Last Week: The European Union Banned Naked Credit Default Swaps and Moved Towards A Speculation Tax, While The U.S. Focused on “Lavish” Teacher Salaries
March 7, 2011 the European Union made it official, naked credit default swaps are banned, unless one is selling against a “proxy” portfolio.
Here is the link to the Reuters, March 7, 2011 report on the EU’s action, banning credit default swaps:
Simultaneously, on March 9, 2011, the European Union passed measures to move forward and study imposing a tax on speculation:
Why is the European Union taking these measures? As we all know, following the financial crisis, the deficits and budget needs are overwhelming. It is estimated this tax will bring in close to $200 billion annually, according to Sarah Anderson’s report at the Huffington Post on March 10:
The European Union is taking a stand. Funds to expedite job creation are critical. A speculation tax can aid in earmarking funds to aid innovation. Ironically, those against the tax, particularly the UK and the U.S. argue it will impede innovation. Here is the definition of innovation by our major financial institutions: “quick profits, that lead to ever-increasing bonuses, that add nothing to sustainable economic value.”
Meanwhile, back in the U.S., Wisconsin Governor Walker signed into law the end of collective bargaining for Wisconsin teachers and other union members.
It is time to stop the mission creep and focus on the real issues that are retaining high unemployment and a fragile economy. Targeting teachers is not the answer.
What is one of the most critical issues that must be addressed? Balancing the budget, while igniting the U.S. economy. Short term fixes, such as attacking “lavish” teacher salaries does nothing but polarize the right and the left and distract us all from “adult” debate on how to get out of the mess created by the major banks and mortgage industry.
Regulatory Arbitrage and Sky Rocketing Regulatory Costs are the Issue Now, not “Lavish” Teacher Salaries
Arbitrage is by definition, seeking to profit due to a price discrepancy in one market, vs another, of a similar financial instrument. Arbitrage is often times risk less and can yield quick profits.
There will be a significant discrepancy in the global financial markets, if we allow naked credit default swaps and do not impose a speculation tax, if the European Union does. This is what one calls regulatory arbitrage. Regulatory arbitrage has become a new field of study, with the advent of the global financial crisis and passing of Dodd Frank.
Regulatory Arbitrage is a new field for those seeking to become re-employed. But, as one knows, fields of study such as this are not adding sustainable economic development. We are spending billions of dollars keeping up with the management of the systemic risks posed by a soon to be $700 trillion dollar derivative market.
What is the Answer to Increase Innovation in the U.S, if it is not Derivative Speculation?
Eliminate the Over-the-Counter Derivative markets, except for the end users’ foreign exchange needs and a rare end user ag swap and move all other contracts to futures contracts traded on privately managed futures exchanges, just like the Minneapolis Grain Exchange that has worked just fine since 1881.
Very few farmers use over-the-counter derivatives to hedge and those that do will have an “end-user’ exemption under Dodd Frank.
You can speculate on the demise of Greece’s and Ireland’s bonds on futures exchanges, it does not have to be on the U.S. taxpayers’ nickel in the over-the-counter markets. Speculators can accomplish the same on futures exchanges. Why are they fighting moving the speculation out of the over-the-counter markets? There is lack of price transparency and profits are significantly greater.
Once again, The Derivative Project poses four questions for every American to pose to their 2012 Candidates:
- Do you believe the U.S. Taxpayer should pay billions of dollars to monitor the speculative derivative trades by the five major derivative banks, as defined by the Office of the Comptroller of the Currency, linked here? Couldn’t these regulatory costs be better used for teacher salaries and innovative teaching strategies for our country’s youngest citizens?
- Major U. S. banks were irresponsible and did not manage counter party credit risk in the over-the-counter markets, throwing us into the greatest recession since the great depression. Do you support a speculation tax on derivatives to help repair our high unemployment rate and fragile economy? If not, why not?
- Do you support moving credit default swap contracts to regulated futures exchanges, transforming them into futures contracts from swap contracts in the OTC market, to eliminate wasteful taxpayer regulatory expense? If not, why not?
- What is the IRR to the U.S. economy by investing $1 dollar in regulatory costs to monitor the systemic risk of over-the-counter naked credit default swaps, compared to the IRR of investing $1 in early childhood pre-school education, where Minneapolis Federal Reserve Economist Art Rolnick has determined an IRR of 13%? Here is a link to the Minneapolis Federal Reserve’s summary of Mr. Rolnick’s work.
Our country can no longer afford the polarization. The hour is late. It is time for “adult talk” and real IRR’s so we can get our economy back on track after the derivative debacle.