We Need a Financial Transactions Tax Before It's Too Late
By Matt Taibbi, Rolling Stone
04 July 18
As the country sits atop a giant debt-bomb, measures are needed to rein in
excess speculation
Sunday's CNN Money headline was terrifying:
"The $6.3 trillion debt binge: American companies have never owed this much"
Thanks to low interest rates, Trump's tax cuts and a financial unsafe-sex
atmosphere where regulatory oversight is almost nonexistent, companies are
borrowing massive amounts and encouraging waves of stock buybacks, sending
an already insane market to worrisome new heights.
That $6.3 trillion debt bomb upon which corporate America is sitting is now
bigger than any in history, eclipsing even pre-2008 levels. The national
"economic miracle" Trump keeps lauding is - like his own financial empire -
resting on a bed of borrowed cash.
For more than a year, the soaring stock market - and particularly the
seemingly unsustainable performance of tech stocks - has led to whispers of
a new speculative bubble.
Maybe it won't all blow up this time, but it sure feels like we should pump
the brakes. This would be a great time, for instance, to reinstate the
doomed Glass-Steagall act, whose 85th birthday passed noiselessly late last
month. The law curbed speculation for generations by separating commercial
and investment banking.
The problem is, the current administration - and a bipartisan group of
Senators - are determined to go the other way, having just rolled back more
provisions of the already-weak Dodd-Frank Act. Returning to Glass-Steagall,
which was designed to prevent banks from over-creating bad loans and pumping
them into the economy via investment banking operations, seems like a
distant fantasy.
A new approach to reining in speculation is needed, which is why the tiny
glimmer of good news from late last week was so welcome.
On June 27th, Sen. Kirsten Gillibrand (D-NY) became the first co-sponsor to
S. 805, the "Inclusive Prosperity Act of 2017," originally introduced by
Bernie Sanders.
The bill is the American version of a Financial Transactions Tax, a plan to
raise revenue and curb speculation by attaching micro-taxes to financial
transactions. The E.U. moved toward an FTT plan for 11 Eurozone countries in
2013.
The Sanders camp trumpets the plan as a money-raiser - a way to pay for
big-ticket social programming like free college tuition. But it also has a
huge safety component.
The Wall Street version of a sin tax, even the tiniest financial
transactions surcharge could help rein in greed orgies just enough to keep
the economy from exploding. In the past, these micro-taxes have been
envisioned as a way to pay for the inevitable bailouts in our increasingly
deregulated economy.
But if you really want to know why a financial transactions tax is needed,
all you have to do is read Guy Lawson's Octopus, a crazy story of a master
con-man named Sam Israel who ends up being conned by even worse con-men.
The book is significantly about the evils of the financial-ization era, when
Wall Street learned it could make bigger and faster profits on financial
transactions than it could by nurturing the underlying brick-and-mortar
economy.
In the early part of the book, Lawson describes how Israel and his former
boss, Fred Graber, used to overwhelm the markets and make easy risk-free
cash by using high volumes of transactions to move a stock price. They
called this "painting the tape." As Lawson writes:
The agribusiness giant Archer Daniels Midland was one of the stocks Graber
fooled with relentlessly. To paint the tape on ADM, Graber and Israel would
call eight different brokers and put in buy orders simultaneously to run up
the price - at a time when Graber was holding lots of the stock ready to
sell into a rising market.
The practices Lawson describes took place in the Seventies and Eighties.
Even back then, a couple of determined goons with telephones could do a lot
of damage. These days, supercomputers can exponentially increase the scale
of this breed of skullduggery.
For instance, the Israel-Garber "painting the tape" scheme would today be
called "spoofing" or "momentum ignition," and would invariably involve
computers placing massive numbers of buy or sell orders.
In a computer-dominated trading environment, the aim isn't just to move the
stock with your own purchase power. The idea is also to trick other
algorithmic traders into mass-dumping or buying their holdings.
Using this technique, a single slick operator can generate huge volumes of
transactions often without having much or even any skin in the game.
All of this activity has no real economic purpose, other than to move the
"tape" for an instant or two and make some over-moussed Wall Street parasite
a bunch of unearned money.
A secondary problem is that even in the rare case that authorities get
around to identifying and outlawing things like this, they tend not to be
able to really do much in the way of enforcement.
For instance, the Dodd-Frank Act that Trump is so determined to wipe out
specifically outlaws spoofing, as authorities (among other things) were
responding to the infamous "flash crash" of May 2010. But the line between
illegal spoofing and legal "momentum ignition" is "nuanced," as the
Congressional Research Service put it a few years ago. It's very hard to
detect and prove.
There are countless other schemes HFT experts have cooked up over the years,
from "order anticipation" to "layering" to modern variants on the old "wire"
con from The Sting, in which traders use computers to take advantage of
infinitesimal time differences in the reporting of price changes.
The situation is similar to steroid use in sports. Even if authorities had
the manpower and the inclination to police the markets properly, they'd
still be years behind the innovators.
High-frequency trades currently make up between 50 and 60 percent of all
stock transactions in the U.S., which isn't inherently bad, but it's not
necessarily a positive thing, either. For sure, there's a ton of
economically useless activity buried in that percentage.
A financial transactions tax kills three birds with one stone. It raises
money, provides a major disincentive to socially useless volume-based
trading and decreases dangerous speculative volatility.
Late last month, CNN polled American feelings about the economy. The network
found 66 percent of respondents think current economic conditions are good,
while 59 percent think they will still be good a year from now. It's the
second time in a row pollsters found such a gap between current and future
expectations:
Those numbers sound pretty good, but combined with a poll taken in November,
that 7-point difference between confidence in the current economy versus
where people think it will be in a year is something never seen before in
nearly two decades of polling. CNN has asked that pair of questions 57 times
since 1997, and has found a gap like that only twice - never more than four
points, and never in consecutive polls.
After a pair of huge corrections following the dot-com and subprime bubbles,
Americans are wary of tumescent stock market numbers. They're catching on
that there's a difference between growth and gambling.
A financial transactions tax might help incentivize Wall Street to once
again emphasize true long-term investment, as opposed to spending all day
moving piles of money around. As with Medicare-for-all, it might take a
while for Americans to accept an idea already embraced in Europe.
Still, a senator from New York signing on to an idea so universally despised
by Wall Street is worth raising an eyebrow or two. Hopefully it leads to
something more, perhaps even before it's too late.
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