How Wall Street Can Bail Itself Out Without Destroying the Dollar

For Grover "Drown Government in the Bathtub" Norquist, this bailout deal will work out very well. At a proposed cost of $4,780 per taxpayer, it'll further the David Stockman strategy of so indebting us that the next president won't have the luxury of even thinking of new social spending (expanding health care, social security, education, infrastructure, etc.); taxes will even have to be raised just to pay for the bailout. It'll debase our currency, driving up commodity prices and interest rates, which will benefit the Investor Class while further impoverishing the pesky Middle Class, rendering them less prone to protest (because they're so busy working trying to pay off their debt). It'll create stagflation for at least the next half decade, which can be blamed on Democrats who currently control Congress and, should Obama be elected, be blamed on him.

But there's another way: Create an agency to fund the bailout, loan that agency the money from the Treasury, and then have that agency tax Wall Street to pay us (the Treasury) back.

It's been done before, and has several benefits.

In the United Kingdom, for example, whenever you buy or sell a share of stock (or a credit swap or a derivative, or any other activity of that sort) you pay a small tax on the transaction. We did the same thing here in the US from 1914 to 1966 (and, before that, we did it to finance the Spanish American War and the Civil War).

For us, this Securities Turnover Excise Tax (STET) was a revenue source. For example, if we were to instate a .25 percent STET (tax) on every stock, swap, derivative, or other trade today, it would produce -- in its first year -- around $150 billion in revenue. Wall Street would be generating the money to fund its own bailout. (For comparison, as best I can determine, the UK's STET is .25 percent, and Taiwan just dropped theirs from .60 to .30 percent.)

But there are other benefits.

As John Maynard Keynes pointed out in his seminal economics tome, The General Theory of Employment, Interest, and Money in 1936, such a securities transaction tax would have the effect of "mitigating the predominance of speculation over enterprise."

In other words, it would tamp down toxic speculation, while encouraging healthy investment. The reason is pretty straightforward: When there's no cost to trading, there's no cost to gambling. The current system is like going to a casino where the house never takes anything; a gambler's paradise. Without costs to the transaction, people of large means are encourage to speculate -- to, for example, buy a million shares of a particular stock over a day or two purely with the goal of driving up the stock's price (because everybody else sees all the buying activity and thinks they should jump onto the bandwagon) so three days down the road they can sell all their stock at a profit and get out before it collapses as the result of their sale. (We ironically call the outcome of this "market volatility.")

Investment, on the other hand, is what happens when people buy stock because they believe the company has an underlying value. They're expecting the value will increase over time because the company has a good product or service and good management. Investment stabilizes markets, makes stock prices reflect real company values, and helps small investors securely build value over time.

Historically, from the founding of our country until the last century, most people invested rather than speculated. When rules limiting speculation were cut during the first big Republican deregulation binge during the administrations of Warren Harding, Calvin Coolidge, and Herbert Hoover (1921-1933), it created a speculative fever that led directly to the housing bubble of the early 20s (which started in Florida, where property values were going up as much as 70 percent per year, and then spread nationwide, only to burst nationally starting in 1927 as housing values began to collapse), then the falling housing market popped the stock market bubble and produced the great stock market crash of 1929. That speculation aggregated enormous wealth in a very few hands, crashed the housing and stock markets, and produced the Republican Great Depression of 1930-1942.

Franklin D. Roosevelt, as part of the New Deal, put into place a series of rules to discourage speculation and promote investment, including maintaining -- and doubling -- the Securities Transaction Excise Tax. Other countries followed our lead, and the UK, France, Japan, Germany, Italy, Greece, Australia, France, China, Chile, Malaysia, India, Austria, and Belgium have all had or have STETs.

Perhaps the most important benefit of immediately re-instituting a STET in the USA, however, isn't that it would raise enough money to bail out the banks and billionaires (and after that crisis is covered, could pay for a national health care system), or that it would encourage investment and calm down markets. Those are all strong benefits, and absent the current Republican Administration bailout proposal would stand-alone strongly.

But the Republican Bush Administration is currently suggesting that we borrow $700 billion (or more) from China and Saudi Arabia and other countries and investors, add that to our national debt, and repay it with interest (making the actual cost over the next 20 years over $1.4 trillion). This is what Republican Herbert Hoover tried in 1931 when he first created the Reconstruction Finance Corporation (later totally reinvented by FDR) to bail out the banks in 1931. Hoover's RFC bailed out the bankers, paid off huge salaries in the banking and investment world, bought him a few months (maybe that's the real goal of the Bush/McCain Republicans now -- just hold things together until after the elections), but ultimately led to the failure within two years of virtually all the banks in the United States. The bailout failed.

Similarly, in 1998 the Japanese banks were facing a serious crisis of liquidity as the result of a bursting housing bubble in that country. The Japanese government used public funds to re-float a number of large banks that year, and it similarly failed. In one example out of dozens, in 1998 135 billion Yen were given from public tax funds to Ashikaga Financial Group, but the company limped along for a few years and in November of 2003 collapsed again, requiring a second infusion of a trillion yen from public coffers. And, as the BBC reported in a 30 November 2003 article ("Japan Bank Bail-Out 'A One-Off'"): "But experts warn that Ashikaga could be just the tip of the iceberg." Professor of Finance at Tokyo University Takehisa Hayashi said, "It will come as no surprise if we see another Ashikaga case in the near future." And they did.

Japan continues to limp along, as a result of bailing out banks rather than fixing structural problems. (At least the Japanese had enough savings to use their own money, instead of debt, to bail out their banks.)

So bailouts don't work, and never have. And they also have the side effects of damaging a nation's credit, sucking up its taxpayers resources, and (when done with debt) weakening its currency.

So let's go back to what we know works. After Hoover's 1931 bailout of the banks failed, FDR did a cold reboot of the entire system, putting into place strong rules to prevent speculative abuse. And he doubled the STET tax, both producing revenue that more than funded the Securities and Exchange Commission and further prevented a repeat of the speculative bubble of the 1920s that led directly to the Republican Great Depression.

We've done it before. We financed the Spanish American War and partially financed the Civil War, WWI, and WWII with STETs. We stabilized our stock market with a STET from the mid-30s to 1966, and other nations are doing it today. It's time to do it again, this time using the STET so tax Wall Street can pay for its own bailout.

Comments

[Baltotoast]

Logic of article seems flawed. Having a very, very low capital gains tax, as we do, has historically provided significant incentive for investments. A transaction tax would seem to be a rounding error, a nit, relative to the effect of differential capital gains from ordinary income. Perhaps the argument would be stronger if there was some actual financial analysis... And of course if the tax is high, then we will just make our capital markets even less competitive on a global basis. In case no one was watching, event before this mess we were losing significant market share to London, et al.

Speaking of which, Japan did not stagnate because of the bailout, it stagnated because the banks did not deal with their bad debt. That is not structural. Nice try, but factually inaccurate.

[Helen Bohenski]

Hon:

Once Hank Paulson gets this money to throw around to his friends on Wall Street, only the Ferrengi Rules of Acquisition will apply re: taxpayer reimbursement, specifically:
"Once You Get Their Money, Never Give It Back"

Helen

[takenawalk]

Thom I listen to your show all the time and I want to thank you for putting intellect into common sense - vice versa.. I find it amazing that all of a sudden these economists are coming out of the wood work saying they knew this was going to happen... - why in the hell did they not speak out years earlier ? I still say that the bail out is not needed but what choice do we have to stop it - If people don't learn from this and how our constitutional rights are being ignored - then I guess were doomed as a free democracy...I only see this bail out being done and no other avenues of getting our tax dollars back...We seem to only be able to do one thing at a time - your idea should be applied just as the bail out is both would help and one for sure (yours) would start returns on those monies coming back to us right right away....

[JBS]

Can you explain how these STETs would affect me?

Last statement I got, I *HAD* about $90,000 in a 401K mutual fund that became an IRA when I got laid off years ago - not sure how much I have now - I'm figurin' it's a whole lot less.

Basically it's money I can't touch, because I'd have to pay 20% penalty on top of Income Taxes. It's the proverbial long term investment that was supposed to be the "best" strategy; don't worry about daily ups and downs, stay in for the long haul and let the value grow. It already had a big "loss" several years ago when they got caught with their hands in the cookie jar, letting big banks and pension funds make late trades at the expense of the small investors, and all their funds nose dived.

HOORAY for the "ownership society"!

But, now I'm getting near the age when I can start drawing money out without paying that 20% penalty. I'll still have to pay income tax on it as I take it out, but I was figuring to try to roll it into some kind of dividend fund and only draw out the "interest". Preserve the capital for as long as I can.

So, how does that get taxed under the STET?

[SamEllison]

The free-marketeers will cry that the US will lose market share to other trading platforms.
With electronic trading the Wall St market would wither and die, so they would say.
Given this, it must be world-wide rules that are followed and the system is ripe for it.

[Helen Bohenski]

Hon:

You can buy the DXD in your retirement accounts to protect against market declines.
They go up when the market goes down and they pay a very handsome dividend. Viva the decline!

Helen

[Danny]

STETs would be rejected by the current mindset, Thom. They make too much sense. I hope some smart economists from the other side of the aisle are reading you, and considering the virtues of it. It makes sense to me.

[Stephen H. Dinan - Huffpost Blogger]

Brilliant idea - the single best idea, grounded in history, that I've seen in response to the current financial crisis. This truly gets at the root causes and charts a way forward that ends the speculative volatility that benefits no one in the long term but the financial elite.

Very nice work Thom!

[Popsforza]

The world was supposed to have ended by now. That was what we were told. If Hank Paulson"s two and one-half page plan for giving himself $700 billion and the unfettered right to use it as he saw fit wasn"t approved immediately, if Congress didn"t see the threat of imminent financial collapse and bow to the Administration yet again the country would suffer the worst economic meltdown since, well, ever!

The world was supposed to have ended by now. That was what we were told. The ad hoc approach employed by Ben & Hanky was insufficient to the task of staunching the bleeding from the wounds of deregulation and neglect. Congress must save the Wall Street investment bank, institutional investors , the bankers and CEOs or else all that is sacred, all that is of value, all that matters to America (i.e. wealth and those who possess it) would be reduced to rubble.

The world was supposed to have ended by now. That was what we were told. I woke up this morning and the world, and I were still here. They were wrong, Again. The crisis ship has sailed. Chicken Little and The Boy Who Cried "Wolf!" stand at the end of the pier not knowing what to do other than to continue their partisan, fear mongering.

Is our economy wrecked? No. Close. But not yet.

Are these the guys to fix it? No. Not even close.

[madhatter123]

I have written and rewritten everyone I can think of to express my anger and objection to the bailout. What happened to our democratic representation?

[JBS]

Bought and sold by Wall Street bankers.

[WASanford]

See my post just a few comments before yours.

[madhatter123]

So why is this deal still going through? I have written and re-written everyone I can think of in Congress that this bailout should not go through.
My husband, a numbers guy, has another idea. Let the taxpayers finance some of the lending instead of buying up the trash. That way, we buy a piece of the companies we help to finance. Then, we get some of the cream instead of the trash. If no one else will buy this stuff now, why should we?
Also, limit the CEO's compensation to a percentage of the DIVIDEND (remember those - they went away when the CEOs started giving themselves huge compensation packages) that the shareholders receive. The higher the dividend, the higher the bonus. This would stimulate the market and force the executives to be compensated accountably.

[schatsie]

Fabulous article and discussion.... we have been exposed to too many myths instead of facts such as these..

why is this man not on PBS???

[WASanford]

You can catch his show on Air America between 12:00 and 3:00 PM (Eastern time) Go to Air America's web site to find a station near you. I stream the show over the internet and either listen to it on the Air America stream or from his home station KPOJ in Portland, Ore. Try his show, you'll like it!

[joebaggadonuts]

But but but.... this plan doesn't give huge sums to the cronies running everything!

[WASanford]

Thom, thank you for your radio show, I listen to you whenever I get the chance. You always make good sense and I nearly always concur with you.

But sadly, I don't think that anyone is really interested in solving the problem if indeed there actually is one. All of our congress persons and senators unabashedly report that their phone calls, e-mails, and letters are running 100 to 1 against this "bailout," yet they continue trying to put a deal together. Why? They are sent to Washington by us to represent us, aren"t they? How can they ignore their constituents like that?

"This afternoon the Lou Dobbs show reported that the representatives and senators who are working on this "bailout," have received millions of dollars in campaign contributions from, you guessed it, the banking industry. These folks whom we elect don"t go to Washington to represent us; they go instead to represent their largest contributors. That"s not democracy. It"s a façade. And that"s the problem that WE have to fix.

We have the power to vote them out of office. They get away with what they"re doing when we fail to exercise that power. So call your representative and senators again. This time tell them if they vote for this giveaway, they"re not representing you and you will have to vote them out of office. And if they do this giveaway anyway then do it! Problem solved.

[WASanford]

Addendum; Senator Feinstein has responded to her constituents, or at least the estimated 50,000 who contacted her to express their feelings against this giveaway. She"s claiming that people are calling her because they cannot secure mortgages to purchase homes. Duh, home prices are in a precipitous freefall and no one has any way of knowing how much they will fall before this thing is over. How can anyone reasonably make a loan in these circumstances? This isn"t a symptom of restricted credit; it"s caused by an inability to determine equity. And why would anyone in their right mind want to buy a home in this environment?

If you want to understand what"s really going on, go to OpenSecrets.org and see how much the bailees* have paid the bailers to commit this crime against the American people.

Hint: Senator Christopher J. Dodd received $4,267,896 from the securities and investment industries, $1,439,672 from the insurance industry, and $1,262,691 from the real estate industry in the 5 years since 2003.

*My made up word.

(172 words)

[marissastar]

Why the heck is this idea not being taken seriously? It makes total sense on the surface --- am I missing something? Oh yes, I am missing the fact that it wouldn't perpetuate the enslavement of the average middle class taxpayer ---and that's the ultimate goal, isn't it?

[Egalitare]

It is being taken seriously. Wall Street seriously is in love with the volume generated by speculation, so this cuts into business.

Which means they've lost sight of what the market is for. The trade itself is more celebrated than the purpose of the trade.

[iyamchazz]

Very logical, but common sense after all is not a very common commodity.

[joebhed]

The restoration of a number of FDR-initiated methods is a prime idea, and the STET is a good starter.

But, it does not address the root cause of the problem.

Which is that all money created in this country is created as debt.

""Create an agency to fund the bailout, loan that agency the money from the Treasury, and then have that agency tax Wall Street to pay us (the Treasury) back.""

$700 BILLIONS, borrowed for 20 years, could produce an annual repayment of $50 BILLION or so.

The real problem here Thom: ALL NEW MONEY IS CREATED AS DEBT.

Borrowing $700 Billion, FOR ANY PURPOSE, requires the repayment annually of $50 Billion, more or less, OF NEW MONEY.

That NEW MONEY to make those payments is created as debt, and so on and on we go.

THIS IS THE SOURCE OF TODAY'S HOUSE OF CARDS.

The only solution is to QUIT RIGHT NOW issuing ALL NEW MONEY AS DEBT.

And begin right now to create ALL new money as DEBT-FREE, direct Treasury credits, just like Lincoln did when the Northern bankers refused to fund the war.

At some point, Thom, people are going to ask the deadly serious question - how did we get to have so much debt anyway?

The Federal Reserve Act of 1913.

Go to monetary.org and let's begin the greatest reform this country has ever known, and begin to restore true economic democracy.