Rolling the Dice, Again

Let’s suppose a bunch of organized crime types –unbeknownst to you– put together a scheme to offer odds on whether or not you will pay your mortgage on time each month for the next year. And even though your mortgage is only a few hundred bucks a month, they found high rollers willing to put big money, hundreds of millions, on one side or the other of these bets.

While that’s a little oversimplified, that’s pretty much what happened leading up to the 2008 financial crash when the big banks had folks betting for and against packages of home mortgages. Of course organized crime types would be in big trouble if they did something like that; gambling laws in almost every state make that kind of activity a big no-no. Those laws, however, do not apply to banks, and others engaged in what can laughably be called investing. During recent decades the Federal Government adopted laws exempting this form of gambling.

You would think that after what happened so recently we would have changed those laws. You would be wrong. In fact the lobbyists have managed to block even modest reform. Dodd/Frank would have made some important changes, but it has been hamstrung by opponents who simply cut off funding to implement the reforms.  

And the gamblers have turned to the commodity market. Summer, normally a quiet time, has seen an all-time record trading month in July and it looks like August will surpass it. All the exchanges from commodities to stocks are racking up billions of trades every day; some are showing trading increases in the billion range doubling normal volume. From the high-frequency traders who are little more than pirates roaming the capital markets to panicky investors afraid to be skinned by the gamblers, the markets are crazy.  

It’s time to set some parameters that will bring the markets back to their purpose, to create capital to support our economy. Banks need to get back to banking and off the trading floor. The exchanges need to focus on their purpose, to serve as a marketplace for capital and business to meet and create growth in our economy. At this point they are too interested in the revenue created by billions of trades and not interested enough in the future of this nation.

We need to reward investors, those who buy and hold stocks. Those in the market for the long haul. They’re the ones who should get the tax breaks. Let’s make capital gains taxes gradually go away the longer you hold an investment. Let’s make the gains reaped by those who buy and sell stocks in a matter of days or hours or a few seconds subject to punishing taxes. This kind of “playing” the market generates no public benefit.

And let’s call those who bet for and against almost anything what they are, gamblers. Let’s take away their “Get out of jail free cards.” Let them suffer the same legal consequences as those running an illegal card game in their basement. It’s the right thing to do.

Surely, You Jest?

High-frequency traders account for between 60% and 80% of the couple billion trades on the NY Stock Exchange every day. They are also deep into commodities and other markets. Using computers and sophisticated algorithms these modern-day “Highwaymen” ride the capital market highways and byways, ducking in and out in nanoseconds to pick up a couple pennies here and there.

And they gallop alongside large institutional block-traders pushing the price up on the block, cashing in when it executes. The “Highwaymen” are long gone with their profits when the pricing drops. The institutional trader (read- Grandma & Grandpa’s pension fund) is left holding an over-priced stock paid for with the hard earned savings of their pensioners. While it isn’t always the old folks who suffer, at the end of the day the high-frequency traders, day-traders, and other bottom feeders have pumped up the prices paid by regular investors-- the “losers,” as those who game the market call them.

None of this has anything to do with the stated purpose of the markets, putting  funds into the hands of business, funds to create jobs. The high-frequency folks, however, are emerging into the daylight. They showed up first on “K” Street doling out hundreds of thousands of dollars to candidates and lobbyists. Well north of a million and a quarter last year according to published reports. Big bucks, but well within their means, given the six billion they are reported to have skimmed off the markets last year.

The high-frequency folks have also laid claim to a positive impact on the market. They feel they’ve made it more competitive and lowered trading fees. They have to be joking. Experts argue that by using their speed to duck in and out of the market, they have taken the edge off competition and destabilized the market. And it seems much more likely that trading fees have been driven down by online trading and the brokerage houses featuring low fees.

None of the fun-and-games trading schemes that have emerged since the markets were opened up to pure gambling plays have anything to do with providing the capital American business needs to create jobs. Laws exempting traders from gambling laws and allowing banks to wander out of their traditional role created this mess, and triggered the economic collapse we are still staggering from.

Restoring sanity to this sector is no big secret. Repeal the gambling exemptions, and set up tax rules that will encourage capital development. Start with a 95% tax on gains from investments held less than a day, 80% on those held less than a week, 60% on those held less than a month, and so on until those held more than a decade are tax free. Let’s take our capital markets out of the hands of the Highwaymen and their ilk and return it to “Investors” and the companies they own. Let’s focus on what’s best for our people in the long term, not the next quarter. Let’s put the market to work providing capital for our economy and jobs for our people.