Friday, August 28, 2009
Is this better than financial market regulation?
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?