Published on Zmag (Source: Guardian Unlimited), by Dean Baker, July 05, 2009.
Last month, when Congress failed to pass a bankruptcy reform measure that would have allowed home mortgages to be modified in bankruptcy, Senator Richard Durbin succinctly commented: “the banks own this place.” That seems pretty clear.
After all, it was the banks’ greed that fed the housing bubble with loony loans that were guaranteed to go bad. Of course the finance guys also made a fortune guaranteeing the loans that were guaranteed to go bad (i.e. AIG), and when everything went bust, the taxpayers got handed the bill. The cost of the bailout will certainly be in the hundreds of billions, if not more than $1 trillion when it is all over …
… The logic is very simple. For someone using these markets to hedge, the tax will be inconsequential. For example, a farmer that hedges a $400,000 wheat crop will pay $80 when selling a future. Similarly, airlines that hedge by buying oil futures will barely notice the higher cost. In fact, because trading costs have fallen so much in recent decades, a tax at this level would just be raising costs back to their levels of two decades ago, a point at which there was already a very vibrant futures and options market.
However, even a modest tax will make life much more difficult for speculators. Many of them expect to make quick short-term gains, often buying and selling the same day. For these traders, an increase in transactions costs of 0.02 percentage points would be a burden.
Of course, a modest tax will not drive the speculators out of the market altogether, it is just likely to reduce the volume of speculation. For this reason, even a modest tax can still raise an enormous amount of money in a market where tens of trillions of dollars of derivatives changes hands each year.
This tax can best be thought of as a tax on gambling. Gambling is heavily taxed in every state that allows it. Representative DeFazio’s bill is effectively a tax on gambling in the oil markets. It will not stop it, but it would discourage it, and in the process raise a huge amount of money that could go to productive purposes.
The bill faces an enormous uphill struggle in Congress. As Senator Durbin said, the banks own the place and they are not going to just step aside and let Congress impose a tax on such a lucrative business. But it is important that people know about the DeFazio bill. First, Mr. DeFazio deserves a place on the honor roll for standing up to Wall Street.
Also, it is important for the public to know that there is a relatively low cost way to make up the shortfall in the Highway Trust Fund. When Congress raises some other tax and/or cuts a useful program, people should know that there was a better alternative. It just didn’t happen because, as we know, the banks own the place.