Rule Or Ruin?

Many technical advances present two faces. For instance, we have an unrealistic view of life in the “Horse & Buggy” age. In the motor vehicle age we see death and injury rates and imagine that things were better in earlier times. They were not by any measure; horses are difficult to control at best and the drivers then were no more responsible than they are now. The key to reducing the downside of motor vehicles has been to make cars, trucks and big boy’s toys safer through technical improvements. The rules of the road -among other things- have to improve as well.

A new book, Automate This: How Algorithms Came to Rule Our World, came out last week. Former tech journalist Christopher Steiner delves into the rise in the use of this digital tool as well as its impact on our society. In a Fast Company interview, he says he initially planned to just cover the use of algorithms on Wall Street. But from that starting point his research took him out further and further into our lives like the concentric waves when a rock splashes in a lake. Algorithms make Google search work. They drive customer service programs, they are everywhere.

Many of us know that algorithms underlie the high-speed traders who dominate our stock markets these days. They carry out most of the billions of trades the markets see every day. The upside is that the cost of trading has been going down with this volume. One downside is that some high-volume traders use this tool to shadow trades being exercised by pension funds and other wealth management entities. They can race ahead of these traders scooping up their target stocks and selling them to the funds at a higher price seconds later. The effect is to drive up the cost of the securities in your 401(k) or Grandma’s pension plan.  

Worse, they have contributed to the market’s abandonment of its only benefit to society, as a source of capital for business. In fact the markets have veered from the view of arguably the most talented investor in the world, Warren Buffett, who famously said, "The best time to sell a stock is never." Businesses are obsessed with daily prices and struggle to meet the quarterly expectations of the market instead of the long-term goals that could make them hugely more profitable.

There is a simple solution for this problem. Tax capital gains based on the length of time an investment is held. Just for fun let’s say if you hold an investment for twenty years or more, there would be no tax liability. Ten to twenty years, 5%, five to ten years 10%, two to five years 15%, one to two years 25%, one month to a year 50%, one week to a month 75%, less than a week 95%. Better than pirating value from Grandma’s pension, better for investors, better for business and their employees, better for America. Ethically there is no basis for the gambling hall culture on Wall Street; high speed trading is one gaming table we don’t need.

Problems We Know How to Solve, “Social Security”

Social Security hits the ripe old age of 75 this year. Wingnuts on the left and right are sounding the alarm and coming up with ways to save it, threats to shut it down, everything but the obvious. Let’s begin by putting to bed forever the myth that Social Security and its brother Medicare are insurance policies. While it’s true that like an insurance policy these government programs take money in from a large group and pay it out when members of the group hit certain metrics. And that you might collect more or less than you pay into it. That’s it! End of insurance comparison.

Unlike an insurance policy, your money is not protected by reserve requirements. Nor is it in any special fund should you have need of it. The bucks you and your employer hand over to the feds for Social Security and Medicare go right into the hands of the Congress, and we all know how careful they are with our money. Right!

The solution to keeping these programs solvent is very simple, level the playing field. Certain folks were left out when Social Security was created in the thirties. For those with higher incomes there is a cut off in how much they had to pay each year, currently a little over $100,000 a year. That means the upper middle class and the rich don’t have to pay FICA taxes on much or most of their income.

Another birth defect was equally unintended. The thinking was that many in the public sector -legislative bodies and worker bees at the federal, state and local level- already had pension plans in place. Since it would not be necessary for them to collect from Social Security, there was no reason for them to pay FICA taxes. As it worked out, many of these folks leave public employment in their forties and fifties, their public pensions in place waiting for them to cash in. They move into private sector employment for ten years or more and collect Social Security benefits just like the folks who have been paying in all their working lives.

What has changed? Social Security/Medicare has become an income tax that pays benefits to nearly everyone but collects mainly from the poor and middle class private sector workers. This tax is at the root of the issue that has billionaire Warren Buffet sounding the alarm that he and all of his peers pay a smaller share of their income in taxes than their lowest paid employee. That is clearly wrong as he points out. Exempting certain folks in the public sector is equally wrong.

We can save the Social Security system by making it fair to all. Everyone should pay this tax on every penny of their income. That would be a well deserved birthday gift; fair to everyone at long last.

Problems We Know How to Solve, “Piracy”

A host of issues plague our nation that I have no idea how to cure. However, I can make some disappear. The ones I have in mind are protected by powerful special interests although it would be hard to find anyone who would consider them beneficial to society or our nation.

Piracy is generally frowned upon at almost all levels in America, indeed in the world. However, the same electronic trading that has modernized our capital markets has opened the way for traders flying the Jolly Roger to make a mockery of the market’s purpose. Be it stocks, bonds, commodities, derivatives (yes there are good derivatives), or anything other financial instrument, there is but one reason for them to exist; to support our economic system. To put the “Capital in Capitalism.”

Unfortunately that purpose has been lost in what has come to be known as the “Casino on Wall Street.” “Playing” the market, as it’s called, has long been a problem. A focus on short term gains has pushed aside solid growth as the players –it would be wrong to dignify them with the title investors– jump in and out of market instruments. But now a new breed of players using sophisticated software and massive computers have created a new way to game the system, High Frequency trading.

Algorithms allow them to race alongside the flow of electronic orders in the markets not unlike the sea going pirates of old that they emulate. They jump in and out in nanoseconds, thousands of times in a few minutes picking up a fraction of a cent here and there. They are daytraders on steroids. High Frequency traders contribute nothing to the companies they trade, worse they drive up prices for legitimate traders looking to improve their long term holdings. Often those entrusted with little folks’ life savings.

How does the Casino on Wall Street get away with gambling that is illegal in New York State as it is in most states? Simple. The United States Congress exempted this form of gambling from State Laws. While that legal loophole should be closed it is not the most effective way to curb this abusive practice.

A change in our tax code would pull down the Jolly Roger. Let’s eliminate all capital gains taxes on profits from investments held for more than twelve months. Tax profits earned from investments held less than a year at 35%; those held less than six months at 50%; those held less than 90 days at 60%; those held less than 30 days at 70%; those held less than seven days at 80%; those held less than 24 hours at 90%; and those held less than an hour at 95%.

High Frequency trading generates as much as 70% of the trading on Wall Street; one of these outfits is reported to make 20% of the daily trades. When you add in the daytraders, there’s not much focused on what should be the primary role of the market, raising capital to support our economy. It’s past time to shut down the Casino and pull down the Jolly Roger. That will take the focus off quarterly returns and allow management to look to long term growth.