patrick.net

APOCALYPSEFUCK is Comptroller says

No, it should be left to the market. Bank of America, Wamu et al should have been left to fail and their executives dragged from its offices by howling throngs of bankrupted investors and depositors, torn limb from limb and skull fucked and their offices burned and the rubble left as a memorial to criminal banking.

The surviving banks would have learned a lesson.

Agreed.

sbh says

How does your model

My proposal is to automate the mechanics of basic banking and to standardize contracts, not to take over every niche in the financial market or to be the sole marketplace.

There's no reason why basic banking can't be streamlined and made freely available. There's no reason that contracts can't be made simple, fair, and understandable.

sbh says

Does your model of non-profit finance apply to this relationship.

No. The non-profit corporation I propose only handles the mechanics and standardization. I am not proposing to eliminate all profit seeking from buying and selling of stocks. However, my system would eliminate the rent on electronic money that banks charge as well as all the fraudulent fees.

sbh says

Also, with respect to the original question about parasitism: my retirement account has accumulated multiples of my life's earnings through labor, and I will spend or give away every dime of it by my death. Does anyone think that generated wealth is parasitical?

There's a huge difference between investment and speculation. One is symbiotic, and the other is parasitic. My tax proposal from other threads would eliminate speculation, bubbles, and microtrading while encouraging investment.

T = 1 - 0.01M

If we had the above tax rates, the Second Great Depression would have never had happened. Neither would the first one.

sbh says

Apropos of the distinction between investment and speculation, you may want to clarify that.

Owning something for a short time (a few milliseconds or a few days) and then selling it is speculation. Real wealth creation (the creation of products, jobs, infrastructure, and markets), takes time. Investment is a long-term enterprise, not a short-term one. Furthermore, investment is not a zero-sum game, whereas speculation is.

Of course, nature is messy and works with gradations rather than lines. So, my capital gains tax proposal takes this into account:

T = 1 - 0.01M
where T is the Tax Rate, M is the number of months a property (stock, bond, house) is held.

The capital tax rate starts at 100% and decreases to 0% over 8 years and 4 months. You can save unlimited amounts, tax-free, for retirement. But speculation becomes non-profitable.

Consider the microtrader with a few milliseconds advanced insider knowledge -- this actually was revealed to be commonplace recently. He used to be able to make millions siphoning wealth out of the system (and from other people) by having software exploit the few microseconds difference. Under my tax proposal, all his profits are taxed at 100%. He did nothing to earn them, generated no wealth, in fact decreased wealth through inefficiency and transaction costs. Even ignore ethics and morality, there is no economic justification for him profiting at all.

Now consider someone who actually creates wealth, builds a business, or invests in a company that over a few years builds something worthwhile. At year 5, the tax is 40%, a bit higher than normal income. At year 6, the tax is 28%, less than the highest marginal tax rate for income earned through sweat and blood. That's a pretty good deal already. At year 7, the tax is 16%, about the current long-term capital gains tax. At year 8, the tax is a mere 4% and it drops to 0% in four months.

My capital gains tax proposal is extremely generous to investors while eliminating almost all speculation. As such, it is great for the economy as a whole. Real wealth generation takes time. It can't be accomplished in a few milliseconds or a few weeks.

Dan8267 says

Owning something for a short time (a few milliseconds or a few days) and then selling it is speculation. Real wealth creation (the creation of products, jobs, infrastructure, and markets), takes time.

Yes, but the former is fun. The latter is work. Nobody likes work.

Vicente,
End of 2011, FIRE sector was 8.4% of GDP.
http://blogs.wsj.com/economics/2011/12/10/number-of-the-week-finances-share-of-economy-continues-to-grow/

Dan8267 says

Consider the microtrader with a few milliseconds advanced insider knowledge -- this actually was revealed to be commonplace recently. He used to be able to make millions siphoning wealth out of the system (and from other people) by having software exploit the few microseconds difference. Under my tax proposal, all his profits are taxed at 100%. He did nothing to earn them, generated no wealth, in fact decreased wealth through inefficiency and transaction costs. Even ignore ethics and morality, there is no economic justification for him profiting at all.

You can stop the front-running by simply requiring the bid & ask to stand long enough for a human/manual trader to react to it. That would bring back enough tail risk so that the skimming would stop. And there is something useful in this activity, it's price discovery, so I disagree with the 100% tax, in favor of a transaction tax. Of course more useful/productive long term investments can be encouraged by lower tax rates (as they already are). Good discussion!

mell says

a transaction tax.

Tax want you want to discourage. Don't tax want you want to encourage. A transaction tax would discourage transactions, which in principle should decrease the liquidity of markets and increase the overhead.

The tax I propose discourages short-term, zero-sum games and encourages long-term economic development. Naturally, we could implement many different variations. For example, instead of a linear decrease in tax, we could use a decreasing sigmoid function that rapidly decreases the tax over a few days than slowly decreases the tax over a few years.

The point is to use the tax policy to make "bad things" non-profitable. Of course, one must have a criteria for what is "bad". I submit that we consider things that harm the economy as a whole "bad" and things that benefit the economy as a whole "good".

Dan8267 says

The point is to use the tax policy to make "bad things" non-profitable. Of
course, one must have a criteria for what is "bad". I submit that we consider
things that harm the economy as a whole "bad" and things that benefit the
economy as a whole "good".

This is true, but we must examine how making rapid transactions is "bad."

I generally agree, however, the downstream effect tax policy of this sort would have on liquidity can not be understated.

I suspect the loss of liquidity would be great, adding risk that when one desires to liquidate a buyer would be hard to find.

The added liquidity provided by the speculators is certainly good for price certainty. See 2007 housing crash for market value where there are no bids.

control point says

This is true, but we must examine how making rapid transactions is "bad."

I wouldn't say that rapid transactions are bad. You want transactions to be quick and as costless as possible.

What's bad is
1. The zero-sum games.
2. The irrational price instability.

And both of these things are strongly related to short-term holding of assets. It's nearly impossible to play a zero-sum game that lasts five years or more. It's impossible to play a non-zero-sum game that lasts less than a few hours.

Perhaps the fundamental problem with #2 is that the market sets prices. Maybe an entirely different system should be used. Just a vague idea, but something like pooling money across all commodities, setting prices based on performance, and distributing profits based on shares of the totality rather than individual. I'd have to think more about that possibility.

sbh says

mell says

Good discussion!

What kind of regulations do you advocate for business in the Libertarian ideal? As much as I think we cannot be America without capitalism, I consider capitalism to be like Hannibal Lector: sociopathic and amoral. Surely your "free-market" context has some rules and numbers other than "less", "more", "over" and "under".

Here are some examples:

- Environmental regulations, because pollution infringes on personal liberty. Those need to be followed though by private AND government entities, no pass for military etc.

- Fraud, in fact violation of all EXISTING laws, should be prosecuted to the fullest extent. nobody is above the law. This is an area where the US has turned into a banana republic.

- Some sort of monopoly regulations and oversight need to exist, but I'd keep them simple and small.

- Most laws need to be simplified and turned from thousand-pages monsters into short and concise statement that everybody can and will read before passing them or doing business in an area where those laws apply. This would cut down on armies of lawyers employed by banks, real estate firms, heath-care companies etc.

- Information will be public good, e.g. leaked documents, homes for sale or wanted (no prosecution for bringing information to others ever) and all non-essential business functions can be legally carried out without a license. This will cut down on middlemen such as realtors, financial advisors and "economists".

- Banks can only be called banks if they engage in traditional banking business (not speculate like a hedge fund) and only those are eligible for FDIC.

Just a couple of ideas to start with ;)

CL says

Does someone who say, works in auto finance help or hurt GDP? Does the insurance business help or hurt GDP?

It seems to me that insurance distorts prices, especially in healthcare. It also disconnects the consumer from making cost-driven choices. Is insurance parasitical?

Would auto finance be considered so too, in this climate? Are auto companies getting the same kind of skim from their finance dealings?

Heraclitusstudent says

And the reason why I think banks should be private is that someone needs to decide where to lend the money. This capital allocation is critical for economy. The assumption is that private people investing money at their own risk will do a better allocation than government bureaucrats reacting to various political pressures.

Bankers are people. Government Officials are people.

Either way, people are making the decisions.

CL says

Would auto finance be considered so too, in this climate? Are auto companies getting the same kind of skim from their finance dealings?

Oh yeah. No-Fault, the best thing that ever happened to Auto Insurance.

thunderlips11 says

Oh yeah. No-Fault, the best thing that ever happened to Auto Insurance.

Can you expound? (and thanks)

Sure. Back in the day, I think it was the 70s if memory serves, insurance companies insisted that the legal costs associated with assigning proportional blame was too expensive, and that by lowering the legal costs, customers would save on insurance.

So they lobbied for states to pass no-fault laws.

The result was a boom of fraud and bad driving, as well as rapidly increasing costs for insurance, which results in people driving without insurance they can't afford.

Since there is no legal process involved, no-fault states enjoy much higher rates of fraud than no no-fault states. Also, good drivers are punished along with the bad equally; since no determination is made as to whose fault the accident primarily was.

Similar effects happened in England as well when no-fault was introduced:
http://www.theguardian.com/money/blog/2012/feb/15/car-insurance-no-fault-claims-elephant

CL says

Is the Financial Sector parasitical

In my opinion, not in general no.

I think that those who invest in real estate and other rentier type investments are parisitical, in a way. But I don't blame them. They are trying to put capital to work in the best way they believe they can.

To the extent that the financial sector facilitates rentier capitalism, by providing leverage at good rates to those who have the back up assets to participate, and then by having policies (the fed) and investment vehicles (Goldman and other inv bankers) that promote the success of rentier investments, they are perhaps also parasitical.

One might argue that the reason for our current employment depression (and liquidity trap etc), is that the cycles I try to allude to above went too far.

Also, about bubbles, it's my belief is that the boomer generation over hyped the 21st century, that is the rolling over of the calendar in 1999 - 2001. THe financial sector was very much involved in the pre 2000 irrational exuberance, that had to lead either to a depression (at some point) or to blowing other bubbles to replace the the stock market bubble. The piper had to be paid eventually.

We're still working on that. IT would have probably been better to just go ahead and have a really bad recession starting in 2001 without the huge tax cuts, wars, and housing bubble to postpone it. (not that that was the purpose of the wars).

donjumpsuit says

Cheap credit is parasitical.

In other words, if you are rich, you should have to take your assets and make bets on buying companies, goods, or capital improvements.

However, it doesn't work that way.

If you are rich, you have earned the privilege of borrowing super cheap money to grow your portfolio.

That is wrong on a number of different levels.

I've argued for some time that one of our problems as a nation has been cheap money for too long.

There is another recession coming, bad one. Why? We're getting a few Fed chairman who will be no doubt forced to begin taking away the punch bowl. There is simply no way around it.