Wednesday, May 19, 2010

24 Hours for the Tax

Today, people across Canada are speaking out in favour of a tax on financial transactions. Having written about this in the past, I want to add my voice to those who have identified a much needed measure to rein in the greed of those who would impose any cost to society in order for them to rake in unearned profits.

In case you haven’t heard, yesterday Germany took a bold step forward and banned a financial practice called naked short selling to take away one of the more popular financial derivatives that is purely speculative in nature. As could be expected, the financial markets took a tumble.

What must be remembered is that over the last ten years, the fuel of economic growth has been the rise of the importance of the financial sector. This has come at the expense of the real economy that produces goods and services that people actually use in their everyday lives.

In my early posts, I called the financial speculative economy the zombie economy because it sucks the life of real economy and everyday people.

From a purely economic perspective, a financial transaction tax makes a lot of sense. In fact, there is a great deal of empirical evidence that supports Hyman Minsky’s Financial Instability Hypothesis, which explains that as assets rise in value, this rise sets into motion a dynamic in which increasingly riskier investments come to market that are gobbled up by investors without the means to withstand a sudden decrease in asset values. Eventually, when the downturn inevitably arrives, the decrease bursts the asset value bubble and everyone begins to scramble to protect themselves from the fallout of debt obligations that can’t be possibly be met.

This is the scenario that played out in the global financial markets, which necessitated a multi-trillion dollar intervention backed by public funds.

Of interest, the federal government recently intervened into the housing market to make it more difficult for financial speculators to flip a house. By increasing the required down payment from 5% to 20% for a CHMC backed mortgage for the purchase of a rental property, the government essentially squeezed the profit margins for those who would use the housing market for speculative gain.

Using a regulatory regime instead of a imposing a tax to achieve the same end is simply a matter of choice. Ideologically, both types of measures are consistent with the idea of state intervention into the market to advance the common good.

If anything, the present government is being ideologically inconsistent in its opposition to a financial transaction tax.

So, why are they giving preferential treatment to large investors and interfering with the ability of smaller investors to turn a profit?

Big money can afford to hire lobbyists to influence public policy.

Little folk like you and me can only get the government’s ear when we make some noise.

So, it’s time for ordinary folk to make some noise, and I’m not talking about setting fire to a local bank branch like what happened in a posh section of Ottawa last night by an anarchist group that certainly has a good grasp of how to use the media to get their message across.

OK, call me old school.

Power to the people, right on.

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