Friday, May 26, 2017

Algorithmic Trading should be minimized with Financial Transactions Tax

This is typical NPR whitewash.

They don't give many details, I don't think he mentions the most famous Quant meltdown of all, LTCM, it was the biggest bailout-thing of any kind in history at the time, only to be outdone later.  It was a famous hedge fund based on the math from the "economics nobel" award winning formula by Scholes et al in the 1970's for figuring out the average math for commodities, therefore a fair way to price them.  So LTCM was based on the idea that if you just raise billions and borrow hundreds of billions more, and bet against all the commodity price levels that don't meet the math, and ride the average profits.  All the big money, smart people, and big banks believed it, or so they said.

Problem is, in all forms of gambling, there's always one more number, and when that comes up...  In this case, it was the post-Soviet meltdown of Russia, caused by the western backed (if not created) Yeltsin regime.  But all the big banks and everybody had bought into LTCM, so it had to be slowly "unwound" over months to prevent the entire economy from tanking.  A scraped profit for a few had put the entire economy at risk (and risk is a very big cost).

To the extent we even allow trading in stocks, bonds, and commodities, those trades should be taxed to discourage clever ways of "gaming" them which creates only zero sum gains at best, if not public losses in the aggregate.

The so called transaction tax.  That's the chief tool to crack down on excessive trading and re-trading, because small percentages add up when you are doing trillions of trades to gouge a profit.

Right now we leavy heavy and unfair 8% tax on "sales" of ordinary commodities, like clothes.  But we refuse to levy any tax whatsoever on trades of stocks and commodities.  In the 1920's, there was a 0.02% tax on stock trades, but today there is none in the US.  There used to be such a tax in London, I'm having some trouble verifying that right now.  It turns out one major reason for Brexit was to dodge the proposed EU transaction tax, which would be 0.1% on stocks and bonds, and 0.01% on commodities.  If London had such a tax, and I believe they did at some time, it was somewhat smaller than that.  So you can see now why all the money people wanted to leave the EU.  I did not know this until right now.

We should tax stock trades and clothing exchanges the same, and everywhere in the country.  0.1% seems like a good rate to me.

Anyway I believe most tax revenue should come from taxes on large wealth and income flows, and not as much on sales and trading--which weigh down the economy at greater expense to the poor.  But 0.1% seems ok.

A financial transactions tax was promoted by Sanders and Warren, but is certain never to get passed and signed by the current representatives.  We could only test our democracy by replacing anyone not like Sanders and Warren, then would our representatives still follow the will of the banks?  I would hope not, not that I know for sure.  But we certainly cannot expect anything until we do replace all the representatives not like Sanders and Warren.

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