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Regulating the Wall Street casino
Last week's post on taxing Wall Street trades prompted a heated discussion about the value (or lack of value) of certain Wall Street activities. Here's the sequel. A senator wants to use state gambling laws to regulate parts of the Street.
Washington state Democrat Maria Cantwell is particularly concerned about the $600 trillion derivatives market. She wants to repeal parts of a 2000 law that prohibited states from using their gambling laws for derivatives regulation. Cantwell isn't convinced Congress will do enough in this area, so she's hoping states might step in if Congress drops the ball. More from McClatchy:
There is precedent for state gambling laws being applied to financial transactions.
In the early 1900s, gaming establishments known as "bucket shops" allowed people to place wagers on whether a stock would go up or down without actually buying the stock. States banned such betting after the economic crash and the panic of 1907.
In 2000, Congress attached the Commodity Futures Modernization Act to a must-pass, 11,000-page omnibus spending package that provided funding for a handful of Cabinet departments and other federal agencies. The bill essentially deregulated the commodities markets and pre-empted the states from applying their "bucket shop" or other gambling laws.
The CBC's Washington correspondent assesses Cantwell's proposal this way:
It isn't likely her effort will fly, but her logic is sound. This country not only allows financial institutions to keep on making bets that could ruin everyone, it's actually been providing the money for some of the action.
Like sheep for the shearing. As my friend the PR pro used to say, you can make nice warm mittens out of most voters.
Ouch.
But on the subject of gaming laws and Wall Street, this proposal seems reasonable, unless you buy the idea that derivatives are "God's work."
Cantwell uses another term: "Casino Capitalism," which is why she wants to regulate via gambling laws.
Your thoughts?
$600 trillion derivatives market? No wonder our economy is in such a mess. It's so obscene with that much money moving around in circles and someone collecting fees every time it passes GO, and not creating value, by being invested in growth companies and job creation.
There should be 2 sets of taxes and fees for trading. One set for trading that (including flash trading and corporate raiding) redistributes existing value and places the economy at risk. This should be taxed and fee'ed heavily because these activities will benefit only a few and will cost the federal government to help those victims of these activities.
The other set for investing for the long term in growth of companies and job creation, which should be much less taxed because these activities will create new wealth and economic growth. These activities will pay for themselves as more people get jobs, ease the burden of federal programs, and create new taxpayers.
Those who have no idea what they're talking about should restrain themselves from even opening their mouth at all.....typically liberals fit into this category.
Options and futures contracts are technically "derivatives" and play an important role in balancing the overall marketplace.
All trading activities are regulated by the CFTC.
Sounds like another dumb Democrat politician who can't distinguish CDSs from other derivatives.
No subprime lending = no CDSs
Jonathan, you're correct that without the horrible loans, CDSs wouldn't have been a problem. But the use of these derivatives actually made the toxic loans all the more palatable to investors. And to say that the CFTC regulates all trading activities in this realm isn't even remotely true. The OTC market is extremely dark.
You all make some good points. Honestly if you tax these transactions it will kill them really so just prohibit them. It's hard to deny that derivatives can increase wealth for the economy and in theory make the markets more liquid. yes it may create jobs too especially in NYC where the big rollers in this spend their money (we hope) on hotels, restaurants and Yankees season tickets for their bimbos. Morally I find it reprehensible but maybe the answer is to close the individual tax loopholes Congress extends to the highest bidders. If these traders have to ante up more taxes owed by an increase in rates maybe that sends a message at least. If these risks like with swaps endanger our economy which it has, maybe some jail time for execs who look the other way is good. Rock on.
Rob
I hate that the media uses innocuous terms for financial instruments that are clearly akin to gambling. I understand that the industry coins the terms, but the media shouldn't parrot their disingenuous euphemisms, when simple terms that people understand are more apt.
For instance, we should call a "Credit Default Swap" what it is: a gamble or a bet. Calling it insurance is especially misleading. Since when can someone insure assets that a third party owns? Doesn't that give the insured an incentive in the destruction of the asset? This is not insurance; to be insurance, the purchaser of the CDS would have to own the underlying asset, which is not required; therefore, a CDS is nothing more than a bet against the underlying asset.
Since its "casino capitalism," why not drop the cryptic financial instrument descriptions (like "CDS") and call those instruments what they are: bogus.
Since it looks like this would be aimed at derivatives instead of the whole market, it could be a little less controversial than than the transaction tax.
The main problem I see is enforcing it with modern technology. For example, on-line brokers would have to update all of their Web sites to handle derivatives trades on a state-by-state basis.
I think it's always better to go with uniform national regulation. I'm getting kind of tired of Congress passing the buck to states because they don't have the fortitude to get the job done.
