A troubling and insightful article

[John Masterson]

A troubling and insightful article by Mark Cuban about what Wall Street has become today. Mostly a high-risk day trading/gambling emporium that does not reward good companies with a higher stock price, nor does it help new companies raise capital...which was the entire original purpose.

We need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy.  It won’t come from traders trying to hack the financial system for a few pennies per trade.

Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk.  We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy.  That their stated value add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system.

http://blogmaverick.com/2010/05/09/what-business-is-wall-street-in/

[Peter Gibbons]

Some very good points:

"The best analogy for traders? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing.  A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it.  A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market."

"It’s rare for companies to go public these days. Just as rare for secondary offerings.  The only thing that keeps me in the market is that most of the stocks (not all) pay dividends or some other sort of cash payout. For the first time in my life, I bought outside the United States.  I bought Australia in a big way because it is becoming increasingly hard to find new domestic investments that are not influenced by the “hackers” and the games being played on a macro level. It’s hard to believe, but evaluating countries as an investment is now easier than evaluating companies . Even with all the unrest in Europe. Or maybe because of it."

However the solution according to Mark is more government intervention:

"My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business.  Whether its through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years."


I personally think that market forces would have taken care of this couple of years ago.
Instead people bought into the "Too big to fail" idea and now the same companies that were saved with taxpayers money are doing the same things.

[The Original Henry]

From the article:

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business.

Why? If you step back and look at the 30,000 foot view, what we're witnessing is a broad change of the way the macro economy and business works. Rather than trying to hold on to the past it would be wise to wrap your head around where it's going and try to meet it there instead.

The same could be argued about the outdated employer/employee relationship model. The dysfunction in that model today is just a symptom of these broader landscape changes that are taking place.

[codger]

"An troubling..." 

JM, I'm surprised. You sound a little confused on your use of the articles A and AN. I know, nitpicking. I couldn't let it go unremarked. I am a bit of a grammar Nazi.

[John Masterson]

From the article:

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business.

Why? If you step back and look at the 30,000 foot view, what we're witnessing is a broad change of the way the macro economy and business works. Rather than trying to hold on to the past it would be wise to wrap your head around where it's going and try to meet it there instead.

The same could be argued about the outdated employer/employee relationship model. The dysfunction in that model today is just a symptom of these broader landscape changes that are taking place.

O Henry...

Did you read the entire article and you still came to that conclusion? I think the article explains a bit why this new mode of Wall Street is not a good thing for the country.

If you did read it through and still have the opinion that this is just a new model that is a useful alternative, then I guess I just have to disagree with your conclusion.

[John Masterson]

I personally think that market forces would have taken care of this couple of years ago.
Instead people bought into the "Too big to fail" idea and now the same companies that were saved with taxpayers money are doing the same things.

I don't see how that would work.

 How would the market have fixed it a few years ago, and what prevented the market from doing so?

[Peter Gibbons]

"What prevented the market from doing so?"

Government intervention. If the government had not saved AIG - Goldman Sachs may not exist today.
And Goldman Sachs is the company that is making crazy money now using High Frequency Trading.

[John Masterson]

"What prevented the market from doing so?"

Government intervention. If the government had not saved AIG - Goldman Sachs may not exist today.
And Goldman Sachs is the company that is making crazy money now using High Frequency Trading.

OK, I see your theory.

And you believe that the global economy would simply not have collapsed and plunged the world economy into Great Depression?

[The Original Henry]

Hi John.

I wasn't trying to say the new model is either good or bad. I was trying to say that the current situation on Wall Street is more likely the symptom of a broader macro shift in the economic and/or business environments. If that's the case then it's pointless to worry about the symptoms and ignore the disease. Pining for the way things used to work won't do any good if the underlying fabric is changing.

The economy as it is currently structured is not sustainable. It was great to get us quickly to where we are today, but you simply can't have an economy whose entire underpinnings are rooted on constant expansion. Even if it only grows 2-3% per year on average, that's still an exponential growth curve. At some point that model will become unstable and unsustainable, and I think what we're seeing are the beginning signs of that starting to come unraveled. Add to that an aging boomer generation and new generations that are both smaller and less productive and you have a recipe for trouble.

I'm not smart enough to know what's going to happen, but my guess (and my original assertion) is that the basic fundamentals are undergoing a slow metamorphosis that will eventually result in different economic and business fundamentals all together. The current mess on Wall Street stems from the fact that we don't yet know what those new fundamentals will be so everyone is making bigger and bigger reaches at trying to work the market using systems and ideas that are fading before their eyes.

The answer isn't to force time into reverse and go back to the way it used to work, it's to gracefully flow with the inevitable transition. The problem is nobody knows what the transition looks like or where it's going so there is a ton of desperation and craziness right now as these people try to figure out what the heck is going to happen.

[Peter Gibbons]

"And you believe that the global economy would simply not have collapsed and plunged the world economy into Great Depression?"

I think there would have been some much needed restructuring.

This "Too big to fail" is I think a scare tactic. And when is it going to stop?
Now we have Greece - what is going to be tomorrow?

By the way have you read about this connection: ?
http://www.dailymail.co.uk/news/worldnews/article-1277038/Goldman-Sachs-probed-financial-transactions-Greece.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=akqC4y5U7MnU

[John Masterson]

Henry,

Well, I think the government ought to eliminate capital gains tax if you hold stock for 5 years or more, and hike the taxes on short term gains. Eliminate much of the the profit from these hacker activities that do nothing but churn the market and produce nothing of value.

It's all about the incentives.

Right now a bunch of hackers are harnessing computer algorithms to game the market into oblivion, and it's no longer doing what it must do to support our financial system by fueling innovation and creating jobs in the process.

[John Masterson]

Peter,

I know where you are coming from, having seen the problems in socialist/communist regimes and too much government power.


But sometimes you really do need government regulation.  The free market ran aground with all this day trading/hacking, and was really hours away from a meltdown that could not be quickly repaired.

I believe we were all headed for real poverty for quite a while if that meltdown had happened.

[The Original Henry]

Well, I think the government ought to eliminate capital gains tax if you hold stock for 5 years or more

Can't really disagree with that notion, but I doubt it would be that simple. The problem of course is the unintended consequences. Capital gains are charged to home owners who sell and to entrepreneurs who work through their own S-corp or C-corp companies. Now you have to write individual exclusions for all the new avenues of tax avoidance that have been created.

Invest your money into houses, hold for 5 years, flip and re-buy without paying any taxes on the gains.

Work through your own S-corp, take no payroll for yourself, leave all the gains in the company and after 5 years you can take it all home tax free.

There are many more examples, plus there will be all the new 5-year schemes that will be created just to avoid taxes on investment income. That's a lot of special situations, exclusions, and careful wording that would have to be created just to support what is initially a simple idea.

It could also have a counter-effect. People may have legitimate reason to do what they're doing, and if you remove the incentive to do it on Wall Street they could move their large sums of money elsewhere in order to continue their current behavior. Wall Street collapses and something else pops up to absorb big-time, short-term money activity.

There simply are no easy answers to what is a very complicated situation. Even the simplest of interventions can have wildly unpredictable results.

[John Masterson]

Henry,

I meant just stock, not other holdings. Specific regulation to Wall Street.

Sometimes you do have to engineer incentives with taxes.  It's powerful IF you get it right.

[codger]

JM wrote, "Well, I think the government ought to eliminate capital gains tax if you hold stock for 5 years or more, and hike the taxes on short term gains. Eliminate much of the the profit from these hacker activities that do nothing but churn the market and produce nothing of value."

An excellent solution, and it would be effective if implemented and enforced. I don't see it happening. Too many lobbyists and campaign contributions would fight it.

Market churning mechanisms are killing the markets, and that includes futures trading schemes.

This is also why other than the toxic VAT, no transformative tax legislation will happen. The existing tax code collects a lot of revenue; provides a way to perpetuate class warfare; provides a mechanism for those in political power to punish enemies, real or perceived; provides a political solution to redistribution of wealth.

Fundamental changes are needed, but don't look to the current congress to do anything of real significance.