It’s Time to Tax the Speculators

Some years ago I had the pleasure of interviewing Jim Cramer, who at the time was merely an excitable market commentator and not the self-caricaturing mad man of Mad Money. I had admired his memoir of his days as a hedge-fund operator, called Confessions of a Street Addict, but I felt uneasy about the ways he surfed the ups and downs of the market in search of a fortune. “What’s the difference,” I asked him, “between you and a bookie?” He laughed and replied, “Nothing.”

This was an honest answer, and in its way, a profound one, because it gets to the heart of our economic distress. Wall Street has always had a claim to a privileged status in American life because it is supposedly the financial heart that pumps the blood through the entire financial system, backing innovation and supporting dreams of small business and creating jobs. So when these brokers and bankers have enjoyed a privileged status, we explained the justice of the arrangement to ourselves by pointing to their smarts at allocating capital, and reminding ourselves what was in it for us.

What we’ve certainly learned in the last fourteen months is that when it comes to the hedge fund operators, this is a nasty myth. Bookies aren’t interested in which team wins a game, and hedge funds aren’t interested in investing in companies and helping them grow. The hedge funds just want to make money on the swings. “It’s true that what you do in a hedge fund is like betting on a football game,” Cramer explained to me. “If the Eagles are favored to beat the Giants by six, and you think the Giants will win, then you bet on the Giants. If a company is trading at eight times earnings and you think it’s worth 10 times earnings, buy it! If you think it’s worth six times earnings, sell! So basically, what I did is not different.” And some hedge fund operators don’t simply bet; they manipulate the line, as Cramer indiscreetly explains in this video.

In other words, the hedge fund operators don’t add any more value to a company or a society any more than a bookie adds to a football game. Which brings us to Paul Krugman’s column in The New York Times today, in which he calls for a special tax on speculators that would serve to deter speculation. This month, British Prime Minister Gordon Brown presented a proposal at the Group of 20 meeting of leading economies that would tax financial transactions as a way to discourage “socially useless” activities. “Such a tax would be a trivial expense for people engaged in foreign trade or long-term investment,” writes Krugman, “but it would be a major disincentive for people trying to make a fast buck (or euro, or yen) by outguessing the markets over the course of a few days or weeks . . . [and] would deter much of the churning that now takes place in our hyperactive financial markets. This would be a bad thing if financial hyperactivity were productive. But after the debacle of the past two years, there’s broad agreement — I’m tempted to say, agreement on the part of almost everyone not on the financial industry’s payroll. . . that a lot of what Wall Street and the City do is `socially useless.’ And a transactions tax could generate substantial revenue, helping alleviate fears about government deficits.”

It shouldn’t be hard to back this tax. All it should take is to remember that what killed AIG wasn’t the stable, regulated insurance business that it ran, but the wild, unregulated hedge fun that sat atop it, and that what killed Bear Stearns wasn’t it conventional investments, but the real-estate backed hedge fund that operated within the firm, and that what killed Lehman Brothers was the astonishing overlevraging of its investments designed to hype the profits of its bets. We need Wall Street to raise capital and to underwrite business. We don’t need a casino, and we should tax the gamblers and the bookies.

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