"Wall Street owns the country. It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street, and for Wall Street. Our laws are the output of a system which clothes rascals in robes and honesty in rags."
-1890 speech by Populist leader Mary Ellen Lease, thought to be the prototype for Dorothy in The Wizard of Oz
Consider these arresting facts:
- The Bank for International Settlements estimates that in 2008, annual trading in over-the-counter derivatives amounted to $743 trillion globally - more than ten times the gross domestic product of all the nations of the world combined.
- Just five super-rich Wall Street banks control 97% of the U.S. derivatives market: JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.
- Wall Street traders compete to design computer programs that can move many trades in microseconds, allowing them to beat ordinary investors to the "buy" button and to manipulate markets for private gain.
- Goldman Sachs, the uncontested leader in this game, was reported in September to be sitting on a cool $167 billion in cash. Meanwhile, a September survey of state finances found that state governments faced a collective budget shortfall for fiscal 2010 of $168 billion - nearly the same amount.
- In 2008, Goldman Sachs paid a paltry 1% in income taxes - less than clerks at WalMart.
Wall Street bankers have been called today's "welfare queens," feeding at the public trough to the tune of trillions of dollars. They are taking from the taxpayers and not giving back. These banks were rescued so they could make loans, take deposits, and keep our money safe. But while that is what banks used to do, today the big Wall Street money comes from short-term speculation in currency transactions, commodities, stocks, and derivatives for the banks' own accounts.
Wall Street traders have been criticized for profiting from "speculation" or "gambling," but that criticism hardly goes far enough. With high-speed computer programs, math whizzes, and taxpayers to bail them out when all of that brain power short circuits, these traders are not even gambling. What they have is a sure bet, while the rest of us are gambling, taking real risks for our rewards, which are liable to be few. The winnings of the Wall Street traders are coming right out of our pockets and our tax money.
Meanwhile, the sales tax on these speculative trades is zero. Wall Street's gamblers have managed to trade in practically the only products left on the planet that are not subject to a sales tax. Parents in California are now paying 9% sales tax on their children's school bags and shoes, and race track winnings and other forms of gambling are taxed at up to 25%. But trades in Wall Street's "financial products" get off scot free.
We need to get some of our tax money back, and we can. But first, a closer look at Wall Street's questionable trading practices ....
Why Goldman Always Wins
In the midst of the worst recession since the Great Depression, Goldman Sachs is having a banner year. According to an October 16 article by Colin Barr on CNNMoney.com:
"While Goldman churned out $3 billion in profits in the third quarter, the economy shed 768,000 jobs, and home foreclosures set a new record. More than a million Americans have filed for bankruptcy this year, according to the American Bankruptcy Institute."
Barr writes that Goldman's "eye-popping profit" resulted "as revenue from trading rose fourfold from a year ago."
Why Goldman always seems to win at this game became evident in a revealing incident last summer, in which the bank sued an ex-Goldman computer programmer for stealing its proprietary trading software. Assistant U.S. Attorney Joseph Facciponti was quoted by Bloomberg as saying of the case:
"The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."
The obvious implication was that Goldman has a program that allows it to manipulate markets in unfair ways. Bloomberg went on:
"The proprietary code lets the firm do 'sophisticated, high-speed and high-volume trades on various stock and commodities markets,' prosecutors said in court papers. The trades generate 'many millions of dollars' each year."
Those many millions of dollars are coming from ordinary investors, who are being beaten to the punch by sophisticated computer programs. As one blogger mused:
"Why do we have a financial system? I mean, much of its activity looks an awful lot like gambling, and gambling is not exactly a constructive endeavor. In fact, many people would call gambling destructive, which is why it is generally illegal....
"What makes Goldman Sachs et. al. so evil is that they offer vast wealth to our society's best and brightest in exchange for spending their lives being non-productive. I want our geniuses to be proving theorems and curing cancer and developing fusion reactors, not designing algorithms to flip billions of shares in microseconds."
Gambling is an addiction, and the addicted need help. A tax on the microsecond trades of Wall Street gamblers could sober them up and return them to productive labor, and transform Wall Street from an out-of-control casino back into a place where investors pledge their capital for the development of useful products.
Speeding Tickets to Slow Day Traders: The Tobin Tax Gains Momentum
The fact that speculative trades remain untaxed suggests a tidy way the public could recover some of its bailout money. The idea of taxing speculative trades was first proposed by Nobel Prize winning economist James Tobin in the 1970s; but at the time, the tax raised prohibitive accounting problems. Today, however, modern technology has caught up to the challenge, and proposals for a "Tobin tax" are gaining traction. The proposals are very modest, ranging from .005% to 1% per trade, far less than you would pay for a pair of shoes. For ordinary investors, who buy and sell stock only occasionally, the tax would hardly be felt. But high-speed speculative trades intended to manipulate markets for private gain could be slowed up considerably. Short-term traders, who often make money on very small margins, might be discouraged from trading at all.
Various proposals for a Tobin tax have received renewed media attention in recent months. President Obama gave indirect support for the tax in a Press briefing on July 22, when he recommended that the government consider new fees on financial companies pursuing "far out transactions". Leaders from France, Germany, and the European Commission endorsed putting a speculation tax on the agenda at the G20 meeting in Pittsburgh in September. Brazil has now imposed what may be the first Tobin Tax on foreign investment inflows. A U.S. bill proposing to tax short-term speculation in certain securities, called "Let Wall Street Pay for Wall Street's Bailout Act of 2009", was introduced by Rep. Peter DeFazio (D-OR) last February. A different bill to regulate derivative trades was approved by the Financial Services Committee in October.
Derivatives are essentially bets on whether the value of currencies, commodities, stocks, government bonds or virtually any other product will go up or down. Derivative bets can cause shifts in overall market size reaching $40 trillion in a single day. Just how destabilizing short-term speculation can be - and just how lucrative a tax on it could be - is evident from the mind-boggling size of the market: $743 trillion globally in 2008. Promoters of international development have suggested that a mere .005% tax could raise between $30 billion and $60 billion per year, enough for the G7 countries to double international aid.
More than raising money, however, the tax could be an effective tool for slowing harmful speculative practices. According to a number of Nobel Prize economists, a downsized speculative market would go far towards creating a more sturdy financial system, helping to avoid the need for future bailouts. But if the tax is too small, it might not have the desired effect on speculation. The larger 1% tax originally proposed by James Tobin is therefore favored by some proponents. The much-needed income from a U.S. tax could be split between federal and state governments.
Opponents of the Tobin tax, led by the financial sector, argue that it would kill bank jobs, reduce liquidity, and drive business offshore. Supporters respond that Tobin tax profits could be used to create new jobs, and that the small size of the tax would hardly affect cash flows - although certainly the speculative market would shrink. Players in dice-rolling speculative operations have long claimed that their trades "stabilized" the system by enabling investors to hedge risk, but the recent financial crash has exposed that defense as being without clothes.
Officials from the International Monetary Fund insist that implementing a Tobin tax would be logistically impossible. But Joseph Stiglitz, a Nobel Prize winning economist and former World Bank leader, disagrees. In Istanbul in early October, he said that a Tobin tax was not only necessary but, thanks to modern technology, would be easier to implement than ever before. "The financial sector polluted the global economy with toxic assets," he said, "and now they ought to clean it out."
While Wall Street's welfare queens have been busy collecting generous government handouts, the 50 states have been left to fend for themselves. Some 48 states have faced budget crises in the past year, forcing them to cut libraries, schools, and police forces, and to raise taxes on income and sales. A sales tax on the exotic financial products responsible for precipitating the economic crisis is long overdue.