I’ve never been very interested in business news, always had difficulty remembering the difference between puts and calls, much less the definition of a credit-default swap. I did have a strong sense that high finance had wandered away from investing in things–in actual commodities, in new products and services–and had lurched toward creating paper profits…in ways too complicated to explain. In the past year or so, however, this lack of knowledge has become a severe professional limitation–given the financial wreckage that surrounds us–and so I decided to rectify it, to the extent possible. When I heard that John Lanchester, an excellent novelist, had written a book about the financial crisis, I pounced. And it was very much worth it. I recommend the book strongly for those, like me, who are financial nitwits. I now, finally, understand what a credit-default swap is…
And it seems to me–this is no great insight–that a fundamental change has to take place in the culture of Wall Street, an end to casino-game financial ploys and a return to what capitalists are supposed to do: investing in products that will help to build our economy. There are two ways to insure that this will happen: through regulation and taxation. Financial regulation–which the Wall Street CEOs who testified in Washington yesterday don’t want–will be one of the big battles of 2010. At the very least, the financial gambling on collateralized debt obligations (CDOs) and credit-default swaps (CDSs)–a multi-trillion dollar market which Congress, incredibly, banned from regulation–have to be brought under the regulatory umbrella. A new, more flexible regulatory system has to be created (bankers are famously nimble at creating new devices to escape regulation) that will also have the power to take over, and manage, banks that should be closed down, even big ones. Consumers also should be protected against predatory lending–whether it be skeezy mortgage peddlers or bank credit card usurers.
But if you really want to discourage certain forms of behavior, you need to tax it. Wall Street has to be shoved–hard–in the direction of making investments that will build the economy. The 10-year tax on big banks that President Obama is proposing today is nice, but not nearly enough. A better idea would be to tax every financial transaction that does not involve equity in real corporations that make real products, or futures trading in real commodities like corn or pork bellies. Clearly, bankers will try to find a way to camouflage their casino-gambling in financial derivatives by creating new instruments that are a mix of actual commodities and financial-games. The tax should apply, by percentage, to each new offering that contains financial derivatives. Will a careful evaluation of each new product slow the market down to a crawl? Good. There’s too much churning and arbitrage now. As Paul Volcker said in December, none of these exotic new financial-casino products has added anything to the economy.
This is a fight the President needs to take on in 2010, if he hopes to reconvince the public that he’s not all about business as usual in Washington…or on Wall Street.