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Saturday, June 27, 2009

Here's a tax target for ya

Oil speculators.

Comments (10)

Elsewhere I have read that banks are some of the leading speculators. It seems that some are using the TARP money to do this. Thus they are using our taxes money to buy futures and drive up the price while demand stays flat. Interesting if true.

Libertarian Guy: Oil speculators don't care what the price is. They trade on changes in the prices. I'm sure they made money as oil prices have plunged in the past year to what? about $70/bbl now? From +$140 last summer? There's big bucks in those swings!

DeFazio is a great guy - a little weak in understanding economic theory, but a good, independent-thinking Congressman. I don't know why he voted against the climate bill yesterday, but I'm glad he did. In addition to record low temps all around the world, I'm freezing my ears off here in the Willamette Valley, so it's hard to give any credence at global warming fanatics.

I don't know why you'd think DeFazio is weak on economic theory... I've heard him on Thom Hartman and was amazed and impressed with his understanding of the complex financial markets. While almost every other congressman was flailing during the recent crisis, trying to sound knowledgeable, he was running circles around them... no sound-bites, cliches or grandstanding needed. DeFazio is one of the few politicians that make me glad there aren't term limits.

I think this idea is great. Which is only to say it will get shot down. Still, it's great to see someone with a novel idea trying to solve a problem with the least amount of fallout.

Why not include the trade of exotic mortgage backed securities?

If folks want to treat them as de facto currency -- or monetary equivalents -- then we could tax them just like we "tax" the exchange of illegal state currency . . . at 10 per cent. If a state cannot create their own currency then how could a state do the same thing by way of a state authorized incorporation of a private financial wizard company . . . exempted, oddly, even from personal liability of the incorporators/owners?

Someone can avoid the exchange tax simply by holding their investment to maturity. If the holder did not plan to hold to maturity then they must be just an ordinary speculator anyway.

Come to think of it, if you withdraw your retirement account early -- so as to use your savings for something, anything -- you have to pay a penalty (delayed tax) that is no more draconian than that above. The little folks get faced with proposals for a real estate transfer tax (on the transaction price, even where equity is a tiny fraction or even negative). Let's just be "fair."

A modest tax on all futures contracts seems in order. See, Taibbe's Rolling Stone article:(not online) http://seekingalpha.com/article/145197-matt-taibbi-vs-goldman-sachs

DeFazio's a rare bird - honest, candid & intelligent. He's the best candidate for Governor, but has enough Congressional seniority to tempt him to stay put. Too bad - we'll be saddled with another AFSCME/SEIU tool & 26% public pension costs for another decade. (I know DeFazio's pro-union, too, but not suicidally so.)

JoWriter. I don't care if they trade. My point was that they may be using TARP dollars to do so. Not only have they received tax dollars, now they are using those tax dollars to increase the costs of fuel used by those who had to give up the tax dollars. Thus we are paying a penalty twice.

So what's the solution for guys that lose money speculating on oil futures? There is prob the same amount of money made aas lost in the markets.

TKrueg - there's a huge difference between economic theory and complex financial markets. What you heard is just more evidence that DeFazio actually does his homework, unlike many congresspeople, who just rely on their staffs and special interests to tell them how to vote.

LibGuy - my point was that while speculating may have driven up oil prices for a short while, the prices are now down. Did speculating do that? Probably.

Steve - I don't know. What do you think? I'm opposed to taxes of all kinds, so I can't arrive at a coherent opinion.

Not all "speculation" occurs in the pit of a futures exchange. People speculate about all manner of things in a market, even the prospect of future advancement with an employer or the value of getting a formal education.

The notion of isolating on the futures market and a single commodity therein is grandstanding.

The future exchange exists as a central place for folks that have real goods to exchange -- the cash market -- to obtain predictability and certainty about the gains or losses from making a cash trade today that has a future delivery date. Either to receive or deliver the goods.

A genuine hedger takes a position in the exchange that is opposite to that of the cash transaction. The hedger transfers price fluctuation risk to another. The other side of any futures trade could be either another genuine hedger or a speculator.

The concern raised is price movement caused by speculators. We can address this in a sensible manner, as follows:

1) Each party to a futures trade could be required to attest to whether it is a hedge against a cash side transaction. A miller or a farmer would not think that this is rocket science. It is a binary question, where those traders that do not attest that they are a genuine hedger must therefor be a speculator.

2) The regulators of the exchanges could compare the open contracts against the number that represent hedging activity, corresponding to real cash market transactions.

3) The regulators could set a threshold for the highest proportion of speculators among all the open contracts. It would be some point that is certainly at or below the combined number of hedger involved contracts. Since many hedgers that buy contracts for a hedger are met with a sell contract from another hedger the number of speculators should be much less than the total of all contracts that are part of a genuine hedge.

The precise choice about where to draw the line, the threshold, would be little bit of both a policy choice and arbitrary line drawing so as to have some trigger point.

Fixing a percentage tax to any and all contracts is complete nonsense, and does not remotely solve the articulated problem of speculator -- on the futures market alone -- frenzy.

The threshold above is targeted at letting the cash market folks, the genuine hedges, be dominant in influencing the price and is targeted at protecting them from the disruption caused by fly-by-night "Hedge Fund" monsters -- the Real Speculators -- who likely do not have a single genuine hedge on their books.

If Mr. DeFazio wants to assert economic wisdom about speculation he could start by labeling Hedge Funds as Naked Speculators. The principal is not whether they have two offsetting speculative positions but whether they have a real cash position in ANYTHING other than some Enronesque paper. A genuine hedger has real goods to exchange to make good on a futures transaction.

If you know what a naked short is then the above should be a breeze to figure out.

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