Disco, Parachute Pants, Paper Trades and Regulatory Reform

Mar 11, 2010

So far the debate has been around the BEST way to achieve regulatory reform….

…how to bring transparency to derivatives markets
…how to protect consumers
…how to address systemic risk and “too big to fail”
…how to improve the effectiveness of regulators and regulation

But, more recently, there is growing noise about the merits of having highly liquid, efficient, transparent capital markets. The AFL-CIO and other groups have called for turning the clock back to the 1990s or 1980 by imposing a tax or other barrier on financial transactions to cut trading volume in half. They recently announced a mobilization starting next Monday with this argument as a central objective.

The timing couldn't be better. Charles Jones, finance professor at Columbia Business School in New York, and Erik Sirri, former director of the Securities and Exchange Commission’s trading and markets division and now a finance professor at Babson College in Wellesley, Massachusetts have just completed a study, Examining the Main Street Benefits of our Modern Financial Markets, they were working on for us to aid in better understanding the impact of such a tax on investors, businesses and the broader economy. From the Executive Summary:

America’s vibrant capital markets are the global gold standard, fueling the financial needs of business from the smallest single-person startup to our largest public companies. They enable the dreams of American families and help make the American economy the envy of the world. In this report, we show how Main Street businesses and workers benefit from our nation’s well-regulated, efficient, transparent, and modern capital markets. We also demonstrate that seemingly small changes such as a financial transactions tax can cause considerable damage far fromWall Street, harming both investors and American businesses and impeding job recovery and growth.

Proponents of a financial transactions tax have it exactly backwards. Average investors, every business, and our nation’s economy benefit from today’s highly liquid, efficient capital markets. Everyone has access to the best price – and pays less to get it. And business gets the investment it needs. Today’s high-volume markets make it possible for average investors to get the best price and pay dramatically lower transactions costs when they buy and sell stocks. And, with more investment, they fuel the capital needs of businesses of every size. Technology has democratized our markets in much the same way that technology has made it possible to quickly find the best price on an airline ticket and pay little or no transactions costs to get it.

The American people get it -- according to an independent poll of 800 U.S. registered voters by Lombardo Consulting Group from March 10, 2010, 70% of respondents said that they opposed or strongly opposed a tax on stock trades and similar transactions, with 61% of respondents agreeing that new taxes on banks and other financial institutions would "just do more damage to the economy."

Rather than killing liquidity and returning to the days of disco and paper trades, we should focus on ways to continue to make our markets more efficient, fair and transparent.

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