Time to tax Goldman Sachs

Why do we have a financial system?

I mean, much of its activity looks an awful lot like gambling, and gambling is not exactly a constructive endeavor. In fact, many people would call gambling destructive, which is why it is generally illegal. Why? The main problem is not that successful gamblers receive something for doing nothing and are therefore leeches on society — although that is true. The main problem is that when a society allows people to get rich for doing nothing, it encourages everyone to do nothing.

What makes Goldman Sachs et. al. so evil is that they offer vast wealth to our society’s best and brightest in exchange for spending their lives being non-productive. I want our geniuses to be proving theorems and curing cancer and developing fusion reactors, not designing algorithms to flip billions of shares in microseconds.

Once upon a time, investment banks had something to do with investment. They provided direct capital to production (the “buy side”) and introductions between capital and production (the “sell side”). Investors had to choose carefully where to put their money, because it was actually at risk. And thus did our most productive businesses obtain financing to generate new wealth for the nation and for the world.

Or perhaps this was never entirely true. “To turn $100 into$110 is work; to turn $100 million into$110 million is inevitable.”

Anyway, why do we have a financial system? To facilitate the real economy, period. And perhaps I am dim, but I do not see how day trading facilitates anything. In fact, I do not see how most of what Wall Street does facilitates anything, other than making bankers rich even as the rest of us become poor.

With global production, consumption, and employment collapsing, how could an entity that is supposed to be a mere facilitator report its largest quarterly profit in history? From April through June, what did they contribute to our society, exactly, that was worth $3.44 billion? At this rate, they will pay out$20 billion in bonuses this year. What kind of civilization responds to an economic collapse by handing over even more wealth to its financiers?

Various levels of outrage are emerging from across the political spectrum. Paul Krugman, the Wall Street Journal editorial page, Charlie Gasparino, and Sheila Bair all seem to think something is wrong here. Also Glenn Beck and Jon Stewart (fun videos; do not miss). How is that for a diverse list?

So… What do our lawmakers think?

Goldman Sachs profits hailed by lawmakers

Democrats and Republicans alike lauded Goldman Sachs on Tuesday after the company, which received taxpayer assistance last year, said its quarterly profit rose and that it was setting aside billions for employees.

“Is there a law in the United States that you can’t make profits?” Representative Paul Kanjorski, a senior Democrat on the House Financial Services Committee, asked reporters.

Richard Shelby, the top Republican on the Senate Banking Committee, said, “I’m not surprised. Goldman Sachs has a history of being well run and sometimes ahead of the others.”

No, Representative Kanjorski, there is no law against making profits. But there ought to be, the way Goldman does it.

If it were up to me, I would change the tax code, starting with short-term capital gains. On assets held for one day or less, I would tax capital gains at 99.9%; one week or less, 99%; one month or less, 90%. And so on. For individuals working in the finance “industry” — a misnomer, since it is pretty much the opposite of real industry — I would impose a marginal tax rate of 95% for income above $75,000. But it is not up to me. We will be lucky if we even get a “too big to fail” tax as proposed by Ms. Bair. Our lawmakers know that the public outrage will pass within days, but the political donations from Wall Street will keep coming forever. All Goldman needs now is a little distraction, like a stock market rally… (No, I am not really that paranoid.) 10 comments to Time to tax Goldman Sachs • dismal Thank you for holding on to your sanity, it is inspiring, especially when the whole world appears to be going crazy. Great post, and to the point. • snoopy >>> What makes Goldman Sachs et. al. so evil is that they offer vast wealth to our societyâ€™s best and brightest in exchange for spending their lives being non-productive. I want our geniuses to be proving theorems and curing cancer and developing fusion reactors, not designing algorithms to flip billions of shares in microseconds. >>> Bravo! Many top-notch engineers from Silicon Valley bummed by the lack of activity in technology headed to get MBAs and ended up on the payrolls of investment banks. There is no other near-zero risk way of making millions. It’s a formula – get an MBA at a top 10 business school and head to wall street. Work 100 hour weeks and retire rich in 10 years whether or not you climb the hierarchy. If you climb the hierarchy, then you stop putting crazy hours and continue to make zillions. • SBMA01 I have been thinking in a similar way for some time and wondering if I was missing something. Making markets, discovering prices, and providing liquidity does indeed provide some value to the world. But compensation for that value is so wildly mismatched its astounding. • anne from chicago I find myself, ever since Paulson announced the bailout and the reasons for it last fall, boggled by the entire situation. An entire sector gone mad. MBAs turned into gamblers. Their risky bets taking down the global economy. And now, those at the top of the tower in finance, a sector that exists solely because the feds rescued it, feel worthy for such excessive bonuses. Goldman received$22 billion directly from the feds – $10 from TARP and$12 from AIG. Do they really think this cash had nothing to do with their success this year? That \$20 billion in bonuses might not really be theirs to distribute to their own?

The titans of the world have greatly benefitted from the crash of the economy – but not because of their savvy business dealings. They’ve benefitted because federal policy propped up their failed sector and encouraged even more consolidation of the TBTF companies. Seems like these profits are not at all the property of these financial firms – and instead belong to the investors who provided them with salvation last fall.

• richfam

Your comments are always interesting and helpful but I think you may be going a bit too far with this Goldman rant. First, remember the old “hedgers” and “speculators” thing as it relates to commodities markets in specific and all markets in general – speculators create liquidity for hedgers. Hedgers can be defined in this case as investors and capital raisers (companies). So there’s surely a need for short term traders in markets.

As far as Goldman goes – you can’t give a child candy and then ask them not to eat it. Either don’t give the candy or don’t complain when they get fat. Markets were uncorked and they bought because the government gave them the capital and liquidity to do so (at a price, I might add) and now they’re fat. Complain about the policy not the results.

Also, they took the bet knowing that they’d be out of business, in jail, and castrated by the press/blogs and bubblevision(CNBC) if it did not work, pretty balls-ie I’d say.

• richfam —

We have futures markets orders of magnitude larger than the underlying commodity trade. For “hedging” to be useful, the markets need to be roughly efficient. Are they? Or are they now purely technically driven (and heavily manipulated) by the likes of Goldman Sachs? Does the behavior of oil futures over the last 12 months look like an efficient market to you?

Well, maybe. So suppose you are right and all the high-frequency trading provides a necessary service. Janitors also provide a necessary service. If you are telling me that service is worth billions of dollars, well… I don’t believe it. I think they are massively overcompensated for providing what are essentially secretarial services. They are overcompensated because capitalism is like a game, but the financial system is like the field on which the game is played. If the players could manipulate the field, they could score a lot of points. (OK bit of a tortured analogy.)

If someone had the ability to invent solar-powered flying cars, would you prefer that they work on Wall Street doing statistical arbitrage? I know some brilliant people who are doing precisely that, and it saddens me. But these are the incentives our system offers today. I consider it a market failure at least as great as the monopolies and trusts that took over around the turn of the last century.

Anyway, my problem is not so much with what they do as with how much they get paid for doing it. Something is very, very wrong here, in my view.

A couple of final comments. To my knowledge, Gasparino’s rant was the first and only time anyone on CNBC has said anything negative about Goldman’s earnings. For the most part, the anchoresses got all excited and bouncy when talking about it.

Finally, I strongly disagree with “don’t hate the playa; hate the game”. It is very possible for someone to be a scumbag without ever doing anything illegal, and I am not shy about saying so. A topic for another time.

• richfam

Okay, so maybe I’m jealous… I think I’m complaining about the ref not the game – FDIC backed notes used to fund a big bet on the markets – which is why I think it was such an aggressive bet. I think conversion to a bank holding company will come back to haunt them on this stuff.

I can see you’re point on wasted talent but not on pay – I have some experience here – its win all or lose all for many traders (and there’s no tail risk to the firm unlike bankers). For structured bankers – no respect at all – they created sub-prime cdo’s, had the firm keep most of it and got paid anyway.

Market manipulation – yes.

• OregonGuy

>> For individuals working in the finance â€œindustryâ€ â€” a misnomer, since it is pretty much the opposite of real industry <<

Exactly. When I hear how smart the Goldman people are it makes me very pessimistic about the future. If our “smart” people are engaged in activities that produce no useful output, how can the U.S. economy provide a decent standard of living for its people in the long run?

Further your mention of gambling. When I was a kid 40 years ago, gambling was Las Vegas – which was seedy – and the local numbers racket. Now you have the State Lottery Commission enticing people to take a daily 40MM:1 shot on a lottery ticket and casinos everywhere. When Government not only allows gambling, but participates in it to fleece its citizens, then anything goes.

Our grasping, debt-laden country is going to throw a rod through the hood of our well-being if we don’t reign in the excesses of the rentier class.

• jcauchy

Sorry Nemo, I am with richfam on this one. Big difference between running a rigged casino and being a good card counter. GS are scum but not because they have some good traders. They have clout in DC and they screw their own customers. But everyone wants to be with them. Your tax scheme is ludicrous, it’s a spoof, right? My question in response, why /can’t/ we have multiple large investment banks go bust all at the same time ?

Capitalism needs capital markets, oh God, now I’m quoting Larry Kudlow, ok, just shoot me.

• wildgunman

Well to answer your question, trading “day trading” facilitates market liquidity, which should facilitate more accurate prices. Greater liquidity should, in theory, make it easier for companies to finance new investment, and more accurate prices should, in theory, force the economy to allocate resources to their best possible use.

Now lets get one thing straight first, these two things DO happen. It’s not just a theory. In places where there are no liquid capital markets it is much harder to raise financing, especially for smaller companies, and price discovery does force companies to adjust their policies. Now to your point, it is almost entirely unknown to what extent the huge amount of additional effort put into this in the US actually helps these two thing. My guess is not much, at least in proportion to the large scale gains from trading.

I disagree that Goldman needs to be taxed because they make money from trading. The degree to which their actions may or may not be harmful is a matter for those who supervise these markets such as the SEC and the Federal reserve. However, I do think that Goldman extracts a huge amount of value from the implicit guarantees and financial support that the government throws their way. This is a clear violation of the principles of equal taxation, and if anything Goldman needs to be taxed more for this reason. But not because they make profits that are considered too big. They all need to be taxed more. From Citigroup to the scrap heaps that remain of Lehman Brothers, all of them should either be taxed more.