New Insights into Preventing Wall Street Meltdowns and Reducing Debt

PhineasPhineas Baxandall in The Huffington Post:

This week's news made the path for great idea a lot clearer. The international agreement in Basel this weekend introducing mild controls on financial firms is proof that a bolder proposal to reduce instability by taxing speculation is an idea whose time has come. Further urgency came this week with yesterday's AP-CNBC poll showing that “Wild gyrations on Wall Street have made U.S investors leery of buying individual stocks and skeptical that the market is a fair place to park their money.”

For decades various economists have proposed a simple way to make the American financial system more stable. As the 2008 Wall Street meltdown reminds us, financial markets become more volatile when huge volumes of money slosh across financial markets seeking tiny margins on high-volume trades. Nobel Laureate economist and presidential adviser James Tobin proposed in 1972 the first version of this simple solution currently before Congress. By placing an infinitesimal fee on short-term financial trades, real productive investments won't be discouraged; but purely speculative trades seeking tiny gains will disappear because they'll no longer be profitable.

The simple elegance of a speculation fee has captured the imagination of a broad swath (PDF) of world leaders and economists (PDF) because it would dry up the financial waves that disrupt markets and can devastate communities (link). Government budget writers have also been drawn to the promise of raising billions in tax revenue while improving capital markets. A tax of a measly quarter ($0.25) per $100 would not discourage investors, but would raise an estimated $150 billion annually that could be dedicated to funds against future financial meltdowns, paying down debt, or other needs. Dozens of far-sighted members of Congress have even lined up behind Rep. DeFazio to introduce legislation to create a “Financial Transaction Tax” that would exempt smaller middle-class investors and pension funds.

Wall Street doesn't like this idea.