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Dean Baker
Published: Tuesday 10 July 2012
“While these stories are undoubtedly confusing to most of the public, which is not generally familiar with the intricacies of different interest rate indexes, the basic story is fairly simple: Big banks were caught lying about interest rates in order to make big profits ”

Wall Street Speculation Tax: A Way to Address Corruption

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Over the past week, the business news has been filled with stories about major British banks manipulating the LIBOR rate. While these stories are undoubtedly confusing to most of the public, which is not generally familiar with the intricacies of different interest rate indexes, the basic story is fairly simple: Big banks were caught lying about interest rates in order to make big profits.

For the most part the victims were other high-rollers who were taking the other side of bets on complex financial derivatives. However there were also pension funds and even governmental units such as school districts and park services that were persuaded by their financial advisers to get into this high-stakes game. These folks were among those who lost because of the LIBOR liars.

A Fundamental Problem

While there should be a thorough investigation that results in the guilty parties being severely punished, this incident sheds light on the fundamental problem with the modern financial industry. There is enormous money to be made by shaving a small fraction of a penny here or there. When this shaving is done on trades that can run into the hundreds of billions or even trillions of dollars, those fractions of a penny can run into really big bucks. And when we give people enormous incentive to lie and steal, it is likely that many will take advantage of the opportunity.

There is an obvious answer to this problem and a simple way to do it. The answer is to take the money away. If bankers didn't have the opportunity to make hundreds of millions or billions of dollars by manipulating the market, they wouldn't do it. And the simplest way to take away this opportunity is to reduce the size of these markets with a modest tax.

A small tax on flipping stock, options, credit default swaps and other derivative instruments would drastically reduce the size of these markets, thereby reducing the opportunities for market manipulation. Such a tax could also raise a substantial amount of money.

The Joint Tax Committee of Congress calculated that a 0.03 percent tax on all trades, as was proposed by Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio, could raise more than $350 billion in the first nine years that it was in place. This is almost ten times the sum at stake with the Buffet rule and more than 10 times the amount of money that would be saved by ending subsidies for the oil industry.

A Targeted Tax

The great thing is that almost all of this tax would come out of the hide of the Wall Street crew. While many of us hold some stock either directly or through a mutual fund in a retirement account, there is a considerable amount of evidence that shows people respond to higher trading costs by trading less.

This means, for example, that if this tax doubled the typical cost of a trade (it doesn't), then most people will cut back their trading by roughly 50 percent. That means that a typical investor will pay little or nothing as a result of this sort of tax. They may pay more money on each trade, but they will make fewer trades, leaving their total trading costs pretty much unchanged.

It's also important to remember that trading costs have been falling rapidly as a result of the advance of computer technology.  While the financial industry's lobbyists have been claiming that the Harkin-DeFazio tax would be the end of the world, in reality it would just raise trading costs back to where they were 5-10 years ago.

Shrink the Financial Sector

In addition to be being less corrupt, a smaller financial sector is likely to better serve the economy. Finance is an intermediate good, like trucking. We need the financial sector to allocate money from lenders to borrowers, just like we need trucking to move goods from point A to point B. But the financial sector doesn't directly produce items we consume, like food, housing or health care. In principle, the smaller the financial sector, the better.

Recent research indicates that countries with large financial sectors have slower growth. It appears that a bloated financial sector pulls highly skilled people away from research intensive sectors of the economy such as computers and biotechnology. The sort of financial shenanigans we saw with the manipulation of the LIBOR rate also seems to pull capital away from start-ups that need to borrow to finance investment.

In short, there are some very good reasons to want a smaller, more efficient financial sector. And a tax on financial speculation is a great way to get there.



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ABOUT Dean Baker
Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is the author of several books, including Plunder & Blunder: The Rise and Fall of the Bubble Economy, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer and The United States Since 1980. He was the editor of Getting Prices Right: The Debate Over the Consumer Price Index, which was a winner of a Choice Book Award as one of the outstanding academic books of the year. He appears frequently on TV and radio programs, including CNN, CBS News, PBS NewsHour, and National Public Radio. His blog, Beat the Press, features commentary on economic reporting. He received his B.A. from Swarthmore College and his Ph.D. in economics from the University of Michigan.

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6 comments on "Wall Street Speculation Tax: A Way to Address Corruption"

Clarence Swinney

July 10, 2012 1:41pm

2013 Budget
revenue-2901--21% national Inocme 16% Gdp
expend-3803
deficit 901
2014 budget proposed
revenue-3215
expend-3883
deficit 667

Why with a 14000 National Income cannot we pay 3800 and not borrow ?
When will we get intelligent And stop the games
Exemptiosn total 1100B
GE paid 2.3% on 8B profit
Verizon in 2011 made 6B profit paid no taxes
Many Hedge Fund Managers make fortunes and pay no tax until years later

bladtheimpailer

July 10, 2012 1:56pm

Under this plan Treasury will receive $350 B over nine years. And what exactly will the government do with this cash? My guess is it would be spent on something like security and intelligence on the public so that the bankers would feel safe in their locked compounds while still getting value for their enforced donation.

I know that the bankers have the world in their grasp and have the ability to retaliate with biblical economic devastation against any entity which would even question their omnipotence. However, the bankers have brought the financial sector to unsustainable heights of instability with their cheating and lying, not to mention their crimes against humanity for the sake of their own profits. If there are no rules and regulations to the game anything goes and does. As kids we used to play monopoly this way and try to corner the lower denomination bills working upward. "Rents" would be paid and no change given if the exact amount was over paid because someone had garnered all the money supply, often up to the fifty "dollar" mark. My older brother once even got to the $100 mark and very quickly owned the board in entirity.

Who knows what the bankers master plan is to own the whole board? They could as easily as I make my lunch cause a world wide depression with all it's intendant horrors. Of course they'd have the solution to our salvation and then own the "board" and run it as they see fit.

Enough of this pissing around trying to get the bankers (like immature 3 year olds whose greed wants it all) to tweak their system so that the rest of us can have some crumbs from their table. Humanity built the F'n table and provided the meal upon it, and we did this while the bankers demanded breakfast lunch and dinner all through the construction. It has finally come to the time when mankind must take ownership and apportion the meal according to each his need and contribution. This will mean that the bankers will have less say than the current homeless.

If you don't know how the banking ponzi scheme works it's about time you learned. There are many sites explaining how the fractional reserve system lives off of everyone and thing, in and from the past, now, and far into the future. I remember hearing back in the 1990's how Britain had just finished paying off it's debt to the bankers from the Napoleonic wars. Just think of thr British debt run up since then!(yes of course their economy has expanded also, but that to is part of the great scheme). Try "Money as Debt I - IV" on you tube to learn the truth.

I wish Mr. Baker would lay before us his economic philosophy on how economics should play out; otherwise he's starting to sound like a shill for saving the current financial, industrial military, and capitalistic corporate triumvirate in one form or another just as the "New Deal" did back in the 1930's. The era of capitalism as we know it and the fractional reserve system has to come to an end so it would be nice if some of the more knowledgable minds would start mapping out alternatives for public discussion. Or are they afraid to speak out?

BozoAdult

July 10, 2012 12:02pm

I'm in favor of a tax. Grover Norquist is not. Guess who wins.

m1kem1lls@hotma...

July 10, 2012 11:01am

There is collusion between the brits, europe and the u.s. banks. About five or six years ago the u.s. banks changed the rate they charged their credit card customers from the U.S. Treasury rate to the libor. Citi, Chase, BofA, et al are all crooks. They was method to their madness. It is clear now that it was all part of a grand get-rich-quick plan. There should be a transaction tax on every trade made on Wall Street, including every speculative transaction accomplished by the banks.

larronm

July 10, 2012 10:47am

I agree with Mr. Baker. As a retiree with modest resources, I depend upon my stock investments to enable me to live a comfortable lifestyle. I trade only rarely but do so when it helps my portfolio. (doesn't that sound impressive? Don't be, not a big deal.) I have no problem paying a small fee or tax on those trades. At $7.00 per trade it won't hurt me any. But if it would reduce the manipulations by the Wall Street crowd it would be good for all of us. Certainly the government could use the money for some of the more important things this country needs and the average citizen would not have to bear the costs. It's a win, win idea.

gduell

July 10, 2012 10:31am

Why a "modest" tax? Why not a hefty, confiscatory tax? The vast majority of Americans don't trade, have no trading done on their behalf, and couldn't care less about such a tax.