Before I do a flurry of election related posts in the run up to November 4th, I just wanted to do one more post in relation to the stock market, and the financial crisis they have created. In my previous Financial Crisis Raises Fundamental Questions post, I wrote about how we have to change the rules governing public companies, to give business executives more personal liability for the companies they run, so they are encouraged to follow the same common sense rules of business that private companies have to follow. However, as I also pointed out in that article, the reason so many public companies are so irresponsibly run nowadays is because they have to pander to the stock market. And these days, most stock traders tend not to buy and sell shares on the basis of sound business fundamentals (such as sustainable profits), but rather just on the basis of growth—even if it means running up huge debt (which fundamentally, is what has led to the current financial crisis, as well as previous “bubbles”). Even worse, speculators often deliberately manipulate the market to generate profit just for themselves, with disastrous results not only for the companies they’re supposed to be “investing” in, but even the community at large: witness the California electricity crisis for example.
If we can’t simply abolish the stock market entirely (which would be an ideal but almost certainly impractical solution), then we clearly have to find a way to bring these speculators under control, so the stock market can work for the purpose it was originally designed for: investing in businesses. Basically, we have to encourage people to buy shares as a long term investment, rather than using the stock market as the world’s biggest casino, where the players use other people’s money. So how can we achieve this? One way to discourage speculative stock trading would be to tax the buying and selling of shares. I mean, we tax just about every other profit making exercise these days, so why not this? A mere 1% should be enough to discourage speculative trading, while not deterring long term investment. And the tax revenue generated would be huge—it would quite possibly go a long way toward paying for the Wall Street bailout! What fairer way could there be to generate the revenue needed to fix the mess the stock market created in the first place? Of course, all the stock markets of the world would have to work together to introduce this at the same time, otherwise the speculators will just move to markets without this tax. But the governments of the free world have already shown a remarkable degree of cooperation in dealing with this crisis, so this would seem to be an ideal opportunity to implement something like this. The phoenix from the flames, so to speak.
POSTSCRIPT: I’ve been giving this idea further thought, and I think it might be even more effective if we start with a higher tax rate, and reduce it over time. Anyway, feel free to post your own ideas!