Labor Day Special: Reward Real Work, Tax Fantasy Finance
"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit."
--Lord Adair Turner, Britain's chief financial regulator.
"The big disadvantage of most taxes is that they discourage some really productive activity. This [Wall Street transaction tax] would discourage numerous financial transactions. People flip their assets several times in an hour or a day. They make money but does it really add to the productive base of the United States?"
--Thea Lee, AFL-CIO Policy Director
Every working American knows the difference between going to work and going to Vegas... unless you're on Wall Street. There you can pretend that pure speculative activity (that produces no real economic value) should be the most highly rewarded activity in the world -- higher than any other occupation, ever. A year has past since this selfish fantasy crashed into a tragic toxic stew, sending nearly 30 million from full-time jobs to the unemployment lines or to part-time work. Yet, we still have failed to put a lid on fantasy finance.
We were fools to let the casino engulf nearly a quarter of our economy in the first place. And we'll be even bigger fools if we miss this moment to slap a tax on all financial transactions, the very best tool we have to reign in Wall Street's destructive excesses.
So far, very few of us seem willing to step out on this issue. But over the last week, there have been unexpected rumblings as Britain's chief regulator, an aristocratic Lord no less, along with the AFL-CIO issued nearly identical calls in behalf of a financial transactions tax. Maybe these strange bedfellows can wake us up from our stupor and ignite a serious discussion about the necessity of what was once called a "Tobin Tax".
James Tobin, the late Yale economist and Nobel laureate, originally proposed this tax to stifle currency speculation that he believed would engulf the world economy after the Bretton Woods financial agreements collapsed in 1971. Of course, that speculation returned with a vengeance, but nearly all economists and policy makers dismissed Tobin's proposal as a violation of our dominant dogma: free markets know best, always.
Since our all-knowing financial markets imploded last fall, I've been howling in the wind in behalf of such a tax for the same reasons suggested by Thea Lee and Lord Turner. (Forgive me for pointing you to Chapter 10 of The Looting of America).
First, unlike payroll taxes that can discourage businesses from hiring people, we're dealing with the fact that there's too much useless activity going on in the financial sector. Flipping all those assets back and forth does nothing to promote the productivity of the real economy and, in fact, creates a crash-prone system that causes massive unemployment. Flipping toxic assets is more like dumping toxic waste into our rivers -- it might be profitable for a few, but overall it's tremendously harmful. So we want to discourage too much useless financial activity, and a tax on financial transactions helps reign in the sector's excesses.
Second, we need to siphon profits out of the "swollen" financial sector and to put downward pressure on outrageous, unconscionable and totally unjustified Wall Street profits and pay. Even more importantly, if Wall Street didn't have so much money at its disposal, it would have less influence over our elected officials, and would not be able to skew the regulatory process with a multi-million-dollar revolving door between the financial industry and government agencies.
If the G-20 nations decided to bring the hammer down on this tax, it would raise hundreds of billions of dollars per year. (The estimated take for the U.S. alone would be at least $50 billion a year and almost all of it would come from the Wall Street firms and hedge funds that engage in repeated high speed trading.)
But this kind of bill will never see the light of day unless we build a broad populist movement to demand it. A poster-child for any campaign should be Andrew J. Hall, who hopes to waltz off with a $100 million payday from Citigroup, a bank which survives entirely because of taxpayer largess. Hall, a successful oil speculator and trader who produces no discernible value for the economy, has a contract that would be worthless had Citigroup gone under, as it certainly was slated to do before we bailed it out. Now he wants his lucre as if he had courageously sailed through the storm on his own. In fact, some view him as a hero to the taxpayer because his speculative profits are helping CitiGroup get out of the red. For me, it's hard to view this as anything other than financial insanity.
Instead of justifying this outrageous rip-off and the many more to come, we should support Representative Peter DeFazio's efforts to tax financial transactions. He has two bills in Congress that could help rebuild our economy. HR 1068 taxes financial transactions to repay us for TARP funds. A second bill just proposed calls for "a transaction tax on crude oil securities to pay for the deficiency in the Highway Trust Fund and to pay for the Surface Transportation Authorization Act of 2009." (link) But due to benign neglect by congressional leaders and the rest of us, these efforts have gone nowhere.
While Europe seems more willing to reign in its bankers, on this side of the pond Wall Street is regrouping rapidly. The higher the stock market, the more boldly Wall Street marches backward towards record profits and renewed sky-high salaries. Seeing no serious opposition, the banking community is using taxpayer support to fund lobbyists to kill any and all legislation aimed at curbing their powers. They will gut the proposed Financial Consumer Protection Agency. They will make sure that the most profitable derivatives will be exempt from controls. They will undercut any and all efforts to curb windfall profits. And of course they will undermine serious attempts to curb their obscene levels of pay.
Not only is this a missed opportunity and a travesty of justice, but it is an economic disaster in the making. Lord Turner and the AFL-CIO are calling for a transaction tax in order to help head off the next crisis which is inevitable unless the system is reformed. They know that if you let wealth accumulate in the hands of the few, you will get a fantasy finance casino. You can regulate all you want but that casino will continue to emerge through the cracks. The only stable solution is to move money out of the bulbous financial sector into the real economy, and to move money from the super-rich to the middle and the bottom of the income ladder. A financial transaction tax is an excellent way to accomplish just that.
It's hard to figure out why more of us aren't up in arms over this. Maybe we feel intimidated by the way banks work. Maybe we have a secret admiration for those who pay themselves tens of millions of dollars (using our tax dollars). Maybe we think the crisis is over and we can go back to business as usual. Or, maybe we think the tooth fairy will come and rescue us. I really don't know. But this is the best moment since the 1930s to do something about our obscene mal-distribution of wealth and our ruinous, bloated financial sector.
We fought a war of independence to free us from aristocratic rule. Now an aristocracy of wealth is taking over, again, even after we watched it wreck the entire economy. If a British Lord and the AFL-CIO can agree to take on this elite, maybe we do have a little something to celebrate on this Labor Day.
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, Chelsea Green Publishing, June 2009.
Follow Les Leopold on Twitter: www.twitter.com/les_leopold
Dan Dorfman: Roubini Mystery: Bear, Bull, or Both?
There are rumors going around Wall Street that Nouriel Roubini has actually been on the long side of the market (betting it would rise) throughout his bearish tirade.
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I thought when the concept of "efficient markets" became a stupid phrase, that we were over our love affair with dysfunctional theories. Alas, Laffer came back, and the free marketeers are in ascendancy once again.
Tobin had a good idea. Nothing to be afraid of in the high speed trading world, imposing a slight tax. Tobin thought it best for the cross border currency exchange market. Imposing it on market manipulating algo-driven high speed trading seems quite appropriate. Here's a link to a definitional page about Tobin:
http://www.justiceplus.org/tobin_tax.htm
Lammert says we are in for a ride come September 10. http://www.economicfractalist.com/blog/
Denninger says we are in for an awakening, but sees that the lies have gone on for some 30 years, so he is not predicting when: http://seekingalpha.com/article/160207-are-the-policymakers-waking-up
Nyaradi reports that he doesn't know, but signs are, well not good: http://seekingalpha.com/article/160185-september-rally-or-crash
I really loved your key phrase: fantasy finance.
The latest derivative they are trying to use to scalp us is the life insurance cash settlements derivatives:
http://seekingalpha.com/article/160173-wall-street-securitizing-life-insurance-policies-seriously
It will help to further destabilize the insurance companies as it upends their actuarial calculus.
Excellent writing. Great idea to tax these transactions. But I believe that these big financial institutions need to be broken up as well. They have too much power and too much influence in the government system and financial system. This is such a dangerous situation we are in.
OK, so every time I sock away some money in an investment I get taxed? And when I need to cash out an investment to pay a medical bill I get taxed? And when I shift asset classes as my needs change I get taxed? Discouraging savings and investment may not be the smartest idea during and economic downturn.
See Les Leopold's Profile
Yep.. All of 1/10th of 1 percent. Not exactly a big hit on you but an enormous hit on large volume, high speed trading.
1/10 of 1% is actually quite a lot when 6 or 10 transactions are concerned.
why not slap 50% more tax on tobacco and alcohol ? more revenues and easier to collect that way :)
It's really not hard to figure why more of us aren't "up in arms" about this...nobody's paying attention. there's still the lie that America is "the richest nation in the world" and "It can't happen here" while we watch it happen here right in front of our eyes.
It seems most people can't think globally even tho we're in a global situation. All they see and think about is what's right in front them and even then their heads have to be pushed into it. People don't know ho wto think anymore, if we ever did.
I think it's simpler than that. It's the fear of the term tax. Call it something else and it might stand a chance. But US citizens have been told taxes are as evil as Islamic Extremists.
Staying Home for Labor Day?
Reward yourself with a look at what everybody else is doing (waiting on each other to clear out of the way) this Labor Day.....
http://www.suburbanempire.com
A speculative tax will help. Unfortunately, the four disciples of Wall Street, Geithner, Summers, Bernanke and Emanuel, will undermine any effort.
Thank you for the excellent post.
Two things I would like to point out about the free market.
Number one, corporations are legal artificial persons that exist solely by the authority of the state. They are not a separate business sector. The authority of the state of course is based on coercion. Many of the financial problems we currently face are not caused by business, but specifically by corporations. Even a cursory analysis of the idea of a corporation will show that they are inimical to human welfare.
Number two, our entire financial system is based on a constantly inflating currency that has the net effect of rewarding power while robbing from the poorest of the country. There is no escape from the use of this currency due to legal tender laws, again, state coercion.
Mr. Leopold, ... we thought Mr. Community Organizer Hope will come to our rescue. Little did we know that he's the front man for Tom Daschle and Larry Summers. We got PUNKED!
Everything that you wrote is right on the mark, particularly "It's hard to figure out why more of us aren't up in arms over this. "
People get the government they deserve?
I know one thing, I will unequivocally vote against any congress member from the State of Florida that undermines and does not vote in favor of this bill, the fed audit bill and the CFPA and any other sensible pending financial reforms. Aside from writing them in favor of these bills, they wll receive a scathing letter should they vote in opposition.
"I will unequivocally vote against any congress member from the State of Florida ..."
Are you suggesting that you have more than one Representative in Congress that you can vote against?
Even in Florida, aren't you only allowed to register in one congressional district?
two financiers are walking in the park and the 1st sees some dog poo and says it would amuse me to see you eat that. i would give you 500 million to watch. 2nd says how about if my assistance does it . 1st says ok. 2nd calls on cell and offers assistant $10 thousand to eat the poo. he agrees. they continue walking and they see more poo. now the 2nd says to the 1st i give you 500 million to eat that. the 1st asks how about if my assistant does it. ok so he calls his assistant and offers $10thousand. the assistance eats the poo. then the 1st says you know I dont see that we are accomplishing anything here. the 2nd says what do you mean!!!!! we just increased GDP by more than a billion dollars today!!!!
Two assistants are each $10,000 richer. Free markets work.
Don't forget to pay your income taxes.
Where did the $10.000 come from? Could it be savings of pensioner?
Oh well, never mind.
It is my opinion that the actual purpose of a stock market, futures market, and derivative market has long ago been abandoned. The ultimate purposes of these markets are to provide capital, efficient and accurate market signals, and the dissemination of risk under rational conditions. However, much of the useful regulation was gutted, productive tax policies abandoned, and effective policing ignored.
Business in England wanted to exploer and find the new spices and ither things but were caps with how much exploration they could do because of the amount of money in the economy as a whole.
The King of England spurred by Banker rasiesd taxes on everyone and created the Bank of England then allowed this Central Bank to use Tax Money and then multiply it by 30% creating the First National Debt shared by all the people not just the Businesses that needed the money.
This paper money having little vaule became the fuel for the Trade Engine and Eroupean Expansion.
Problem is with all that tax money going to the banks small businesses began to fail and farmers went broke. Soon pest and famine cover the poor.
So, here we are today facing the same problem from history. Central Banks need to collect their spoils from Business not the public who do not use huge loans . So the public is not bankrupted and the Businesses walk away rich.
A story about capitalism.
In 1492 Columbus sailed to the americas. His voyage was funded by the queen of Spain. She was a capitalist. She risked accummulated wealth on a highly speculative venture with the hope of real productive returns years down the road. There was a very real probability that all of her investment would be lost. Between the time she spent the money and when she heard that there was some kind of positive result there were months of zero communication. Until the day Columbus returned to Spain the investor did not know whether she had lost 100% of her investment or still had a chance of realizing a return.
There was no market to share the risk. She could not sell her shares on a particularly good day when stocks speculatively wildly swung upward independent of their underlying value. There were no derivatives or futures. She could not make money by selling the investment short.
This was a case of capitalism doing something that only capitalism can do... make something possible by risking accummulated treasure on the possibility of future gains.
Many of the greedy bunch of cowards on wall street knows very little about actual capitalism, but they do know how to pull emotional strings with stories to try to make it sound like they do.
The Queen confiscated the work-product of ther subjects, by force of arms, against their will. She then put THEIR capital at risk for HER benefit. Even with you impute to her the best of motives, any one of her subjects might have made better use of THEIR monies for THEIR OWN desires or needs.
Just a friendly reminder
The fact that an enterprise is undertaken doesn't mean it is done with morally justifiable motives. As a matter of fact I do not mean to impute to her the best of motives (or the worst, or any kind of motive).
I only mean to make the point that this is a story of real capitalism, not the phony day-trading pretender. There are many others, it's just an anecdote.
If she collected the capital being put at risk by immoral means, then that is it's own separate issue. That, I suppose, is theft.
But don't confuse the two issues. If she had acquired the capital through moral means, not through theft, then she would be free to put it at risk in whatever enterprise the laws (regulations) of the land allowed.... in this case pretty much anything because she was the law.
I'm not defending the queen of 500 + years ago, just illustrating the point that much of what is called capitalism these days isn't.
To implement these changes to form a system of actual moral (and yes even spiritual) accountability will take a new successful political party in the United States. I think it will happen out of the communication of the Internet over the next 500 years. But the level of intelligence and understanding required to effect that level of change just does not exist yet in the electorate of the American people on any significant level yet. I think the election of President Obama was a good start. He is definitely the first wave on some kind of systems theory Omaha Beach in our psyche's. But the Totalitarian Corporatist State that we all now live under is formidable indeed. They will not give up their entrenched power any time soon. There will be many "President Obama's" over the next 100 years before there may be any chance at all of any kind of change. All we can do is try to educate people and keep trying until our dyding day and hope someone, somewhere will start to think. For now we live under the Corporate Socialist State for Wall Street and the Military Industrial Complex. Our fate is endless printed money and endless war. The people call the shots. These people run the show. They are accountable to no one.
Well said. Yes, it will take an internal revolution of the spirit -- that is applying moral and spiritual principles known throughout the ages; not only Judeo-Christian, but a recognition that "we're all in this together" and that what affects one, impacts upon all. While the mystics have always known this truth: "that we're all connected"; I suppose it was the first astronauts able to see the globe from outer space -- no particular boundaries but those they remembered from where an ocean or river artificially separated peoples and then, separate nations were created. I can't imagine a business, an enterprise, a relationship (personal or otherwise) where accountability and personal responsibility aren't the hallmark. Failing to be accountable and responsible...well, the wheels fall off rather quickly. We've seen a lot of that in the last generation since the so-called "Regan Revolution". In my lifetime, it didn't begin with Dr. Spock; rather with the toxic sound-bytes of the Nixon-Agnew campaign and it picked-up steam and ferocity with candidate Ronald Regan for President. Many haven't learned the consequences of this mean-spirited, "divide and conquer" rhetoric. A natural consequence is fated to harm all of us; unless and until people fully appreciate we are really all connected. As Jesus said: “What you do to the least...”.
I agree 100%. Well said.
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