Monday, July 27, 2009

Superfast Financial Sleaze

A New York Times article published in the last few days details how deep-pocketed stock traders, a la Goldman Sachs and many hedge funds are using supercomputers to game the market system. They have tricks like buying and selling a stock within milliseconds or executing a buy order and then canceling it within a few milliseconds. If you can buy and sell the same stock several times in one minute and make even a minute profit on every share on every sale, then the moolah starts adding up very quickly.

Thus a part of Goldman Sachs’ recent record quarterly profit was derived from such super-fast trading. It is estimated that high-frequency traders earned $21 billion in profits last year. Moreover, a handful of them are now responsible for half of all trading on the NYSE.

Without going into the details of supercomputer based automatic trading, which would melt my brain if I actually learned enough to explain them and confuse you to tears if you tried to understand such, here is the essence: they are skimming income from everybody else in the business and diverting it to themselves, the superwealthy.

At any rate, that’s what the great minds of finance are using their wisdom for. Forget actually creating something of value, this is about making money, pure and simple. Moreover this is about a kind of speculation which milks the society for the benefit of the favored few without a shred of corresponding benefit for anyone else. I understand that the people who are reaping the windfalls - and their mouthpieces and defenders in the business community - can spout their reasons and rationales for the underlying value of their machinations but we know what that’s worth.

I brought this story up as a perfect example of the importance of taxing stock transactions. Obviously the scam would be instantly shut down if even a miniscule tax were levied; the stock market could then begin to return to what’s supposedly its main purpose; investment. There is absolutely no reason to encourage that type of speculative activity; it serves no good purpose whatever. Moreover, there is no investor who is in it for the long run who would be hurt by paying a one percent tax on their stock purchases. And that one percent would bring in a very large and urgently needed amount of money. If you have the money to invest in stocks you obviously have the money to support government.

Representative Peter DeFazio of Oregon, arguably one of the most liberal members of congress, has proposed a .02 % tax on some stock transactions. As a testament to how warped the system has become his proposal has brought a howl of protests from affected parties, who, after all, since they own the government, will easily quash his proposed tax.

This is similar to Obama wanting to add an income tax surcharge to the top one percent of income earners – those above $280,000 per year – to pay for his health care plan. The protests were so vociferous, that number has now been changed to $1 million, leaving a large revenue shortfall.

And lets not forget that capital gains are taxed at a very low rate compared to income that comes from actually working for a living. Warren Buffet, one of the world’s richest people, has famously remarked that he pays income taxes at a lower rate than his domestic staff.

Contrast Americans’ current desire to have government without paying for it, and the concurrent difficulty of having the wealthy contribute their fair share, to the 1960’s. Back then, top wage earners paid a 91% income tax rate; corporations paid one third of all income taxes as opposed to about 7% today; and even I, in 1960, earning a pay rate very close to the bottom of the scale, paid $400 income tax on a $4000 income. I thought it was quite unfair at the time, considering the hardship of living on that meager income, but at least everyone was coughing up and paying their share.

Not so anymore, only future generations need worry about paying for today’s government. And, absent drastic changes to America’s political culture, certainly not the well healed, ever.

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