Friday, August 28, 2009

Is this better than financial market regulation?

We should put sand in the wheels of the market

A big problem in finance has been the systemic risk that's due to the growing gap between gross and net exposure in the securities and derivatives markets. Consolidation in settlement and clearing systems is reducing that gap = lower risk = lower capital requirements = cheaper trading. This consolidation makes it easier to levy transaction taxes. Are such taxes desirable? Well, banks make most profits in socially useless markets where there's excessive trading, churning and volatility, and acquire undue political influence from those profits. Could tax on financial transactions steer more bank activity towards the real economy and pare down finance so that its size and profitability is no longer out of proportion to its role of facilitating the growth of that economy?

Posted by icarus @ 06:12 PM (1097 views)
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5 thoughts on “Is this better than financial market regulation?

  • Just google the FT title if the link doesn’t get you the whole article.

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  • And how exactly are ‘we’ meant to do this?

    The Bank of England isn’t interested in whether banks are socially useful, only the money they make and the debt they create. Ditto the government.

    Where exactly does the author Avinash Persaud suggest that the impetus for this kind of reform come from?

    Oh. He doesn’t.

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  • mark wadsworth says:

    This is what’s called tackling symptoms rather than causes.

    While I stick to the view that land value tax is the least bad tax, an even more fundamental point is that the root cause of all credit bubbles are asset price bubbles; and the root cause of asset price bubbles is artificial scarcity/non-price rationing. Which in the context of the UK means NIMBYism etc. So really, all we need to do is wind the clock back to the 1950s and build more houses, every year, year-on-year.

    Having weighed up the pro’s and con’s, it appears that building more state-owned housing* is better than building more housing for owner-occupation. That’s because as soon as you have owner-occupiers, you have NIMBYs and the whole cycle starts again. As long as you have more social tenants, you have more people who concentrate on the finer things in life – like earning a bit more, spending more time with their friends and family, down the pub etc. If you lose your job, so what, you just stay where you are; if you get a really good job and are prepared to take the risk, then by all means by yourself somewhere nice, but don’t expect the whole politico-economic system to revolve around your narrow interests.

    * Not just ‘social housing’ in the narrow sense of ‘where losers live’.

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  • tenyearstogetmymoneyback says:

    Refereing to Marks comments at 3.

    Anyone know who owns all the rented housing in Germany ?

    :- Duncan

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  • @mark w – The UK housing bubble is part of a series of bubbles that have blown up since 1980s financial liberalisation generated a massive amount of own-account trading by Wall Street banks and their hedge-fund, private-equity, SIV etc. offshoots. Trading in real and financial assets in order to generate and exploit price changes took off. Wall Street generated bubbles in emerging east European stock markets in the 1990s, make big spec. profits and withdrew, bursting the bubbles. Next came the dotcom bubble, from which Wall Street got out fairly well and left others, especially some European insurance companies, to take the hit. Then housing, and perhaps energy or some emerging market were next on the agenda.

    That’s one reading of what’s happened. Another, not necessarily contradictory, reading is that central banks of China and other foreign countries held $3 trillion + or – of surplus US dollars (not necessarily because of Asian ‘propensity to save’) and, given US reluctance to allow foreigners to buy its industry, housing was the only asset class big enough to absorb that kind of money.

    There are other views. The point is that the roots of the global housing bubble are at this level, not at the level of housebuilding in any particular country. Banks do have a lot to to with it and that’s one of the places where the problem needs to be tackled.

    paul – you’re right – the banks are not going to roll over and die. Since you made your point in general terms I’ll reply in kind. No power is permanent, no defence is impregnable. People are mightily fed up with banks right now, so there’s potential impetus there. AP’s point about the increased capacity to net out securities and derivatives exposures is surely an interesting one – it weakens the too-big-to-fail argument. It would mean that e.g. the collapse of a Lehman Bros would be a lot less catastrophic.

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