The Wall Street Journal has a new story from over the weekend on Democratic proposals, in Congress and the administration and from outside groups, to impose a tax on financial transactions (John D. McKinnon, Democrats Weigh Tax on Financial Transactions, WSJ, October 10, 2009):
Taxing financial transactions on Wall Street is gathering support in high places.
With federal budget deficits soaring, policy makers and other advocates are eyeing the huge sums that could be raised as a way to cover the costs of new initiatives.
Labor unions, in particular the AFL-CIO, have proposed a financial-transactions tax as a way to defray costs of a health-care overhaul. Lawmakers have discussed a similar fee as a way to cover the cost of future financial oversight. Liberal advocates are pushing the tax to pay for new stimulus spending.
Financial transactions taxes, whether on the US domestic level or the often-proposed international “Tobin tax,” are sometimes described simply as broad based revenue raisers, and sometimes described as ways of deliberately slowing down the movement and flow of capital. As a revenue raiser, one current proposal operates this way:
This week, the left-leaning Economic Policy Institute floated the idea of a national transaction tax that would raise $100 billion to $150 billion a year. The tax, at a rate of 0.1% to 0.25% of the value of the trade, would be levied on all financial transactions such as stock trades, but not on consumer transactions such as with credit cards.
The money would be used initially to pay for temporary aid to states, hiring incentives for public- and private-sector employers and school construction money.
“We are in a difficult time right now, so people are looking at every opportunity to gain some revenue to fund” new initiatives, said Rep. Stephen Lynch (D., Mass.), a member of the House Financial Services Committee. “Because I was one of the first to suggest using this to fund [new] regulatory infrastructure, folks have come to me and said, ‘That’s a good idea; I’ve got a better one: Why don’t we use it for stimulus or especially health care?’”
One Democratic aide said the idea is under consideration among House leadership, though the discussions are preliminary.
It does sound like a dandy, relatively hidden revenue raiser – one that could generate vast sums of money relatively unnoticed, at least among ultimate ordinary consumers and taxpayers, who will not notice the long-term, collective hit to their pension funds and retirement funds which, anyway, they often do not directly manage. However, taxing at the front end is generally considered more distorting than taxing at the back end, and a tax on simply engaging in transactions themselves is almost certainly more distorting, other things being equal, than a tax on the final net economic transaction. Certainly less transparent to those who ultimately bear the tax. And of course there are many questions of where the incidence of tax falls – after all, a huge percentage of these transactions involve people’s retirement funds, long term savings, pension plans, including those of the unions. It is not just a bunch of plutocrats sitting around trading their stocks and bonds.
Hence a bit of bait and switch – when that point is raised, then the defense is offered that, well, after all, it is independently a good thing to slow down and make more expensive capital market transactions. Capital flows too quickly and too fluidly as is, on this view; it needs to be slowed down, for its own sake, quite apart from the revenue raising. The sand in the wheels of commerce is a good thing because the flow of funds is, if not precisely too efficient, then too volatile. This was an argument heard particularly in the 1990s with respect to the global capital markets, around the various currency crises, the Mexican peso crisis of the early 1990s or the Asian crisis of the later 90s. Of course, another bit of bait and switch was going on in those arguments as well – many of the Tobin tax supporters presented this as a desirable distortion of incentives, but actually were interested in the revenue, proposed as a way of funding international organizations starting with the UN.
Sometimes the transactions tax is coupled with the idea of exempting transactions that favor holding for some period of time – an anti-volatility, anti-rapid-turnover kind of rule; sometimes it is suggested that this will spare long-term retirement savings from the burden of the tax. The problem is that the distortionary effects are not easily separated that way; the effects of economic distortion are not the same as the question of who pays the direct transaction tax. The economic distortions are far less about whether I pay such taxes on my relatively infrequent trades in my retirement account and much more about whether the market as a whole is less efficient and so reduces the long run growth and value of my retirement account indirectly, irrespective of whether I, individually and directly, pay much in the way of the transactions taxes.
According to the article, leading Democrats such as Barney Frank are open to the idea. The revenue needs, it seems, will be insatiable, and the distortions something like the indirect, hard to pin down, long-run effects of inflation. But in the case of a domestic US transactions tax, of course there is something else to worry about. There is no reason why financial transactions have to remain in American markets. Other than efficiency, liquidity, depth, interconnectedness among financial markets, security, relatively good corporate and regulatory governance, transparency, low transaction costs, the neutral application of the rule of law to all comers. Yes, the United States offers all those things, but it does not have a monopoly of them, obviously. London offers all of that. So do other places – mainland China does not, as yet, but Singapore does, and other places in the world.
Hard as it might be to imagine financial market transactions migrating from the US elsewhere, it has happened to many financial centers in the past and can happen to the US in the future. The US has huge accumulated advantages in these areas, many of which are social, institutional, and political-legal cultural benefits that seem immutable and free-standing. On the other hand, automotive Detroit seemed immutable and free-standing and the beneficiary of all those advantages for decades and decades – its political class decided to eat its seed corn, so to speak, and even once it was obvious where it was heading, decided to go with the flow and double-down the bet on ‘other taxpayers’ money’. Maybe it will (continue to) work out for the best for the UAW and its labor allies, at the expense of the rest, but there are limits to even what the current administration can do for it.
This is not a declinist prediction. It doesn’t have to be this way. It is, rather, to observe that for the US now, actions to promote US decline are decisions taken today by the political class. Decline-inducing decisions include making the US less attractive as a capital market center and leader, making transactions more expensive in order to favor current spending.
Does a complex welfare state need taxes? Sure. Transparent, widely shared, everybody pays something and everyone can see what they pay, so that everyone has a stake in the extent of taxing and spending, as visible and little distortionary as possible. Thus almost the opposite direction to where the US tax code has drifted since the 1986 reform and even more so to where current proposals aim to go. They tend to increase the rent-seeking possibilities of the political class and its ability to ‘get the juice’ from economic actors who must navigate the artificial shoals of regulations that aim to benefit particular constituencies and particular politicians. VAT taxes flunk the transparency requirement, as do turnover taxes of this kind. That is, of course, one reason why politicians love them.
lonetown says:
In other news, spending cuts remain unmentioned.
October 12, 2009, 10:58 amMartinned says:
Then again, from a neo-classical economics point of view, VAT is preferable over income tax, because it creates less of a deadweight loss.
October 12, 2009, 11:04 amCalderon says:
Does anyone (Prof. Anderson?) know what Frank is getting at in the following passage talking about the tax being a “one-time provision”?
Is the idea there really to impose a one-time tax on all outstanding funds in US financial markets? Or to impose a one-time tax whenever anyone sells their current investments but that it would not apply when they bought or sold future investments? Or am I just missing some other obvious meaning?
October 12, 2009, 11:06 amHal (GT) says:
So basically it’s, Taxes to the left of me, Taxes to the right of me, Taxes before and behind me.
While the wealth shifts out of the US for more free markets.
October 12, 2009, 11:23 amMike says:
It is not just a bunch of plutocrats sitting around trading their stocks and bonds.
The tax is also a peripheral attack on high-frequency trading. Many companies (like Goldman Sachs) make billions manipulating markets and front running. The tax would affect firms like GS most of all – which means the tax won’t pass.
October 12, 2009, 11:25 amShelbyC says:
What are you talking about? The total spending reduction in the health care bill is a real number, correct?
October 12, 2009, 11:27 amDilan Esper says:
look, this whole post is based on the assumption that the financial sector produces value. however, there are a heck of a lot of people who are VERY skeptical of that assumption these days, especially when it comes to very short term transactions (which are the ones which will be hit by the tax). a lot of us think such transactions are no more useful to the economy than simple gambling.
a tax on transactions favors long term savings over short term speculation. those of us who do not worship the false god of the free market uber alles think this is an excellent policy goal.
October 12, 2009, 11:30 amSeaDrive says:
NYC has threatened something of the kind from time to time, but the exchanges threaten to move out of town, and the city capitulates.
October 12, 2009, 11:35 amShelbyC says:
Well, you are of course free to practice whatever religion you choose. All we ask is that you don’t force it on the rest of us.
October 12, 2009, 11:45 amMartinned says:
In 1986, Fischer Black, one third of Black/Scholes/Merton, wrote an amazing article in the Journal of Finance. While being one of the apostles of the (strong form) efficient market hypothesis in the 1970s, he came to doubt that position later on. In his 1986 essay, he argues that if markets were perfect, they wouldn’t work.
(If people only ever traded because they have information, there wouldn’t be enough volume to make markets work. In fact, if all people are information traders, who would take the other side of the trade?)
I’ve always found that a fascinating idea. For present purposes, it follows that those who create “noise” contribute to the overall workability of the financial markets, which, as a whole, certainly do serve a useful purpose in the economic system. (Which doesn’t mean transactions shouldn’t be taxed, it only means they should be taxed at a sufficiently low rate.)
October 12, 2009, 11:53 amHal (GT) says:
Good point.
October 12, 2009, 11:55 amSteve says:
The massive cut in SEC fees in 2006 didn’t do a lot to stimulate the economy, so I rather doubt a new tax of a quarter-point will do much in the opposite direction. Hard to see how there would be much impact on the typical buy-and-hold investor.
October 12, 2009, 12:03 pmRedman says:
Tax the rich
October 12, 2009, 12:04 pmFeed the poor
Till there are no
Rich no more
Abdul Abulbul Amir says:
If I understand this correctly, my 401k mutual fund purchases will taxed each month on my payroll deduction. Then the mutual fund will pay the tax again when it purchases securities, and again when changing the allocation of its investments. It will be taxed again when selling investments to pay redemtiions. Lastly, I will be taxed again in retirement when selling those mutual funds for money to live on.
My 401k is only a 201k to begin with. This sounds absolutely insane.
October 12, 2009, 12:04 pmMartinned says:
FIFY
October 12, 2009, 12:09 pmMatt_T says:
Well put.
October 12, 2009, 12:09 pmAbdul Abulbul Amir says:
Don’t confuse teaser starter rates with end point rates. After all a bump from 0.25% to 0.35% can’t be that big of a deal. Same for a bump from 0.35% to 0.50%. Etc, etc, etc.
Some time, you should look into how Schlitz beer threw away its leading position.
October 12, 2009, 12:10 pmMartinned says:
Compared to an average day’s movement in the market, this tax (should) hardly show up on your radar. A tax like this should only matter for day traders, which is hopefully not what they’re doing with your 401k.
October 12, 2009, 12:13 pmMartinned says:
Yes, before you know it, the transaction tax will be 110%!
But seriously, while a 0,50% tax would be a bad idea, it would hardly matter for your buy-and-hold portfolio.
October 12, 2009, 12:15 pmShelbyC says:
How about index funds? And other funds?
October 12, 2009, 12:17 pmBob from Ohio says:
High-frequency trading should be banned. It creates no economic benefit, just enriches the traders.
I would recommend it being done by a convention so the good patriots of Wall Street don’t just migrate their computers to Singapore.
A international convention to rein in the finance world on this and other fronts would be a good idea in theory. The twin problems would be the excessive political power of Wall Street on both parties here and the socialist crap we could expect from other parts of the world.
October 12, 2009, 12:17 pmAbdul Abulbul Amir says:
If thats the goal rather than the sales pitch, only apply the tax to securities held for a day.
October 12, 2009, 12:17 pmJDS13 says:
The tax would indeed affect your buy-and-hold portfolio, because this tax on market-makers and day traders would increase the bid-ask spreads and reduce liquidity. This in turn would reduce the propensity of buy-and-hold investors to rebalance or otherwise rejigger their portfolios… The loss of efficiency in capital allocation would go way beyond even a tiny tax.
Buy-and-hold isn’t good for our economy – what’s good is to keep capital flowing to its highest use. Any tax on that impoverishes us all.
October 12, 2009, 12:21 pmthe federal white collar criminal says:
I don’t see why VAT taxes have to flunk the transparency requirement. There’s nothing stopping you from requiring that the total tax amount appear on receipts, just like there’s nothing stopping states from requiring retail establishments from including retail sales taxes in the posted price.
It’s quite silly to oppose a form of taxation that is much less susceptible to tax fraud than retail sales taxes solely over an eminently solvable issue, particularly when most people don’t pay attention to the retail sales tax rate anyway.
October 12, 2009, 12:26 pmAnderson says:
The tax makes as much sense as a sales tax.
However, I agree w/ Mike. “What’s good for the country is good for Goldman Sachs, and vice-versa.”
October 12, 2009, 12:27 pmSteve says:
So those massive 2006 cuts to SEC fees must have driven liquidity through the roof, right?
October 12, 2009, 12:30 pmMartinned says:
Sure, why not create more bureaucracy still? Instead of having a simple, uniform tax, why not make everyone fill out a form in triplicate showing when they purchased and sold the shares in question? (Not to mention the question of what to do with someone who holds 100 shares, buys 10 more on Monday, and sells 20 on Tuesday. Did this person hold any securities for less than one day?)
October 12, 2009, 12:30 pmCalderon says:
I’m not sure how you can say it only matters for day traders. If you assume a 0.1% tax on the value of the transaction, and that you or your mutual fund trade once a month, you’re looking at a 1.2% tax per year. Given that your average annual returns likely will be somewhere between 6 and 10% a year, the tax will take out between 10 and 20% of your profit.
A couple of other points would be that the tax will distort investing away from whatever it covers and toward other potential investments. If the tax covers only stocks, then we’re going to see a shift toward bond investing, which tends to hurt start-up companies. If both stocks and bonds are taxed, then you’ll see a shift toward other investments … such as real estate, and I’d hope we’ve learned that we don’t really want to encourage excessive real estate investments.
Also, one of the purposes of a well-functioning capital market is to get funds quickly to where they can be used best. If the automotive industry is dying and environmentally green technologies are growing, then you want to shift you money to the latter. If you think green techs are over invested but medical equipment suppliers look promising, then you’d want to shift again. This tax would hamper innovation and change in society overall by slowing how quickly funds are transferred from old ventures to newer and more profitable ones.
October 12, 2009, 12:31 pmMike says:
You were dead on until you allowed your partisanship make you into drooling infant.
Democrats do not really want this tax. The tax would hit Wall Street. Have you even looked at the campaign contributions Dems receive from Wall Street? Start with Barack Obama, and work your way down.
This isn’t an free market v. regulation issue. This is a Wall Street v. the American people issue. If, after the bailouts, you can’t see that…then perhaps you are beyond help.
I support this tax as a way for the American people to recoup at least a small fraction of the hundreds-of-billions Wall Street stole from us.
It is true, as you said, that short-term trading does not add value. Short-term trading is gambling – unless you’re Goldman Sachs. There isn’t much of a gamble when you’re front running the markets.
The “free market” line you tossed in was a red herring. There is no free market in Wall Street. When a private enterprise is fully backed by the government, nothing that the enterprise engages in can fairly be called “free market.”
October 12, 2009, 12:37 pmMark N. says:
Part of the motivation is also an attempt to recover the costs of a financial-sector bailout from taxes specifically on the financial sector. Perhaps there are better ways than a transaction tax, but it’s one that comes up immediately as an option.
October 12, 2009, 12:44 pmAnderson says:
Mike ate his Wheaties this morning!
October 12, 2009, 12:45 pmroad2serfdom says:
According to my quick math (hope it is right). If a day trader turns over her portfolio 28 times a day, then this tax at a 0.5% rate would be approximately a 50% annual asset tax. 14 turnovers a day would mean a 25% asset tax each year, etc.
I don’t know the number of times a day heavy day trader trade values equal to the size of their portfolios. It proablaly depends on the industry, with some traders able to trade at the margins of thier portfolio, resulting in less of this kind of tax, for others each trade might be a big bulk of their total assets.
October 12, 2009, 12:48 pmMike says:
So when traders are trading in and out of Citi millions of times in a day…That is simply getting “funds quickly to where they can be used best”? During one trading day, 60% of the market volume involved people trading Fannie, Freddie, and AIG.
Are you a Wall Street PR rep? Or have you not been following high-frequency trading? Here’s an illustration of Wall Street’s alleged practice of getting “funds quickly to where they can be used best.”
Wall Street – as currently operated – is a giant casino. A tax on trades is no different from a tax at the black jack table.
October 12, 2009, 12:49 pmMark Field says:
Don’t the Brits have a Tobin tax?
I think Bob in Ohio makes a good point that an international convention would be a good idea. I also agree with those who suggest that high frequency trading is of minimal benefit.
October 12, 2009, 12:50 pmMartinned says:
@Calderon: I agree, except for this point:
That is indeed its purpose, but the premise of all Tobin-tax related proposals is that it is not, in fact, doing this. They point to the tendency of capital market to panic, and to display other herding behaviour that bankrupts otherwise viable industries. (The car industry, which you also mention, not being one of those.) The suggestion is that, by taxing transactions, capital providers would be forced to take into account the number of transactions they engage in when choosing their optimal investment (strategy). That would cause them to favour trading methods with fewer individual trades, i.e. long-term rather than short-term investments. In other words, the suggestion is that this tax would redefine “best” in favour of long-term investments.
(Put differently, it would mess with the discount rate of short-term investments relative to long-term investments, making the latter come out better.)
Now I don’t have an opinion (yet) on whether any of this would be a good idea, but I certainly think it’s an intriguing possibility. (One of the problems with economics is that it is impossible to be certain what will happen unless someone actually tries this, and even then it is hard to draw the right lessons.)
I am generally highly suspicious when the government claims to know what use of capital is “better”, but in this case the preference is only very general: long-term over short-term. If this works as advertised, it could give the government (or better yet, the central banks) a useful additional instrument for managing capital markets.
October 12, 2009, 12:51 pmDilan Esper says:
You were dead on until you allowed your partisanship make you into drooling infant.
I don’t think I said anything about political parties. Indeed, I don’t trust Chuck Schumer to do anything that the financial services industry opposes.
My point was that there’s a tendency of many ideologues to assume that anything the market does is beneficial to society. But there’s plenty of evidence that clogging up the gears short term is a very good idea.
There’s an analogy in international finance. A lot of right-leaning economists criticized Malaysia’s capital controls, saying that they were a gross interference in the free market, etc. But when Asia crashed, Malaysia didn’t, and arguably the capital controls were the reason, because they interfered with the sorts of speculative transactions that intensify the impact in a crash.
A market where short-term speculation is discouraged is less volatile. You get less boom and less bust. That’s a very good thing if you don’t think that having so much risk in the macroeconomy is a very good idea.
October 12, 2009, 12:54 pmLarryA says:
Back in 1898 we had a little dustup called the Spanish-American War. To fund the war Congress levied a temporary tax on telephone service.
As I remember, that tax was finally repealed circa 2002. That’s what Congresscritters mean by “temporary.”
It won’t be just raising rates. Today part of the reason Congress is taxing transactions is because “capital moves too fast.” As soon as the tax starts to bite they will start exempting transactions, for instance for union pension funds since “access to capital must be equitable.” Then they’ll get into different tax rates for different transactions because “capital is moving in the wrong direction.” Then there will be sin tax rates for those transactions where “people are making poor capital investment choices.” By the time that’s implemented the market will be bankrupt, so the government will need to take over control in the name of “efficient distribution of capital.” Except by that time there won’t be any capital left.
No problem. Rolling all the retirement funds into Social Security will solve everything.
This betrays the “the government is needed to solve the problem the government created” thinking.
October 12, 2009, 1:07 pmMike says:
You toss Schumer out as a sacrificial lamb. Yet I cited Obama. And, indeed, Wall Street has completely overtaken the Obama Administration. Hence, my observations about your partisan blind-spot remains apt.
Other than a few hacks: Post-bailouts, how many people really have the “tendency … to assume that anything the market does is beneficial to society”?
I’ve noticed a major change in sentiment? Haven’t you?
That neither of the political party has channeled this populist rage is all the evidence a thinking person should need to prove beyond a reasonable doubt that Wall Street owns both parties.
Until you and others realize this, Wall Street will keep pimping the American taxpayers. The first step, though, is understanding that, yes, Wall Street owns Democrats, too. Not just a few insiders like Schumer. But the entire Democratic party; as well as the Obama administration.
October 12, 2009, 1:07 pmlonetown says:
Taxes should be so transparent that it seems like they are taking the money directly from your pocket! which in fact they are
October 12, 2009, 1:08 pmDilan Esper says:
By the way, having supported the tax in concept, let me say that I do agree with LarryA’s point that there’s always a big danger with these things that rather than being implemented in a straightforward way so as to accomplish their goals, they will become a mechanism for government to favor particular constituencies and meddle in the economy in various ways.
I might add, however, that this is also true of tax measures conservatives tend to favor, such as cuts in capital gains taxes.
The fact is, nothing ever gets implemented in an ideal fashion. But that doesn’t mean that even an imperfect implementation may not be better than the status quo.
October 12, 2009, 1:10 pmLarryA says:
What you actually get is fewer small booms and busts, while the pressure builds up for the big adjustment.
Exactly what happened in housing, where government “discouraged” the market over the past forty or so years, until the pressure got too high to control.
October 12, 2009, 1:12 pmDilan Esper says:
You toss Schumer out as a sacrificial lamb. Yet I cited Obama. And, indeed, Wall Street has completely overtaken the Obama Administration. Hence, my observations about your partisan blind-spot remains apt.
Mike, I don’t trust Obama (who is advised by plenty of Wall Street types and who doesn’t want to oppose key contributors from that sector) to take on Wall Street either. Are you happy now?
Other than a few hacks: Post-bailouts, how many people really have the “tendency … to assume that anything the market does is beneficial to society”? I’ve noticed a major change in sentiment? Haven’t you?
I’ve noticed a change from some people. Certainly Alan Greenspan and Richard Posner, for instance. And I will admit that there is an anti-Wall Street sentiment in even some right wing populism, such as the Tea Parties and Glenn Beck.
But I have also noticed PLENTY of people defending an extremely hands off attitude with respect to the free market, including, not to put too fine a point on it, Kenneth Anderson, Todd Zywicki, and Jim Lindgren on this blog.
October 12, 2009, 1:13 pmDilan Esper says:
What you actually get is fewer small booms and busts, while the pressure builds up for the big adjustment. Exactly what happened in housing, where government “discouraged” the market over the past forty or so years, until the pressure got too high to control.
That’s a very strange view of what happened. The teaser mortgages were very much a product of the free market. They would have happened with or without Fannie Mae and the CRA. Securitization was certainly helped along by Fannie Mae, but given the money people were making, that probably would have happened too.
In other words, it was precisely in the most unregulated sectors of the market that the bubble inflated fastest. Did government policy make it worse? Probably. But note that it wasn’t a simple tax mechanism– government was doing very complex things to inflate the housing market. Unless you think that the thing that really caused the bubble was the mortgage interest tax deduction, I don’t see how this is at all comparable to a financial transactions tax.
October 12, 2009, 1:16 pmMartinned says:
OT: The latest mini-scandal here in the Netherlands is that the government have apparently taken to collecting traffic tickets themselves. When people refuse to pay the ticket, the Justice Department takes the money directly out the offender’s bank account. (Technically, the legal niceties of the method used mean that people can get the money back if they simply call their bank, but still: who knows that?) It’s actually surprising how few people are screaming over this one… I guess all those Europestan distractions are working…
October 12, 2009, 1:17 pmMike says:
Didn’t Todd Zywicki say that subprime lending was not leading to a housing bubble? Didn’t he also say that subprime lending was not going to harm low-income borrowers? If he, in fact, said those things: Should he be taken seriously?
Hmm….It seems that he said:
“[T]he growth in subprime lending is not creating overwhelming debt burdens for low-income households.”
And:
“There has been much criticism lately about so-called ‘exotic mortgages’ that are creating a ‘housing bubble’…. Although often lumped together, the two are distinct. And I’m not sure I see what the problem is here. I want to focus on the supposed harm of exotic mortgages, especially interest-only mortgages (which are said to create the housing bubble by allowing people to borrow ‘too much’ and forcing up home prices).”
QED.
Fringe people say many fringe thinks. I don’t know of too many people who take the guy seriously.
Most serious thinkers have moved beyond that silly thinking. The bailouts have changed sentiment. You should look beyond a few fringe people who said some of most completely idiotic things of all time.
Wall Street is not a free market. Who other than those few who claimed that subprime lending was a good thing, say otherwise?
October 12, 2009, 1:20 pmSteve says:
If you assume a 0.1% tax on the value of the transaction, and that you or your mutual fund trade once a month, you’re looking at a 1.2% tax per year. Given that your average annual returns likely will be somewhere between 6 and 10% a year, the tax will take out between 10 and 20% of your profit.
Turning over your portfolio 12 times in the course of a year would be a very active trading pattern. A more typical mutual fund would turn its holdings over once per year, if that.
Your scenario essentially assumes that whatever investments the mutual fund holds in January, by February it will have sold them all and bought something else altogether, by March it will have sold everything yet again and purchased a third set of investments, etc., without anything being bought and held for the long term. You won’t find many mutual funds, or individual investors for that matter, who trade like that.
October 12, 2009, 1:22 pmMark Field says:
I assume that mutual funds which reinvest dividends would be exempt from this tax. If not, then it’s true that the tax could be imposed multiple times per year.
Also, I don’t know how often index funds adjust their portfolios. It wouldn’t make much sense to tax transactions which accomplish that. In short, if the point is to discourage short term, speculative trading, there’d have to be some care taken to accomplish that.
October 12, 2009, 1:31 pmDilan Esper says:
Mark Field:
If you set the tax rate low enough, you wouldn’t need to worry about those considerations. It’s like the proposals for e-mail taxes. The spammers send so much e-mail that you could set a tax rate that creamed spammers while being completely unnoticed by anyone else. Well, similarly, you can set a tax rate on financial transactions that would cream the high volume traders while being tiny for everyone else.
October 12, 2009, 1:37 pmSteve says:
A lot of people are unintentionally making arguments in favor of charging a flat fee per transaction (as the SEC does currently) rather than a percentage of the trade value.
October 12, 2009, 1:43 pmruralcounsel says:
A little more sand in the gears of finance; sounds like just the ticket to generate prosperity. Wouldn’t it have been more efficient just not to have bailed out the financial sector? Ah, but I forgot, then the Administration wouldn’t have been able to pick and chose who got bailed and who got failed.
I’m sure that it is now very trendy and cutting edge to question whether financial markets produce value, short-term hindsight being what it is. I’m beginning to think the same can be said for the Federal government. If the U.S. Government were a stock, it would be time to short it.
October 12, 2009, 1:52 pmDilan Esper says:
I’m sure that it is now very trendy and cutting edge to question whether financial markets produce value, short-term hindsight being what it is.
The funny thing about this comment is that a lot of the support for unfettered free financial markets and deregulation over the last 30 years came from exactly the sort of short-term hindsight you are talking about. People forgot how important and necessary government intervention in the economy was during times of massive shocks, panics, and depressions.
October 12, 2009, 1:57 pmpc says:
What? There are less than a dozen IPOs per quarter as is. How would a tax per transaction hurt start ups? Besides, by the time a company does its IPO it can hardly be considered a start up. This isn’t 1999.
What a lot of people don’t seem to realize is that we are already paying this tax. The difference is the money is going directly into the pockets of Goldman and other shops that run HFT scams. Those firms are extracting wealth from the market and providing nothing in return.
October 12, 2009, 1:58 pm...Max... says:
And what is going to happen with option trading? How are they going to compute the “total value” of a $0.06 OTM vertical spread on a $50 underlying stock? 2x$50×0.25% = $0.25, 4x the trade value in this example…
October 12, 2009, 2:04 pmShelbyC says:
Why do we have to call it unfettered free markets? Can’t we just call it freedom?
October 12, 2009, 2:07 pmMartinned says:
What’s wrong with the standard Black-Scholes formula that everybody else is using? (Assuming options would be covered at all. Alternatively, options could only be covered when they’re exercised, or not at all.)
October 12, 2009, 2:07 pmPlugInMonster says:
Whether or not the markets provide value to society is nobody’s business. Butt out.
October 12, 2009, 2:07 pm...Max... says:
In this case I’d expect a big flight into synthetics. And perhaps Black-Scholes formula will stop reflecting the real world ;)
October 12, 2009, 2:15 pmLN says:
How are they going to find the value of an option that trades for 6 cents? I don’t know, maybe they’ll assign it a value of 6 cents.
Also, even though the government intervened in the housing market, artifically distorting prices, wise all-knowing markets were not fooled and recognized that housing gains were not sustainable. Wait what?
October 12, 2009, 2:18 pmFederal Farmer says:
I wonder then, who’ll feed the poor?
October 12, 2009, 2:19 pmAbdul Abulbul Amir says:
Securitization was critical. Without the Fannie Mae seal of approval those securities would have not be seen as nearly risk free, nor spread as widely.
When the GSE’s started securitizing no money down mortgages in ani-deficiency states (!!!!) in the 90′s the flood gates were open.
The housing bubble and subsequent bust has the fingerprints of regulators and GSE’s all over the place.
October 12, 2009, 2:23 pmlonetown says:
Those that can – do, those that can’t – leach!
October 12, 2009, 2:26 pmGuest12345 says:
What exactly do you think happened in the last year or two? That was the market “recognizing housing gains were not sustainable.” There is nothing about markets that even suggests they are prescient such that you can pick any arbitrary time interval and that interval will reflect the entire future of the market to infinity. Markets reflect what people believe at any given moment. Sometimes people realize that what they believed was wrong, and then you get corrections.
Get over it.
October 12, 2009, 2:27 pmFederal Farmer says:
They’d have to compute the tax at the NPV of the option, not the value of the underlying stock.
October 12, 2009, 2:28 pm...Max... says:
Going by this logic, if I short a $50 share and cover the short at $49.94 6 hours later, I should only pay the tax on 6 cents? Before responding, check Wikipedia for the meaning of “vertical spread”.
October 12, 2009, 2:29 pmFederal Farmer says:
OT, but Black-Scholes is fine for European-style exercize options (such as indexes) but needs refinement for American-style exercize options such as equity options. When I worked at Fossett we used an iterative form of Black-Scholes.
October 12, 2009, 2:31 pm...Max... says:
They’d have to compute the tax at the NPV of the option, not the value of the underlying stock
In this case it’ll be a tax on something like 50c, not on 6c since the transaction tax presumably doesn’t care whether the trade is long or short (I used Dec QQQQ puts for a quick estimate). Better than basing it on the underlying, but still a major disadvantage. More complex spreads will fare even worse.
October 12, 2009, 2:34 pmDilan Esper says:
Why do we have to call it unfettered free markets? Can’t we just call it freedom?
No, we can’t. In a state of nature, after all, there is no market at all. And in a laissez faire economy, there’s a lemons equilibrium.
The only way you get to a system where one is free to do high frequency trading or derivatives trading or whatever is through intense regulation which sets up the market and drives out the lemons. So it makes no sense at all to speak of “freedom” in that context.
October 12, 2009, 2:37 pmDilan Esper says:
Whether or not the markets provide value to society is nobody’s business. Butt out.
Right now we have over 9 percent unemployment, which means a lot of people lost their jobs as a result of the disfunction in financial markets. Those unemployed people have every right to call on their elected representatives to “butt in” to the markets.
October 12, 2009, 2:39 pmDilan Esper says:
When the GSE’s started securitizing no money down mortgages in ani-deficiency states (!!!!) in the 90’s the flood gates were open. The housing bubble and subsequent bust has the fingerprints of regulators and GSE’s all over the place.
Fannie and Freddie deserve the criticism they got, but plenty of bad mortgages were securitized, even in the end, by the private sector which did not meet Fannie and Freddie’s standards. So the idea that absent Fannie and Freddie, the market couldn’t have created this bubble seems quite false.
October 12, 2009, 2:41 pmloki13 says:
The problem that I have when I engage in dicussions with True Believers in Libertarianism(tm) is the same one I have when I run into one of few reamining unreconstructed Marxists. To wit-
Me: Marxism doesn’t work. Look at the Soviet Union!
Marxist: But they just weren’t doing it right!
Me: Free markets are great, but look what happens when you put blind faith in them.
TBIL: But there was still, somewhere, somehow, some sort of government!
In short, you slowly realize that insistence upon any particular solution is the mark of an ideologue, facts be damned. Just as a Marxist would deny the basic existence of human nature (greed and selfishness) when constructing his perfect society, a libertarian denies the communal aspects of human society in their elevation of the individual, ignoring the fact that humanity has always formed bonds of complexity with one another that matter as much as our individual needs.
To ignore the individual, or the society, is madness.
Anyway, this is a long and short way to analyze most issues- the perfect is the enmy of the good. Free markets are good, and government should be limited; but there is always more to it than that. I am agnostic about this proposal. I believe that “speculators” perform a valuable service in providing information to the market. I also think that they can be destructive. Cf. the difference between short selling (providing the market with information about a company’s possible negative performance) with naked short selling (doing the same without owning the stock to cover). There may be value, if short-term transactions are much more harmful and result in an inefficient allocation of resources as compared to longer-term investments, of making them slightly more expensive to make so that investors will internalize the cost; OTOH, it may be a bad idea on balance. Knee jerk reactions in either way without evidence aren’t really helpful.
October 12, 2009, 3:03 pmJames T. Carrington says:
Exactly – VAT = Flat.
October 12, 2009, 3:05 pmSuperSkeptic says:
You could, yet I would still oppose a freakin e-mail tax, thank you.
Have you ever seen the movie Office Space?
October 12, 2009, 3:08 pmDangerMouse says:
Dems should re-name this bill the “Hong Kong Financial Promotion Act.” Same with the old Sarbanes-Oxley law. Everything that the Federal government does to make things more expensive for financial markets here will benefit places like Hong Kong. Someone else earlier mentioned that there were very few IPOs. Blame Sarbanes Oxley, among other things.
Several other points:
1. It’s amazing how many people don’t realie the degree to which Freddie/Fannie distorted the real estate market. The effect was gigantic. Yes, there were numerous other problems, like inaccurate credit ratings. But absent the near-universally understood guarantee of Freddie/Fannie, and thus the backing of the Federal Reserve (which proved correct), the bubble would not have grown so large. It’s sad that many partisans are hoping to cover up the effects of Freddie/Fannie, and are re-doubling their efforts to expand programs that led to the crisis, rather than listen to the evidence.
2. There are many mutual funds that engage in numerous transactions daily, such as index-replicating funds, active ETFs, and certain asset-allocation funds. Some of these transactions might not involve “securities” and instead are derivative based, but even still, many funds have very high portfolio turnover in order to pursue opportunities. They have objectives designed to deal with high portfolio turnover. Additionally, many fund mergers might involve large rebalancing of assets, which would impose a huge tax on mutual funds looking to consolidate inefficiencies.
3. Politically, I don’t think that Dems really understand the role of the financial markets. They might accept Wall Street cash, but they really have no idea about the role the financial industry plays in wealth creation. They don’t seem to understand the role that a free market has in expanding wealth (ala Hong Kong), and much of their rhetoric takes as a given the idea that America’s financial markets will always exist as a strength that can be taxed or regulated without burden. This is the most troubling thing, especially given the willed blindness about bad policies seen in Freddie/Fannie, which allowed the market to become distorted once the government entered as a player.
October 12, 2009, 3:11 pmloki13 says:
Yes, of course. Feddie/Frannie are brand new entities. They are 100% to blame, as opposed to the market for CDOs (securitized debt obligations, aka bundled mortgages that were packaged up)… those wonderful instruments that made everyone on Wall Street so much money, and for which there was so much *demand* that, well…. but since they’ve existed since the 60s, they couldn’t be the problem. amiright?
October 12, 2009, 3:15 pmPaul says:
I thought I read that New York State lost about 1/3 of their yearly income tax revenue last year when the bottom dropped out of the financial markets. My point is – the government is getting a 40-60% cut of the money that everyone is upset about “people” or firms making. Yes we/they can try to discourage people from making the money because it isn’t “good” income (in the view of some) – just keep in mind that this means that they/we will also then get 40-60% less from our cut. It seems to me that the governments cut is pretty healthy – if I was able to get a 40% plus cut of someone’s profits (income) I would be hoping that they would do well. Actually I would be cheering them on. (some would say that is what one does when one buys a stock but that is for another day)
October 12, 2009, 3:17 pmDangerMouse says:
Loki,
The market for CDOs was caused by Freddie & Fannie acting to guarantee mortgage debt and to push mortgages on those who could not afford them. Mortgage brokers engaged in those transactions because they were secured by the Federal Government. Thus, the bonds were rated in the highest rating category notwithstanding their crappy collateral, because of the influence of Freddie & Fannie. Why this eludes you, when it has been openly discussed over the course of the past year, is beyond me. Perhaps you like like talking points instead.
There is no reason why a person would purchase a securitized bond based on crap assets, knowing that there would be a high likelihood of default, unless there was a money trail from Freddie/Fannie to backstop the assets and thus the bond. Money talks, and the money was coming from Freddie & Fannie.
October 12, 2009, 3:22 pmSuperSkeptic says:
It seems, and as it has been noted in a few comments, it is politically impossible at this point to swallow the correction pill because of all the alleged side-effects to the economic body(or simply the presence of rent-seekers – a virus). Instead, we get “sand in the gears,” – modern preventative bloodletting.
October 12, 2009, 3:26 pmloki13 says:
DangerMouse,
I’m not sure why you are accusing me of talking points. Freddie/Fannie were in the minority of the CDO boom. In fact, they were badly trailing the major players and were playing catch up. The reason the bonds were highly rated was because of “tranching” (the idea that if you cut up shinola, you can get a rose). In short, you are just wrong. Whether there should have been GSEs like Fred and Fan is an interesting question, but the CDO market (and the CDS market that was related to those CDOs) is separate.
October 12, 2009, 3:26 pmChrisTS says:
Oh god, can we do this, please? (Assuming that shooting them all would be inefficient.)
October 12, 2009, 3:30 pmMark Field says:
Exactly the comparison I’ve made myself.
October 12, 2009, 3:31 pmloki13 says:
Hmmm…. are you saying we should have the spammers internalize the bullets?
October 12, 2009, 3:32 pmDangerMouse says:
Loki,
Freddie and Fannie, at the time of the crisis over a year ago, had guaranteed approximately 5 trillion of debt.
Freddie and Fannie own or guarantee approximately half of all home loans in America.
Please let me know any other “major player” who had even close to that level of crappy assets guaranteed. Just provide a link to the info, showing that I’m “just wrong.” Thanks.
October 12, 2009, 3:33 pmDilan Esper says:
Politically, I don’t think that Dems really understand the role of the financial markets. They might accept Wall Street cash, but they really have no idea about the role the financial industry plays in wealth creation. They don’t seem to understand the role that a free market has in expanding wealth (ala Hong Kong), and much of their rhetoric takes as a given the idea that America’s financial markets will always exist as a strength that can be taxed or regulated without burden.
Danger, don’t be so smug. We all took 1st year Macroeconomics, where we learned how the free market efficiently allocates resources through the mechanism of the invisible hand. The problem is that I don’t think that many right wingers and republican partisans took 2nd year economics courses, where you start to learn about all the complexities that can prevent the invisible hand from working the way it is supposed to.
October 12, 2009, 3:34 pmDangerMouse says:
Dilan,
That’s fine. Just point me to a speech made by…. Barney Frank, on the important of strong, free-markets. Thanks.
October 12, 2009, 3:36 pmloki13 says:
DangerMouse:
Here’s one chart:
Here
There’s plenty more evidence that this was a demand-driven problem, including *common sense* if you care to think about it.
October 12, 2009, 3:41 pmBob White says:
Dilan,
October 12, 2009, 3:46 pmI don’t know about you, but my first year Macroeconomics course was all about how the government can make the economy act the way it wants by changing spending and interest rates and my first year Microeconomics course was all about how government and other distorting factors prevent us from reaching optimal transactions. It sounds like the Democrats all took Macro, the Republicans all took Micro, and nobody took anything beyond the first level classes.
DangerMouse says:
That chart seems to prove my point. Agency and government-sponsored debt was the biggest player. Moreover, the increase in ABS doesn’t reflect that the securities being backed were freddie and fannie sponsored debt. ABS as a stand-alone category doesn’t EXCLUDE the effect of fannie & freddie, it merely conceals it. Read any standard ABS risk disclosure in a Fund’s SAI for more info.
Are you disputing that Fannie & Freddie had 5 trillion of debt guarantees at the time of their conservatorship?
October 12, 2009, 3:49 pmDilan Esper says:
That’s fine. Just point me to a speech made by…. Barney Frank, on the important of strong, free-markets.
Why does Barney Frank need to make speeches about points made by Adam Smith centuries ago?
Look, Barney Frank– like many politicians of both parties– comes in for his share of blame for what happened. But it wasn’t because he doesn’t understand economics. Indeed, one of the notable things about the housing bubble is that a lot of the culpable policymakers (not only Frank but Rubin, Summers, Greenspan, Bernanke, Gramm, and others) are very smart people.
October 12, 2009, 4:01 pmSeamus says:
So we want the financial markets to become less efficient? That is, less likely to quickly reflect all material information held by investors? Why don’t we just repeal all 33 and 34 Acts? That would really increase the risk-adjusted cost of financial transctions.
October 12, 2009, 4:08 pmDangerMouse says:
Why does Barney Frank need to make speeches about points made by Adam Smith centuries ago?
Perhaps because I said that Dems don’t understand the importance of strong free markets, and Barney Frank is the Dems point-person on the financial markets, given his role as Chairman of the House Financial Services Committee.
If Barney Frank is out there making speeches about the importance of strong free markets, I think that’s a good indication that Dems understand them. If not, well, it’s a good indication that he doesn’t. Heck, maybe (as it’s likely) he’s making speeches saying that Adam Smith is WRONG? Did you ever consider that?
Dilan, it’s one thing not to understand economics. Economics can be very complicated. It’s another thing to assume a given thing, X, will always be there even if you tax or regulate the hell out of it. Maybe he understands economics just fine, but has other priorities and doesn’t care if the New York financial industry collapses entirely.
How does Barney Frank explain the existence of Hong Kong?
October 12, 2009, 4:08 pmAllen says:
I did take the second year econ, and now the masters level econs as well, and don’t recall anything that skews the markets as much as government intervention. I remember taxes, quota’s, regulations, etc. The next closest thing to the government was information, but that gap has closed considerably in the last 20 years.
In the housing market at least, the feds left the conservative loans behind, got into subprime loans and the market had to either compete or die. The market responded by making riskier loans but set them up to either backstop with the feds or repackaging them as CDO or another product, this allowed them to bring the risk back to reasonable for the returns they experienced.
If the feds hadn’t gotten so aggressive in the housing industry, we wouldn’t have this bust. On the other hand we also wouldn’t have had the boom of the last 20 years as real estate go out of hand. It’s up to each person if they feel the economic wipe out occuring today is worth the growth of the last decades.
October 12, 2009, 4:15 pmSteve says:
It’s nice to see Dangermouse talking about something other than Obama’s love of infanticide, but why does he keep bringing up Hong Kong? Are conservatives under the impression that the Hong Kong securities markets are some kind of regulation-free paradise, or what?
October 12, 2009, 4:23 pmPLR says:
The free market demands that all buyer and sellers of sophisticated financial instruments be taxed only at the capital gains rate, while the rest of us rubes pay tax at ordinary income rates.
October 12, 2009, 4:24 pmDilan Esper says:
So we want the financial markets to become less efficient?
You are assuming that because (a) efficient markets process information quickly, it therefore follows that (b) markets that allow for instantaneous and high frequency trading will be more efficient than markets that do not.
For all sorts of reasons, (b) does not follow from (a).
October 12, 2009, 4:28 pmFirstDutyOfIntelligentMen says:
This isn’t about nudging the market in a healthier direction. This is about increasing revenue for the federal government through the transfer of wealth.
P.S. – Arguing over the best form of taxation is fairly academic since Washington generally contemplates new taxes in addition to rather than in lieu of the existing tax structure.
October 12, 2009, 4:30 pmDilan Esper says:
If Barney Frank is out there making speeches about the importance of strong free markets, I think that’s a good indication that Dems understand them. If not, well, it’s a good indication that he doesn’t.
That’s faulty logic. That’s like arguing that because a politician doesn’t give speeches about evolution, he or she must be a creationist.
Dilan, it’s one thing not to understand economics. Economics can be very complicated. It’s another thing to assume a given thing, X, will always be there even if you tax or regulate the hell out of it.
Danger, regulations created the financial markets. Without governmental regulations, you have a lemons equilibrium which nobody is willing to invest in. In the 19th Century, people hoarded money in the mattress. They still do in third world countries without adequate financial regulations.
So, in actuality, “regulating the hell out of it” is a precondition for a functioning, efficient, free financial market. The question is what regulations are beneficial and what regulations are harmful. And Barney Frank, I assure you, is regularly briefed by professional economists, both liberal and conservative, about whether particular regulations and taxes are beneficial or harmful, on balance.
October 12, 2009, 4:31 pmDilan Esper says:
I did take the second year econ, and now the masters level econs as well, and don’t recall anything that skews the markets as much as government intervention.
Wow, what an ignorant statement. I don’t have an economics degree and even I know, quite well, that in the economics profession there is a huge debate both generally about how much effect various variables have in “skewing the markets” as well as specifically, as to whether particular government regulations are good and bad. (Indeed, even many conservative economists like Milton Friedman argued that certain sorts of government interventions were necessary and good, and would not “skew the markets” to an unacceptable extent.) So you are either misrepresenting what your professors told you or you didn’t understand it as well as you think you did.
In the housing market at least, the feds left the conservative loans behind, got into subprime loans and the market had to either compete or die. The market responded by making riskier loans but set them up to either backstop with the feds or repackaging them as CDO or another product, this allowed them to bring the risk back to reasonable for the returns they experienced.
You know, I hear conservatives say this all the time, and it ignores a crucial fact. THE BANKS WERE MAKING A ****LOAD OF MONEY MAKING, AND THEN SECURITIZING, SUBPRIME LOANS. They were essentially capturing some of the expected increased values in the homes they were lending on by structuring the loan to backload the costs after the home went up in value, with the expectation that it would be refinanced.
I don’t care how many times conservatives talk about Fannie and Freddie, it remains a fact that YOU DON’T NEED TO PUT A GUN TO BANKERS’ HEAD FOR THEM TO DO SOMETHING THAT MAKES THEM A TON OF MONEY.
Seriously, this really is obvious. But ideology blinds people.
October 12, 2009, 4:36 pmDotar Sojat says:
A lot of people have a lot more money than me and I think the government should make them give me some of it.
October 12, 2009, 5:06 pmDangerMouse says:
Steve,
Ask the people who did IPOs post-Sarbanes Oxley if Hong Kong is more amenable to the financial markets than America. Repealing or amending Sarbanes Oxley will do more to boost the industry than anything else.
The government can’t tax a dead industry. No profit = no tax.
THE BANKS WERE MAKING A ****LOAD OF MONEY MAKING, AND THEN SECURITIZING, SUBPRIME LOANS.
Of course they were making money. It’s easy to make money on a loan for crap assets when the Federal Government guarantees the debt. 5 trillion of guaranteed debt means a lot of bankers were willing to play. You can’t blame the bankers for making money. You can blame the agencies for guaranteeing crap assets that opened the field for bankers. No garantee on crap assets means no bankers would play. This isn’t that hard to understand.
October 12, 2009, 5:08 pmDilan Esper says:
Of course they were making money. It’s easy to make money on a loan for crap assets when the Federal Government guarantees the debt.
Danger, do you understand the concept of a teaser mortgage? How it worked? How, in a rising housing market, it is essentially a bet by lender and borrower that the market will go up? And how, so long as the market does go up, it makes the lender a lot of money?
Note that all of this is true whether or not there is an implicit government guarantee given on the security. And indeed, many teaser mortgages were OUTSIDE of Fannie and Freddie’s guidelines (even the relaxed ones) but they made the banks money anyway.
You can’t blame the bankers for making money. You can blame the agencies for guaranteeing crap assets that opened the field for bankers. No garantee on crap assets means no bankers would play.
You are essentially asserting that the bankers would have passed up an opportunity to realize huge short-term profits.
Danger, the credit card industry had no government backing. Indeed, credit card interest is fully taxed (unlike mortgage interest). And yet, the credit card industry expanded its subprime business exponentially during the same period when the housing bubble took place. That pretty much indicates that there was more to this than the government.
Again, don’t take any of this as a defense of Fannie, Freddie, Barney Frank, or the Clinton Administration. It isn’t. But you seem to be willfully ignoring that bankers placed huge bets on an upward housing market, and as long as housing continued to go up, those bets were rational with or without a government guarantee.
October 12, 2009, 5:16 pmDotar Sojat says:
Dangermouse – for some, its incomprehensible.
October 12, 2009, 5:18 pmShelbyC says:
Well, as a blind idealogue, for the most part I view the free market, like other forms of freedom, as good in and of itself. Kind of like marriage or religion. I believe that I can make better marriage choices for myself than the government. But even if I’m wrong, I am still against governemnt intervention in marriage.
October 12, 2009, 5:21 pmloki13 says:
No Dotar, for some it’s a matter of simple economics.
You start with a simple financial instrument. Say, a REIT. Morph it to make it a CDO. CDOs can be anything (with a constant stream of income, pooled together- like mortgages, or credit card obligations, or auto loans). Then you tranch it- given differential rates of payment and default to account for risk. Assume that the ratings agencies are along for the game, and they rate the highest tranches AAA. So you take something that is inherently risky, and by dividing it, you create something that isn’t risky… which might work… if the underlying asset class is sufficiently diversified (or if housing prices always rise). Then, in order to make sure more money is made by all, you can sell insurance on the CDOs (CDSs). Finally, you’re creating an additional agency problem because with this packaging, the people who are making the mortgages are no longer holding them, and have no incentive to make good mortgages (for the most part)- just to make an many mortgage as possible and send them upstream.
Of course, as Dilan points out, banks makes a ton of money of this. Threy were insatiable. This was a demand-driven issue. They wanted more and more and more streams of incomes (esp. mortgages) to package into CDOs. This created increntives to make more of them to worse parties. Basic econ- what happens when there is high demand for a product?
October 12, 2009, 5:31 pmloki13 says:
But even if I’m wrong, I’m still against [fill in the blank].
See, that’s where we’re different. If I’m wrong, I like to change my opinion. It took me a long time to realize that the world didn’t fit into my theories. I prefer things that, you know, work and fit in with the world, as opposed to shoehorning the world into my a priori beliefs.
Like this dialogue with DangerMouse. I’m 99.9% certain he’s wrong about Fannie and Freddie wrt. the crisis. But I could be wrong. OTOH, I am uncertain about the overll utility of having GSEs in the mortgage market, and probably inclined to believe it is a bad idea. I am also of the opinion that the mortgage tax credit is probably a bad idea, but I’m somewhat ambivalent about it (and realize it would be political suicide). Life’s complex.
October 12, 2009, 5:36 pmShelbyC says:
Interesting. I think you might be better off trying to differentiate my marriage example from regulating finance. But you didn’t, so to run with my example, you think that in order to decide whether or not the government should be allowed to choose my spouse, you think that it is neccessary to determine whether or not the government can choose a better spouse that I can? Am I understanding you correctly?
October 12, 2009, 5:49 pmDilan Esper says:
See, that’s where we’re different. If I’m wrong, I like to change my opinion. It took me a long time to realize that the world didn’t fit into my theories.
There’s an old economists’ joke that involves a renowned economics professor being given a tour of the facilities of an anti-poverty program. The program’s director, beaming, is introducing the economist to single mothers who were able to find jobs and child care, showing the economist the job training and interview skills classes that they offer, and providing testimonials from clients who got off of the streets thanks to the program. “You see how well this all works in practice?”, the director said to the economist.
The economist replied, “yes, but does it work in THEORY?”.
October 12, 2009, 5:51 pmloki13 says:
ShelbyC,
I didn’t understand your example. You didn’t write “government choosing who I married”. You wrote “government intervention in marriage”. I didn’t really address that, primarily because government intervens in marriage already (can’t marry your cousin or your sister, have to take bloodtests for STDs in some states, can only marry opposite sex etc.) so I didn’t know what you meant, so I ignored your example! But yes, I think that having the government select your partner is a bad idea. We good now?
Dilan,
I prefer this one-
An economist was walking with his granddaughter down a street. The little girl spotted a five dollar bill on the ground and went to pick it up. The economist told her not to. When she asked why, he said,
“Dear, I believe in the efficient market. That bill can’t exist, or someone else would’ve picked it up by now.”
October 12, 2009, 5:58 pmNickM says:
Never fear. Exemptions will be drawn into the tax to exempt Goldman Sachs and any other sufficiently politically connected firms.
Nick
October 12, 2009, 6:13 pmShelbyC says:
Of course, there have been many programs that have valued full employment over individual freedom, and none of them have been good. But in any event, whether or not a particular policy is better on a global scale is, of course, unknowable.
October 12, 2009, 6:15 pmShelbyC says:
Betcha the bill was already picked up when he said that :-). Not that I have an opinion on EMH.
October 12, 2009, 6:19 pmDilan Esper says:
Of course, there have been many programs that have valued full employment over individual freedom, and none of them have been good. But in any event, whether or not a particular policy is better on a global scale is, of course, unknowable.
Congratulations for missing the point of the joke.
October 12, 2009, 6:26 pmShelbyC says:
Thank you.
October 12, 2009, 6:31 pmDangerMouse says:
Danger, regulations created the financial markets. Without governmental regulations, you have a lemons equilibrium which nobody is willing to invest in.
The New York Stock Exchange was created on May 17, 1792. Last I checked, the first blue sky law (which predated the Securities Act) was enacted by Kansas in 1911. So for more than 100 years, there were effectively no regulation of securities. Yet somehow, industries prospered and sold stock in the 1800s. In fact, in case you’re not aware, self-regulation is still in existence.
Of course, a legal framework respecting private property and the rights thereto must exist for financial markets to develop. But that basic step is a far cry from saying that the policies of liberal democrats like Barney Frank are necessary for the creation of strong financial markets, or some idiotic complaint that deregulation over 30 years caused the subprime crisis. I’m all in favor of smart regulation and smart laws. Stupid laws like Sarbanes-Oxley, which most people now realize has been unintentionally burdensome and incredibly costly, only muck up things. And to the Big Government crowd, every nail requires a hammer and every financial hiccup requires more regulation. I’d prefer SMARTER, market-based regulation than merely adding to the stuff already on the books. Government regulation can distort things very easily, as the losses from Sarbanes Oxley attest to. But when I hear some lib say that “deregulation caused this!!!!” my response is: “which specific deregulation?” Most libs have no clue. If there’s a smarter way for things to be done, let’s hear it.
October 12, 2009, 6:35 pmloki13 says:
No, that’s the wrong approach. “Smart regulation” and “smart laws” is a recipe for disaster. Why? Because government doesn’t pay well. Because regulators will always be two steps behind. Because private industry will spend more money to find a way around “smart” regulation than the government can spend to enforce it.
You want DUMB laws and DUMB regulation. You know- “you shall not do this”. Period. Or- “Do this and pay this”. That works. Clear guidelines.
Everyone wins. Lower compliance costs for industry. Lower regulatory costs for government. Less money spent on transaction costs (wasted to wriggle around regulations or enforce unclear “smart” regulations).
October 12, 2009, 6:43 pmDangerMouse says:
loki,
By smart laws, I mean laws that don’t impose ridiculous costs like Sarbanes Oxley, despite the claims of politicians to the contrary. It is stupid to impose an annual hundred billion dollar compliance cost on an industry, even if it’s plainly stated.
By the way, you never really admitted that Freddie and Fannie were on the hook for 5 trillion of debt.
October 12, 2009, 6:54 pmloki13 says:
DangerMouse,
I don’t do goalpost shifting. Her’s your original statement:
Followed by:
What I wrote to you was exactly on point, and should disabuse you of what you tenaciously cling to. As noted, when the crisis began F&F were losing market share to private entities. Why? Demand. F&F had always played a huge role in the market- what changed? CDOs. F&F’s portfolio outperformed the private lenders. But there is nothing I can say to change your mind, so you want to change the goalposts.
Original Statement by You:
F&F are the reason for the crisis.
New Statement:
Well, they had a lot of money in there, and that’s bad, right! So, yeah!
As I wrote, I never believed having GSEs in the motgage market was a good idea. But the cause of the crash was the insatiable demand for CDOs (and CDSs from those CDOs). On that point, you’re wrong. If you have evidence, other than asserstions, that this is not the case, fell free to provide it.
October 12, 2009, 7:04 pmChrisTS says:
Whatever it takes. :-)
October 12, 2009, 7:17 pmpc says:
FINRA is a market based regulator. Madoff was a FINRA member.
October 12, 2009, 7:19 pmloki13 says:
I’m writing this as a further aside, because this conversation again makes me realize what I find so frustrating when I have a conversation with the True Believers. It is not enough to find some common area of interest and develop that, while acknowledging that (perhaps) there is fault in some other way. No… they must be right about everything, always, and the “left” is wrong about everything, always. What- Stalin and Mao aren’t enough? How about Hitler as a lefty too? Problems with race? Well, as DB tells us, Lincoln freed the slaves, there was no southern strategy, Reagan accidentally spoke in Mississippi (states rights, who knew?), Southern Democrats during the 50s were eeevil, and, oh, Robert Byrd Robert Byrd Robert Byrd. It goes on with everything. It’s not enough for DangerMouse to reach common ground with me, in that we both agree that an implicit government backing for GSEs is a bad idea; no, instead THE GOVERNMENT is responsible for all the housing problems through BARNEY FRANK and the DEMS! This, of course, despite all the ample evidence (if he cares to read) about what was going on in Wall Street with CDOs. Now, he could stick to his guns and say that despite the failures of these exotic instruments and self-governance, the correct (True Believer) course of action would be to Liquidate Liquidate Liquidate since we’ve all been told that FDR CAUSED THE DEPRESSION but…. it just gets tiring sometimes. I feel like words and reality have lost all meaning when people blithely go through and manage (strangely enough) to look at history and find that everything, somehow, vindicates their viewpoint. Lochner was correct, the Framers were libertarians, Nothing is True, Everything is Permitted. That is all.
October 12, 2009, 7:20 pmSteve says:
The New York Stock Exchange was created on May 17, 1792. Last I checked, the first blue sky law (which predated the Securities Act) was enacted by Kansas in 1911. So for more than 100 years, there were effectively no regulation of securities.
Ah, the good old days, when the market magically self-regulated! Would that it were true. In fact, the first regulation of securities trading in America dates to… 1792. The cite is N.Y. Laws, 15th Sess., ch. 62.
On a separate note, the next time someone tries to tell you that the Federal Government has grown all out of proportion to anything the Founders ever imagined, you should suggest they read up on the federal response to the market crash of 1792. Implemented by Alexander Hamilton, as fate would have it.
October 12, 2009, 7:21 pmDilan Esper says:
The New York Stock Exchange was created on May 17, 1792. Last I checked, the first blue sky law (which predated the Securities Act) was enacted by Kansas in 1911. So for more than 100 years, there were effectively no regulation of securities. Yet somehow, industries prospered and sold stock in the 1800s.
Danger, if I remember my economic history textbook correctly, the 19th Century was a time of periodic financial panics along the lines of the Great Depression, and ordinary Americans were afraid to invest their money (indeed, they didn’t even trust banks, much less the stock market). They hoarded their money. Total market capitalization was quite small, there was a lot of fraud, and the stock market was held in low repute as a form of rich man’s gambling.
I suspect a lot of conservatives and libertarians share your romanticized view of economic history, but in the real world, the shared prosperity of the stock market (what G.W. Bush called the “ownership society”) was very much a product of the quite intrusive regulations imposed by FDR and liberals.
October 12, 2009, 7:22 pmpc says:
You remember correctly. Back in the good ol’ free market 1800s you had: the Panic of 1819 (2 years), the Panic of 1837 (6 years), the Panic of 1857 (2 years), the Panic of 1873 (5 years), and the Panic of 1893 (4 years). Basically, the US was in a depression for 1/5th of the 19th century.
Go free market.
October 12, 2009, 7:44 pmDangerMouse says:
It’s not enough for DangerMouse to reach common ground with me, in that we both agree that an implicit government backing for GSEs is a bad idea; no, instead THE GOVERNMENT is responsible for all the housing problems through BARNEY FRANK and the DEMS!
Well, that’s because the government was largely responsible for the housing problems. If the government is going to become a player in the market to the tune of 5 trillion dollars, then of course bankers and issuers are going to issue debt in those obligations in CDOs. You seem to believe that the mere existence of the collateralized debt instrument explains all. You don’t seem to understand WHY they were taking off, and the role of a 5 trillion dollar implicit guarantee had. There were reasons why banks were highly leveraged, among which was because they had an implied guarantee on a large portion of their balance sheet. If the interest failed to materialize, the entire house of cards would collapse. That’s what happened.
Barney Frank has an ideological interest in explaining away not only his past statements about Fannie & Freddie, but also has an interest as a big government liberal to come up with another regulatory scheme to give to union cronies, and to raise taxes on businesses, and etc. If partisanship is so repellant to you, then look no further than Barney Frank.
October 12, 2009, 8:05 pmChrisTS says:
pc: And what about the Panic of 1792? Wild bank speculation, gambling on the likely rise or fall of shares, etc.
October 12, 2009, 8:06 pmDangerMouse says:
..everything, somehow, vindicates their viewpoint. Lochner was correct…
Lochner uses the same reasoning as Roe v. Wade. If you really knew anything about me, you’d know that I don’t like Lochner. It’s just more judge created garbage.
October 12, 2009, 8:07 pmDangerMouse says:
Go free market.
I see. So you’re a disciple of Michael Moore’s advocacy of socialism. Lovely. Tell you what, why don’t you spend the next couple years in Cuba and let me know how their economy is doing.
October 12, 2009, 8:10 pmChrisTS says:
Steve:
oops. Just saw that. It’s a bit unfair to say Hamilton ‘implemented’ the panic and crash; he did not want them after all. Still, his Bank and all the wacky devices he crafted to help it (the scrips and such)in the absence of any control certainly did cause it.
I was reading the novels of David Liss over the summer and got interested in the history of financial speculation. Having done some further reading, I can say that Liss is very good on the history and offers a fun way for readers to begin to learn about the early markets in London, Holland, and the U.S..
October 12, 2009, 8:13 pmloki13 says:
DangerMouse,
Last time- the reason they were rated highly was because of tranching. Your reasoning does not explain why F&F lost market share to the many private entities that did not have government backing. In short, you are conflating separate issues. You continue to make this assertion, and I have explained patiently why it doesn’t match reality. If you have any *actual evidence* for your claims, I would love to hear it, because hen I might learn something. I wish you would try and learn something as well.
October 12, 2009, 8:13 pmloki13 says:
Also, no dissing on Alexander Hamilton. He’s my man. Speaking of internalizing a bullet…. :(
October 12, 2009, 8:15 pmChrisTS says:
loki:
It does, but DM is one of the worst you could engage. There are some libertarians and conservatives here on VC (including commenters) who are not fanatics. Avoid the Chinese mousetraps.
October 12, 2009, 8:17 pmSteve says:
It’s a bit unfair to say Hamilton ‘implemented’ the panic and crash; he did not want them after all.
Yes, it would be a bit unfair, but what I actually said (or at least intended to say) was that Hamilton implemented the federal response!
October 12, 2009, 8:20 pmChrisTS says:
ooh. By the way, I am indirectly related to Burr.
October 12, 2009, 8:20 pmChrisTS says:
OH. duh.
October 12, 2009, 8:21 pmpc says:
Yes, advocating for rules to prevent abuse and allow a fair playing field is just like Cuba. Everyone that trades or invests in the market is already paying a tax to the HFT scammers. Go read the Karl Denninger article I posted.
October 12, 2009, 8:30 pmNickM says:
The cause? There’s no one cause on something like this.
CDOs enabled the crash, but the CDOs were only a problem because financial geniuses determined that default risks were unconnected to each other and gave AAA ratings to the cream of the crap. [an intentional phrase, not a typo]
Then there’s all the blame to go around for why the crap mortgages existed (weakened lending standards, lending fraud, excessive optimism, etc.). Add in all those responsible for spreading the crap mortgages throughout financial institutions and GSEs.
Oh, as far as Barney Frank is concerned, you’re not going to get smart or dumb regulation, just insane regulation, from a man who says this,
Nick
October 12, 2009, 9:04 pmmattski says:
You know who knew how to rule Cuba? The Mafia, that’s who. Now that’s what I call Freedom.
October 12, 2009, 9:06 pmloki13 says:
NickM,
I wouldn’t disagree with you. I listed several issues above. For example, ratings agencies that were paid to rate the crap as AAA. Traders who didn’t understand the models they were using to slice & dice. Models that didn’t look far back enough in history. A poor understanding of risk (aka- the idea that everything could all go bad at once was a novel concept). Agnecy problems (the people who sold the mortgages had no skin in the game- they just tried to sell as many as possible to package them upstream and earn commissions, so it was in their interest to look the other way, and so on up the chain). How about the complete failure to accurately price the underlying assets? Heck, I could even add in that while private lenders made up 56% of the market, having the GSEs didn’t help. But if you wanted to give a one word answer for what went wrong, “CDOs” is a good place to start (not CDOs in and of themselves, but the greed and demand associated with them).
What makes me unhappy is when people like DM just say, “Yep, it’s F&F.” That’s a seperate problem; and one that I would actually agree with on the merits (GSEs are a bad thing in this instance) if it wasn’t so completely wrong in this instance.
I’ve got nothing to say about Barney Frank. Finding a stupid quote from a poltician is like finding a goth girl that wears black- not too tough.
October 12, 2009, 9:37 pmRicardo says:
It does sound like a dandy, relatively hidden revenue raiser – one that could generate vast sums of money relatively unnoticed, at least among ultimate ordinary consumers and taxpayers, who will not notice the long-term, collective hit to their pension funds and retirement funds which, anyway, they often do not directly manage.
That is a strange argument. It’s not exactly a secret that the institutional brokers who trade accounts for pension funds earn their money by charging commission on every trade. Since “vast sums of money relatively unnoticed” by “ordinary consumers” are being generated by commission-based trades, there is an obvious incentive for brokers to churn accounts. That is nothing new at all. So then why the selective outrage on a tax that will probably reduce this churning and turn pension funds toward more conservative long-term investment strategies?
October 12, 2009, 10:21 pmPerseus says:
Alexander Hamilton: “for a bubble connected with my operations is, of all the enemies I have to fear, in my judgment the most formidable…”
Ditto. He has been one of my scholarly interests.
October 12, 2009, 10:40 pmpc says:
I do kind of see DangerMouse’s point. If it weren’t for the federal government’s meddling in the housing market, Matthew Tannin wouldn’t have had “to sell his beachside retreat in the Hamptons and two of his three Ferraris.”
October 12, 2009, 10:50 pmRicardo says:
Indeed. The book “Asian Godfathers” by Joe Studwell really does a lot of damage to the myth of Hong Kong as free-market idol. Many of HK’s wealthiest tycoons got rich by getting government-granted monopoly licenses and receiving other concessions and special privileges. These same tycoons own many different vehicles listed on the Hong Kong stock exchange each and move money between them in opaque ways and play games with accounting that would make Enron’s own accountants and auditors blush.
Hong Kong is finally starting to crack down on these kinds of antics which have hurt its reputation among international investors severely. Nobody is going to buy common stock when they are just going to be consistently outvoted and stiffed on dividends by preferred share owners who are inevitably corporate insiders. Returns on many “blue-chip” HK common-stock shares are actually nothing to brag about.
October 12, 2009, 11:58 pmRicardo says:
The GSEs neither issued nor guaranteed any subprime CDOs. Period. They delved into alt-A loans and securitized them in Residential Mortgage Backed Securities — those were guaranteed and still are. But the subprime CDOs that so many institutions have taken such huge losses on were never issued or guaranteed by the GSEs.
Think about it for a second. Why would AIGFP be selling credit-default swaps on synthetic subprime CDO indices if the underlying assets were already guaranteed by the GSEs? The GSEs have a better credit rating than AIGFP did because of their implicit government backing. It doesn’t make any sense.
October 13, 2009, 3:47 ammattski says:
There has been a lot of good analysis on this thread. I particularly appreciate loki & dilan’s contributions.
Speaking with a layman’s broad brush: the people who cry “free market” when faced with gov’t regulation have little interest in free markets. What they really love is monopoly and asymmetrical, insider information.
And “freedom” is an extremely ambiguous word. An intelligent discussion won’t follow without that recognition.
October 13, 2009, 7:08 amruralcounsel says:
My disagreement, generally, with the viewpoints of Dilan et al. is that they seem to presume that those who favor free markets were also in favor of the bailouts and the policies that created the need for the bailouts. Which of course is an inconsistency.
Free markets are prone to excess, in both directions. If everyone had perfect information, there would never be any trades. Free markets are not fully efficient. I don’t see that as a problem, as they apparently do. Nor do I find that as a convincing reason for added government regulation.
Government wants a stable economy so they can project tax revenues for planning purposes. Or worse, sometimes government wants to catalyze abnormal growth, just like an Enron inflating its financials. Big business wants a stable economy so they can project sales and plan capital spending, and wants a stable financial sector so they know where they can obtain capital and at what cost.
None of which are particularly compelling reasons. Stability is abnormal and unnatural. Markets do not always rise. We end up with a wiser constituency and more robust economy if we give it the freedom to bubble and burst. It will eventually anyways, you know. But by trying to give it all this government life-support, we merely allow a more fragile economy to grow to absurd proportions based on unsustainable consumer spending, and when the inevitable bust comes, it is actually more devastating. The more insurance they carry, in the form of government guarantees, the riskier the behavior it induces.
I see the past economic year as a failing grade for everyone’s attempts to regulate the economy. Certainly not as an argument favoring more government meddling or corporate welfare. Free market concepts include the freedom to fail when one takes excessive risks, regardless of size or impact on the economy. That has value.
Trying to rig the system destroys value. And government is one of the biggest players in trying to rig the system. Their regulatory role should be relegated to providing transparency and pursuing warranted criminal prosecutions. Not picking CEO’s for GM or a board of directors for Chrysler.
Vis a vis the transaction tax….
Ricardo:
Perhaps because one is consented to (fees), and one is imposed (tax)? Because I can move my investments to someone who doesn’t churn the account, but won’t be able to avoid the tax? I can’t begin to express my outrage at most things taxes are spent on. Presumably the fees are earned for services provided by terms of a bilateral agreement. And, if I’m stupid enough to let my account be churned, maybe I deserve to lose value. No one said freedom creates all good outcomes. Freedom actually punishes the inept and ignorant.
October 13, 2009, 9:39 ampc says:
Again, look at the HFT scammers. You are already paying tax if you are trading equities, without consent, and you can’t even vote the bums out that are doing it. The way in which you are being taxed is completely opaque so you don’t even know how much of a premium you are paying to make a trade.
October 13, 2009, 11:24 amNickM says:
Ricardo – “subprime” is often used as a shorthand descriptor of the multiple varieties of risky loans. When it is, Alt-A’s count as “subprime”.
I think you and others have been talking past each other here by using different common meanings of the same word.
Nick
October 13, 2009, 12:13 pmDilan Esper says:
None of which are particularly compelling reasons. Stability is abnormal and unnatural. Markets do not always rise. We end up with a wiser constituency and more robust economy if we give it the freedom to bubble and burst.
The problem with this argument is that the people who take the risks are imposing a small risk on themselves and a much larger risk on the 9-10 percent of the population who ends up unemployed when the bubble burst. The AIG and Goldman Sachs people surely took a hit– they may have $15 million in the bank instead of $30 million. But meanwhile, ordinary Americans have lost their homes and their jobs and are being thrown into poverty.
Hence the need for government. Yes, smoothing out the bumps and preventing the bubbles creates moral hazards. This is an absolutely legitimate criticism of the bailouts and of the regulatory state. But the moral hazards are often the price we have to pay to ensure ordinary people don’t get the shaft.
Trying to rig the system destroys value.
But many of us would find a society with 4 percent unemployment and a slightly lower total national wealth to be preferable to a society with 10 percent unemployment and a slightly higher total national wealth (even if this were the tradeoff at issue– in fact, many of the regulatory measures actually add value by making the markets a more attractive investment).
October 13, 2009, 2:00 pmChrisTS says:
loki13 and Perseus:
I’m not dissing Hamilton. My point was that the lack of pro-active regulation made the bubble – and crash – he feared a reality. I believe he thought he could control the new financial market through the strength of the Bank and his many agents; he was mistaken.
More generally, I believe that folks who think these bubbles and crashes will not occur in the absence of regulation are always mistaken. The economists’ idea that people are generally rational is foolish; the fact is that most of us are predictably irrational. And if we throw in the hope of sudden wealth with a touch of gambling fever..well, we get the same cycle over and over. Sometimes the betting is on real goods – tulips, chocolate, or pork bellies – sometimes it’s on paper with no independent value. But we keep doing it, and we ought to adopt measures to mitigate the worst of it, at least.
October 13, 2009, 2:43 pmloki13 says:
ChrisTS,
I agree with the substance of your post. I am just very protective of Hamilton. Of all the founding fathers, I think he got the biggest shaft from history. And, um, the whole duel thing must have sucked too. But it is hard to think of a more inspring story- poor immigrant that was largely self-taught, war hero, great explainer of our founding document (he wrote most of, and edited all of, The Federalist), one of the single greatest reasons it was adopted (hello, NY!), de facto shadow President during our first eight years, brilliant lawyer (truth is a defense in defamation, wrote the study guide that New York lawyers still studied 100 years later)… I could keep going, but you get the idea.
That a scumbag like Jefferson is venerated all out of proportion while Hamilton gets the shaft from history is a great injustice. But don’t get me started….
October 13, 2009, 3:33 pmRicardo says:
Which is not accurate. In finance or policy circles, when someone talks about subprime they mean subprime, not subprime + Alt-A. That’s not a pedantic distinction. Financial institutions went bankrupt in part because of write-downs on subprime CDOs and other securities. Some people here want to say those securities were issued or guaranteed by the GSEs. This is incorrect. As far as I know debt or mortgage-backed securities (which never went past the Alt-A level of credit risk) issued by the GSEs have not been written down because the principal and interest payments are now guaranteed by the federal government.
On the other hand, the GSEs did hold a portfolio of private-label subprime CDOs. Since they were highly leveraged, these write-downs as well as their obligations on Alt-A RMBSs and losses on their own retained Alt-A mortgages pushed them over the edge. The GSEs’ collapse was an effect, not a primary cause of the financial crisis.
October 13, 2009, 9:26 pmRuralcounsel says:
Dilan,
But don’t you suppose that the “ordinary people” are smart enough to order their affairs (employment, investment and savings, housing) in a manner to mitigate or buffer the ups and downs? I’d wager that the self-employed fellow with a pile of cash in his mattress, a vegetable garden and a flock of chickens, and his home paid off in the countryside is faring much better than the GM assembly line worker living on the edge of his credit cards in a suburban house teetering on foreclosure, and with a questionable pension.
What you propose is a way to make the status quo less painful. I would argue that the problem is the status quo. We’ve suckered people into living an urban consumerist lifestyle by promising them forever economic growth. And we can’t deliver on that promise.
The bad things you see occurring because of lack of regulation are products of that regulation. Presupposing results, without accounting for response to those results, is too statist. Our economy is fragile because we built it on the presumption that we shouldn’t have bumps in the road, or that if we did, we’d fix it quickly
Don’t presuppose that ordinary people aren’t smart enough to look out for themselves. That’s why I predict it will be many years before consumer spending resumes at its old rate.
Unless, of course, we allow politicians and industry leaders to supply worthless and misleading reassurances about risks, rewards, and regulation.
October 14, 2009, 8:54 amChrisTS says:
loki13:
I’ll give you that. By the way, in my family we are not all that proud of the duel. :-)
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April 17, 2010, 1:25 pm