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A FedEx delivery man prepares a package for a GameStop store in New York City on January 27. The video game retailer saw its stock price soar in the last week of January, backed by fans pitting themselves against large investors who had bet that the stock would fall. Photo: Reuters
Opinion
David Brown
David Brown

GameStop frenzy a symptom of an overstimulated market that needs a tax on financial transactions

  • While markets are riding high on monetary stimulus, the Fed’s objective is to spur real job growth, not trading fads. A tax on financial transactions would not only curb exuberance, but help foot the government’s stimulus bill

The key to global recovery is rebuilding political, economic and financial confidence so the last thing the world needs is another shock coming on the heels of the Covid-19 pandemic.

The recent shenanigans over GameStop share trading is yet another symptom of the nascent risks arising from frothy financial markets. After all, it was overgenerous market liquidity, excessive risk-taking and dangerous financial engineering which led to the 2008 crash, and the world seems to be heading back down the same road.

We have been taken to the brink over the Covid-19 crisis, and policymakers are under pressure to find workable solutions to make the world safer again. Better market governance and new regulatory measures to slow overzealous speculation are needed. But it might be time for a tax on financial transactions to promote better financial stability.

You can’t blame the markets for being so euphoric after being pumped up with so much monetary stimulus from the US Federal Reserve since the coronavirus crisis first hit last year. The Fed’s dilemma now is letting the markets down gently without upsetting financial and economic confidence too much.

Irrational exuberance in the markets and the return of animal spirits in the real economy were critical for jump-starting recovery last year, but now the Fed must be questioning whether it has gone too far.

People sitting behind computer screens generating paper profits on will-o’-the-wisp trading fads like GameStop and bitcoin are not the Fed’s ideal for people gainfully employed in real jobs, especially while the US unemployment rate is still running at 6.3 per cent.

The Fed has to find just the right temperature for the US economy and the financial markets simultaneously. This will be a tough task with US stock markets hitting new highs while US growth is slowing from a record peak of 33.4 per cent in the third quarter last year to 4 per cent in the fourth quarter, with an uncertain path ahead.

Potential inflation risks are not the worry here, but lacklustre US recovery prospects and a dearth of new job opportunities in the midst of excessive risk-taking are of concern. Near-zero US interest rates and overgenerous liquidity provision from the Fed’s quantitative easing operations are fast losing their relevance for prudential macro-management.

GameStop attack was no revenge of the little guy

Fed chair Jerome Powell’s job this year will be to wean the US economy off its addiction to cheap money, while the government takes up the slack with extended fiscal stimulus to fill the gap. US President Joe Biden’s US$1.9 trillion rescue package should go a long way to keep businesses going, help protect jobs and boost consumer spending along the way, but it comes at a high cost.

In 2020 the US budget deficit hit a new post-war high at 15 per cent of gross domestic product and this needs to be attended to soon. The key question is who pays for the extra deficit-spending in the long run, without higher taxes or spending cuts and implicit risks to economic growth longer term.

A financial transactions tax might be the answer, raising the cost of market overtrading, dampening excessive speculation, and boosting government revenue at the same time with limited detriment to growth. It won’t go down well with Wall Street, but it would certainly help finance Biden’s plan for regenerating US growth and jobs.

In 2019, Democrat Senator Bernie Sanders proposed a US bill which aimed to tax trading of stocks, bonds and derivatives at rates which could have raised up to US$2.4 trillion over 10 years according to economists’ estimates. Maybe this is the moment for Biden to resurrect the idea.

Biden will need to sell the concept to the rest of the world to avoid leaving US markets at a critical disadvantage going it alone. A global financial transactions tax would have universal appeal at a time when governments have been left strapped for cash as a result of the Covid-19 crisis.

Economist John Maynard Keynes floated the idea of a tax on financial transactions in 1936 as a way of discouraging excessive market speculation. One can only wonder whether, with the right regulatory controls and an effective financial transactions tax in place, the 1929 Wall Street crash or the 2008 financial crash would have happened. Something needs to change.

Discouraging excessive risk speculation, bolstering global financial stability and setting the right conditions for recovery is what the world desperately needs right now.

David Brown is the chief executive of New View Economics

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