Trading Fees
Of the host of proposals for new regulations that are floating around, the one that makes the most sense is the idea of fees (a tax) on trading. The economic purpose of financial markets is efficient allocation of capital. A fee will reduce liquidity by raising transaction cost. That liquidity cost is a cost that has to be added to the fees. But, if kept low and uniform across forms of investment, the increased transaction costs should not produce a marked change in the efficiency of capital allocation.
It is legitimate worry that the fees will get too high. Governments tend to raise taxes once they are in place. But, transaction fees probably could get global support and that is a necessary aspect of any plan to reduce systemic risk. The global competition for trading activity should keep the fees from getting too high. Traders and investors will be affected directly, but hopefully they are not going to sink or swim on the slightly different margins the fees might produce. Many people who do not know they are investors will have to depend on their pension fund manager to respond to the fees.
Part of the loss of liquidity will be a transfer from high frequency traders to brokerage firms. Institutions trading large blocks of financial instruments will also experience an impact. The liquidity issue will be more important for institutions such as pensions and mutual funds than for individual investors or even individual traders. But, institutional investors charge adequate fees to support the professional staff required to address the issue.
One reservation is that the proceeds will probably be treated by governments similar to the way any other revenue is treated. Before long it will just be like SS payments, just more money for government to spend. But, what could really make fees a disaster would be if the government can’t resist its tendency to want to pick winners and losers. In order to work, the fees need to apply to all financial transactions even to the issues of the politicians’ pet causes.
Thus, since it is doubtful the money from the fees will be there to insure against the risk, the reason for favoring the fee is exactly the source of many economists’ and market participants’ concern. It reduces liquidity. By so doing it will reduce the ease by which problems jump across markets that make up the shadow banking system. But, in order to have that effect it has to be uniform across all types of trades.
Thursday, January 28, 2010
Friday, December 25, 2009
Did the repeal of Glass Steagall create big banks and lead to the financial crisis?
Glass Steagall
One thing to remember about the last 10 years of consolidation is that 10 years make a nice memory, but actually most of the 70 years under Glass-Steagall were all a period of consolidation. Consolidation didn’t result from a single act; it pre dates the repeal of Glass Steagall. The first big spurt of consolidation came during the depression when so many small banks failed -- another came in the 60’s, then the 70’s, another in the 80’s, and so on. It’s been so steady it’s silly to try to attribute it to any one event. Also, under Glass Steagall we weren’t free from banking problems (Continental Illinois and the S&L collapse spring to mind).
Many countries with only a few big banks faired much better than the US during the depression, especially in terms of banking problems. They also got along quite fine without Glass Steagall during the 70 years we operated under Glass Steagall. Further, both the current crisis and the depression were global -- hardly related to the banking structure in any one country.
Glass Steagall-type regs are a Red Herring. I say that despite a natural disposition in favor of Glass Steagall. (I grew up with it after all. It's like a childhood friend). But, the current problems didn't originate in banks. They were the result of excesses in the shadow banking system and among consumers. And, in terms of institutions, they were aggravated by organizations that weren't at all related to changes in Glass Steagall.
It would be strange, indeed, if the regs that were appropriate in the mid 20th century turned out to be appropriate in the 21st. Remembrances of an idealized “days gone by” are easy. The hard part is figuring out what makes sense now.
Some legislation will pass; it’s too easy to vilify banks (i.e, think Potter in the movie “It’s a Wonderful Life”). But remember George Bailey was a banker, too. If you want to split hairs and differentiate between a thrift (Bailey Building and Loan) and a bank, it would be more defensible to target thrifts as the culprits (Golden West, WAMU, IndiMac). But, depository institutions didn’t cause this mess even if the politicians find them convenient to blame.
If something like Glass Steagall passes and gets signed, the logical reaction is ambivalence. If it makes people feel safer, that’s good. If it really make them less safe, that’s bad. But, they will only feel safe until a WAMU, Bear Sterns, Lehman Brothers, Merrill Lynch, AIG, Fannie or Freddie blows up.
One thing to remember about the last 10 years of consolidation is that 10 years make a nice memory, but actually most of the 70 years under Glass-Steagall were all a period of consolidation. Consolidation didn’t result from a single act; it pre dates the repeal of Glass Steagall. The first big spurt of consolidation came during the depression when so many small banks failed -- another came in the 60’s, then the 70’s, another in the 80’s, and so on. It’s been so steady it’s silly to try to attribute it to any one event. Also, under Glass Steagall we weren’t free from banking problems (Continental Illinois and the S&L collapse spring to mind).
Many countries with only a few big banks faired much better than the US during the depression, especially in terms of banking problems. They also got along quite fine without Glass Steagall during the 70 years we operated under Glass Steagall. Further, both the current crisis and the depression were global -- hardly related to the banking structure in any one country.
Glass Steagall-type regs are a Red Herring. I say that despite a natural disposition in favor of Glass Steagall. (I grew up with it after all. It's like a childhood friend). But, the current problems didn't originate in banks. They were the result of excesses in the shadow banking system and among consumers. And, in terms of institutions, they were aggravated by organizations that weren't at all related to changes in Glass Steagall.
It would be strange, indeed, if the regs that were appropriate in the mid 20th century turned out to be appropriate in the 21st. Remembrances of an idealized “days gone by” are easy. The hard part is figuring out what makes sense now.
Some legislation will pass; it’s too easy to vilify banks (i.e, think Potter in the movie “It’s a Wonderful Life”). But remember George Bailey was a banker, too. If you want to split hairs and differentiate between a thrift (Bailey Building and Loan) and a bank, it would be more defensible to target thrifts as the culprits (Golden West, WAMU, IndiMac). But, depository institutions didn’t cause this mess even if the politicians find them convenient to blame.
If something like Glass Steagall passes and gets signed, the logical reaction is ambivalence. If it makes people feel safer, that’s good. If it really make them less safe, that’s bad. But, they will only feel safe until a WAMU, Bear Sterns, Lehman Brothers, Merrill Lynch, AIG, Fannie or Freddie blows up.
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