Yesterday, a few Wall St. CEOs faced a wave of stupid questions from the Financial Crisis Inquiry Commission. Jamie Dimon, head of JPMorganChase, made a flippant but important comment: financial crises happen “every five to seven years.” There’s even a book out called This Time is Different: Eight Centuries of Financial Folly detailing the long history of booms and busts. Warren Buffett has said the boom/bust cycle will continue because fear and greed are hard-wired into human beings. Whatever rules the gov’t throws together today will fix the last problem (housing) but do nothing for the next problem. Also, these rules will be watered down by lobbyists, and further eroded over time as the public forgets and Congress is bribed by their Wall St. masters.
Booms & busts are inevitable. When a bubble pops, the gov’t will need to spend lots of money to prevent the economy from falling into a depression. The solution is to pass a Tobin Tax, a tiny tax on financial transactions. This tax can be designed to be progressive, ranging from 0.1% to 0.5%. If you buy $1M worth of stock, you pay $5K in taxes. At the lower tax rate, $10K in stock would cost $10 in taxes. It can be tweaked to catch most cheaters. Furthermore, the SEC should push most OTC trading to exchanges, which further increases the funds generated.
The money raised by this Tobin Tax should be reserved for the inevitable busts that require gov’t action. Just like a national disaster, the Fed would declare a financial disaster and use the funds to prevent a depression. During good years, the money will be used to pay off the last bubble and save money for the next. Along with authority to take over failing banks and smoothly enter bankruptcy, a financial disaster fund will cure the hangover after a bubble.
[Obama is on TV right now proposing an excise tax on banks to recoup $100B probably lost from TARP. It’s fine, but the funny business will just move to hedge funds. Bankers are like cockroaches, you need to gas the whole place or they’ll keep coming back.]