This page has been archived and commenting is disabled.

Enlightened Self Interest

Bruce Krasting's picture





 

Over the past few months my thinking on what global leaders should be doing in the face of the rapidly growing problems has morphed in an entirely different direction. For some time now I’ve been banging on the table that interference with market forces in an attempt to kick a can down the road are the worst kind of policies. My concern has been that the costs of this interference will ultimately be greater than the cost of letting chips fall where they may.

My revised thinking is driven by one factor. "What’s in my best interest?", is what it's come to. Enlightened self-interest is all that matters to me. To hell with everyone else.

To that end, I want to make a strong recommendation that a financial market tax be implemented in the US and Europe.

What I want to see is a plan along the following lines:

Fee for stocks and options = ½%. (This would be applied to both the buy and sell side so that the cost of a “print” would be 1%)



Fee for all other transactions = .005% (FX, bonds, CDS, Swaps, Futures and all other derivative transactions.

Dean Baker, from CEPR, is strongly behind this type of thinking. It doesn’t matter that Dean has never been close to a financial market in his life. He actually thinks that transaction taxes could raise $100b++ a year (for ever). Dean does admit that there may be some consequence to this. He is aware that a proposal along these lines would destroy liquidity across all markets. He thinks this is not important at all. His thinking:

 

The small fees the EU is considering charging would only raise transactions costs and liquidity back to levels seen in the early to mid nineties.

Well, that’s what I’m looking for. Let’s dial back the markets so that the level of liquidity is back to the “early” nineties. That would be perfect for me. I don’t care that people who actually know what they’re talking about have to say about this. For example, Ken Rogoff, former chief economist at the IMF, (a guy who’s opinion I normally respect). His thinking on a transaction tax:

 


The tax would significantly reduce market liquidity with "no obvious decline in volatility" and "increase the cost of capital, ultimately lowering investment."

Let me explain my thinking. Upfront, I want to address the criticism I’m going to get. I’m a 10 percenter. I wanna be a 5 percenter. I don’t give a damn about anyone else in the system other than myself. I have financial resources. I have investment skills and experience that the vast majority of small investors don’t have. My goal is to make a pile of money off of those folks that don’t have what I have. Fairness and economic consequence is of no concern to me. I just want to get richer.

If we do get a Fin Tax that has some teeth, it will destroy liquidity. The vast amount of intra-day trading of equities is not able to generate a net 1% cost of transacting. The typical profit targets are far less than 1%. A transaction tax would wipe out the HFT crowd. That group accounts for as much as 70% daily turnover. Take out the rest of the day traders and jobbers and we would get turnover down to about 20% of what it is today. That would put guys like me in the catbird seat.

Should we get a transaction tax, I would anticipate a enormous ramp up in daily volatility. Intra day swings of 5% on the big indexes would be a common event. Individual stock names would be subject to even more violent swings. Small cap stocks would be the worst hit. There I’m anticipating daily swings in the 10% range. On days where there is company specific news that intra day swing could widen to 20%. Cha Ching for me!

On an annual basis I would expect very big swings. 30-40% changes in the S%P index would be a normal event. Over all, the ramp up in volatility would be very bad for equity valuations. Today there is a great debate as to whether the S%P should trade at 13Xs earnings or should it be 15Xs? In my view a year after the implementation of a transaction tax the market would be wondering if the “proper” multiple is not 5 -10Xs earnings.

That outcome would suit me just fine. I want to buy assets very cheap. That the suckers who believed in the “Buy and Hold” were puking after a 50% correction wouldn’t bother me at all. I want to own Dean Baker’s stocks at 50 cents on the dollar.

I want the IPO market to dry up. I want any company to pay through the nose for new equity money. I also want secondary stock issuance for big companies to fall apart. Today, the cost of a secondary is a temporary reduction in a stock’s price of 3-5%. I want that to widen to at least 10%. I’ll make a fortune that way.

Bonds have always been a specialty for me. I’m certain that spreads would widen by big amounts. I would just sit back and make a bundle. Some poor sap wants to sell $100k of an obscure Muni bond? Screw them. My bid will be 5% down from the last trade. I think that bond trading for off the run issues will just be a cash machine for me.

I’m pretty good at distressed investing. Given that just about everything would be distressed I would have a field day.

The financial sector of the US (and the globe) would see their earnings go out the window. This, coupled with the fact that the same sector represents about 30% of current GDP, there would have to be a depression. A big one.

Once again, this would suit me just fine. I would buy real-estate at 25 cents on the dollar. Cash, and only cash, would talk in these conditions. There would be no mortgage market left.

The Fed would be printing money like mad in these conditions. Hyper inflation would follow. I’m as certain as I can be that I would be a big winner (versus everyone else) should that be the result.

 

********************************************************

I’m half serious and half joking this morning. I’m looking at the TV and all of the OWS stuff that is happening around the world. This is gathering speed very quickly now. Anyone who thinks this is going to go away in a few days is just nuts.

One global response from the “Deciders” to the current protests could be a transaction tax. That would be “popular”. It might just be something that is done as a way of appeasing the crowds. Whatever one thought of the possibility of a transaction tax a month ago, those estimates have to go up today. The bigger the protests, the greater the probability that the tax is implemented.

A transaction tax would be like Prohibition. The Volstead Act just made crooks rich. It cost the government billions in lost revenue. The population came to hate it. It was bad policy that was adopted because of a visible protest movement of that time.

The left side of my brain is with Rogoff. A transaction tax would kill liquidity/capital formation. That would result in a huge spike in volatility. This, in turn, would result in broadly lower equity multiples. The connection between stocks and the economy is too tightly correlated. A very sharp downturn in the economy would have to follow. For these reasons, I’m violently apposed to a transaction tax.

The right side of my brain says, “Bring it on”. I’m confident that I can survive and thrive in that environment. Fortunes were made in the 30’s. What may come will be no different.

I do want to be clear about this. The 99% have been pushing the transaction tax. They may get what they think they want. But in the end it will result in more pain for the 99’ers. The concentration of wealth in America will just get higher and higher up the ladder.

A transaction tax that limits liquidity will not create jobs, it will end up costing the government net tax dollars. But guys like me will do just fine.

Be careful of what you wish for.

 


 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 10/16/2011 - 23:08 | Link to Comment geekgrrl
geekgrrl's picture

"Let me explain my thinking. Upfront, I want to address the criticism I’m going to get. I’m a 10 percenter. I wanna be a 5 percenter. I don’t give a damn about anyone else in the system other than myself. I have financial resources. I have investment skills and experience that the vast majority of small investors don’t have. My goal is to make a pile of money off of those folks that don’t have what I have. Fairness and economic consequence is of no concern to me. I just want to get richer."

I've been thinking about this paragraph all day. I hope it is sarcasm. I think it is sarcasm, especially given the post you made a few days back: http://www.zerohedge.com/contributed/new-study-%E2%80%93-traders-are-wor..., and the teaser comment "Sunday sarcasm. Or not?"

Still, the thing that is infuriating is that I'm not very certain of that assessment. I have no doubt people like that exist, but I surely hope you're not one of them.

Sun, 10/16/2011 - 19:50 | Link to Comment Coldfire
Coldfire's picture

Tax is theft.

Sun, 10/16/2011 - 19:58 | Link to Comment 11b40
11b40's picture

......and HFT is what?

Fight fire with fire.

Sun, 10/16/2011 - 20:04 | Link to Comment Mercury
Mercury's picture

How about a 1% tax on all orders under say, 2000 shares or $40k ??

That would kill HFT (or you tweek the amount until it does) which doesn't provide as much liquidity as the industry claims and it would probably produce  a net gain for market structure in general.

Throw in a one or two trade exemption per stock per day so it won't hurt the retail, home investor and pair the whole deal with a commitment to hack off some of the red tape and BS from the legal monstrosities of Sarb-Ox and Dodd-Frank.

Then,  distribute the tax proceeds to retail education, retirement or health savings accounts at the end of the year.  This would encourage long-term, retail investing and be a nice (well-greased) bone for the wealth-gap crowd.

There, I fixed the stock market.

Sun, 10/16/2011 - 17:53 | Link to Comment PulauHantu29
PulauHantu29's picture

Very thorough, Bruce. Thanks.

Sun, 10/16/2011 - 17:03 | Link to Comment Rogue Economist
Rogue Economist's picture

Bruce, you don't seem to get the Big Picture here.  The monetary system is collapsing.  You can't maintain your self0iunterest because its just so much toilet paper.    A transaction tax is absurd, there won;t be transactions because there is no valid money to transact with.  besides that, the Oil to run the economic system at a waste based loss in not there anymore.  Face it bud, you are dirt poor, you just don't know it yet.  You can't preserve your wealth, its a mirage produced by the Age of Oil.  Wake up and Smell the Coffee.

RE

Sun, 10/16/2011 - 17:03 | Link to Comment Rogue Economist
Rogue Economist's picture

Bruce, you don't seem to get the Big Picture here.  The monetary system is collapsing.  You can't maintain your self0iunterest because its just so much toilet paper.    A transaction tax is absurd, there won;t be transactions because there is no valid money to transact with.  besides that, the Oil to run the economic system at a waste based loss in not there anymore.  Face it bud, you are dirt poor, you just don't know it yet.  You can't preserve your wealth, its a mirage produced by the Age of Oil.  Wake up and Smell the Coffee.

RE

Sun, 10/16/2011 - 16:18 | Link to Comment Rastadamus
Rastadamus's picture

You, sir are a fucking genius.

Sun, 10/16/2011 - 16:06 | Link to Comment knukles
knukles's picture

"There you go again."
        -R. Reagan

Every fucking time I hear sombody expose more of any fucking kind of any fucking taxes, I only assume that they're a gubamintyal employee, ward of the state, misguided statist or been just plain fucking worn down by the PR/BS/propaganda machine.
The problem is not too little revenues, but way the fuck too much out of control spending, crony capitalism, useless programs and plain fucking waste... the CBO even suggests some 30% of the entire Federal Budget is Theft and Waste.

I love ya' Bruce, but this is beyond any pale of reason.  
You know better.
PS I run my own IRA's etc.  I'm a little guy.  I do not need to pay any more.  I'm already being bled dry.

Sun, 10/16/2011 - 19:17 | Link to Comment cossack55
cossack55's picture

Must concur, Mr. Knuckles.  Bruce if off the reservation on this one.  Raising any tax for any reason only encourages the DC scum.  Could be his NFL fav is getting its ass kicked and Bruce started drinking early. 

Mon, 10/17/2011 - 07:22 | Link to Comment anarchitect
anarchitect's picture

Both of you need to read the final section of Bruce's article.

Sun, 10/16/2011 - 15:42 | Link to Comment SilverDoctors
Sun, 10/16/2011 - 20:12 | Link to Comment Stuck on Zero
Stuck on Zero's picture

I used to be a review editor for a major medical journal.  I rejected 90% of the papers as unworthy of the paper they were written on.  Major statistical flaws, assumptions, lack of controls, and systematic errors.  They were published anyway.  When I complained to the editor he told me that if they rejected all the papers for lack of scientific rigor they would have nothing to publish.  I quit.

Sun, 10/16/2011 - 15:31 | Link to Comment CapitalistRock
CapitalistRock's picture

There are plenty of already illiquid markets to play in. You don't have to create new ones. It's certainly not a road to riches, but if you think it is, then go right ahead and jump in. No need to wait on taxes to reduce trade, liquidity, and price discovery.

Sun, 10/16/2011 - 15:29 | Link to Comment Comrade de Chaos
Comrade de Chaos's picture

2nd repetition

Sun, 10/16/2011 - 15:29 | Link to Comment Comrade de Chaos
Comrade de Chaos's picture

1 st

Sun, 10/16/2011 - 15:27 | Link to Comment Comrade de Chaos
Comrade de Chaos's picture

I agree Bruce, it will become a policy of unintended consequences in the same way repeal of Glass - Segal or Greenspan's low interest rates worked. I also agree that main losers will be middle class 99's. 

However  if those regulation will push TBTF over the edge, I'll sing hallelujah and make more money as well. 

Populism has never worked (as well as the 'lobbism') and in the long run those two extremes lower the sustainable GDP growth and most if not all suffer. Unfortunatelly, given the WS ability to lobby and manipulate the legislative power, such a political reaction is rather probable and natural outcome. 

Hopefully, populism will not go to far in our country & entitlements such as Student Debt Relief (only will encourage bad behavior) will not be implemented. If they do, we will live through what South America experienced in the 50 - 90's, stagnation or reduction of the medium life style and inflation. 

Sun, 10/16/2011 - 20:21 | Link to Comment Escapeclaws
Escapeclaws's picture

Loans at low interest rates to pay for college is why college got to be so expensive. Like health insurance resulted in out of control medical costs. How does this happen? The costs grow far out of proportion to any intrinsic value.  People get locked in to needing health insurance and student loans but that, in turn, just causes the prices to keep increasing to infinity.

Sun, 10/16/2011 - 15:20 | Link to Comment Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Perhaps humans should be outlawed from trading activities. The likes of Dr. Krasting and Mr. Hyde would then be removed from the equation. Sorry Bruce. Then it would be all HFT, all the time. The market could have tremendous swings but it would mean revert quickly (this is a thought experiment) since the machines will not panic. They will be programmed to take the other side. It will improve technological prowess since bandwith will have to increase exponentially to keep up with an exponential evolutionary jaunt. Before we can make that leap, perhaps the machines trading wildly yet in total offering an expression of perfect Brownian Motion with a lognormal distribution will suck up all bandwith from the internet so say goodbye to facebook, youtube, twitter etc. Same for electricity needed to cool the fires of blazing silicon. Off the grid, social media will be about wooden boxes with strings attached that resonate when plunked creating something called music. Troubadours will roam from town to town on foot singing ballads of hedge fund traders and their mythical exploits. The "market" will be invoked in slightly hushed tones for its mystical powers. Etc.

Sun, 10/16/2011 - 14:57 | Link to Comment vegas
vegas's picture

Any kind of financial tax, no matter the name, does only one thing; it puts someone's hard earned confiscated money into the hands of a fucked-up bureuacrat with a political agenda, that eventually ends up in the hands of crooks, liars and thieves.

Hey Bruce, if you are so interested in a proposal like this, then voluntarily send the UN some of your trading money, but not mine.

 

Time to get off the crack pipe.

Sun, 10/16/2011 - 14:26 | Link to Comment Mr. Anonymous
Mr. Anonymous's picture

"I do want to be clear about this. The 99% have been pushing the transaction tax. They may get what they think they want. But in the end it will result in more pain for the 99’ers. The concentration of wealth in America will just get higher and higher up the ladder."

Bruce, did someone hack your computer?  Because this piece was written by a hack, and you're too smart to be one.

The 99% of the 99% don't have a clue about the transaction tax.  Furthermore, it could be applied only to HFT trades, which is where the bulk of the mal/misfeasance is occuring.  HFT didn't even exist a decade ago, or in no measure like today.  There was no Armageddon.  The wealth gap was considerably smaller.  America, at least from my vantage, appeared healthier, both as a nation and its citizens mental well being.

You sound like an Agent Provacateur. 

Sun, 10/16/2011 - 13:59 | Link to Comment gs_runsthiscountry
gs_runsthiscountry's picture

"I do want to be clear about this. The 99% have been pushing the transaction tax."

Nice try Bruce...the sarcasm was great until you turned it into the slipperiest piece of writing I have seen in awhile.

NO, BRUCE, LET ME BE CLEAR ABOUT THIS. Nowhere have I seen this idea that the 99% have been pushing a transaction tax. In fact, it is a common complaint from every angle, that there is no clear message....but again, nice try.

It is hilarious to watch all manner of PAC's, politicians, MSM types and now a self professed self interested blogger, with a flair for satire,  try to frame a the meme of the OWS'ers.

Let us see where the OWS movement leads. Bruce, instead of being part of the solution, by doing what you are doing, you are becoming part of the problem.

gs_

Sun, 10/16/2011 - 13:17 | Link to Comment Dick Darlington
Dick Darlington's picture

Here's the Mr Europonzi interpreting OWS. From Reuters:

The financial crisis had also shown the need for stronger global governance, Trichet said, saying he saw this as a message from protests that brought thousands onto the streets across the world on Saturday.

 

"It is our task to make the world financial system much more solid ... that is how I interpret part of the message that comes from this movement," he said.

 

Uh huh, this is to show how delusional these unelected sociopaths really are... Methink nursing home would be the right place for this old man.

http://www.reuters.com/article/2011/10/16/us-ecb-trichet-idUSTRE79F0J920...

Sun, 10/16/2011 - 13:50 | Link to Comment thunderchief
thunderchief's picture

 

Enlightened Self Interest  

"Cha Ching for me!"

"What’s in my best interest?", is what it's come to. Enlightened self-interest is all that matters to me.

"A big one "

Bring it on”.

"I’m violently apposed "

"To that end, I want to make a strong recommendation..."

"A cash machine for me... "

 

Question Bruce?

How many of these terms can be use in the men's room at 2am?

Answer..

All of them..

My vote is therefore Sunday Sarcasm.

 

 

 

Sun, 10/16/2011 - 13:05 | Link to Comment Diogenes
Diogenes's picture

Does anyone remember before home computers when every stock transaction involved phoning a broker and paying a $75 commission?

That didn't kill financial markets, in fact they were healthier than they are now.

HFT volume doesn't reduce volatility, quite the opposite. Eliminate sniping pennies and front running and you save legitimate investors hundreds of millions every month and you eliiminate flash crashes and a lot of other suspicious movements.

Wouldn't it be great if we could eliminate all the financial games and ripoffs and get back to a time when financial markets supported genuine businesses like manufacturing?

I realize a lot of overpaid theives and sociopaths would lose their jobs or at least have their pay cut by 9/10ths.

Bruce and the rest would have to go back to making money the old fashioned way. They would have to earn it.

Those who have some real investment savvy would come out ahead, the con men and chiselers would get the boot.

I don't see a down side.

Sun, 10/16/2011 - 15:18 | Link to Comment thewhitelion
thewhitelion's picture

Amen!  

"Should we get a transaction tax, I would anticipate a enormous ramp up in daily volatility. Intra day swings of 5% on the big indexes would be a common event. Individual stock names would be subject to even more violent swings. Small cap stocks would be the worst hit. There I’m anticipating daily swings in the 10% range."

Bruce, it seems like you're assuming an awful lot based on. . .  what? 

Sun, 10/16/2011 - 14:29 | Link to Comment Mr. Anonymous
Mr. Anonymous's picture

"I realize a lot of overpaid theives and sociopaths would lose their jobs or at least have their pay cut by 9/10ths.

Bruce and the rest would have to go back to making money the old fashioned way. They would have to earn it"

Diogenes, you're scaring the children.

Sun, 10/16/2011 - 13:04 | Link to Comment Georgesblog
Georgesblog's picture

Informed consent is one of the requirements of binding agreement. However, be fairly warned: Politicians never met a tax they didn't like. Taxes take on a life of their own. A politician's hand in your wallet is a malignant growth on your behind.  We should carefully reflect on history before giving politicians any more bright ideas.

http://georgesblogforum.wordpress.com/2011/10/06/crash-course/

Sun, 10/16/2011 - 13:03 | Link to Comment falak pema
falak pema's picture

Tobin tax, transaction tax and this :


MARK CUBAN: "Tax The Hell Out Of Wall Street And Give It To Main Street"

Read more: http://www.businessinsider.com/mark-cuban-tax-the-hell-out-of-wall-street-and-give-it-to-main-street-and-other-advice-for-the-protesters-2011-10#ixzz1axtVFv00

BK : This whole article suggests a number of regulatory moves written by an Oligarch in a journal where you post often. Care to comment it?

Sun, 10/16/2011 - 19:08 | Link to Comment penisouraus erecti
penisouraus erecti's picture

Why does Mark Cuban need gubmit to give his money to main street - he could do it himself and cut out the middle man! My guess is he could find better things/causes/people to give it to than some f'd up bureaucrat could.

Sun, 10/16/2011 - 14:12 | Link to Comment 11b40
11b40's picture

From Mark Cuban, someone who understands how to make money the old fashion way:

In a world of High Frequency Trading and black box trading that does nothing but create a platform for “financial hackers” to turn the market into their own proprietary financial playground, we need to figure out a way to revert the Stock and Bond Markets, and the derivative instruments created from these equities, back to their original purpose, a place to raise capital for growing business. Instead, today its a platform for financial engineers and hackers looking to exploit every and any opportunity.  When 60pct or more of trades are from High Frequency/Algorithmic traders and the correlation for every market index rushes past .7, the market is no longer a market, its a platform.

The simplest way to change this is to place a very simple per share tax on every transaction. 10 cents a trade. Every share. Every option. Every Bond. Every currency transaction.  Every trade.

The obvious response is that trading volume will plummet. So what ? Let it. The next response is that traders will merely move their trades to foreign exchanges. Yes they will. Will transaction costs go up ? Duh.. that is the point. The market thrived when spreads and transaction costs were much higher just a few short years ago. It will survive now.

Read more: http://www.businessinsider.com/mark-cuban-tax-the-hell-out-of-wall-street-and-give-it-to-main-street-and-other-advice-for-the-protesters-2011-10#ixzz1ayAyafwy

Sun, 10/16/2011 - 16:08 | Link to Comment boiltherich
boiltherich's picture

"...traders will merely move their trades to foreign exchanges..."

I know those are Cuban's words not yours but I need to disagree with them.  If there were a massive capital flight seeking returns where they are not taxed then you have a far larger problem than a dinky little transaction tax, you have a whole other category of unknowable risk called ForEx.  By the way, I did not read the whole Cuban piece because I do not like him much, but a flat per share amount as opposed to a flat per transaction percentage in the 0.5% range would indeed kill investing in many companies that have low priced shares, or seek to issue a lot of shares at start up.  Why would I buy a penny stock of a company I feel has huge potential when the tax is five or ten times the cost of the company itself?  The flat per share tax is regressive to those companies that need capital to grow most. 

Besides, the ONLY reason for flight to foreign exchanges in the case of a small per transaction (%) tax would be to continue to use HFT which has become unprofitable here, and once the algos get hold of foreign exchanges those nations will impose the same or worse taxes to stop it because no matter where on the planet you have an exchange HFT crowds out real investing in favor of gambling in a rigged casino.  Anyplace that allows HFT discourages real and stable investment.

A small percent transaction tax does not hit serious stable investors, it only makes HFT unprofitable.  I know that no matter what else happens in the economy I see the markets as rigged and a suckers bet, I would never invest a dime in stocks or bonds (or gold) until the playing field is once again level, and the majority of people feel the same way.  I would like to invest in our economy (us) but I ain't giving a single red cent to banksters under any circumstances. 

Sun, 10/16/2011 - 15:08 | Link to Comment falak pema
falak pema's picture

11B40 : TY for repeating my post.

I'd like Bruce to comment the opinion of a top capitalist on his take about WS taxation, as BK has expressed his own ideas here on same subject, in the context of mounting national opinion, OWS, hostile to the banking lobby. Amongst the different options open to potentially tax the financial community, it would be nice for BK to do a comparative qualitative, and if possible quantative anaysis, aka how much will this collect and what effect it wil have on financial market behaviour.

Sun, 10/16/2011 - 13:01 | Link to Comment frobn
frobn's picture

The underlying assumption is it will be BAU after next crash. Maybe yes, maybe no. What are the odds?

Sun, 10/16/2011 - 12:49 | Link to Comment Old Poor Richard
Old Poor Richard's picture

I'm confused, why a large tax on the things ordinary citizens invest in, but a microscopic tax on the high risk, high profit gimmicks used by the looters?

Sun, 10/16/2011 - 12:48 | Link to Comment Tic tock
Tic tock's picture

There are corners to this one - HFT, does it provide liquidity in the Bond Market, or on small caps? What happens when Banks leave the space, how many are there like BK, and can they really channel the volatlity their way, will they be making more than 5% on a trade? ...assume it's all true: trading becomes more specialized, more importantly, firms move to relying upon Retained Income to fund themselves. Alright, so we are slowing the pace of Investment in Jurisdictions where the transaction tax operates - is that a good thing - if it makes Capital more productive instead of more inflationary, then almost certainly. The other part, starting to 'tax' the shadow banking system - well, crumbs, how much more 'money' is there than in the Government and Consumer Economy - both of which are facing Dire cost pressures... say ten times as much capital is held in Money instruments than in the currently taxable base - so not only is revenue flowing from 'untapped' resources, it could also increase Consumer disposable wealth, a trader's outlook is marginal from that perspective. 

Sun, 10/16/2011 - 12:47 | Link to Comment Sathington Willougby
Sathington Willougby's picture

(Never mind that government and corporation are indistinguishable in America and business plans are enforced at gunpoint.  Don't look at that.)

"THE YEAR WAS 2081, and everybody was finally equal. They weren't only equal before God and the law. They were equal every which way. Nobody was smarter than anybody else. Nobody was better looking than anybody else. Nobody was stronger or quicker than anybody else. All this equality was due to the 211th, 212th, and 213th Amendments to the Constitution, and to the unceasing vigilance of agents of the United States Handicapper General." http://www.tnellen.com/cybereng/harrison.html

A capital market is where a business can raise funds.  We can all agree the faster it raises these funds, the better.  These markets also provide valuable investment opportunity.  What do you hope to gain from a transaction tax?  Expect to increase spreads and disimprove liquidity.  Also expect volatility to increase.  High volume/high frequency traders are the analogous situation to pouring oil on high seas, they smooth some of the roughest spots.  They smooth out inconsistencies, otherwise they can't exist, they are subject to the same profit forces everyone else faces.  HFT'ers act as a carrier signal to the market, usually termed price discovery or market making.  So called "front running", where the HFT gets information faster and digests it faster and better than the layman, nets these trades tenths of a penny.  You'd begrudge someone a tenth of a penny, a few bucks on average size trades, for the privilege of paying costs of a few hundred dollars which is what was paid for transactions in the nineties?  I know HFT didn't drive down the prices themselves but they play a role. 

Remember when Mao had the chinese kill all the sparrows because they ate the seeds in the fields?  Every chinese was out ringing bells, shooting birds and throwing rocks.  Birds died just from weariness. from harrassment, they couldn't light enywhere.  Next year they had an extreme famine.  " Ecological imbalance is credited with exacerbating the Great Chinese Famine in which upwards of 30 million people died of starvation."  Why?  No birds in sight to control the pests.  The bugs ate all the crops.  Be careful about unintended consequences and what you wish for, cut off your nose in spite of your face etc etc.

http://en.wikipedia.org/wiki/Four_Pests_Campaign

Comply now, anomalies will be exterminated from the population, Bergeron got what he deserved, Kurt Vonnegut would love this approach, we can all work at the office of the handicapper general.

 

Sun, 10/16/2011 - 12:42 | Link to Comment ConfederateH
ConfederateH's picture

Is buying and selling gold a "financial transaction"?  If the taxes on that dropped to .5% it might be worth it, otherwise Bruce seems to be recommending yet another tax, as if we don't have enough already.  How about this Bruce, I'll trade you income tax and property tax for your financial transaction tax.  Deal?

Sun, 10/16/2011 - 12:38 | Link to Comment mccoyspace
mccoyspace's picture

I would love some help in understanding the argument.
The tax would mean lower volume because most trades now are made on booking less than 1%. So those would stop. I got that.
I'm less sure about the resulting greater volatility. Is that because it takes less money to move a lower volume market? If so, then why weren't the smaller markets of the past more volatile?
Finally I would really love to understand more how higher volatility is 'money in the bank' for professionals and insiders. Is that through a better understanding of fundamentals/market dynamics/ etc that would allow the pros to know when there is a deal to be had for a second or two as an asset's price churns up and down (call it 'informed micro-timing)?

Thanks for any clarifications for those of us not so in the know.

Sun, 10/16/2011 - 12:32 | Link to Comment Yancey Ward
Yancey Ward's picture

Bruce,

You are the best contributor to this site, by a wide margin.

Sun, 10/16/2011 - 12:27 | Link to Comment billwilson
billwilson's picture

Whatever is necessary to kill off HFT is what should be done. HFT has destroyed the markets. Current volumes suck (even with HFT). Why? Because no one wnats to play in this rigged casino anymore. Take away the HFT guys and you may get some sanity back into the markets ... and some real volume (not this 100 shares sold 2 million times in an hour crap).

 

Sun, 10/16/2011 - 12:21 | Link to Comment Rainman
Rainman's picture

There are only so many positions in which to have sex. Same goes for taxes. You can choose the method you desire. One eventually leads to ejaculation and the other still leads to debt repudiation. Let's not overcomplicate things.

Sun, 10/16/2011 - 11:57 | Link to Comment the grateful un...
the grateful unemployed's picture

bruce you're not a 90%er, you're a 10%er and you want to be a 5%er, (1% is the top)

most of the companies which come to market are products of financial enginnering, looking for a product. IPO offering always go to insiders, who can then flip them for a quick profit. In the meantime small businessmen are paying double digit rates. How about an IPO tax?

Liquidity is already rock bottom low most days, or have I been misreading TD? The reverse of your thinking goes thus: A non-transaction tax improves liquidity, and decreases dangerous volatility, including commissions. Abolish all commissions or fees of any kind.

ergo

It's like a transaction tax at the grocery store on a quart of milk. Hey its not like you had to go out and find me the milk (see large financial institutions, and pooled assets) you already had it in your cooler, so why are you charging me an EXTRA tax at the checkout counter?

abolish commissions. Not all exchanges are created equally, so there should be ONE (government run, because if you're going no fee someone has to pick up the tab) exchange, stocks options and derivatives.

Then of course everyone would have to show they have the shares they are trading, you know phantom shorts, and phantom longs, or HFT trades generated to game the system.

with me so far. just following your logic to his inevitable conclusion. so we have a government stock market, no fees or transactions. now the market is backed up with the full assets of the UNITED STATES TREASURY, a promise first made in 1987 but not fully realized until this very moment. You can't promise a bunch of guys in a crap game trying to get each others money, that you will back everyone if the cops show up and confiscate the cash. you have to run the crap game, easy enough, and we do but so far we run it for the benefits of a few guys who are shaving the dice.

just a sunday morning muse, but fun wasn't it?

 

Sun, 10/16/2011 - 11:52 | Link to Comment sangell
sangell's picture

I'm at a loss to know what makes this Tobin tax so popular in Germany?

Must be something in the German character. The nation that gave us Schadenfreude now appears to want to make whatever their word for economic masochism an equally global term.

 

Sun, 10/16/2011 - 13:37 | Link to Comment the grateful un...
the grateful unemployed's picture

The Germans also have Uber-Cash for Clunkers. Any car over seven years old goes to the junkyard. It'll be cold day before those fasicsts send my 20 year old Chevy Caprice to the crusher. They have the equivalent of the holocaust for undesirable automobiles, and no one is doing anything.

Sun, 10/16/2011 - 14:59 | Link to Comment snowball777
Sun, 10/16/2011 - 12:07 | Link to Comment ISEEIT
ISEEIT's picture

Just another means by which to kick the can. These fucks are no different than any of the rest of us.....Except that they are in charge/have authoritie. In th end they are stupid, they try to control the uncontrollable, they attempt to fashion reality to their benefit.

Central planning fails precisely due to human nature.

 

Sun, 10/16/2011 - 13:01 | Link to Comment CH1
CH1's picture

Yep, just one more trick to get the suckers to "sacrifice."

Pay what the state wishes, or else you are evil!

Sun, 10/16/2011 - 11:49 | Link to Comment apberusdisvet
apberusdisvet's picture

Since derivatives are a ticking nuclear bomb, I would do something about them before another tax that would be manipulated by the  Government or the banking cartel elites.  Every tax that has ever been imposed has been abused to benefit special interests; name me one that hasn't been.

Sun, 10/16/2011 - 15:40 | Link to Comment boiltherich
boiltherich's picture

Every tax that has ever been imposed has been abused to benefit special interests...

Nothing personal vet but every time the word tax appears in any piece published here at ZH we get slobbering dogs of the right salivating and screaming that all taxes are bad.  Is the tax system busted?  Sure.  No debate there from even the most liberal progressives.  But all taxes are not bad no matter that in a nation of 312,000,000 someone somewhere is going to benefit from any alternative ways revenues could be raised. 

As I said above, I am deeply opposed to the use of taxation as a weapon to force behavioral change.  People must be allowed to behave as they choose not as the government chooses for them, UNLESS their behaviors are harming others or taking advantage of others through frauds and abuses, or profiting from non public information.  I still do not favor taxation as a way to stop such bad behaviors, they ought to be made criminal and then criminality punished, equally under the law. 

But to think we can live in a society as an advanced nation without taxes is absurd, and from my point of view taxes on unearned income are far more fair than income and use taxes on those that have little if any net worth or tangible assets.  Anybody that says above that tax by itself will permanently destroy investing incentive is full of shit.  Where there is money to invest investment will be done.  Sure it might not go into a rigged casino, it might end up getting invested in actual productive opportunities, or even that barbarous relic gold, but investment will still go on because the alternative is no investment, no gain.  Taxes are not a risk, insofar as they are known just like any other fixed/variable overhead cost of doing business, and it is risk not overhead that determines investors willingness to invest in a given venture, as well as his required rate of return. 

Make no mistake, this tax proposal does not hit the average investor with onerous taxation, but it does stop cold HFT traders.  If used as a revenue generator I am fine with it, if it's purpose is to bend (real) investment to the whim of the government (now also known as Wall Street) then I say use regulation and law first and actually do something new, like enforce the laws. 

Do NOT follow this link or you will be banned from the site!