See my comments in BF below-- In a message dated 4/22/2010 12:31:22 P.M. Pacific Daylight Time, [email protected] writes:
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. I donno about that even if, yes, banks would want to do exactly that. But anti-trust laws worked well in the past and there is no structural reason why they wouldn't be able to work well again. It would take active oversight and serious interest in doing so. That, in turn, would require modern-day incentives. Which, as I see it, is the major problem to address. What kind of incentives ? That, Horatio, is the crux of the matter. Incentives for both bankers and regulators. 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. What if increases over $ 5 million had to be made public, with the names of everyone who approved such packages broadcast / publicized ? > - 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. I could not agree more. -- 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/
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