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A financial transaction tax is not that great in the first place, but making it $.10 per share instead of a percentage of the price paid is a bad idea. Let's do

A financial transaction tax is not that great in the first place, but making it $.10 per share instead of a percentage of the price paid is a bad idea. Let's do some math: Activision-Blizzard Share Price (ATVI): 13.50 Tax on a $100,000 trade: ~$7407.40 Google share price (GOOG): $586.31 Tax on a $100,000 trade: ~$170.55 Berkshire Hathaway Class A share price (BRK.A): 117,100.000 Tax on a $100,000 trade: ~$.10 Creating this massive disparity in the tax payable based on share price would cause massive market distortions in the short term. It would also lead institutional investors to pressure corporations to do massive reverse splits to drive up the per-unit share price to minimize the tax per transaction, which would lock small-scale retail investors out of the market in addition to being a huge waste of resources. This idea is clearly half-baked. I think a number of your other ideas are as well. You need to think through what actual benefits you expect from your proposed changes, as well as what the unintended consequences would be. Your post does not explain this very well at all. To cite another example: forcing a split between retail and investment banking is a common talking point from people who want "more regulation". But most folks advocating for this do not have a coherent explanation for why this would actually be helpful. It's often claimed that deregulation contributed to the crisis, therefore we need to bring back this regulation. But the institutions that precipitated the crisis were all pure investment banks, so this regulation would have done absolutely nothing to prevent the financial crisis. This post does a great job of explaining why this particular policy proposal is poorly thought out, as well as covering the general issue of advocating policies without actually understanding what they would do or why they might be worthwhile: <http://www.theatlantic.com/business/archive/2011/10/if-you-favor-a-policy-please-first-figure-out-what-it-is/247092/> http://www.theatlantic.com/business/archive/2011/10/if-you-f....

jholman 15y ago
Excellent link. Regarding splitting retail/investment banking, the following is a completely ignorant question, phrased in the form of a rambling incoherent hypothesis. I don't understand why it was a good idea for the U.S. to bail out the banks, but I can see how retail banking is essential to the month-to-month life of Main St, and so I can see why the government might be willing to spend taxpayer money to save it (to save taxpayers). It seems like maybe if retail banks weren't all playing the investment-bank game, maybe the suicidal investment banks could have been allowed to fail?
- othermaciej 15y ago
  I personally would have preferred to see banks allowed to fail, and get wound down by the FDIC, to bailouts. I think the reason for the bailouts was not combination retail/investment banks. The biggest recipients of bailouts were pure play investment banks. The theory is that failing to bail them out would have led to contagion across wide swaths of the financial system, but the main vector would not have been retail banks; it would have been the counter-parties to the many transactions that the investment banks had, including such examples as pension funds holding CDOs. I think the root cause of the bailout was the revolving door among the biggest investment bank players (especially Goldman Sachs) and financial regulators, including the Fed, the SEC and the Treasury Department. It's a classic case of regulatory capture <http://en.wikipedia.org/wiki/Regulatory_capture> http://en.wikipedia.org/wiki/Regulatory_capture>. I don't think this is so much outright corruption, as the fact that the top finance people in government have gradually come to have the same worldview as the top finance people on Wall Street. So it was easy for them to think that a rash of bank failures was the worst possible thing imaginable, and must be avoided at any cost. At the same time, they could not imagine imposing severe consequences on the management and investors of those banks. If there's any regulation that is truly critical, it's preventing this revolving door. But I am not sure how we can sanely do that.
guelo 15y ago
On the Glass-Steagal reinstatement, even though you did not offer any argument against it except to repeat McCardle's claim that people don't know what they're talking about, I'll offer an argument for it even though I admit I'm not some financial expert. Glass-Steagall meant that investment banks had to entice investors to put their money into the system. The repeal allowed investment banks to raid and leverage depositors accounts. This introduces systemic risk because depositors unlike investors view their savings as a demand account and receive little interest because of that. Their money is basically cheap for the banks to get and the depositors always expect that money to be there. Investors expect a return that justifies the risk that they are entering into together with the investment bank/brokerage. Their money is relatively expensive to banks to get because the investor knows that money could disappear. Once banks could treat all those deposits as levergable funds for risky investments they didn't have to entice the expensive investment money or use caution in their investments (FDIC will pick up the losses). So with the repeal of G-S, brokerages suddenly had access to huge piles of FDIC insured money and all that money needed some place to go... and we've coincidentally had 2 major bubbles since. First the dotcoms, then mbs's and other related cdo's and now Treasuries. Break up the banks, make the investment houses have to make sensible bets (not 50:1 levers) that return better returns for investors and force banks to make terribly boring investments to return terribly boring rates to depositors and we have the beginnings of the return of sanity in banking. Without that, we will continue to inflate bubbles, pay bonuses and then bailout losses after the unavoidable asset deflation. Here is another, more informed than me, argument for reinstatement http://moneywatch.bnet.com/economic-news/blog/maximum-utility/what-can-we-learn-from-the-emerging-details-of-the-volcker-rule-proposal/1817/ http://moneywatch.bnet.com/economic-news/blog/maximum-utilit... "However, whether the elimination of the Glass-Steagall act caused the present crisis is the wrong question to ask. To determine the value of reinstating a similar rule, the question is whether the elimination of the Glass-Steagall act made the system more vulnerable to crashes. When the question is phrased in this way, it’s clear that it has made the system more vulnerable for the reasons outlined above.
- yummyfajitas 15y ago
  and we've coincidentally had 2 major bubbles since. First the dotcoms... Dotcom bubble: 1995-2000. Gramm-Leach-Bliley: Nov 1999. Further, if you measure the housing bubble in the usual way (movement in the price/rent ratio), the housing bubble also started in 1998. http://research.stlouisfed.org/fred2/graph/?g=31w http://research.stlouisfed.org/fred2/graph/?g=31w

jholman 15y ago

Excellent link. Regarding splitting retail/investment banking, the following is a completely ignorant question, phrased in the form of a rambling incoherent hypothesis. I don't understand why it was a good idea for the U.S. to bail out the banks, but I can see how retail banking is essential to the month-to-month life of Main St, and so I can see why the government might be willing to spend taxpayer money to save it (to save taxpayers). It seems like maybe if retail banks weren't all playing the investment-bank game, maybe the suicidal investment banks could have been allowed to fail?

othermaciej 15y ago
I personally would have preferred to see banks allowed to fail, and get wound down by the FDIC, to bailouts. I think the reason for the bailouts was not combination retail/investment banks. The biggest recipients of bailouts were pure play investment banks. The theory is that failing to bail them out would have led to contagion across wide swaths of the financial system, but the main vector would not have been retail banks; it would have been the counter-parties to the many transactions that the investment banks had, including such examples as pension funds holding CDOs. I think the root cause of the bailout was the revolving door among the biggest investment bank players (especially Goldman Sachs) and financial regulators, including the Fed, the SEC and the Treasury Department. It's a classic case of regulatory capture <http://en.wikipedia.org/wiki/Regulatory_capture> http://en.wikipedia.org/wiki/Regulatory_capture>. I don't think this is so much outright corruption, as the fact that the top finance people in government have gradually come to have the same worldview as the top finance people on Wall Street. So it was easy for them to think that a rash of bank failures was the worst possible thing imaginable, and must be avoided at any cost. At the same time, they could not imagine imposing severe consequences on the management and investors of those banks. If there's any regulation that is truly critical, it's preventing this revolving door. But I am not sure how we can sanely do that.

guelo 15y ago

On the Glass-Steagal reinstatement, even though you did not offer any argument against it except to repeat McCardle's claim that people don't know what they're talking about, I'll offer an argument for it even though I admit I'm not some financial expert. Glass-Steagall meant that investment banks had to entice investors to put their money into the system. The repeal allowed investment banks to raid and leverage depositors accounts. This introduces systemic risk because depositors unlike investors view their savings as a demand account and receive little interest because of that. Their money is basically cheap for the banks to get and the depositors always expect that money to be there. Investors expect a return that justifies the risk that they are entering into together with the investment bank/brokerage. Their money is relatively expensive to banks to get because the investor knows that money could disappear. Once banks could treat all those deposits as levergable funds for risky investments they didn't have to entice the expensive investment money or use caution in their investments (FDIC will pick up the losses). So with the repeal of G-S, brokerages suddenly had access to huge piles of FDIC insured money and all that money needed some place to go... and we've coincidentally had 2 major bubbles since. First the dotcoms, then mbs's and other related cdo's and now Treasuries. Break up the banks, make the investment houses have to make sensible bets (not 50:1 levers) that return better returns for investors and force banks to make terribly boring investments to return terribly boring rates to depositors and we have the beginnings of the return of sanity in banking. Without that, we will continue to inflate bubbles, pay bonuses and then bailout losses after the unavoidable asset deflation. Here is another, more informed than me, argument for reinstatement http://moneywatch.bnet.com/economic-news/blog/maximum-utility/what-can-we-learn-from-the-emerging-details-of-the-volcker-rule-proposal/1817/ http://moneywatch.bnet.com/economic-news/blog/maximum-utilit... "However, whether the elimination of the Glass-Steagall act caused the present crisis is the wrong question to ask. To determine the value of reinstating a similar rule, the question is whether the elimination of the Glass-Steagall act made the system more vulnerable to crashes. When the question is phrased in this way, it’s clear that it has made the system more vulnerable for the reasons outlined above.

yummyfajitas 15y ago
and we've coincidentally had 2 major bubbles since. First the dotcoms... Dotcom bubble: 1995-2000. Gramm-Leach-Bliley: Nov 1999. Further, if you measure the housing bubble in the usual way (movement in the price/rent ratio), the housing bubble also started in 1998. http://research.stlouisfed.org/fred2/graph/?g=31w http://research.stlouisfed.org/fred2/graph/?g=31w