[OPE] Bob Pollin on "ending casino capitalism"

From: Jurriaan Bendien <adsl675281@tiscali.nl>
Date: Sat Oct 18 2008 - 18:12:56 EDT

(I am not sure that his proposal would end gambling in debt obligations, but thought it interesting enough to post it - JB).

Ending Casino Capitalism


Wall Street is begging for government life support. Unfortunately,

we need to acquiesce to avoid another 1930s-style

Depression. But Wall Street has to accept in return a revived

regulatory system that would promote financial stability and

the well-being of the majority. Here are four observations

and proposals, intended to apply to all US financial markets

and institutions, whether banks, holding companies, hedge

funds or variations thereof:

1. The bailout doesn't have to cost taxpayers $700 billion.

The most cost-effective way to finance the bailout is for the

Federal Reserve, not the Treasury, to buy the bad debt from

distressed financial institutions. If the Fed, as opposed to the

Treasury, buys the bad debt, the funds don't come out of taxpayers'

pockets but from the Fed's power to create money.

This may seem like alchemy. But in fact it is simply a variation

on what the Fed does normally-in conducting day-to-day

monetary policy and in managing financial crises. Last year the

Fed bought $840 billion in government bonds outright from

US banks. As recently as September 19, the Fed announced

plans to purchase short-term debt obligations issued by Fannie

Mae, Freddie Mac and the federal home loan banks as a way

to "further support market functioning." The Fed can later

re sell the bad debt to private dealers, albeit at distress-level,

cut-rate prices. In any case, the funds to transact these operations

will not have to come from taxpayers.

2. Tax speculators. A small sales tax on all securities transactions-

stocks, bonds, derivatives, mortgage-backed securities,

short sales and all new schemes-would raise the costs of

speculative trading and therefore discourage casino capitalism.

At the same time, the tax will not discourage investors

who intend to hold securities for a longer period since unlike

the speculators they will be trading infrequently. This tax

could generate, conservatively, $100 billion per year in government

revenue-enough to cover, for example, a green investment

program that could create 2 million new jobs.

3. Impose asset-based reserve requirements. These force financial

institutions to maintain cash reserve funds in proportion

to the riskier assets in their portfolios. They can discourage firms

from holding excessive amounts of risky assets and serve as a cash

cushion to draw on when market downturns occur. The same

principle guides the margin requirements that apply to stocks

purchased with borrowed funds. During the late 1990s, Federal

Reserve chair Alan Greenspan acknowledged that he could have

dampened the stock market bubble by raising margin requirements,

but he refused to take action. Measures like these can also

push financial institutions to channel credit to projects that advance

social welfare. Policy- makers could stipulate that, say, at

least 5 percent of banks' loan portfolios be channeled to low-cost

housing and 5 percent to green investments. If the banks fail to

reach these quotas, they would then be required to hold this

same amount of their total assets in cash.

4. Loan guarantees for priority productive investments.

Financial bailouts are a form of credit risk insurance for reckless

speculators. Instead we need to provide credit risk insurance-

i.e., loan guarantees-to promote social priorities like

affordable housing and green investments. Investments in these

areas will expand. The securities sales tax and asset reserve

requirements should prevent speculators from converting such

initiatives into new casino opportunities. As such, the overall

costs to taxpayers would be small.


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Received on Sat Oct 18 18:21:04 2008

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