Apart from a few Redditeers who are looking to pocket some tendies (profits) off the next market mania fiasco, I think most serious investors are hoping to avoid the scenario where we have a recurring GameStop-style runup-of-the-week. It was an interesting and pretty unprecedented occurrence, but it wasn’t good for the market nor for the many ordinary investors who got needlessly burned.
Essentially what we witnessed when it came to the runup of worthless or troubled company’s stocks such as GameStop is looking more and more like a pyramid scheme. Those that got in early and out early made lots of money, but most people got left holding the bag. Most of the winners appear to have been big money players, and most of the people who lost money appear to have been ordinary (retail) investors.
Big money whipped up buying frenzy, inducing a lot of ordinary people to try to get-rich-quick through the baseless and massive increase in the price of a few stocks, far far beyond what they were in any form of reality worth. It was market manipulation pure and simple, and if left unchecked, would kill confidence in the markets and destroy the economy.
If that sounds harsh, I don’t believe it is. I’m not a fan of over-regulation or needless regulation, to say the least, but some regulation is necessary to preserve the fairness and integrity of the markets. Many people believe that they system as it is now is not fair, and a lot of the participants of the Wallstreetbets mania believed they were fighting back against the unfairness of the system. Perhaps, but it’s the government’s job to reign in abuses or practices that are not fair to everyone. Whether or not they are doing a good job of it is something I’ll leave for others to comment on and debate.
What can be done?
I am of the strong belief that the government needs to prevent what happened the last week in January from happening going forward. The problem is, how best to do it.
I guess if I had the answer to that question, I’d be on Capitol Hill being sworn in as the next head of the SEC! I have a few ideas, but one potential solution that I am definitely not in favor of is the proposed tax on financial transactions, including stocks. This idea has been floated a few times in the past, and its proponents saw an opening to bring it forward again following the January market craziness.
Who do we need to be protected from?
I’ve read the arguments for and against this sort of tax, and I just don’t think the “pro” arguments hold any water. Those in favor of the tax argue that it will prevent frequent trading, especially the kind that we saw revolving around GME et al. While I’m not a fan of frequent trading, and really dislike day-trading, I don’t see them as something the government needs to guard the markets against nor prevent people from doing.
Market manipulation is another matter though. But the tax idea is not going to prevent what we saw with GameStop. The proposal would levy a 0.1% on stock trades; for the small traders who put maybe $1000 into GME during its crazy run, would a $1 tax really have stopped them from doing it? Even big traders pumping, say, $1 million into the scheme, the tax would have amounted to $1000. Would that have deterred any of them from chasing hundreds of thousands or even millions in profit? I just don’t see it.
Beware of mixed purposes and unintended consequences
Proponents of the tax also say it will help eliminate the national debt in the U.S.. One member of the House of Representatives, which I won’t mention by name because I don’t ever want this blog to be political, is even proposing using the tax money to eliminate all student loan debt. The Honorable Representative believes the tax in question would generate about $1 trillion per year, which eventually would cancel out all of the nation’s outstanding student loan debt balances. I’m not going to debate whether this is a good or bad thing from a values standpoint, but I hardly think properly regulating financial markets and addressing student loan debt levels have any logical connection.
One thing about tax increases that you learn early in an economic degree program is that they often do not generate the level of revenue originally anticipated. Taxes, which are necessary in an advanced, civilized society, are also what is known as “economically inefficient”. The more something is taxed, the less economic activity it generates, and therefore the less tax that can be collected on it. If proponents of the stock tax think it’s going to generate $1 trillion per year, it will probably actually raise a lot less. The more people that avoid the tax by trading stocks less frequently, the lower the tax base, and the less tax actually collected.
My biggest fear of a stock tax, if enacted, is that it will produce a host of something that governments are very good at generating: unintended consequences. Those in favor of the tax claim it will lead to a more equitable society, because the very wealthy will pay a disproportionate share of it. I’m not sure that’s what will actually happen.
Wither retirement?
What I see taking place if a stock transaction tax is exacted is this: a significant plunge in the stock market, 401(k) and other retirement plan balances going way down (not good if you’re even remotely closing in on retirement), people losing interest in investing, and an old-age wealth crisis whereby ordinary people will not be able to afford a decent life in retirement. And it won’t prevent another GameStop pyramid scheme from happening anyway!
What the government needs to do is stop market manipulation, not throw up a tax and hope for the best. There needs to be much stronger penalties for people who cause market bubbles through misinformation and by stoking up emotion over something that isn’t real (i.e. a one-week 1000% increase in a stock’s price for bogus reasons).
There is a saying that attack is the best form of defense. But is a tax is the best form defense? We need to be defended against market manipulation, but the proposed tax doesn’t look like the best way to do it. Let’s address the causes of the problem rather than generate a set of unintended consequences with something that won’t fix anything anyway.
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