Quote from benwm:Whenever a well-meaning, but misguided, do-gooder suggests adopting a Tobin tax on fx, or other financial transactions, trump by proposing instead a Goodhart tax on each e-mail addressee. We might even win.[/B]
How about extending the simple heuristic Reg-T-like leverage limits to
other markets with similar volatility? Especially to the market, where
overleveraging caused the 2008 'credit crunch' crisis?
Why not focus our regulatory zeal on those lower-middle-class 10:1
leveraged house market speculators who were the primary source of the
financial contagion? What exactly is the difference between:
property_market_speculators_leverage = 1 / (1 - loan_to_value_ratio)
and the good old:
stock_market_speculators_leverage = stock / net_liquidation_value
Well, probably this: the latter has been capped in the US at 2:1 since
the 1940's, whereas the former is potentially unlimited. E.g. Fannie Mae
permits 1 / (1 - 0.8) = 500% (5:1) leverage on a painfully illiquid
house market with margin-call-liquidation periods measured in months. On
the other hand, if you try to buy DIA or FXE shares with similar or
lower volatility (and liquidation period measured in milliseconds), you
cannot exceed 200% (2:1) overnight due to the good old (literally)
Regulation T.
And if all animals were equal, then Tobin tax would cover property
market transactions as well. The proponents would feel on their own skin
how exactly 'tiny' would a 1% transaction tax be when applied to a 10:1
leveraged bet (such as a mortgage). (Answer: the Government would take
20% of your cash deposit, even before any market losses multiplied by
10). And now a surprise: the capital-efficient low-volatility currency
markets permit 100:1 leverage. So Tobin-tax them with a 1% rate and you
get... a daylight robbery, whereby the IRS confiscates the entire cash
deposit the customer had (twice, if the customer wants to close the
position).
But no, every manual worker has a right to home ownership, so labour
unions would fight a tax on property market leverage tooth and nail,
which is why in this particular market leverage will be tagged socially
useful, and we shall silently exempt it (because it is not a 'financial'
transaction, at least the US Rep. DeFazio says so).
The IMF knows that they have to tax someone, because their (J.P.
Morgan's) models of bank capital requirements fail to account for
volatility mean-reversion, allowing the most aggressive risk-taking to
go on precisely the very top of any bubble, and constraining bank
lending only *after* the fact (i.e. the crash), when credit is most
badly needed for economic recovery. Spain flauted these not exactly
common-sensical regulations and saved some 'excessive' reserves for lean
years, and now their banks can afford to take over British ones, which
played by the Basel II rules...
So to sum it up, a 0.25% Tobin tax on SPY traders (or rather on their
accredited investors - mostly pension funds) will obviously address all
root causes. Rather than merely creating a 10:1 preference for ES
futures trading (because there the Tobin tax rate proposed in the US is
10 times lower, 0.02%).
(a letter sent to mailto:IMFConsultation@imf.org )
BTW,
http://www.imf.org/external/np/exr/consult/2009/index.htm should start displaying some of these messages after January 1.
