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LQD: Tax Wall Street's Speed Freaks into Oblivion | 29 comments (29 topical, editorial, 0 hidden)
Re: Tax Wall Street's Speed Freaks into Oblivion (none / 1)
How would you blanket ban all tricks?
Easy as an atom bomb. Legislate a few defined financial market procedures an make any innovations subject to legal review and challenge prior to implementation. Make any unapproved procedures felonies. Define in law the purpose of financial markets as providing investment capital to socially usef projects and set up regulatory procedures accordingly. This would be like dropping a neutron bomb on Wall Street, but that, arguably, would be a good thing. When you have a giant parasite on the body politic the parasite needs to be destroyed.
You're arguing for a whitelist approach. Let me ask you: does the proposed whitelist include the simplest kind of put and call options? If so, then you've lost. General claims can be built up from only those(*), so your whitelist stops nothing at all, however many pages the legislation comes out to be.

Thus by the above, you are really arguing for a world in which no kind of puts/calls are allowed in any form, period. I am not opposed to such a world, but if you have to argue your case and someone points this out, what do you say?

The ordinary use of a put/call is a kind of insurance: it is entered into for protection against wild stock price fluctuations at some future time.

This is not a math problem with a logical solution. Capital and capitalization is the organizing principle of modern societies. The effects of the existing situation are not morally neutral. If your political and moral compass indicates that it is appropriate for Goldman to own the US Department of Treasury, to rent the US Senate, to dominate and intimidate the rest of Wall Street and to suck the life out of the rest of the economy, then, in effect you are saying that the cleverest thief wins, that who ever can most effectively grab and most ruthlessly use power is the legitimate ruler of our society.
All I'm saying is that the math says no to simple minded ideas that sound good but leak like a sieve. I'm not defending Goldman at all, rather I am saying that (as I see it) Goldman will laugh off these puny attempts if some US legislators do actually try them. It would be much more effective to just kill Goldman outright, or nationalise them and convert them into a nonprofit.

(*) Technically for those who want more details: a convex function f has an integral representation in terms of the functions (x - k)_+, and the latter are used to define call options. Thus one can build arbitrary differences of convex functions of an underlying asset using combinations of puts and calls, and this is plenty enough for any practical purpose of speculation, I should think.

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Thu Jul 30th, 2009 at 12:23:42 AM EST
[ Parent ]
Re: Tax Wall Street's Speed Freaks into Oblivion (none / 0)
I am not a trader.  If puts and calls open Pandora's Box, unless a safe remedy can be found, I would ban them, had I the power.  I agree that GS should die--by  the Sherman Anti-Trust act or a new law if required.  Their continued existence seems incompatible with the rule of law and a properly functioning representative democracy.  The financial services industry, Goldman Sachs and the epigoni, is the only part of the society that has any true representation at present.

If most of the financial industry were to disappear it would mostly mean that a lot of people would have to start making honest livings.  All of the vaunted innovation has only led to the impairment of the economy and the enrichment of the individuals comprising the financial industry.  I do not see how recovery is possible while continuing to feed a parasite of that magnitude.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jul 30th, 2009 at 02:00:19 AM EST
[ Parent ]
Re: Tax Wall Street's Speed Freaks into Oblivion (none / 0)
If puts and calls open Pandora's Box, unless a safe remedy can be found, I would ban them, had I the power.
Yet doing so if you could would open you up to the counterargument that these options are just insurance, eg why should ordinary people or companies be exposed to the full risk of owning stocks with fluctuating prices when an option can limit the potential fluctuations for its holder, and thus bring a measure of financial certainty in planning for the future? You must be able to answer this question (convincingly) in the negative or the proponents of the markets can use this argument.

In some ways this is as difficult as the gun debate, namely how do you convince people that nobody should be allowed to own guns, when the gun lobby responds by asking why should people live at the mercy of burglars and armed attackers with no protection?

If most of the financial industry were to disappear it would mostly mean that a lot of people would have to start making honest livings.
I doubt it. I believe it would involve a lot of pain and misery throughout, which I'm ok with. But clearly, governments around the world have been scared to death of the pain it would bring to their countries, which is why they largely preferred to guarantee the gamblers' debts.

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Thu Jul 30th, 2009 at 02:54:24 AM EST
[ Parent ]
Re: Tax Wall Street's Speed Freaks into Oblivion (none / 1)
martingale:
Yet doing so if you could would open you up to the counterargument that these options are just insurance, eg why should ordinary people or companies be exposed to the full risk of owning stocks

Why should ordinary people or companies be exposed to the full risk of devastating cyclical market mood swings?

I believe it would involve a lot of pain and misery throughout, which I'm ok with.

With the current system, there's already plenty of pain and misery throughout.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jul 30th, 2009 at 04:59:48 AM EST
[ Parent ]
Re: Tax Wall Street's Speed Freaks into Oblivion (none / 1)
Why should ordinary people or companies be exposed to the full risk of devastating cyclical market mood swings?
Indeed, that is where serious questions must be asked about the true value of the financial services sector, and the wisdom of relying on it for pension funds, corporate finance, etc. vis-a-vis alternatives. There is also the question of the immediate consequences of decoupling by shutting large parts of it down.

With the current system, there's already plenty of pain and misery throughout.
But is it sufficient to catalise major political change? I doubt it. People are far from having lost everything they can, yet. If Russian society under Yeltsin is any indication, it can get a lot worse until someone decides to really put the screws on the financial oligarchs.

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Thu Jul 30th, 2009 at 06:27:06 AM EST
[ Parent ]
Re: Tax Wall Street's Speed Freaks into Oblivion (4.00 / 3)
  • Make put and call options subject to the doctrine of insurable interest. Outside hedging - which should always be subject to the doctrine of insurable interest - puts and calls serve no legitimate purpose that I can see. That kills non-linearity and extra margin (the two most troublesome aspects of puts and calls) dead in one blow, without harming the legitimate functions of these tools.

  • Similarly, make commodities markets open only to participants who actually have the capacity to make or take delivery, and do not permit them to purchase more futures than what they can take delivery of.

  • Enact a blanket prohibition on naked shorting of any kind.

  • Make over-the-counter securities and commodities derivatives legally unenforceable. Security and commodity derivatives need to go on exchange. Make all attempts by private players to deploy their own economic power to force compliance with such contracts a form of blackmail.

  • Oh, and a blanket 2-5 % Tobin tax on all exchange transactions should kill much of the excessive liquidity dead.

Similar schemes can easily be devised for blowing out an atom bomb over black-hat speculation in other markets.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jul 30th, 2009 at 02:21:57 AM EST
[ Parent ]
Re: Tax Wall Street's Speed Freaks into Oblivion (none / 1)
Jake,
If puts and calls open Pandora's Box, unless a safe remedy can be found, I would ban them...

You illustrate why I included the "if"!  I have repeatedly called for a requirement of "insurable interest in CDSs and extending it to puts and calls should be obvious, but it wasn't to me at the time I wrote the comment.  Thanks.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jul 30th, 2009 at 10:46:41 AM EST
[ Parent ]

LQD: Tax Wall Street's Speed Freaks into Oblivion | 29 comments (29 topical, 0 editorial, 0 hidden)
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