Just another Reality-based bubble in the foam of the multiverse.

Tuesday, January 13, 2009

A Modest Proposal

Bob Herbert speaks heresy:

...there’s a good idea floating around that takes its cue from the legendary Willie Sutton. Why not go where the money is?

The economist Dean Baker is a strong advocate of a financial transactions tax. This would impose a small fee — ranging up to, say, 0.25 percent — on the sale or transfer of stocks, bonds and other financial assets, including the seemingly endless variety of exotic financial instruments that have been in the news so much lately.

According to Mr. Baker, the co-director of the Center for Economic and Policy Research in Washington, the fees would raise a ton of money, perhaps $100 billion or more annually — money that the government sorely needs.

But there’s another intriguing element to the proposal. While the fees would be a trivial expense for what the general public tends to think of as ordinary traders — people investing in stocks, bonds or other assets for some reasonable period of time — they would amount to a much heavier lift for speculators, the folks who bring a manic quality to the markets, who treat it like a casino.

“It raises money in a way that comes primarily at the expense of speculation,” said Mr. Baker. “The fees would be a considerable expense for someone who is buying futures, or a stock, or any asset at 2 o’clock and then selling it at 3. The more you trade, the more you pay.

“For the typical person holding stock, who is planning to hold it for a long period of time, paying the quarter of one percent on a trade is just not that big a deal.”

The fees, though small, could amount to a big deal for speculators because in addition to the volume of their trades they often make their money on very small margins. Someone who buys an asset and then sells it an hour later at a one percent appreciation might feel quite pleased. He or she would be less pleased at having to pay a quarter-percent fee to purchase the asset in the first place and then another quarter percent to sell it.

This, according to Mr. Baker, is part of the beauty of the transfer tax; it tends to curb at least some speculation. “It’s a very progressive tax,” he said, “that discourages nonproductive activity.”

A hallmark of the Bush years has been the rampant irresponsibility — by the White House, Congress and the general public — when it comes to matters of finance. The costs of the wars in Iraq and Afghanistan were placed on credit cards and off the books. Their ultimate overall costs will be in the trillions.

Incredibly, President Bush and Congress cut taxes in wartime, which is insane.

Budget deficits and the national debt are streaking toward the moon. And the only remedy anyone has come up with for fending off Great Depression II has been deficit spending on a scale reminiscent of World War II.

Excuse me, but did somebody say the baby boomers are about to start retiring?

Maybe the piper will never have to be paid. Maybe the deficits will someday magically right themselves. Maybe some prosperous future generation will be more than happy to clean up the mess we left behind.

If none of that is true, we should start looking now for some real money somewhere. A stock transfer tax is not a bad place to start.

Why not, indeed. That's the best way to control the irrational exuberance I know of.


Anonymous said...

Traders provide liquidity to the markets. Basically, they are market makers. Without liquidity, who will buy all those millions of shares of stock when the mutual fund that has YOUR money tries to sell the stock? Not only will all investors (401K accounts) lose money from this tax, but they will also lose even more money as stocks will drop significantly more when investors want to sell but there are few buyers.

Not only that, but with the Madoff scandal in December, many investors already don't trust nor want to invest in the markets. This tax would only make this worse. U.S. more than any other country relies on capital.

How many jobs were lost in the last four months of last year? Do you know how many jobs would be affected when hundreds of thousands of traders suddenly stopped trading?

What about hedge funds? They are speculators, but they also invest for longer term. Hedge funds would go out of business overnight. Wealthy americans have huge investments in hedge funds.

It's a shame that some people are not able to gauge risk vs. reward. Is $100 billion per year really worth potentially large market disruption, in addition to job losses, and investment capital leaving U.S. markets?

Why not just raise short term capital gains tax? Traders would have to pay more taxes, but they would still provide liquidity and would not be standing in unemployment lines

kelley b. said...

Yes, raising capital gains taxes is a great idea. I'm all for it.

Incidently, you might be surprised to know this, but many, many Americans don't use 401(k)s. Or mutual funds. I damned sure don't.

I've got a nice nest egg, but I've managed to piss off every money manager relative and acquaintence by keeping it completely out of the market. Low yeild, indeed- but then, I've still got it all.

Hedge funds invest for the longer term? What kind of rube do you take me for? Or even worse, what kind of rube have you been taken for?

Basically the market has zero value now, even though as Madoff said, you're not broke until everyone else realizes you are.

Keep on shoveling all those imaginary dollars into the bottomless pit of Wall Street. It will suck every drop of life from you.

America will not be safe until it completely changes its financial structure with strict market regulation.

That's the change America needs- and Amerika will never allow.