Congress will soon be back from recess – and back to gnashing its teeth over the budget and the various important things that, too many in that branch of government now assert, our country can no longer afford to do. One way to enlarge their sense of the possible: consider a source of revenue they have so far largely ignored – a small tax on sales of stocks, bonds, and complex financial instruments.

How small? Really, really small. A bill co-introduced by Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore., calls for a tax of 0.03 percent – that’s 30 cents per $1,000. Yet even at that exceedingly modest level, a Wall Street speculation tax (also known as a financial transaction tax or FTT) would generate more than $350 billion over the coming decade, according to a non-partisan analysis of similar legislation introduced in 2012.

So we are talking about serious money, and a proven way to raise it. Similar taxes already exist in more than 30 countries, including the United Kingdom, South Korea, South Africa, India, Hong Kong, and Brazil. Encouraged by their experience, France, Germany, Italy, Spain, and seven other European countries are moving forward with plans to adopt a coordinated speculation tax. The new tax laws within these countries may take some time for businesses and individuals to get used to, but with the correct guidelines by professionals such as Tax Accountants Brisbane services (if Australia wants to jump on board), then people will get used to this and adapt in a positive way to help with their tax output.

It’s a tax – no getting around that. But it’s also a way to help close what amounts to a huge tax loophole. Americans pay sales taxes on all manner of goods and services. Wall Streeters don’t pay sales taxes when they buy and sell securities. That fact helps explain why the financial sector, which generates some 30 percent of the nation’s total corporate profits, pays only about 18 percent of corporate taxes.

Revenue and fairness aside, a speculation tax can be crafted to reduce short-term bets and market volatility, drawing resources out of empty financial gamesmanship and back into job-creating private and public investment. That would be a strong argument for such a tax even if federal tax rates were not at a half-century low and the country badly in need of revenue.

This unusual combination of benefits explains why Bill Gates, Warren Buffett, former Federal Deposit Insurance Corp. chair Sheila Bair and Vanguard founder John Bogle, among other business leaders and economists, have spoken up for the idea.

Lined up on the opposite side of the question, unsurprisingly, are the Financial Services Roundtable, the Securities Industry and Financial Markets Association and various other spokesgroups for the big banks and hedge funds. Not because of the impact on their own bottom lines, they are quick to insist. In the long Washington tradition of big fry hiding behind small fry, they tell us that the burden of a speculation tax would ultimately fall on investors, retirees, business owners and everyday folks.

But that’s a claim that wilts under the briefest scrutiny. People who use the financial markets to borrow, invest, save for retirement or manage risk would scarcely notice a 0.03 percent tax; they already pay far more in exchange fees, clearing fees, fund management fees and other costs built into the financial system. For someone purchasing $10,000 of stock, the tax would be all of $3. Even that bit of simple math overstates the impact, since the existence of such a tax would likely lead to less frequent trading. Dean Baker of the Center for Economic Policy and Research argues that most investors would “end up spending roughly the same – or even a lower – total amount on their trades.”

The industry’s other main line of argument – that a speculation tax would damage U.S. competitiveness and economic growth – runs aground on the successful experience of the U.K. and Hong Kong, two global giants of finance. It also collides with the fact that the United States itself had such a tax for much of the 20th century, with none of the dire consequences cited by today’s critics.

One subsector of modern finance – the high-frequency traders who buy and sell in a time frame of seconds or minutes – might face a serious competitiveness problem; but that would be a blessing for the country as a whole. Even a minuscule speculation tax could throw a monkey-wrench into their business model. But much of what high-frequency traders do amounts to little more than glorified front-running or insider trading, based on privileged knowledge of breaking market trends. When they get things wrong, they cause debacles like the “Flash Crash” of May 2010; when they get things right, they extract money from the real economy to no purpose other than their own enrichment.

The Wall Streeters have one compelling reason for opposing a speculation tax. They are battling against this idea out of an entirely reasonable concern that, once on the table, it will prove to be too attractive, and too sensible, for policymakers to resist.

– Jim Lardner

Originally published on USNews.com

For all the mystique surrounding its monetary policy powers, the Federal Reserve is also a regulatory agency. In fact, it’s the heavyweight of Washington’s financial watchdogs. The outsized role of the Fed has, if anything, been increased by the process of financial reform, in ways that should be a central consideration in the selection of the next Federal Reserve chair.

Before the financial crisis, the Federal Reserve already played a central role in financial regulation. The Fed had primary oversight over bank holding companies, the industry’s largest entities. That made it the primary regulator of Citigroup, as well as of HSBC, the largest subprime lender, and Countrywide, the third largest subprime lender. The Federal Reserve also had primary authority for implementing and enforcing consumer protection laws on high-cost subprime mortgages.

It’s clear that the Federal Reserve, like just about all of the federal financial regulators, fell down badly on the job in the buildup to the financial crisis. Not only did it fail to act to stop the abusive and irresponsible lending that fueled the housing bubble, it failed to consider the ways in which excessive leverage and complex derivatives would multiply the impact of a housing collapse, turning it into a global financial catastrophe.

At the same time, there were limits on the Fed’s pre-crisis authority. Large banks could escape its oversight by choosing a different regulator (as Countrywide eventually did in 2007). In addition, the Fed had no jurisdiction over freestanding non-banks that had become central to the financial system, including major investment banks such as Lehman Brothers. The Fed also faced procedural obstacles in gaining full regulatory power over non-bank subsidiaries of bank holding companies.

The Dodd-Frank Act takes a dual approach to Federal Reserve authority. In the area of consumer protection, the dismal record of the Fed – and other safety and soundness regulators – in preventing exploitative and dangerous consumer lending convinced lawmakers that we needed a single agency with the focused mission of consumer protection. Thus, Congress removed many of the Fed’s consumer protection powers and transferred them to the Consumer Financial Protection Bureau.

But in the area of regulating systemic financial risk, Congress significantly expanded the Federal Reserve’s powers and essentially confirmed its lead role as the primary watchdog of overall financial stability. Now more than ever, the Federal Reserve is the central regulator of the financial system. The Dodd Frank Act expanded the agency’s role as the primary supervisor of:

• Bank holding companies. The Fed had this role before Dodd-Frank, but the Dodd-Frank Act made it impossible for bank holding companies to shop around for a more lenient supervisor, and also expanded supervisory powers in other ways.
• Large non-banks determined to be systemically significant. The Fed will now supervise large entities central to the financial system even if they are not banks.
• Important financial utilities. The Fed now plays a key role in supervising organizations central to the “plumbing” of the financial system, such as clearinghouses or payment systems.

This expanded jurisdiction came with a substantial increase in rule-writing responsibilities. Responding to the problems revealed by the financial crisis, Congress directed the Fed to improve the system of prudential regulation for large institutions by:

• Increasing minimum capital levels (or, to put it another way, maximum permitted levels of borrowing and leverage) for large bank holding companies, and deciding just how much those levels should increase with bank size.
• Setting new standards in critical areas that include liquidity, counterparty debt exposures, risk management and risk concentration.
• Designing and supervising regular “stress tests” of key financial institutions to be sure they are prepared for potential financial disruptions.
• Exercising discretionary power to break up a “too big to fail” bank or to limit its activities, including activities in key commodity markets

In these areas, it is the Fed that writes the rules and supervises their enforcement. And it has vast discretion to do so. While the Financial Stability Oversight Council has advisory input, these rules are almost completely under the Fed’s control. There is little or no space for appeal, for example, by anyone who might consider its rulemaking or enforcement lax.

In other realms of Dodd-Frank implementation (including the Volcker Rule’s ban on proprietary financial speculation by banks), the Fed plays an influential role in a joint decision-making and enforcement process with other agencies. These other agencies still play a key role in supervision, including through oversight of important subsidiary entities within bank holding companies. The U.S. financial regulatory framework remains quite fragmented in many ways. But the Fed’s expanded powers clearly give it primary responsibility for ensuring the overall stability of the financial system.

This central regulatory role of the Fed, especially post-Dodd Frank, should be a key consideration in the appointment of the next Federal Reserve chair. In appointing the next leader of the Federal Reserve, President Obama will also be appointing the person who should be the lead watchdog of Wall Street.

— Marcus Stanley

Originally published on USNews.com

On the eve of its August recess, Congress finally agreed to undo much of a sharp rise in the interest charged on federal student loans. Before the deal could even be signed into law, however, a group of private lenders was angling to postpone the day when they would have to say how the cost of their loans compares to the new, lower-than-feared cost of the government’s loans.

In a letter to Richard Cordray, Director of the Consumer Financial Protection Bureau, the Consumer Bankers Association, the Student Loan Servicing Alliance, the Education Finance Council and the National Council of Higher Education Resources pleaded for a 30-day ”grace period” on the disclosure requirement. They were making a “very reasonable request,” the private lenders argued, in view of the “multiple application processes (electronic, paper and telephone) that must be changed and tested prior to implementation” and the difficulty of coordinating with “multiple vendors.”

But this is no ordinary 30 days. As the lenders themselves pointed out in their letter, August is “peak season for lending… as students and their families put together the financing they will need to start school in the fall term.” To put it another way, this is precisely the time when students have the greatest need to “know before they owe” – that is, to understand the higher cost of a private loan before they forego a federal loan.

“Private loans are one of the riskiest, most expensive ways to pay for college,” Lauren Asher, President of the Institute for College Access & Success, declared in a letter of response to the CFPB. Private loans, she added, “do not provide the important deferment, income-based repayment, and loan forgiveness options that accompany federal student loans.”

Disclosure is crucial because, as the TICAS letter points out, “a majority of undergraduate private loan borrowers do not borrow the maximum amount in safer federal student loans first… Indeed, we are concerned that private lenders appear to be increasingly marketing private loans as an alternative to federal loans, rather than a supplement.”

If the Department of Education doesn’t need a grace period on implementing the new federal loan interest rates, Asher argued, private lenders shouldn’t need any extra time to provide honest disclosure.

In fact, they have shown some pretty serious chutzpah by even asking for such an extension.

— Jim Lardner

The financial industry is extremely good at evading taxes. That’s one of the takeaway messages of Offshore Shell Games, a report released this week by U.S. PIRG. CitiGroup, Goldman Sachs, Wells Fargo, Morgan Stanley, and JPMorgan Chase have ducked a combined tax bill of $27 billion, the report estimates, by funneling profits to overseas subsidiaries that are often nothing more than P.O. boxes.

“Loopholes in the tax code make it legal to book profits offshore, but tax haven abusers force other Americans to shoulder their tax burden,” the report points out. “Every dollar in taxes that corporations avoid by using tax havens must be balanced by other Americans paying higher taxes, coping with cuts to government programs, or increasing the federal debt.”

Such practices are “ubiquitous among the largest 100 publicly traded companies as measured by revenue.” Altogether, those 100 companies are holding some $1.17 trillion in offshore tax havens, the report estimates.

— Mitch Margolis