sector. In addition, it has currently been proposed by the Labour Party to have a new banker bonus tax and the Green Party saying they will place a cap on banker bonuses (BBC news, 2015). Moreover, by changing the pay structure of investment banks and their employees to perhaps use a regressive tax on investments over a longer time period and for bonuses to be awarded only when funds are received. For example, if a mortgage is issued over 10 years, then every time a payment is made, the bonus is then added to the employee's next income payment. Then it would be able to help create market stability, and diminish short-term high frequency trading and hopefully speculation.
Although, it will most probably still have an indirect effect on markets. In the same way as mentioned before, the reduction in trade volumes by investment banks would likely lead to a reduction in asset values, diminishing funding for companies (Mishkin, 2013), leading to a reduction of growth. Despite this negative effect on expected growth, it could minimise the expected growth loss compared with the FTT proposal (2011). The FTT would affect everyone directly, not just the financial sector. Furthermore, it would be unlikely to distort the market to the same extent and still generate an income for the government to use as a levy to buffer the financial system against crises. This is supported by Bain and Howells (2008) who claim that efficient markets have low transaction costs. If specifically choosing to use a taxation method, there is the option between transaction tax and income tax (Heath, 2015). After considering that a transaction tax would distort the market volume and perhaps the price, then it could be more logical to use some form of income tax instead. However, it might be a better solution to combine two or more different strategies working together, perhaps even ideas that are less conventional in many western cultures.

Alternative Non-mainstream Political Solution (Strong Regulation Changes and Controls)
Unorthodox economic ideas that are different to the mainstream ideas could be considered given the complexity of the objectives in the FTT proposal. Islamic finance, or banking, principles have some very different perspectives. 'Islam prohibits dishonesty, fraud and deception, coercive practices, gambling and usurious and injurious dealings' and 'Hoarding, speculation and collusion among producers' (Institute of Islamic Banking and Insurance, no date: online). This is supported by the executive director, Martin Steinberg, of Compulsive Gambling at the Connecticut Council, who said: 'hardly anyone identifies it as a gambling problem -- they see it as a "financial problem" or an "investing problem."'(Murcko, 2013).
Gambling is defined as to 'Take risky action in the hope of a desired result' (oxford dictionaries, no date: online). The definition of speculation is 'Investment in stocks, property, etc. in the hope of gain but with the risk of loss' (oxford dictionaries, no date: online). Finally, investing is defined as to 'Put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit' (oxford dictionaries, no date: online).
It is important to create a distinct difference between the definition of gambling, speculation, and investing because it then becomes easier to target and deter unwanted, negative market behaviour. If gambling is considered as taking risky action, then investing should not be taking risky action or only having low risk. If speculation is said to have the risk of loss, then investing should have a contingency plan to prevent total loss. Investing has the expectation of achieving a profit and thus should have odds at least tilted in the investors favour.
Extracting the concepts of no gambling and speculation from Islamic banking and from the deduced meaning of investing above, it could be used to target the FTT proposals objectives. Specifically targeting the following: reducing the current, and future, level of market fragmentation, limiting the negative behaviour, helping to stabilise markets, and avoid future crises (European Commission, 2011) and (European Commission, 2013).
This is important to address because financial markets can be inherently unstable because of numerous factors. One of the main causes being speculation, caused by, but not limited to, irrational expectations, herding, and social learning (causing people to follow the crowd) that distort the market creating higher volatility (Baddeley, 2013).
To help accomplish these objectives, it would require enforcing rules and regulations based on the principles of Islamic banking regarding gambling (and speculation) to EU investment firms. Ideas of this could be to have it so that all investments must be approved, based on theories that evaluate the expected return and the initial price of the financial asset. Considering that many companies have projected (NPV) future income based on previous years, and with models such as VAR and CAPM (Brooks, 2014) these could be used to hypothetically determine the region of acceptability. An example could be only allowing 20% around the model's indicated asset value. If the price inflates beyond 20% the underlying value, then it becomes speculation to buy the asset, and would not be acceptable by the firm. If the government want to stimulate more economic growth, they would then be able to rise the maximum deviation (20 % to 30%) of the underlying asset value and vice versa (20% to 10%). The core idea is to remove unwanted speculation and create control measures for firms that are considered to be critical to the functioning of the economy, diminishing economic volatility. This could be apply to all financial firms or just companies that, if when bankrupt, could collapse the entire economy. Additionally, this could apply to individuals (and immediate family members) who are trading over a specified amount, for example, £500,000 within 12 months. A separate government entity could be allocated to overlook the transactions to follow up on any speculation with the authority to issue extensive fines or take appropriate action to enforce the regulations and deter future misconduct.
This could support the long-term goal of reduced market instability by removing the key distorting factors derived from speculation. The expectation would be that asset bubbles would be unlikely to occur due the regulations preventing asset prices deviating too far from the underlying value based on expected returns. This in turn should help prevent a financial crisis or economic recession that might have otherwise developed if critical firms (investment banks) to the economy are potentially going bankrupt, similar to events in 2007-2009 with further details listed in figure 1 (Ref. 30-62).
Without any change to the financial system, it would continue to be exposed to a repeated occurrence of the Great Recession. It would be exposed to Smith's price mechanism self-correcting system (Sloman and Wride, 2009) with demand negatively shifting (similar to the example in Figure 2), and also herding behaviour, with everyone selling financial assets, thus creating an unstable market (Baddeley, 2013). Furthermore, this would most likely lead to another financial crisis where banks are not lending due to ambiguity aversion, causing a serious disruption to the economy (Wilkinson and Klaes, 2012).
Although being under strict guidelines would probably diminish the demand for investment banks, if applied over the EU then it would help create a long-term solution to market instability and provide the government with an additional tool to react to different situations. This theory has been illustrated in figure 13. It could help maintain control over the financial sector and could reduce speculation without causing serious damage to the efficiency of markets overall and mitigate the probability of another financial sector crisis. Although, there could be some serious negative effects on growth in different countries, and could be very unpopular. It could be perceived to be a trade-off between market stability and economic growth similar to the Philip's curve, which showed a trade-off between inflation and unemployment (Sloman and Wride, 2009). Nevertheless, it would be a very extreme change to current banks and would take a long time to implement even if the government managed to change the current system. It would probably endure a strong pushback by all banks in the EU and would be exceptionally difficult to have the EU agree on such a radical change, even more than the FTT. Furthermore, a great deal of analysis and modifications would need to be conducted over the range (percentage) of acceptability, creating a balance - using the accepted underlying method of asset evaluation - between acceptable risk and economic reward.
However, it might just be the need for any serious change to be implemented in the EU economic system because of the risk of financial instability. If the EU accepts economic theory from various cultures and groups then we could help to adapt the economic system in a beneficial way. Perhaps this concept of diversifying economic schools can be perceived in the same way that risk can be diminished by portfolio diversification as illustrated in figure 6 and provide a better overall understanding. Studies show that a group with a diverse background are more innovative and smarter (Phillips, 2014). It could be argued that every situation is different, and the situation could be adapted to using a wide range of possible options to counteract any given type and severity of economic crisis. This approach is specifically aimed to prevent any future financial crises, and thus diminishing the need to generate revenue, unlike the FTT.
Evidently, understanding the difference between speculation and a good investment has a number of benefits. Primarily, by using applicable financial theory and clearer definition, it opens the possibility of speculation to be measured, monitored, and controlled.

Hypothetical/theoretical Non-mainstream Consideration (Changes in Educational, Regulations and Standard Practice)
Considering that financial markets are rapidly growing and are highly interconnected to multiple economies, perhaps instead of, or combined with, regulation pre-crisis action, there needs to be a long-term solution based on economic trading behaviours.
Firstly, there needs to be a change in the standard models, theories, distributions, and acceptance within the financial industry and a greater need for more academic studying in economics, to apply to the real world markets (Kirman, 2015).
This can be accomplished by first changing the education system for any future additions to the financial sectors workforce. There would need to be a greater understanding of how financial crises occur built into the current pathways leading to the financial sector. This would require the history of economies and financial market crises to be integrated into many subjects. There would also be a need for new alternative theories that consider financial modelling using a variety of distributions, not just a normal distribution to be able to account for behavioural aspects and economic fluctuations. Furthermore, a change in the academic learning system is needed, to focus on individually gathering knowledge and not following herding behaviours that distort markets (Baddeley, 2013).
Secondly, there would need to be a change to the standard models used in the financial industry. Jondeau et al.(2007) said that in financial markets, asset return distributions do not match normal distributions and they are primarily used because of their simplicity or lack of understanding regarding alternatives. In figure 7 there is an example of the Black Scholes option pricing model used with various distributions and creating different prices indicated by the red area with all the other inputs exactly the same in green. Thirdly, new regulations are needed to enforce and support the first and second changes.
The evidence suggests that standard theories cannot account for events such as the 2007 financial crisis. The standard expectations of investors only require knowledge of standard models that cannot account for more extreme events, including the 2007 financial crisis. If models are able to include behavioural aspects or black swan events, then better real world simulations could be generated, hopefully preventing or mitigating the extent of a crisis.
This might reduce the need for changes in laws and regulations, if risk can be properly evaluated. However, this might still allow certain companies to collapse and/or events to still occur. It could be argued that regulatory changes at the EU or global level is needed to enforce any new changes. This would be exceptionally difficult and if possible would most likely take a considerable duration of time to be implemented. Furthermore, it is an assumption that it would work because it might not make the market less volatile, stable, or efficient. Managing the financial sector is a complex issue, and relies on economics to hold all the answers. However it is very difficult especially as the topic is not purely scientific with ideal test conditions. Due to this complexity and lack of understanding, a hybrid solution might be the best option. In this situation, combining regulation, education, and theory modification, could help to mitigate possible future situations but ultimately, it is unknown until the solution is found and implemented with years of research to support it.
Additional Considerations (relevance and Assumptions)

Does the Frequency and Severity of Future Economic Crises Change the Effectiveness of the FTT?
To a certain extent, the proposal for the EU FTT affecting the economy is only viable depending on the frequency and severity of future economic crises. If they are every two years or every hundred change the effectiveness of the FTT and, potentially, alternative proposals.
The FTT is expected to raise 57 Billion Euros ($75 Billion) per year (Bloomberg, 2011) based on the following breakdown by the EC (2012) in Euro Billions: securities (19.4), comprised of shares (6.8), bonds (12.6), and derivatives (37.7). The gross US Government bailout outlays cost $4.6 trillion ($3.3 trillion after repayments) by Mar. 31, 2012 (Chantrill, 2015). Considering the expected FTT income and the assumption that the bailout required will be the same as the USA then it would take 61. 3 (44 with repayments) years approximately to gather the full amount needed to pay for the costs of the financial crisis. Evidently, this is a big assumption and could be very different for all of the EU countries with the requirements going up or down.
However this also creates two additional problems if the FTT funds are to be used as a buffer against future crises. Firstly, it is unrealistic to assume that there will be at least forty years without a financial crisis or recession needing a bank bailout (or government injection) to stimulate a recovery. This is evidenced by the Great Depression in the 1930's (Figure 1, Ref. 1 & 2), the saving and loan company financial crisis in 1982 (Figure 1, Ref. 8), the dotcom crash in 2000 (Figure 1, Ref.17), and finally the Great Recession of 2007 (Figure 1, Ref.30). This indicates an increase in the frequency of negative financial events in the USA. If you were to extrapolate the past data, it could suggest that there could have been one in 2011 (illustrated in figure 12), although there was a recession in the UK at this time (BBC news, 2012). At the same time there are not enough events to make any accurate predictions from events in the US. On the other hand, analysing the global financial crisis (The Economist, no date) data in figures 16 -20 shows there is an increase in frequency of financial crises. Some of the main results derived from figure 16's analysed data (over the last 300 years) are the following: 57% of financial crises occurred over the last 100 years, 43% over the last 50 years, 36% over the last 30 years and 21% over the last 10 years. Furthermore, this could mean another financial crisis very soon, possibly between 2015 and 2022 based on the data from figure 16. Additionally, on the 17th of April 2015 the FTSE 100 peeked over 7090 (Money Week, 2015). In figure 15 you can see that it has not reached this high over the last ten years. Moreover, the last time the FTSE 100 was extremely high, was just before the 2008 crash (Money Week, 2015), potentially indicating another bubble could be currently forming. Even if there was only a financial crisis every twenty years and it takes 40 years to accumulate the full funds then over time it would only get worse even if the initial savings from the FTT were used as a buffer. This can be further illustrated in Figure 14.
Secondly, if there were forty years of government savings for a crisis, it might not be worth over forty years of potentially lost growth (opportunity cost) just for a quick recovery. Steady government investments contributing to GDP might even prevent any initial crisis before it fully develops.
Although, there is not enough significant evidence from the previous paragraphs to make any conclusive predictions about when the next financial crisis will occur. On the 17th February 2015 it was reported that inflation was only 0.3% (CPI) by BBC News (2015) indicating that the economy is not overheating. Additionally, according to the most recent statistics from the Office of National Statistics, the last recorded quarter GDP had grown by 0.5% and unemployment has also fallen. Since the crisis in 2007, there have been a number of amendments to the financial sector's regulations, mostly from the Dodd-Frank Act (US Commodity Futures Trading Commission, 2010) that might have addressed many of the most important concerns in the same way the Glass-Steagall Act of 1933 (Figure 1 Ref.1) did after the Great Depression.
Nevertheless, the FTT funds being used as a buffer against a financial crisis only looks to address the symptoms, not the underlying problem of financial markets. This problem also appears to apply to many economic policies in general. David Beckworth (2010) said inflation targeting is just a response to the symptom not the underlying causes of both shocks to aggregate demand (AD) and shocks to aggregate supply (AS) causing macroeconomic volatility.
Considering the history of the last 300 plus years of financial incidents (The Economist, no date), there would appear to be a reasonable amount of evidence to suggest that there is an increase in the occurrence of these incidents (Figures 16-20). The ability for the FTT to be able to have any positive impact based on expected revenue (Bloomberg, 2011) and potential costs of these events based on past frequency could render the project inefficient. Furthermore, it only appears to be targeting the after-effect, when really there should be a collected effort to developing a system preventing future situations from occurring. Although, there might be a change in frequency due to new regulations (US Commodity Futures Trading Commission, 2010).However, the FTT could still be viable based on the lost growth only if these events become very infrequent.

To What Extent is GDP a Good Economic Indicator?
Many of the arguments against the FTT are mostly regarding the lost growth derived from the policy. It is for the most part true that a financial crisis is likely to lead to an economic recession that then has a negative impact on economies (The Economist, no date). However, there is not always a negative side to no growth or even negative growth for a short period of time. Additionally, there is not always a positive change when the economy is growing. However, the opposite perspective is often taken in economics and is the foundation for many economic policies (Burda and Wyplosz, 2013). This raises questions on what should be the basic objectives of a modern economy, the FTT objectives, and the EC's plans for the EU. There needs to be a much more transparent method for differentiating between different causes of negative growth. There is a big difference between increased savings and reduced levels of disposable income (effective demand).
Consumption is the biggest driving factor for growth in many western countries. In 2013, UK consumption accounts for 64% of GDP and the US it is 68%, but only 34% in China (The World Bank Group, 2015). Furthermore, it is considered to be unsustainable according to Tim Jackson (2011). If the consumption of luxury items stopped completely and additional funds were placed in savings then there would be a huge drop in GDP and there would mostly like be negative growth with a technical recession if this persisted over two quarters (Williamson, 2008). Although, businesses might then utilise the availability of savings and low interest to make investments (Hubbard and O'Brien, 2015), preventing the recession and generating growth using a different method. However, there is not often a distinction between growth by investment and high consumption. This indicates that there is an over reliance on increasing consumption (Jackson, 2011), and that a recession might not always be negative but a change in the economy. The more important features are if this then leads to job losses, companies closing down, and a loss of income because this would mean less savings leading to less investments.
Growth might not always be improving life in general even if GDP per capita rises. GDP per capita measures the average income per person, but doesn't indicate which income groups have received a pay increase. 'More than 80 percent of the wealth in the United States belongs to 20 percent of the population; respondents estimated that this group held less than 60 percent of the wealth, and would in an ideal world hold about a third." (Hakim, 2015: online) as shown in figure 8. Additionally, figures 9, 10 and 11 show that there is an extremely uneven distribution of income and wealth that has been steadily progressing over time. Although this data is only from the US and may not apply to other countries, it clearly indicates that GDP and GDP per capita does not necessarily mean that the quality of life is getting better and nor is it sustainable (Jackson, 2011). This evidence undermines the validity of many counter arguments to the FTT, but at the same time offers no support to the proposal itself because it indicates there are potentially more pressing issues. Many current EU policies are based on growth and the prosperity it will bring to the economy. The Conservative Party (2015) slogan is 'together we can secure a brighter future' and the BBC News (2015) shows financial plans which rely on economic growth for funding. Perhaps there needs to be a new economic indicator used, and considering that the objectives of the FTT do not address these important issues, it suggests that the EU's time could be better spent on alternative projects.

Alternative Financial Indicators
The EU assumes firstly that using the measure of GDP is appropriate, and secondly that increased growth is a positive. As indicated in the previous section, this might not always be the situation. The EC acknowledges that the EU FTT could have some negative effects on growth as indicated by their impact assessment (European Commission, 2011), indicating that the current models used to guide the economy (GDP) might not be best option.
When considering a different perspective to mainstream economics, including challenging the fundamental assumption that growth is good, then alternative indicators could be used to determine what the main focus for the EU. The conventional wisdom based on economics is that higher income provides more choices and thus higher standard of living (Jackson, 2011). However, this is an assumption and lacks the consideration of well-being, happiness (figure 21), and life expectancy (figure 22). This is further supported by Afsa, et al (2008: online) who said that 'GDP suffers from two major weaknesses: (a) being a monetary aggregate, it pays little or no attention to distributional issues and to elements of human activity or well-being for which no direct or indirect market valuation is available; (b) it is measuring productive flows and, as such, ignores the impact of productive activities on stocks, including stocks of natural resources'. Over time a number of serious problems have arisen because of the current system, including: climate change, resource scarcity and the failing of financial markets (Jackson, 2011) and (Milmo, 2014).
Bergh and Antal (2014) evaluate alternatives to GDP as a measure of social welfare or human progress. The Index of Sustainable Economic Welfare (ISEW) and the Genuine Progress Indicator (GPI) are modified versions of GDP, using sustainable or green GDP and savings/investments indexes. Although these alternatives have a number of problems, they do provide a much better representation of social welfare. Another alternative that could be considered is the Happy Planet index (HPI) by the New Economics Foundation (2012). It has a clear focus on three key elements: well-being, life expectancy, and ecological footprint (New Economics Foundation, 2012). Although, there are always problems when trying to measure subjective elements such as well-being and this may distort the results. Furthermore, given the time and widespread use of GDP, it could be difficult to get a global change to another index. At the same time, it is hard to see why there is not a stronger focus on changing to a green index given the problems arising from climate change that could be irreversible (Jackson, 2011). If the EC spent their time changing the GDP index rather than trying to enforce a new tax then they might have been able to lead the EU into a better age of prosperity focusing more on economic behaviour and the sources of problems, rather than symptoms of the underlying problems of markets.
After considering the importance of both GDP (Hubbard and O'Brien, 2015) and alternative measures (New Economics Foundation, 2012) being fundamental guides for economies in general, there could be a great benefit to society if the system was changed. The FTT has some important objectives, but there might be some that are even more critical to the development of the EU. If the EC was to adopt this as a project and propose a system that does not negatively conflict with EU countries, then they might be able to achieve more than just the stability of financial markets, including inequality. They might even be able to push the EU towards prosperity without growth (Jackson, 2011).


Conclusion
Evidently, the EC's decision to make a proposal for the FTT with its objectives indicates that they believe that there are further amendments to the financial system that are required. As indicated in the introduction, based on the European Commission proposal (2011) changes for the financial systems are required because of the financial industry's contribution in developing the financial crisis of 2007. They are supported by eleven countries who have implemented a FTT, this indicates they also agree that action needs to be taken to help create a more stable economy (KPMG, 2015). However, there is significant evidence against the implementation of the FTT by many experts who emphasise the problems that rise in financial markets and diminish growth (Culp, 2010) and (Devereux et al, 2011). Additionally, there is significant evidence to suggest this might not be the optimal method to achieve the targeted objectives and that alternative methods using an income tax could be a better solution. Additional ideas could be to impose strong regulations, possibly based on Institute of Islamic Banking and Insurance (no date) principles to create a safer financial market by attempting to remove speculation or at least minimising the risk taken by financial institutes. Based on the limited data available, there does appear to be a potential problem regarding the financial system and the increased frequency in recent years for financial crises (the Economist, no date) and there could be another crisis soon, unless regulations, such as the Dodd-Frank Act, have resolved the core issues. There are further underlying concerns about the use of GDP and what it is actually able to indicate (Jackson, 2011) based on economic fundamentals (Burda and Wyplosz, 2013). Much of the evidence against the FTT, regarding growth and GDP, has a number of flaws and therefore makes for weaker analysis. However, it does not add to the support of the FTT either. Alternative economic indicators could be used, and it might have been more productive for the European commission to have been dedicating its time to unite the EU. Policies and changes regarding green and renewable energy, or at least a GDP alternative, could direct countries towards prosperity without growth (Jackson, 2011). Overall, the European commission have tried to find one method to avoid the fragmentation of financial markets. Secondly, to insure that financial institutions are contributing towards the costs of the financial crisis. Finally, they hope to create a new incentive structure, by diminishing the disincentives on transactions that distort the market (or are inefficient) aiding current regulations. It would appear that none of the main objectives are clearly achieved by the proposed FTT system. Based on the significant evidence that contradicts the FTT or states that it is just uncertain would lead to the final conclusion be that the FTT would not be an effective system to deliver a levy to buffer the financial system against future similar crisis to that experienced in 2007-2009.




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Appendices
Figure 1 Significant Political and Economic events (1933 – 2009)
Ref.
Date/ Year
Significant Political/ Economic event
1
1933
Glass-Steagall Act of 1933 (approved in response to the abuse by banks, using customer deposits in the stock market) after the great depression between 1929 -1933
2
1933-1973
USA endured 40 years of economic growth without a single financial crisis
3
1970
The New York Stock Exchange relaxed its rules to allow joint stock corporations to become members.
4
1977-1999
Investment banks started to convert from partnership to public companies
5
1979 - 1987
Paul Volcker become chairman of the Federal Reserve
6
1981-1985
Donald Regan became Treasury Secretary
7
1981
Reagan administration started a time of deregulation
8
1982
Deregulation of Savings and Loan companies (allowed to make investments with depositors money. 100's had failed at the end of the decade. 124 Billion bailout)
9
August 11th 1987 – Jan 31st 2006
Alan Greenspan became chairman of the federal reserve, and continued deregulation
10
1998
Citicorp & Travellers merged to make Citigroup, to become the largest financial services group in the world. (Violated the Glass-Steagall Act of 1933 but was given an exemption)
11
May 1998
Brooksley Born chair of CFTC (overlooked the derivate market) proposed to regulate the derivatives market
12
May 7th 1998
Larry Summers directed the CFTC to not try to regulate the derivatives market, followed by a document by Greenspan, Ruban and Levitt advising that regulations are not needed.
13
June 1998
Hennery Paulson – Became CEO Goldman Sachs
14
1999
Gramm–Leach–Bliley Act passed to overturn the Glass-Steagall Act of 1933
15
June 21st 2000
Senator Phil Gramm, chairman on the senate banking committee passes the exempting derivate from being regulated
16
2000
Subprime mortgages accumulative value $140 Billion (5% of all mortgages)
17
2000
Dot-com bubble burst & Federal Reserve interest rates 6.27 %
18
2001
Federal Reserve interest rates 3.78 %
19
2002
Federal Reserve interest rates 1.67 %
20
December 2002
10 Investment banks are fined $1.4 Billion for Illegal activity
Bear Stearns, J.P Morgan, Lehman Brothers and UBS each paid $80 Million, Goldman Sachs $110M , Credit Suisse £200M and Citigroup $400M
21
2003
Federal Reserve interest rates 1.11 %
22
2004
Federal Reserve interest rates 1.38 %
23
2005
Federal Reserve interest rates 3.22 %
24
20006
Federal Reserve interest rates 4.98 %
25
2006
Subprime mortgages accumulative value $650 Billion (21.3% of all mortgages)
26
Spring 2006
Bush Administration offered Hennery Paulson Treasury secretary (Rejected twice)
27
May 30th 2006
Hennery Paulson accepted the position of Treasury secretary
28
July 2006
Housing prices started to reach their upper limit, and in general stopped rising
29
2007
Federal Reserve interest rates 5.02 %
30
August 9th 2007
Build-up of subprime mortgages burst and started causing serious negative effects on the US economy
31
August 9th 2007
BNP Paribas froze withdraws from 3 Investment firms exposed to subprime mortgages in the US. Additionally, redemption calls stimulated a liquidity crisis in Europe leading to uncertainty in the stock market
32
August 2007
Economist predict 80% default on mortgages by brokers. (2.2 Million homeowners at risk)
33
January 2008
Federal Reserve interest rates 2.01 %
34
Feb 13th 2008
Fiscal stimulus package project estimated $ 152 Billion
35
March 14th 2008
Bear Stearns goes under pressure (lost $2.4Billion)
36
March 17th 2008
JP Morgan buys Bear Stearns for $10 per share (2007 vale $170 per share)Deal facilitated by the Federal Reserve and supported by a loan
37
July 7th 2008
Freddie May & Fanny Mac shares drop more than 40%
38
July 13th 2008
Hennery Paulson goes to congress to request emergency help for the G.S.E (F.M & F.M)
39
September 8th 2008
Hennery Paulson Pledged to provide $200 Billion to the G.S.E (Prevent bankruptcy and help keep mortgage rates from rising further)
40
September 10th 2008
Lehman Brothers under pressure (loss of nearly $4 Million, company stock down 75% in one quarter)
41
September 12th 2008
Federal Reserve holds a meeting with all of the major wall street firms
42
September 13th 2008
Lehman try's to find a buyer to save the company, talks with Barclays bank for possible deal
43
September 13th 2008
AIG insurance experiencing liquidity crisis, expected to be bankrupt in days
44
September 14th 2008
Barclays UK regulator unexpectedly rejected deal to acquire Lehman Brothers
45
September 15th 2008
Lehman Brothers filed for bankruptcy
46
September 15th 2008
Bank of America agreed to buy Merrill Lynch ($50 Billion)
47
September 16th 2008
AIG under threat of collapsing from selling credit default swaps
48
September 16th 2008
Federal Reserve loans $85 Billion to AIG. Fed receives, 11.3 % VAR rate, 79.9 % stake in AIG, management replacement and veto power
49
September 17th 2008
The Dow (index of the 30 largest public owned company's on the stock market) dropped 450 points
50
September 17th 2008
Money markets funds has become unstable, partially from Leman Brothers collapse (raising the possibility of economic instability across American business from a shortage of short term loans disrupting day to day basic operations)
51
September 17th – 18th 2008
Federal Reserve guaranteed Money market funds (2.4 Trillion) attempting to prevent panic/a negative multiplier effect spreading and stabilise the market.
52
September 21st 2008
H.Paulson proposes $700 Billion bailout plan TARP (Supplying banks with capital to make loans)
53
September 23rd 2008
US congress talk about the bailout and the need to change wall street
54
September 25th 2008
Deal stopped by GOP conservatives (Mike Pence)
55
September 27th 2008
Members of Congress continue talks for $700 Billion bailout
56
September 29th 2008
TARP was rejected by US Congress (Wall Street down 777.68 points)
57
October 3rd 2008
TARP Passed
58
October 9th 2008
US Treasury decided to change strategy and planned to injects capital directly into the banks (not buy illiquid assets)
59
October 12th 2008
9 CEO's from systemically important banks were invited to meet at the US Treasury
60
October 14th 2008
Publically announced that TARP capital was accepted by all 9 banks, the Fed then started to inject capital to other important banks
61
November 17th 2008
Citigroup can under financial difficulty (plans to cut 52,000 jobs, and Shares dropped below $4)
62
November 20th 2008
Citi Bank receives additional $20 Billion on the initial TARP funding of 25 Billion, with further guarantees of $306 Billion risky assets
63
January 20th 2009
Barack Obama becomes President of USA
64
January 26th 2009
Timothy Geithner become Treasury Secretary
Source: (Author, 2015) data acquired from BBC News (2009), Hank: Five Years from the Brink. (2013) and Inside Job (2010) 

Figure 2 Expected changes in demand, after the EU FTT is implemented (or globally).
CBAQuantity demanded (Volume Trading)Price (Bond, shares & Derivatives P1P2Q1Q2Supply of Open shops(D1)Demand for Trading (Bond, shares & Derivatives)D3D2Q3CBAQuantity demanded (Volume Trading)Price (Bond, shares & Derivatives P1P2Q1Q2Supply of Open shops(D1)Demand for Trading (Bond, shares & Derivatives)D3D2Q3
C
B
A
Quantity demanded (Volume Trading)
Price (Bond, shares & Derivatives
P1
P2
Q1
Q2
Supply of Open shops


(D1)
Demand for Trading (Bond, shares & Derivatives)


D3

D2

Q3
C
B
A
Quantity demanded (Volume Trading)
Price (Bond, shares & Derivatives
P1
P2
Q1
Q2
Supply of Open shops


(D1)
Demand for Trading (Bond, shares & Derivatives)


D3

D2

Q3












Currently, the EU is at point A in the diagram, with a price and quality of P1 & Q1. After the FTT is implemented, it would be expected that as more and more counties in the EU accept the FTT then demand will shift to D2 and then D3 when they all accept a FTT. Even if a price does not change in the short run, the diagram illustrates that, volume will fall to Q2 and Q3 at point C. Depending on each firms, price elastically of demand, they will lose potential finances and have a surplus of financial good that the market will not accept at a higher price. In the long run, it would be likely that the change in market liquidity will lower the price trading in general. This is indicated at point B at the lower price of P2.Currently, the EU is at point A in the diagram, with a price and quality of P1 & Q1. After the FTT is implemented, it would be expected that as more and more counties in the EU accept the FTT then demand will shift to D2 and then D3 when they all accept a FTT. Even if a price does not change in the short run, the diagram illustrates that, volume will fall to Q2 and Q3 at point C. Depending on each firms, price elastically of demand, they will lose potential finances and have a surplus of financial good that the market will not accept at a higher price. In the long run, it would be likely that the change in market liquidity will lower the price trading in general. This is indicated at point B at the lower price of P2.
Currently, the EU is at point A in the diagram, with a price and quality of P1 & Q1. After the FTT is implemented, it would be expected that as more and more counties in the EU accept the FTT then demand will shift to D2 and then D3 when they all accept a FTT. Even if a price does not change in the short run, the diagram illustrates that, volume will fall to Q2 and Q3 at point C. Depending on each firms, price elastically of demand, they will lose potential finances and have a surplus of financial good that the market will not accept at a higher price. In the long run, it would be likely that the change in market liquidity will lower the price trading in general. This is indicated at point B at the lower price of P2.
Currently, the EU is at point A in the diagram, with a price and quality of P1 & Q1. After the FTT is implemented, it would be expected that as more and more counties in the EU accept the FTT then demand will shift to D2 and then D3 when they all accept a FTT. Even if a price does not change in the short run, the diagram illustrates that, volume will fall to Q2 and Q3 at point C. Depending on each firms, price elastically of demand, they will lose potential finances and have a surplus of financial good that the market will not accept at a higher price. In the long run, it would be likely that the change in market liquidity will lower the price trading in general. This is indicated at point B at the lower price of P2.
Source: (Author, 2015) Theory acquired from Howells & Bain (2007), Howells & Bain (2008), Burda & Wyplosz (2013), Hubbard & O'Brian (2008), Hubbard & O'Brian (2015), Mishkin (2013) and Sloman & Wride (2009)

Figure 3 Global number of trades in equity shares

(Atkins & Stafford, 2013: online)


Figure 4 Over the counter daily volume trades

(Atkins & Stafford, 2013: online)



Figure 5 Marginal Propensity to Consume
Consumption 10KIncome (£)25K 100K +(Marginal Propensity to Consume)10K25K 100K +Consumption 10KIncome (£)25K 100K +(Marginal Propensity to Consume)10K25K 100K +
Consumption
10K
Income (£)
25K
100K +
(Marginal Propensity to Consume)

10K
25K
100K +
Consumption
10K
Income (£)
25K
100K +
(Marginal Propensity to Consume)

10K
25K
100K +


Source: (Author, 2015) Theory acquired from Sloman & Wride (2009)Source: (Author, 2015) Theory acquired from Sloman & Wride (2009)

Source: (Author, 2015) Theory acquired from Sloman & Wride (2009)

Source: (Author, 2015) Theory acquired from Sloman & Wride (2009)

Figure 6 Diversification
Part ATotal Portfolio riskSpecific risk Market risk Number of Securities DiversificationPart ATotal Portfolio riskSpecific risk Market risk Number of Securities Diversification
Part A
Total Portfolio risk
Specific risk
Market risk
Number of Securities
Diversification
Part A
Total Portfolio risk
Specific risk
Market risk
Number of Securities
Diversification

Part A illustrated the portfolio theory on systematic and non-systematic (unsystematic risk). The higher the number of securities in different markets, reduces the total risk but it capped at market risk. The same principle could apply regarding the number of options/ opinions from different economic schools of though. Expanding the number of available theory's that could be implements in general or after a crisis might provide new more effective ways that would have different results. This is illustrated in Part B. Additional changes might even change the level of market (systematic risk). Part A illustrated the portfolio theory on systematic and non-systematic (unsystematic risk). The higher the number of securities in different markets, reduces the total risk but it capped at market risk. The same principle could apply regarding the number of options/ opinions from different economic schools of though. Expanding the number of available theory's that could be implements in general or after a crisis might provide new more effective ways that would have different results. This is illustrated in Part B. Additional changes might even change the level of market (systematic risk).
Part A illustrated the portfolio theory on systematic and non-systematic (unsystematic risk). The higher the number of securities in different markets, reduces the total risk but it capped at market risk.

The same principle could apply regarding the number of options/ opinions from different economic schools of though. Expanding the number of available theory's that could be implements in general or after a crisis might provide new more effective ways that would have different results. This is illustrated in Part B. Additional changes might even change the level of market (systematic risk).
Part A illustrated the portfolio theory on systematic and non-systematic (unsystematic risk). The higher the number of securities in different markets, reduces the total risk but it capped at market risk.

The same principle could apply regarding the number of options/ opinions from different economic schools of though. Expanding the number of available theory's that could be implements in general or after a crisis might provide new more effective ways that would have different results. This is illustrated in Part B. Additional changes might even change the level of market (systematic risk).













Total Economic riskSpecific Risk (Economic school) Number of Theories, (economic schools) Systematic riskDiversification Part BTotal Economic riskSpecific Risk (Economic school) Number of Theories, (economic schools) Systematic riskDiversification Part B
Total Economic risk
Specific Risk
(Economic school)
Number of Theories, (economic schools)
Systematic risk
Diversification
Part B
Total Economic risk
Specific Risk
(Economic school)
Number of Theories, (economic schools)
Systematic risk
Diversification
Part B
















Source: Source: (Author, 2015) Theory acquired from Howells & Bain (2008: p 191)


Figure 7 Alternative Distributions affecting Pricing














Source: Source: (Author, 2015) Theory acquired from Buckley (2004), Hull (2015) and Jondeau et al. (2007)




Figure 8 Wealth inequality in America

Source: (Hakim, 2015: online)


Figure 9 USA Income

Source: Pew Research Center (2012)


Figure 10 USA income over time

Source: Pew Research Center (2012)


Figure 11 USA Net worth


















Source: Pew Research Center (2012)


Figure 12 Frequency of financial crisesVery basic extrapolation estimate Between 1930 – 1982 = 52 years approximately Between 1982 – 2000 = 18 years approximately Between 2000 – 2008 = 8 years approximately The difference between 52 and 18 = 34The difference between 18 and 8 = 10 Ratio 34:10 = 3.4:1 10 divided by 3.4 = 2.9 Estimate: 2.9 Years for next crisis Year: 2011Note: The economy shrank by 0.3% in the fourth quarter of 2011. (BBC news, 2012)Time Frequency 1930198220002008Source: Source: (Author, 2015) data acquired from figure 1521882011Very basic extrapolation estimate Between 1930 – 1982 = 52 years approximately Between 1982 – 2000 = 18 years approximately Between 2000 – 2008 = 8 years approximately The difference between 52 and 18 = 34The difference between 18 and 8 = 10 Ratio 34:10 = 3.4:1 10 divided by 3.4 = 2.9 Estimate: 2.9 Years for next crisis Year: 2011Note: The economy shrank by 0.3% in the fourth quarter of 2011. (BBC news, 2012)Time Frequency 1930198220002008Source: Source: (Author, 2015) data acquired from figure 1521882011

Very basic extrapolation estimate
Between 1930 – 1982 = 52 years approximately
Between 1982 – 2000 = 18 years approximately
Between 2000 – 2008 = 8 years approximately
The difference between 52 and 18 = 34
The difference between 18 and 8 = 10
Ratio 34:10 = 3.4:1
10 divided by 3.4 = 2.9
Estimate: 2.9 Years for next crisis
Year: 2011
Note: The economy shrank by 0.3% in the fourth quarter of 2011. (BBC news, 2012)
Time
Frequency
1930
1982
2000
2008
Source: Source: (Author, 2015) data acquired from figure 1
52
18
8
2011
Very basic extrapolation estimate
Between 1930 – 1982 = 52 years approximately
Between 1982 – 2000 = 18 years approximately
Between 2000 – 2008 = 8 years approximately
The difference between 52 and 18 = 34
The difference between 18 and 8 = 10
Ratio 34:10 = 3.4:1
10 divided by 3.4 = 2.9
Estimate: 2.9 Years for next crisis
Year: 2011
Note: The economy shrank by 0.3% in the fourth quarter of 2011. (BBC news, 2012)
Time
Frequency
1930
1982
2000
2008
Source: Source: (Author, 2015) data acquired from figure 1
52
18
8
2011
Figure 13 Regulations controlling speculation and investment markets

Underlying Asset price value Maximum purchase Price (For investment banks)Asset Market price without regulations (potentially) High market and economic VolatilityPriceTimeUnderlying Asset price value Maximum purchase Price (For investment banks)Asset Market price without regulations (potentially) High market and economic VolatilityPriceTime
Underlying Asset price value
Maximum purchase Price
(For investment banks)
Asset Market price without regulations (potentially)
High market and economic Volatility
Price
Time
Underlying Asset price value
Maximum purchase Price
(For investment banks)
Asset Market price without regulations (potentially)
High market and economic Volatility
Price
Time














Source: Source: (Author, 2015) theory acquired from Mishkin (2013) and (Baddeley, 2013)
The expectation of this maximum regulation approach will be to reduce individual asset volatility and then reduce total market volatility. This approach is based on behaverial basis that naturally occurs by individual under the current financial market system. An example would be the recent financial crisis that started in 2007 due to the over whelming demand for MBS (Mortgage backed securities) that were priced to high and did not match their underlying value caused by hearding (Baddeley, 2013). The same could be said in the dot com crisis. This helped to direct the financial system to collapsing indicated by events in figure1.


Assumptions: Financial crisis requiring bailout Financial crisis occurs every 20 yearsFTT requires a minimum of 40 years to cover full costsAll other government finances are in balance (Revenue and spending)No growth, recession, inflation or interested owed Key: Actual Government funds Financial crisis Government surplus Government Balance Government Deficit Y = Year (accumulative)Additional information: Government Surplus 100% pays for 1 financial crisis event (40 Years)Government Deficit 100% needs 40 years to reach balance Government Balance has no deficit and no savings Government Surplus Government Balance Government Deficit Time GovernmentFinances RequiredBailout funds saved/ owedY 1Y 20Y 40Y 60+100 % Saved-100 % OwedSource: (Author, 2015) data acquired from European commission (2013) Assumptions: Financial crisis requiring bailout Financial crisis occurs every 20 yearsFTT requires a minimum of 40 years to cover full costsAll other government finances are in balance (Revenue and spending)No growth, recession, inflation or interested owed Key: Actual Government funds Financial crisis Government surplus Government Balance Government Deficit Y = Year (accumulative)Additional information: Government Surplus 100% pays for 1 financial crisis event (40 Years)Government Deficit 100% needs 40 years to reach balance Government Balance has no deficit and no savings Government Surplus Government Balance Government Deficit Time GovernmentFinances RequiredBailout funds saved/ owedY 1Y 20Y 40Y 60+100 % Saved-100 % OwedSource: (Author, 2015) data acquired from European commission (2013) Figure 14 Government FTT Revenue and financial crisis bailout analysis
Assumptions:
Financial crisis requiring bailout
Financial crisis occurs every 20 years
FTT requires a minimum of 40 years to cover full costs
All other government finances are in balance (Revenue and spending)
No growth, recession, inflation or interested owed
Key:
Actual Government funds
Financial crisis
Government surplus
Government Balance
Government Deficit
Y = Year (accumulative)
Additional information:
Government Surplus 100% pays for 1 financial crisis event (40 Years)
Government Deficit 100% needs 40 years to reach balance
Government Balance has no deficit and no savings
Government Surplus
Government Balance
Government Deficit
Time
Government
Finances Required
Bailout funds saved/ owed
Y 1
Y 20
Y 40
Y 60
+100 %
Saved
-100 % Owed
Source: (Author, 2015) data acquired from European commission (2013)
Assumptions:
Financial crisis requiring bailout
Financial crisis occurs every 20 years
FTT requires a minimum of 40 years to cover full costs
All other government finances are in balance (Revenue and spending)
No growth, recession, inflation or interested owed
Key:
Actual Government funds
Financial crisis
Government surplus
Government Balance
Government Deficit
Y = Year (accumulative)
Additional information:
Government Surplus 100% pays for 1 financial crisis event (40 Years)
Government Deficit 100% needs 40 years to reach balance
Government Balance has no deficit and no savings
Government Surplus
Government Balance
Government Deficit
Time
Government
Finances Required
Bailout funds saved/ owed
Y 1
Y 20
Y 40
Y 60
+100 %
Saved
-100 % Owed
Source: (Author, 2015) data acquired from European commission (2013)




Figure 15 FTSE 100 performance in the last 10 years
Source: MoneyWeekly (2015)


Very basic extrapolation estimate 1720 – 1792 = 72 Years Until next crisis1792- 1825 = 33 Years 1825- 1837 = 12 Years 1837- 1857 = 20 Years1857-1873 = 16 Years1873-1907 = 34 Years 1907-1929 = 22 Years1929-1973 = 44 Years1973-1982 = 9 Years1982- 1987 = 5 Years1987- 1997 = 10 Years1997-2001 = 4 Years2001-2008 = 7 YearsPredictions2008- 20?? = 7 – 22 Years (Mean)2015 – 2030 (based on last 300Y's)Or 2015 – 2022 (based on last 100Y's)Time SeveritySource: (Author, 2015) data acquired from The Economist (no date)51982197319291720179218251837185718731907199720012008198720??1234Data Set: 1720 - 200872, 33, 12, 20, 16, 34, 22, 44, 9, 5, 10, 4, 7Statistics:Count: 13Sum: 288Mean: 22.153846153846Median: 16Mode: 72, 33, 12, 20, 16, 34, 22, 44, 9, 5, 10, 4, 7Data Set: 1907 – 2008 22, 44, 9, 5, 10, 4, 7Statistics:Count: 7Sum: 101Mean: 14.428571428571Median: 9Mode: 22, 44, 9, 5, 10, 4, 7Data Set:9, 5, 10, 4, 7Statistics:Count: 5Sum: 35Mean: 7Median: 7Mode: 9, 5, 10, 4, 7Data analysis:Y = YearsFC = financial crisis57% FC over last 100Y43% FC over last 50Y36% FC over last 30Y21% FC over last 10YMean fallen from 22 – 14 – 7 Very basic extrapolation estimate 1720 – 1792 = 72 Years Until next crisis1792- 1825 = 33 Years 1825- 1837 = 12 Years 1837- 1857 = 20 Years1857-1873 = 16 Years1873-1907 = 34 Years 1907-1929 = 22 Years1929-1973 = 44 Years1973-1982 = 9 Years1982- 1987 = 5 Years1987- 1997 = 10 Years1997-2001 = 4 Years2001-2008 = 7 YearsPredictions2008- 20?? = 7 – 22 Years (Mean)2015 – 2030 (based on last 300Y's)Or 2015 – 2022 (based on last 100Y's)Time SeveritySource: (Author, 2015) data acquired from The Economist (no date)51982197319291720179218251837185718731907199720012008198720??1234Data Set: 1720 - 200872, 33, 12, 20, 16, 34, 22, 44, 9, 5, 10, 4, 7Statistics:Count: 13Sum: 288Mean: 22.153846153846Median: 16Mode: 72, 33, 12, 20, 16, 34, 22, 44, 9, 5, 10, 4, 7Data Set: 1907 – 2008 22, 44, 9, 5, 10, 4, 7Statistics:Count: 7Sum: 101Mean: 14.428571428571Median: 9Mode: 22, 44, 9, 5, 10, 4, 7Data Set:9, 5, 10, 4, 7Statistics:Count: 5Sum: 35Mean: 7Median: 7Mode: 9, 5, 10, 4, 7Data analysis:Y = YearsFC = financial crisis57% FC over last 100Y43% FC over last 50Y36% FC over last 30Y21% FC over last 10YMean fallen from 22 – 14 – 7 Figure 16 Severity and Frequency of financial crises globally 1720 - 2008
Very basic extrapolation estimate
1720 – 1792 = 72 Years Until next crisis
1792- 1825 = 33 Years
1825- 1837 = 12 Years
1837- 1857 = 20 Years
1857-1873 = 16 Years
1873-1907 = 34 Years
1907-1929 = 22 Years
1929-1973 = 44 Years
1973-1982 = 9 Years
1982- 1987 = 5 Years
1987- 1997 = 10 Years
1997-2001 = 4 Years
2001-2008 = 7 Years

Predictions
2008- 20?? = 7 – 22 Years (Mean)
2015 – 2030 (based on last 300Y's)
Or
2015 – 2022 (based on last 100Y's)

Time
Severity
Source: (Author, 2015) data acquired from The Economist (no date)
5
1982
1973
1929
1720
1792
1825
1837
1857
1873
1907
1997
2001
2008
1987
20??
1
2
3
4
Data Set: 1720 - 2008
72, 33, 12, 20, 16, 34, 22, 44, 9, 5, 10, 4, 7
Statistics:
Count: 13
Sum: 288
Mean: 22.153846153846
Median: 16
Mode: 72, 33, 12, 20, 16, 34, 22, 44, 9, 5, 10, 4, 7


Data Set: 1907 – 2008
22, 44, 9, 5, 10, 4, 7
Statistics:
Count: 7
Sum: 101
Mean: 14.428571428571
Median: 9
Mode: 22, 44, 9, 5, 10, 4, 7
Data Set:
9, 5, 10, 4, 7
Statistics:
Count: 5
Sum: 35
Mean: 7
Median: 7
Mode: 9, 5, 10, 4, 7
Data analysis:
Y = Years
FC = financial crisis
57% FC over last 100Y
43% FC over last 50Y
36% FC over last 30Y
21% FC over last 10Y
Mean fallen from 22 – 14 – 7

Very basic extrapolation estimate
1720 – 1792 = 72 Years Until next crisis
1792- 1825 = 33 Years
1825- 1837 = 12 Years
1837- 1857 = 20 Years
1857-1873 = 16 Years
1873-1907 = 34 Years
1907-1929 = 22 Years
1929-1973 = 44 Years
1973-1982 = 9 Years
1982- 1987 = 5 Years
1987- 1997 = 10 Years
1997-2001 = 4 Years
2001-2008 = 7 Years

Predictions
2008- 20?? = 7 – 22 Years (Mean)
2015 – 2030 (based on last 300Y's)
Or
2015 – 2022 (based on last 100Y's)

Time
Severity
Source: (Author, 2015) data acquired from The Economist (no date)
5
1982
1973
1929
1720
1792
1825
1837
1857
1873
1907
1997
2001
2008
1987
20??
1
2
3
4
Data Set: 1720 - 2008
72, 33, 12, 20, 16, 34, 22, 44, 9, 5, 10, 4, 7
Statistics:
Count: 13
Sum: 288
Mean: 22.153846153846
Median: 16
Mode: 72, 33, 12, 20, 16, 34, 22, 44, 9, 5, 10, 4, 7


Data Set: 1907 – 2008
22, 44, 9, 5, 10, 4, 7
Statistics:
Count: 7
Sum: 101
Mean: 14.428571428571
Median: 9
Mode: 22, 44, 9, 5, 10, 4, 7
Data Set:
9, 5, 10, 4, 7
Statistics:
Count: 5
Sum: 35
Mean: 7
Median: 7
Mode: 9, 5, 10, 4, 7
Data analysis:
Y = Years
FC = financial crisis
57% FC over last 100Y
43% FC over last 50Y
36% FC over last 30Y
21% FC over last 10Y
Mean fallen from 22 – 14 – 7



Figure 17 Severity and frequency of financial crises globally chart 2

Source: (Author, 2015) data acquired from The Economist (no date)
The data shows that there has been a large number of financial crises in the last 50 years (in the red area) relative to the total in the last 300 plus years.


Figure 18 Severity and frequency of financial crises globally chart 3

Source: (Author, 2015) data acquired from The Economist (no date)
The data shows that the average underlying trend is going up.


Figure 19 Time period of financial cries pie chart


Source: (Author, 2015) data acquired from The Economist (no date)
In the last 10 years there has been the same number of financial crises as there was over 50 years in the time periods of 1800-1850, 1850-1900 and 1900-1950.


Figure 20 Time periods of financial crises Analysis

Source: (Author, 2015) data acquired from The Economist (no date)
The data shows that throughout the recorded history of financial events, many have occurred recently and are becoming more frequent .


Figure 21 GDP and happiness


Source: Jackson (2011: p 42)


Figure 22 GDP per capita and life expectancy

Source: Jackson (2011: p 56)

Severity and Frequency of financial crises globally 1720 - 2008


Time Line


Severity