Dean Baker has a stab at it but not sure it really works.
Such a tax would also make the financial sector more efficient by reducing the volume of short-term trading that serves no productive purpose. The share of the private sector that is devoted to investment banking and commodities trading has nearly quadrupled in the last three decades.
By reducing the volume of trading this tax would make the financial sector more efficient, freeing up resources for productive uses.
Now let\’s take this on his terms. The financial sector grossly over invested in mortgages. This pumped up the housing bubble. The crash took away more than just the excess of the bubble. Thus we need to change the way the financial system does business in order to stop the inflation of another such bubble.
Hmm, well, OK. And the way we\’re going to do that is by reducing the amount of short term trading is it? Make long term investment more profitable relative to short term speculating by taxing transactions? (You pay the tax only once on one long term transaction while you pay it many times using the same money to make many short term transactions, obviously.)
OK, hands up everyone, what\’s the, in general, longest term financial transaction that a household makes? No, not the pension fund for of course that\’s a series of transactions over time. Yes, the mortgage.
And hands up everyone, in the world of consumer finance, what\’re the longest term transactions that the financial system makes with its customers? Yes, mortgages.
Actually, outside some rarities like long term Treasuries being held to redemption (almost all by pension funds) and a few long term corporate bond issues, mortgages are the bulk of long term financial transactions. In fact, I have a feeling that mortgages are the bulk of the entirety of the long end of the financial debt markets (equity is of course something different).
So, now our proposal looks like this. We had too much money pumped into mortgages. We wish to reduce this. And our method of reduing the amount pumped into mortgages is going to be to privilege long term debt transactions over short term ones. That is, to privilege long term debt transactions like mortgages over short term debt transactions like not mortgages? And this is supposed to reduce the amount being pumped into mortgages?
Clearly I\’ve missed something very important here for this doesn\’t on the face of it look like a particularly effective manner of achieving the stated aim.
* Ahem, yes, see comments.