Perhaps the JPMorgan Chase debacle has caught enough attention to alter the debate. JPMorgan of course claimed to be entering a type of hedge that would be permitted under the Dodd Frank reforms. ( Apparently there were hedges on overall portfolio positions, and then those hedges were themselves hedged writing credit default swaps.) The authors of the legislation beg to differ, noting that the statute was drafted to permit hedges of specific asset but not portfolio-wide heding practices that become almost indiscernible from speculative "bets" on the direction of markets. Perhaps there will be one good result of the $2 billion plus and growing loss that JPMorgan encountered on its complex trades--regulators may finally quit paying so much attention to the banks' "trust our judgement" lobbies and start making it less possible for banks that get federal support to bet with other people's money in big ways that can cause systemic risk. This seems to be a no-brainer--we need to more tightly regulate the activities of commercial banks and prevent them from gambling with huge bets that can swing the marketplace and place the entire system in jeopardy. That means banks will need to accept more staid profit scenarios--and the compensation for managers and traders should be downsized as well. They made fortunes out of wrecking the economy. They should be content with reasonable compensation when they do good jobs, and salary cuts--or being fired--when they don't.
Another action that might help to calm the too-reckless bankers and their desire for super-high profit margins would be to enact a financial transactions tax. It seems that lots of GOP candidates and economists think sales taxes make sense for ordinary folk--from Herman Cain's 9-9-9 plan (that would eventually convert to a flat national sales tax) to the GOP push to cut income tax rates in states in favor of sales taxes. But when it comes to a financial transactions tax, all of a sudden the same folks seem to change their minds, suggesting that such a tax on financial transactions would discourage investment in the capital markets and be bad for America.
There are some singificant factors in favor of a financial transaction tax that would reap a few pennies from each transaction. First, it would raise much needed money from a group that generally can afford the cost. Second, it could act to discourage flash trading, where computer-run programs arbitrage the markets in a way that only those with the sophisticated programs can take advantage, leaving ordinary folk out in the cold. Third, it could be one factor in returning everyone to more prudent approaches to investment--investing for the long term, rather than profiting from arbitraging tiny differences in multiple trades.
The National Nurses United organization has taken out a full page ad in the New York Times in favor of a financial transactions tax. Here's part of the text:
"I pay a sales tax every time I make a purchase. We all do--but not the financial services industry, the bankers who sunk [sic] our economy. A financial transaction tax would cost banks and investment firms just pennies on the dollar for transactions such as stock trades, like a sales tax. Those pennies would add up to create jobs and fund vital programs and services in this country--education, healthcare and rebuilting our deteriorating infrastructure. The big banks will never miss this money, while the revenue generated will provide a better life for millions of Americans. "
Maybe the nurses are on to something. But don't look for Congress to act on this anytime soon.