Dean Baker on Effective Financial Regulation

In his post, ironic-twistingly named “A Financial Sector Small Enough to Drown in a Bathtub,” Dean Baker provides some simple and practical solutions for regulating the overgrown mess of a financial system we currently have:

The best way to restrict the size of the financial industry is through a system of modest financial transactions taxes (FTT). A tax of 0.25 percent on a stock trade, or 0.02 percent tax on the purchase of an option or future, will have almost no impact on those looking to invest in the stock market or hedge their wheat crop. However, it will impose a heavy cost on short-term traders, and therefore will substantially reduce the volume of trading.

Basically, we got into our Subprime/ARM Mortgage crisis because the people lending us money took our debts and sold them as commodities on the market. Doing so meant conducting hundreds and even thousands of individual transactions, all of which would be eligible for this tax he proposes. As he explains, such a tax would have no effect on small businesses or private individuals looking to get a piece of the “American Dream,” but would have made huge differences to the type of financial two-step that got us where we are right now.

Baker also goes on to point out that lots of other perfectly industrious and wealthy nations have imposed the exact same tax. He specifically cites the UK. What he does not point out is that there is a very specific reason that the UK might want to impose such a tax: they’ve already been through basically the same process we’re about to go through now after WWI and it basically killed their empire.

The Dutch also went through a similar scenario. So did Spain, after a fashion. Even Rome did it. In fact it seems an endemic European failing that whenever it seems obvious that manufacturing will not continue to provide limitless growth, we choose to try to make money in the financial sector rather than accept the modesty of an empire at it’s peak. But making money off the financial sector is basically making money out of air; it’s a Robbing Peter to Pay Paul scam which, once the momentum of that game is interrupted, cannot help but come crashing down on itself.

So, that’s where we’re headed. It won’t mean the end of our nation, but it will mean some bitter disappointment for the next few years, I’m afraid. With luck, it will also mean a bit of enlightenment for our head-long society once the power players in it begin to understand that a small shift in fate could put them on the bottom with all that chattel they’ve been ignoring.