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ed_rexIf economics is "the dismal science" those MBAs, turned out like so many widgets during the past 20 years, who now control billions upon billions of dollars of investment capital have - yet again - proven to anyone paying attention that a university degree is no proof of intelligence, let alone of wisdom.
Google stock closed down 7%, or $27.75 per share, today.
Why has this happened, I hear you cry. Has Google blown a major investment? Is it being sued for copyright infringement or has it been targetted by US anti-trust investigators?
Er, no.
Well, has another company launched a vastly superior search engine?
No again.
Apparently, Google is "worth" 7% more now than it was this time last night because one of its executives, George Reyes told an obvious truth when asked about Google's prospects for growth in the short-term future. He said that Google is unlikely to continue growing at the pace it has maintened over the past 18 months.
To quote from the CBC's story,
I suppose it proves only that I am naive in thinking that, possibly, some of the traders out there investing your wealth (not mine; I don't have an RRSP to speak of) might have learned something from the last bust following a lunatic boom. After all, it was only 5 or 6 years ago, wasn't it, the last time we all expected economic growth to continue at an exponential rate for, er, ever?
But of course, the market isn't rational. That is, it operates according to certain mechanical rules, but the steering is done almost entirely by (almost entirely) men who are not nearly so clever as they believe themselves to be. And its original purpose - to raise funds for industry and enterprise - has been almost entirely lost in the short-term gambling that is stock trading as opposed to investing.
In other words, the stock market has become a game, a casino, where monomania is not just the rule, it is virtually a requirement. Like a conclave of shamans poking the entrails of a deer with a magic stick, stock "analysts" read corporate pronouncements for their "signals" and then, with a terrifyingly consistent mob-like behaviour, they buy or sell as one man.
Don't get me wrong. Investment is (often) a good thing. Capital liquidity is (often, and within reason) a good thing. But moving investments around like so many poker chips does no good for anyone but the traders themselves, who get a percentage of every trade.
It's time to make the stock market useful again. I just happen to have a Modest Proposal as to how this could be accomplished.
Basically, the idea is a variant of the Tobin Tax, in the economist James Tobin proposed "[a] uniform international tax payable on all spot transactions involving the conversion of one currency into another, in both domestic security markets and foreign exchange markets..." with the goal of discouraging speculation for and against, for example, the Canadian dollar.
I propose something simpler and possibly more radical: A graduated tax on financial gains from stock transactions.
In essence, traders would be punished for making a quick buck in the stock market, rather than investing for the long term. To do this, profits from "stock-flipping" would be taxed at a descending rate.
If one "earns" a profit of $1.00 on a $1.00 investment within one year, the tax would be 100%.
If one flips the stock within two years, the tax would be 75%.
Three years, 50%
Four years, 25%.
After 5 years holding on to the same stock, any profit would be the investors to keep.
What this would accomplish is two-fold. First, it would put an awful lot of stock brokers out of a job and force them to find honest work, while freeing up a good deal of potentially useful investment capital in the process. Second, it would strongly encourage those investors who remain to think about the long-term value of their investments, rather than to focus on their reading of the psychology of the market.
All right. That's it. There are at least two of you (probably) reading this who I know will think this the most stupid idea they've ever heard of. Have at me, kids. But no ad hominen attacks, this time, okay? I really don't like those.
Google stock closed down 7%, or $27.75 per share, today.
Why has this happened, I hear you cry. Has Google blown a major investment? Is it being sued for copyright infringement or has it been targetted by US anti-trust investigators?
Er, no.
Well, has another company launched a vastly superior search engine?
No again.
Apparently, Google is "worth" 7% more now than it was this time last night because one of its executives, George Reyes told an obvious truth when asked about Google's prospects for growth in the short-term future. He said that Google is unlikely to continue growing at the pace it has maintened over the past 18 months.
To quote from the CBC's story,
"Most of what's left is just organic growth, which means you have to find ways to grow your traffic," Reyes said. "Clearly, our growth rates are slowing, and you see that each and every quarter."
Reyes later put a more positive spin on his remarks. "I am not turning bearish at all," he said near the end of a 45-minute session that was webcast. "I think we have a lot of growth ahead of us. I think it's just a question of at what rate."
I suppose it proves only that I am naive in thinking that, possibly, some of the traders out there investing your wealth (not mine; I don't have an RRSP to speak of) might have learned something from the last bust following a lunatic boom. After all, it was only 5 or 6 years ago, wasn't it, the last time we all expected economic growth to continue at an exponential rate for, er, ever?
But of course, the market isn't rational. That is, it operates according to certain mechanical rules, but the steering is done almost entirely by (almost entirely) men who are not nearly so clever as they believe themselves to be. And its original purpose - to raise funds for industry and enterprise - has been almost entirely lost in the short-term gambling that is stock trading as opposed to investing.
In other words, the stock market has become a game, a casino, where monomania is not just the rule, it is virtually a requirement. Like a conclave of shamans poking the entrails of a deer with a magic stick, stock "analysts" read corporate pronouncements for their "signals" and then, with a terrifyingly consistent mob-like behaviour, they buy or sell as one man.
Don't get me wrong. Investment is (often) a good thing. Capital liquidity is (often, and within reason) a good thing. But moving investments around like so many poker chips does no good for anyone but the traders themselves, who get a percentage of every trade.
It's time to make the stock market useful again. I just happen to have a Modest Proposal as to how this could be accomplished.
Basically, the idea is a variant of the Tobin Tax, in the economist James Tobin proposed "[a] uniform international tax payable on all spot transactions involving the conversion of one currency into another, in both domestic security markets and foreign exchange markets..." with the goal of discouraging speculation for and against, for example, the Canadian dollar.
I propose something simpler and possibly more radical: A graduated tax on financial gains from stock transactions.
In essence, traders would be punished for making a quick buck in the stock market, rather than investing for the long term. To do this, profits from "stock-flipping" would be taxed at a descending rate.
If one "earns" a profit of $1.00 on a $1.00 investment within one year, the tax would be 100%.
If one flips the stock within two years, the tax would be 75%.
Three years, 50%
Four years, 25%.
After 5 years holding on to the same stock, any profit would be the investors to keep.
What this would accomplish is two-fold. First, it would put an awful lot of stock brokers out of a job and force them to find honest work, while freeing up a good deal of potentially useful investment capital in the process. Second, it would strongly encourage those investors who remain to think about the long-term value of their investments, rather than to focus on their reading of the psychology of the market.
All right. That's it. There are at least two of you (probably) reading this who I know will think this the most stupid idea they've ever heard of. Have at me, kids. But no ad hominen attacks, this time, okay? I really don't like those.
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(no subject)
Date: 2006-03-01 04:07 am (UTC)(P.S. I think there's a stray line at the bottom of your original post.)
Investment vs. Speculation
Date: 2006-03-01 11:41 am (UTC)In a nutshell, I think investment is a socially useful activity, but society cannot afford to let it operate as a master rather than a servant.
(Thanks for noting the stray line, by the way; it's gone.)
(no subject)
Date: 2006-03-01 05:14 am (UTC)Here's also why it's stupid:
1) You're making investing in the stock market akin to investing in the traditionally safer but less volatile capital retreats, like gold, but without mitigating the risk factor. You're throttling the profit potential but without staunching the loss potential, effectively making investing in resources more viable than investing in innovation. Investors typically "retreat" back to gold and capital markets during times of geopolitical volatility - they give up the potentially wider profit margins of funding innovation and technology for the safety of a stable resource. By killing the potential profit margins you've just made investing in gold and garden gnomes more attractive than investing in technology. So basically, everybody becomes hoarders, a 3rd world country in which the economic system favors keeping diamongs locked in safety deposit boxes over funding - say, cancer research.
2) Your plan throttles innovation. People invest in what they see being the technology of tomorrow, and companies IPO to generate the capital required to do that R&D and bring that innovation to the market as quickly as possible. Your plan requires investors to be clairvoyant. They not only have to guess what will be innovative next year, they have to have the foresight to anticipate where next year's innovation will lead to the following year (since that is the first year they stand to gain), and then if they don't want to have most of the reward for their risk taxed away immediately, they have to have had the foresight to know what the innovation of the second year will springboard into the third year. If they want to realize the profit from their risk in investing in innovation fully, the investor has to be able to see five years into the future - to anticipate each technological stepping stone and how it leads to the next, all correctly, without having the company make a single misstep in their product cycle. All for an assumption you seem to have taken as a presupposition: that all stocks accrue value.
3) You slash the population of stock brokers in half but unleash a trillion new lawyers on the planet. Now into the second year of my investment, where I finally stand to gain all of 25% of what I actually gained for my risk (assuming I didn't actually lose anything) - it is the management of the former fiscal year who is responsible for any fuck-ups. It seems to me that erroneous financial statements or ambiguous press releases from any company now become litigable back into previous fiscal years. After all, with such a long chronological gap forced upon me by a technophobic innovation-hating government in which I can finally realize the fruits of my five years of clairvoyance, companies now become accountable for their statements five years into the future.
Anyway, your idea just seems to me unnecessary and trying to fix something that's not broken. If investment fund managers are wrong about companies like Google then so what? That is the risk those investors were willing to take in order to achieve a potential gain (and incidentally, they did gain - Google IPO'ed at something like US$87 and it's now well above $300). Where's the problem? Who is the victim?
(no subject)
Date: 2006-03-01 12:22 pm (UTC)The "so what?" has to do with the sheer amount of money in play. The "madness of crowds" is economically destabalizing.
Just about every purchase is now more attractive and safer. There's no motive to take the risk that the stock might drop.
Sure there is. Under my proposal, there is simply less motive to take quick profits. There is still the risk of loss and the potential for gain, but this proposal would see the return of dividends as one of the motivating factors in investment.
I have to wait five years to capitalize on it; and the stock has five years - five years of potential war, pestilence, nuclear attacks, financial mismangement, crime, and god knows what - in which it can drop below my initial purchase price and leave me with less than I started.
Then sell, if you think you've made a bad investment. If you've made a good investment, you'll just need to wait five years in order to realize your profits tax-free. The longer you wait, the more profit you can keep; this enourages you to think about the tangible value of your investment, rather than the moment-to-moment feelings of the mob.
1) You're making investing in the stock market akin to investing in the traditionally safer but less volatile capital retreats...You're throttling the profit potential but without staunching the loss potential, effectively making investing in resources more viable than investing in innovation...
Perhaps so, in which case the same mechanism should be applied to commodities.
2) Your plan throttles innovation. People invest in what they see being the technology of tomorrow, and companies IPO to generate the capital required to do that R&D and bring that innovation to the market as quickly as possible.
You're buying into the myth, not the reality. People in fact, hand their pension funds over to money managers who mostly spend their time trying to out-guess other money managers. In other words, most investment decisions are made with an eye to what is sexy, not what might make good investments.
Your plan requires investors to be clairvoyant.
No more so than now. The only difference is they have to be better clairvoyants in order to make significant profits.
...If they want to realize the profit from their risk in investing in innovation fully, the investor has to be able to see five years into the future...All for an assumption you seem to have taken as a presupposition: that all stocks accrue value.
Don't be silly, I did not presume that all stocks accrue value. Nor did I assume or even imply that my proposal doesn't permit mis-steps. Quite the opposite. My proposal acknowledges that mis-steps sometimes happen, but encourages investors to take the long view and not (for example) dump their shares in Google its executive speaks plain sense.
3) You slash the population of stock brokers in half but unleash a trillion new lawyers on the planet...Now into the second year of my investment, where I finally stand to gain all of 25% of what I actually gained for my risk...- it is the management of the former fiscal year who is responsible for any fuck-ups.
And they are not now? The only difference between the current situation and my proposal is the time-scale.
It seems to me that erroneous financial statements or ambiguous press releases from any company now become litigable back into previous fiscal years.
And how is this different from the current situation?
...with such a long chronological gap forced upon me by a technophobic innovation-hating government in which I can finally realize the fruits of my five years of clairvoyance, companies now become accountable for their statements five years into the future.
This won't be a problem if companies don't lie. Incidentally, I used the 5-year model for sake of argument; I would be interested in hearing an economist's analysis of the most efficient way of setting up the basic structure - ie, at what point does the benefit of longer-term thinking get outweighed by the loss of investor interest in investing?
(no subject)
Date: 2006-03-01 07:41 pm (UTC)The "so what?" has to do with the sheer amount of money in play. The "madness of crowds" is economically destabalizing.
That's not an answer, it's a reaction. And one example of a very recent IPO dropping a paltry 7% one day is neither the "madness of crowds" nor economically destabilizing.
Sure there is. Under my proposal, there is simply less motive to take quick profits. There is still the risk of loss and the potential for gain, but this proposal would see the return of dividends as one of the motivating factors in investment.
Yep, which means less innovation and less risk-taking. The willingness to risk money in an exciting new venture is directly proportional to the potential for quick and/or significant gain. The longer you have to look down a timeline for potential profits, the less-risky in terms of investing you have to be. Good-bye venture capitalism, and good-bye exciting new start-ups, everything needs a track record and a five-year business plan. May as well buy oil.
I have to wait five years to capitalize on it; and the stock has five years - five years of potential war, pestilence, nuclear attacks, financial mismangement, crime, and god knows what - in which it can drop below my initial purchase price and leave me with less than I started.
Then sell, if you think you've made a bad investment.
Bad answer. You assumed I bought in the first place. The question is: why buy?
If you've made a good investment, you'll just need to wait five years in order to realize your profits tax-free. The longer you wait, the more profit you can keep; this enourages you to think about the tangible value of your investment, rather than the moment-to-moment feelings of the mob.
Nonsense. I don't think you know anything about the stock market, and somehow you think Google is typical of it: a newborn stock which happens to have a lot of cachet for its wild-eyed management and its self-admitted willingness to do things differently. You think stocks shoot up 100% every year or something, in which case taking 25% of a 100% gain seems good. But 99% of stocks, any that have been around more than a few years, don't shoot up over the year, they fluctuate within a stable boundary that has nothing to do with sexiness and everything to do with fundamentals. Under your plan, there is no reason to buy BCE or IBM or any blue chip stock.
(no subject)
Date: 2006-03-01 07:53 pm (UTC)Aw, Jesus Christ motherfucking hell, even part two exceeds the character limit. I'm surprised LJ isn't bankrupt already.
1) You're making investing in the stock market akin to investing in the traditionally safer but less volatile capital retreats...You're throttling the profit potential but without staunching the loss potential, effectively making investing in resources more viable than investing in innovation...
Perhaps so, in which case the same mechanism should be applied to commodities.
I knew you would say that. As usual, you want to impose sweeping new laws onto the masses to prohibit their freedom just to punish a tiny fraction whom you see behaving irresponsibly (trying to make money quickly). How draconian. Soon under your government everyone will have to wear helmets everywhere. Anyway, you apply the mechanism to commodities, without realizing that actually, everything is a commodity. So now that you have stifled investment in resources, our money goes elsewhere. Into cars and baseball cards and artwork. Do you put your tyrannical little chokehold around those now? Prevent artwork resale within a year for profit? What next? Is it OK to sell my house the same year I bought it and make a profit, or would you rather people were forced to live somewhere a year before moving? Is the instability of people's free movement unsettling you as well?
2) Your plan throttles innovation. People invest in what they see being the technology of tomorrow, and companies IPO to generate the capital required to do that R&D and bring that innovation to the market as quickly as possible.
You're buying into the myth, not the reality. People in fact, hand their pension funds over to money managers who mostly spend their time trying to out-guess other money managers. In other words, most investment decisions are made with an eye to what is sexy, not what might make good investments.
No, you're insane - you think Google in any way represents the actual stock market. You think a newborn stock in which there is expected volatility in an emerging technology somehow represents what actually happens to all stocks instead of the opposite: it happens to almost none.
Your plan requires investors to be clairvoyant.
No more so than now. The only difference is they have to be better clairvoyants in order to make significant profits.
Yep. And the more clairvoyant you have to be, the safer you're required to be to mitigate the potential loss. A very anti-innovation, anti-technology economy. May as well buy oil and invest only in car companies that promise to keep using my oil.
Don't be silly, I did not presume that all stocks accrue value. Nor did I assume or even imply that my proposal doesn't permit mis-steps. Quite the opposite. My proposal acknowledges that mis-steps sometimes happen, but encourages investors to take the long view and not (for example) dump their shares in Google its executive speaks plain sense.
Investors already take the long view - that's what RRSPs and mutual funds are for. You seem to think there's only one kind of investment, the kind where money managers read tech articles and try to outguess each other. But that's what they ask you when you give them your money: do you want to build your money relatively safely but slowly and retire on it; or do you want to try at greater risk to make some money quickly. Where's the problem? The only problem I see is that you think all people ought to have your goals, and those that do not should be legislated into having them.
(no subject)
Date: 2006-03-01 08:04 pm (UTC)Part 3:
This won't be a problem if companies don't lie. Incidentally, I used the 5-year model for sake of argument; I would be interested in hearing an economist's analysis of the most efficient way of setting up the basic structure - ie, at what point does the benefit of longer-term thinking get outweighed by the loss of investor interest in investing?
A real economist wouldn't even bother arguing with you because you obviously do not have any idea what the actual stock market is doing. All you seem to know is that one sexy infant stock that habitually gets a lot of press for its rogue-management style went down 7% one day and for some reason this outrages you.
The other reason a real economist wouldn't bother arguing with you is because I accepted the idea in the spirit it was intended and ignored a basic geographic reality. What would actually happen is that all investment would immediately move out of the territory in which you enforced your baby step towards communism. We live on a world stage where governments are trying to attract businesses not lose them; where they have to provide incentives for companies to relocate there and HQ there and report there. If you effected this law in Canada, for example, you have simply moved all new start-ups who require R&D capital from their IPOs to see this as the least attractive place to operate. You have made venture capitalists look elsewhere. So new companies don't open here, and existing companies begin moving out - to the US. Unemployment skyrockets at the same time that the dollar becomes less and less valuable, causing inflation, and at some point hopefully someone assassinates you and the new government rescinds your policy of hamstringing business all for the weird rationale of trying to prevent a small number of people from making money too quickly for your tastes.
Taxing ideas
Date: 2006-03-04 12:42 am (UTC)Take it from a professional: your tax proposal is unenforceable!
(no subject)
Date: 2006-03-06 11:55 pm (UTC)didn't understand half of thatdon't own any google stock?