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Banking system reform, one more timeViews: 217
Sep 24, 2009 1:20 pmBanking system reform, one more time#

On the still naively optimistic assumption that there are people here who know the difference between thinking and (insert your own characterization) I would like to put up for discussion two �innovative� but very incompatible suggestions regarding the reform of the financial system.

A. One is a suggestion found in a Linked-In forum on Artificial Intelligence: to combat the instability of the financial market by using automated software to increase the rate of turnover in the capital market: -- even force people to do so by changing the capital gains tax :

�By using the greater computer power of today we can have a much higher turn over of capital in the capital market. This higher turnover will make the market harder to game or control and the market will no longer have the unstable run ups or declines. Who can change or control the market when say 20% of the capital is trading each day?

So now that we have the compute power to provide for all these transactions that will smooth out the market how do we force people to turn over at a rate of 20% a day? Easy, put a cap gains tax of 0% (zero) on all gains of 7 days or less and put a cap gains tax of 90% of all gains of more than 7 days.

The likes of Yahoo, Micosoft and/or Sun Micro Systems will give us the systems that will provide automated software agents to support turning over one's investments every 7 days (based on the specs you give the agent).�

(http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&gid=134407&discussionID=5728017&commentID=6780521&trk=NUS_DIG_DISC_Q-uc_mr&goback=%2Eanh_134407#commentID_6780521). It may be necessary to join the group to access the comment.

Is this a good idea? Will it achieve the stabilization of the markets? Why / why not?

B. Based on the assumption that everything traded on the markets is ultimately representing some real asset or service (present or future) that somebody is willing to commit resources -- investment -- to paying for, repeated trading of the commitment will increase the expected value of that asset, by the expected profit, plus transaction fees, taxes etc. at every step. This expected value will at some point exceed the ability of the original buyer to meet the increased expectation (as in repaying a mortgage whose value has increased through raised interest rates beyond the ability of the first buyer to meet it, or the willingness of other buyers to pay the higher price of the property). At that point, when the number of such transactions exceeds a certain volume, we experience the so-called bursting of the bubble. To combat this, should there be arrangements to prevent this unrealistic increase in expectations? If not, why not? And if so, why, and what form should they take? The possibilities for such constraints range form voluntary restrictions by lenders (to refrain from excessive resale of debt instruments) via regulations to that effect, to regulations for more specific disclosure of the exact nature and original value of the asset, to increased capital gains tax on such transactions, especially short term (i.e. the exact opposite of proposal A). Other possibilities? (Note: Any calls for just �honesty� as the remedy for any problems here -- nobody is arguing its desirability -- should however be combined with suggestions for how to ensure such honesty in the face of the undeniable temptations to not so honestly cash in on opportunities for �honest profit� that end up imposing undeserved hardship on too trusting trading partners or innocent bystanders, and contributes to the unstability of the market overall.)

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