Nurses Support Financial Transactions Tax
by Linda Beale
Nurses Support Financial Transactions Tax
Perhaps the JPMorgan Chase debacle has caught enough attention to alter the debate. JPMorgan of course claimed to be entering a type of hedge that would be permitted under the Dodd Frank reforms. ( Apparently there were hedges on overall portfolio positions, and then those hedges were themselves hedged writing credit default swaps.) The authors of the legislation beg to differ, noting that the statute was drafted to permit hedges of specific asset but not portfolio-wide heding practices that become almost indiscernible from speculative “bets” on the direction of markets. Perhaps there will be one good result of the $2 billion plus and growing loss that JPMorgan encountered on its complex trades–regulators may finally quit paying so much attention to the banks’ “trust our judgement” lobbies and start making it less possible for banks that get federal support to bet with other people’s money in big ways that can cause systemic risk. This seems to be a no-brainer–we need to more tightly regulate the activities of commercial banks and prevent them from gambling with huge bets that can swing the marketplace and place the entire system in jeopardy. That means banks will need to accept more staid profit scenarios–and the compensation for managers and traders should be downsized as well. They made fortunes out of wrecking the economy. They should be content with reasonable compensation when they do good jobs, and salary cuts–or being fired–when they don’t.
Another action that might help to calm the too-reckless bankers and their desire for super-high profit margins would be to enact a financial transactions tax. It seems that lots of GOP candidates and economists think sales taxes make sense for ordinary folk–from Herman Cain’s 9-9-9 plan (that would eventually convert to a flat national sales tax) to the GOP push to cut income tax rates in states in favor of sales taxes. But when it comes to a financial transactions tax, all of a sudden the same folks seem to change their minds, suggesting that such a tax on financial transactions would discourage investment in the capital markets and be bad for America.
There are some singificant factors in favor of a financial transaction tax that would reap a few pennies from each transaction. First, it would raise much needed money from a group that generally can afford the cost. Second, it could act to discourage flash trading, where computer-run programs arbitrage the markets in a way that only those with the sophisticated programs can take advantage, leaving ordinary folk out in the cold. Third, it could be one factor in returning everyone to more prudent approaches to investment–investing for the long term, rather than profiting from arbitraging tiny differences in multiple trades.
The National Nurses United organization has taken out a full page ad in the New York Times in favor of a financial transactions tax. Here’s part of the text:
“I pay a sales tax every time I make a purchase. We all do–but not the financial services industry, the bankers who sunk [sic] our economy. A financial transaction tax would cost banks and investment firms just pennies on the dollar for transactions such as stock trades, like a sales tax. Those pennies would add up to create jobs and fund vital programs and services in this country–education, healthcare and rebuilting our deteriorating infrastructure. The big banks will never miss this money, while the revenue generated will provide a better life for millions of Americans. “
Maybe the nurses are on to something. But don’t look for Congress to act on this anytime soon.
crossposted with ataxingmatter
Please, do tell me, why do you republish this woman’s maunderings?
I know, I know, you and I have differing opinions about the world but this stuff is worse than Amanda Marcotte before she learned to write.
“It seems that lots of GOP candidates and economists think sales taxes make sense for ordinary folk–from Herman Cain’s 9-9-9 plan (that would eventually convert to a flat national sales tax) to the GOP push to cut income tax rates in states in favor of sales taxes. But when it comes to a financial transactions tax, all of a sudden the same folks seem to change their minds,”
Yes, because a consumption tax on final transactions is different from a transactions tax on intermediate transactions.
“First, it would raise much needed money from a group that generally can afford the cost.”
No it wouldn’t you fool. Haven’t you ever hear of the incidence of taxation?
“Second, it could act to discourage flash trading, where computer-run programs arbitrage the markets in a way that only those with the sophisticated programs can take advantage, leaving ordinary folk out in the cold.”
That’s not flash trading. That is high frequency trading. The two are indeed different.
I really, really, do not understand why you repeat this woman’s maunderings here. I disagree with all of you almost all of the time: but you are all interesting and informed.
So why this tripe?
NNUS is a socialist trade union, of course they want more taxes.
Tim:
Hmmm, a tax on Wall Street derivative transactions is gonna impact me? I am all ears for this one. We could do without CDS and naked CDS insuring riskey tanched CDO rated triple A by S&P, etc. It would raise considerable revenue on non-labor intensive investments.
Like “Showdown in Chicago” which I attended for Angry Bear and Naked Capitalism and also Ocuppy Wall Street, the protest is well worth while to publicize. Maybe more people will begin to protest.
Gene:
You think we should black list them and wire tap those nurses?
“Hmmm, a tax on Wall Street derivative transactions is gonna impact me? I am all ears for this one. We could do without CDS and naked CDS insuring riskey tanched CDO rated triple A by S&P, etc. It would raise considerable revenue on non-labor intensive investments. ”
CDO’s rarely trade. This was in fact one of the problems with them, they tended to get sold once and then warehoused. A CDS only trades once, by definition.
An FTT has very little impact on things that rarely trade. For, of course, it is a tax upon the trade itself.
Where an FTT does have a big effect is upon futures, options, currencies and stocks. Things that are often traded. You’ll note I hope that none of those four markets are the cause of the current financial woes?
So an FTT would affect the things that are not the cause of our current problems and not affect those which arguably are.
Doesn’t sound like a very good plan to me.
We can also go further. The EU Commission released a large report on the effects of an FTT. The net effect would be to *shrink* GDP by some 2%. We really want to chrink GDP in hte current circumstances?
Tim, I agree with much of what you said here. But a tax on high frequency trading would be designed not to raise revenue but to “throw sand in the wheels” and effectively could end high high frequency trading altogether. If I understand the data correctly, high frequency trading operates, in effect, as a tax on the market that is levied against the rest of us who are investors, particularly those who invest through large institutions that use common algorithms to effect their trades.
I think we need to be better informed about hedges. Hedges by definition imply a high probability of loss, because it is in essence insurance. You hedge driving risk with car insurance, and if you have no claims you lose your premiums. Same is if I buy a put option on the S&P 500 to hedge my long position. I may take a loss on the hedge, if a drop in the S&P is not big enough.
Now what is happening on Wall Street, is hedges are structured in a way to hedge, but with a hope the hedge may have a high probability of paying off. This is possible by taking a higher probability hedge such as writing an option to help offset portfolio losses, and enhance gains – write a call versus buying a put. Then you have to look at the leverage of the hedge etc.
This is why Dodd Frank is flawed with the Hedge – i’ll call it a loophole.
Technically, JP did nothing wrong based on the weak structure of the regulation, which is not even final. The question is how will one differentiate hedge structures and speculative trading with an intent to profit and not hedge. What if the bank intends to hedge and is trying to profit.
Last question is if the law’s intent should be to just limit the size of the hedge?
Mcwop –
Yes – Wall Street attempts to structure hedges that do not have a correlation of -1. For example, I may go long the VIX (volatility index) as a hedge against the S&P500 declining. Usually the VIX appreciates when the S&P500 declines, but there are some instances when the S&P500 will not decline, or not decilne very much, and the VIX will increase a lot (e.g., N. Korea attacks S. Korea).
A hedge with a correlation of -1 has no value whatsover. You lose money on the hedge as your original idea appreciates and gain money on the hedge as the original idea depreciates. Doing it with options introduces leverage and increases the correlation from -1, but is still a large negative number.
JPM had a version of the VIX/S&P trade on, which introduces basis risk because it’s possible for the VIX to depreciate while the S&P appreciates – causing one to lose money on the hedge, but more problematic would be for the VIX and S&P to depreciate at the same time – which is a analogous to what happened to JPM.
I see absolutely no reason to prevent these types of overlay portfolio hedges – especially since there may be no tradeable asset that serves as a speciific hedge to the asset in question. For example, let’s say I wanted to hedge my home’s value. I could find a Case-Schiller index for the US or my city, but it would be very difficult to find a counterparty to trade specifically against my individual home.
As an aside – agree wholeheartedly with Tim. The OP is continually demonstrates a poor understanding of financial markets and overlays a very strained and cartoonish view of the industry. As for this specific post, who cares what nurses think about financial transactions. If the Flight Attendants union thought that College Professors shouldn’t get tenure, is that newsworthy or even worth discussing?
Mcwop –
Yes – Wall Street attempts to structure hedges that do not have a correlation of -1. For example, I may go long the VIX (volatility index) as a hedge against the S&P500 declining. Usually the VIX appreciates when the S&P500 declines, but there are some instances when the S&P500 will not decline, or not decilne very much, and the VIX will increase a lot (e.g., N. Korea attacks S. Korea).
A hedge with a correlation of -1 has no value whatsover. You lose money on the hedge as your original idea appreciates and gain money on the hedge as the original idea depreciates. Doing it with options introduces leverage and increases the correlation from -1, but is still a large negative number.
JPM had a version of the VIX/S&P trade on, which introduces basis risk because it’s possible for the VIX to depreciate while the S&P appreciates – causing one to lose money on the hedge, but more problematic would be for the VIX and S&P to depreciate at the same time – which is a analogous to what happened to JPM.
I see absolutely no reason to prevent these types of overlay portfolio hedges – especially since there may be no tradeable asset that serves as a speciific hedge to the asset in question. For example, let’s say I wanted to hedge my home’s value. I could find a Case-Schiller index for the US or my city, but it would be very difficult to find a counterparty to trade specifically against my individual home.
As an aside – agree wholeheartedly with Tim. The author continually demonstrates a poor understanding of financial markets and overlays her cartoonish view of the industry. As for the headline to this specific post, who cares what nurses think about financial transactions. If the Flight Attendants union thought that College Professors shouldn’t get tenure, is that newsworthy or even worth discussing?
whether linda has the technical nature of the trades down pat isnt the issue here; the purpose is to tax a negative externality, what paul krugman called “financial tricks of little or no social value”…most economists would favor such a pigouvian tax, even greg mankiw, romney’s economic advisor…
aside to dan: dont you have a comment policy that prohibits insults and ad hominen attacks?