"Our company is not broken. The economy is broken."
Linda Saloom, business operations manager at Saloon Furniture in Wichendon, Mass.
Ms. Saloom knows all about the relationship between the financial sector and the real economy. The meltdown on Wall Street wrecked the economy, not the other way around. We suffered trillions of dollars of lost output and declining value as the fantasy finance bubble burst and drove the real economy off a cliff. To prevent even more severe damage, the tax payers have coughed up at least $1.5 trillion in TARP money and stimulus funds. And we are on the hook for untold billions more in asset guarantees.
Who's going to pay us back?
A few Wall Street firms are refunding their TARP subsidies. But that's chump change compared to what we're owed.
Rep. Peter Defazio (D-OR) is trying to get us a bit more. He introduced HR 1068 into Congress: "Let Wall Street Pay for Wall Street's Bailout Act of 2009." The proposed bill calls for an excise tax to be set on the value of securities and commodities transactions to recoup the net cost of the TARP bail out money. The idea is to place a very small excise tax (.25 of 1 percent) on all stock, bond, futures, options and derivative transactions.
A lot of traders are up in arms. They claim the bill will:
1. Punish innocent day traders with job and income loss for the sins of the big banks.
2. Drive more and more trading off shore to avoid the transaction tax.
3. Destroy market liquidity because it will become too expensive to conduct rapid and multiple trades.
4. Force the inexpensive on-line trading companies out of business and therefore raise commissions on consumers.
5. Let the big boys off the hook by excluding foreign exchange transactions. function well.
And there are many, many more. I even read one comment from a trader who jokingly threatened to do a Timothy McVeigh if the government taxed his trades and took away his livelihood.
The two on that list that I take seriously are the movement off shore and the exclusion of currency transactions. In the era of electronic money, we will need some heavy diplomacy to make sure every exchange and country sets up similar taxes. The international community would have to come down hard on places like the Cayman Islands that might love to set up a tax free exchange. Also, if we exclude any financial instrument or trade like currency transactions, I guarantee that our inventive financial engineers will design new securities that would morph other securities into currency trades. No, the tax has got to go across the board.
The irate traders seem a bit ungrateful. They might already be at the soup kitchen had the government not intervened to save the entire system from utter collapse. They also seem unaware that they have been part of an enormously bloated financial sector that accounted for nearly 30 percent of all corporate profits -- and much of that profit turned out to be fictitious. You can't have a thriving economy based on just moving money back and forth at high speed. You can't build the real economy through fantasy finance derivatives that sell the Brooklyn Bridge again and again. We've got to shrink the financial sector down to size. This tax is one way to start that process. (See The Looting of America)
No one wants to see anyone lose their livelihoods. But the brainpower behind all that day trading might be better used in education, medicine, energy conservation and other vital needs in the real economy. Even in the middle of this deep recession, the financial sector has escaped much of the damage. Check out these BLS statistics from May. The unemployment rate was 4.9 percent Financial Services; 7.5 percent real estate; 12.6 percent manufacturing; 17.4 percent administrative and support services; and 19.2 percent in construction. That's not exactly equality of sacrifice.
My main gripe with the Defazio bill is that it only focuses on the repayment of TARP. What about the rest of the damage caused by the financial meltdown? The stimulus bills tried to patch up part of the gaping hole that the financial collapse caused in the real economy. The financial sector ought to pay us back for that as well.
To the little guy trying to make a buck in the financial casino, this will never make sense. But they're only moving petty cash around. The big boys are moving hundreds of billions every day. That's where most of the excise taxes will come from. And that's how we can move money back to the real economy so that Ms. Saloon's business can flourish once again.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What we can do about it. (http://bit.ly/rltb4), Chelsea Green Publishing, June 2009.