So the whole "banning shorts" thing was wearily predictable. The very politically-connected "good" investment banks had a little scare this week. Call it panic selling, call it a bear raid, whatever. Suddenly, it's illegal to short financials. Go figure.
People like me are appalled. If it's illegal to short in a "panic", we ask, why isn't it illegal to go long during obvious asset price bubbles? If you can tell a panic from a correction, then surely you can tell an asset bubble from a genuine boom, right Mr. Greenspan? Most people were perfectly aware of the housing and tech bubbles in real time. Only economists and idealists get confused.
Whatever. As I said, the whole dialog is tired, obvious, predictable.
But... Much as I'm an unapologetic short, I'm perfectly willing to concede that there's such thing as irrational momentum selling, just as there is irrational momentum buying. Momentum buying is far more insidious and destructive in the long term, but both are bad. Banning short sales (or, in mirror image, restricting asset purchases to short covering) might help prevent momentum trades, but it's a lousy way to address the problem. Decapitation is a perfectly effective cure for migraines, but that doesn't make it good medicine.
Dean Baker frequently suggests a "Tobin tax" on securities trades, which, as reforms go, is not a terrible idea. What if we did put a small transaction tax on taking financial positions? Reduced liquidity means an increased commitment by investors to the underlying economics of their paper. That's a good thing.
But what if we designed this tax so that, rather than being calculated as a constant fraction of transaction value, it was a function of both value and trading volume, so that it would be more expensive to trade when everyone else is also trading? Maybe it'd cost 0.02% of notional value to trade when daily transaction volume has been within 1 standard deviation of the trailing year's mean, but the cost would increase as steeply rising function of any abnormal volume?
Such a tax would have lots of nice properties: First, it would be symmetrical, neutral between buyers and sellers. It would not harm transactors bringing new information into the market, since transaction volume would be normal while the information remains closely held. But it would bite transactors who react to widely known news or who pile on to price momentum. That is, "congestion taxing" wouldn't much damage the information aggregation/price discovery of markets, but would tax the zero-to-negative sum rush into or out of positions once the information work is already done. "Me too" purchases would be expensive, and those that occur would be informative, because they would reflect conviction rather than copycatting. Low-conviction information cascades would be discouraged by a high cost of entry, rather than prevented outright by administrative fiat.
Is this a good idea? It's Friday night, been a phukked up week, and I'm drinking right now (Kentucky Bourbon Ale, ya gotta try it), so maybe I'm slurring my thoughts. Just thought I'd toss this out into the world, and see where it lands.
Update: Jesse Eisinger has just published a nice column on the Tobin Tax in Portfolio.
- 22-Sept-2008, 9:45 p.m. EDT: Added link to Jesse Eisinger's column.
|Steve Randy Waldman — Friday September 19, 2008 at 7:37pm||permalink|