Hi Billy, My take...
On Apr 22, 2010, at 12:06 PM, [email protected] wrote: > It makes for great political theatre and talk show fodder, of course. The > politicians get to huff and puff and pretend they're getting tough on the > "fat cat" bankers -- as President Obama surely will in a major speech in New > York today -- even as they continue to play footsie with their benefactors. Largely true, but also largely irrelevant, I think. Attacking politicians and financiers are both easy. > In this battle between the high-powered, well-heeled interests of Wall Street > and the increasingly disenchanted, homeless and jobless folks on Main Street, > I'm betting the suspender brigade will prevail yet again. > > That's not to say there aren't some fairly simple, straightforward fixes for > the very serious regulatory gaps that got Wall Street into deep doo doo in > the first place. Here are three simple ideas that could have been included in > the financial reform package, but weren't: > > - Banks that are too big to fail are clearly too big, period. If the U.S. > won't allow its financial giants to go bust -- a principle that's hard to > dispute, since the assets of the six largest U.S. banks equal more than 60 > per cent of GDP (Gross Domestic Product) -- they should be forced to spin off > divisions or break up, just as Standard Oil and American Telephone & > Telegraph did in past decades. > > So set a cap on bank-asset size, and force banks that exceed that limit to > shrink. One U.S. financial writer suggests a cap of $400 billion, or about > 2.5 per cent of U.S. GDP. Assets above that benchmark would be taxed. > > Wall Street hates this idea, naturally, and argues it's either unnecessary, > or too tough to pull off. > > Nonsense. All those math geeks who created CDOs and God-knows-what-else are > surely smart enough to figure out how to do an IPO. This is a popular measure, and would avoid this specific problem of "too big to fail." Unfortunately, the unintended consequence of this is likely that the federal government would have to get *more* intrusive, to provide the sort of AIG-like insurance that the private sector used to provide. Worse, many banks would end up making other arrangements in order to gain "effective scale", leading to a more tangled version of what we have to today. It wasn't purely ego that drove massive bank consolidation, it was market forces. And stopping a symptom without understanding those forces is likely to make things (eventually) worse. > - Annual executive compensation -- whether in the form of cash or stock -- > should also be capped at a clearly defined level, to discourage the > inordinate short-term risk-taking that's so pervasive on Wall Street. > > Corporate execs and compensation consultants -- who get paid by, uh, the same > execs they advise (no conflict there, I'm sure) -- insist that it's > incredibly complex to measure fair pay, and a pay ceiling would be hopelessly > simplistic. > > Hogwash. Here's a simple way to address that. Set a yearly pay limit of, say, > $5 million -- as one U.S. financial writer suggests -- and require > shareholders to approve any packages above that level. If the execs perform, > and shareholders are duly rewarded, higher pay shouldn't be an issue. Purely feel-good measures, wouldn't change anything. Shareholders already routinely approve riduculous pay packages, and short-term thinking is a systemtic issue that one cap won't fix. > - Wall Street investment houses like Goldman Sachs don't make their huge > profits by lending money to small and mid-sized businesses. That's left to > the commercial banks. > > Goldman is a trading juggernaut. Through its so-called prop trading > activities, it moves huge blocks of stock in the blink of an eye, making tiny > profits on enormous volumes. Its high-speed electronically-driven trades give > it a huge edge over regular retail investors. > > None of this adds value to the real economy, or helps regular businesses to > expand or hire staff. It's a giant money-sucking mechanism that benefits a > privileged few. > > Solution: Impose a small tax on such transactions. > > "You can't make it illegal, because market-makers have always used their > order-flow knowledge as part of their business, but you can tax it enough to > make it unprofitable," argues Martin Hutchinson of the Permanent Wealth > Investor. > > "The margins on this business are tiny, so a tax of five cents per share on > equities and equivalent amounts on bonds and derivatives should be ample, and > one cent would probably be enough." > > As a further advantage, such a tax would "tilt the playing field" away from > program trading, and back toward more socially and economically useful > activities, he says. > > Now, that's what I'd call a revolutionary concept. This one I actually like. We do need to introduce more friction into finance, if only to remind them they exist to serve the "real" economy. -- Ernie P. > > [email protected] > > _______________________________________________ > Centroids mailing list: [email protected] > http://radicalcentrism.com/mailman/listinfo/centroids_radicalcentrism.com > Archives at > http://radicalcentrism.org/pipermail/centroids_radicalcentrism.com/ _______________________________________________ Centroids mailing list: [email protected] http://radicalcentrism.com/mailman/listinfo/centroids_radicalcentrism.com Archives at http://radicalcentrism.org/pipermail/centroids_radicalcentrism.com/
