In the latest effort to pour gasoline on our economic meltdown, Ralph Nader, protector of the consumer from himself (and prosperity), is advocating such legislation that would enact a tax on the value of stock, bond and derivatives transactions.

Just as the banks have been subject to “stress-tests,” so too should such proposed regulations of the financial services industry like this get a full vetting.

Anyone following how the federal government regulators are grappling (unsuccessfully) with the definition of “systemic risk” and which banks should be allowed to fail must wonder how they will somehow shake the Magic 8-ball and divine some kind of workable definition of “speculation.”

So let’s think of some scenarios that may challenge what might be their definition of “speculation”:

• A couple in their 50s, having worked all their lives for just one company and acquiring its stock and amassing their life savings in such (though not technically “retirement funds” given tax restrictions), start to hear rumors that the company used deceptive accounting.  In a pure act of financial self-defense, they begin to sell off their stock of several hundred thousand dollars.  Under Mr. Nader’s rules, such could well be “speculation” subject to a tax if the couple got in and out of the position as they were unnerved by these once-in-a-lifetime events.  If not sure of such scenario, think of Enron in the summer of 2001.  OK, let’s have an exception for this.
• That same poor couple, nearing their retirement, finds themselves riding the wave of unprecedented prices in the commodities or stocks they own.  Worried that perhaps such is too good to be true, they wish to get out and into something ostensibly safer (US Treasuries).  Again, Mssr. Nader’s could well consider such as that evil force of speculation.  Not sure if such could occur? Please refer to the tech bubble of the late 1990s or the housing bubble of last decade. Sounds like we need another exception.
• Our bedraggled couple, who may never get the opportunity to retire given their serial lousy investment judgment, places a good amount of their nest-egg in a financial services company that happens to go all-in on government debt from Greece, Spain and Italy.  Sensing something may be wrong with such a position, they withdraw what’s left of such investment.  Speculation?  Such a scenario Possible? Ask the “Fiscal Terminator”, Jon Corzine.  This clearly calls for an exception.
• Mutual Funds would not be considered a speculative adventure.  Think of how few nano-seconds it would take Warren Buffet’s tax lawyers to drive an aircraft carrier through this opening, all the while Mr. Buffet is bemoaning taxed loopholes in full-throated manner. Me’s think the billionaire doth protest too much.

There are many more scenarios that would create “exceptions” but the point is, the rule would be the exception and the exceptions would be over-run by special interests and make the law toothless.

Also missing from the calculus is the fact that speculators are an additional source of “liquidity.”  Such seems like an academic term or some Wall Street jargon but it is, quite simply, the ease of transferability of securities, via the supply of buyers.  If you think such is not important, try selling your stock in September 2008 at the hight of the financial meltdown, when there where virtually no buyers.  Suddenly those dreaded speculators who will take risk and keep the economic blood of money flowing through our financial system don’t seem as evil as Mr. Nader makes them out to be.

As is quite often, Mr. Nader has an excellent suggestion, but for an alternative universe.

-I.M. Windee

This entry was posted on Thursday, November 10th, 2011 at 6:48 pm and is filed under Ruminations. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.