As American consumers we pay a speculation premium on many of the things that we buy. Speculators and increased speculation is helping drive the cost of living and for many its pushing meeting many basic needs into the realm of the un-affordable.
This last week John C. Bogle the founder and former head of America's largest mutual fund the Vanguard Group, blasted speculators role in the economy, and their preferential tax rates many speculators pay.
Bogle: Speculators should pay their fair tax share
Q: What do you think about the ongoing discussion over tax fairness?
A: I believe the rich should pay more, but that's not a good platform for tax policy. What has gone wrong is that we've failed to recognize the difference between earned income and unearned income. Is it really fair for gamblers on Wall Street to pay a 15 percent rate when they make a winning investment, and an honest working person - a bricklayer for example - may pay an equal or higher tax on their wages than a gambler? That's absolute absurdity.
Rates may have to be changed, but we also need to look at what is taxed, and how. Dividend income should be taxed at the same rate as ordinary income. As for capital gains, there ought to be some distinction between capital made by people who start businesses, and contribute value to society, and capital made by gamblers on Wall Street, some of whom win. Earned capital income should carry the regular dividend rate, but capital income gains by trading, and particularly short-term trading, should pay a higher tax, even than the present ordinary income rate.
Q: What's the focus of the book you're writing?
A: That our financial system has gone off the rails. It's something we think of as providing capital for new businesses, that will enable people to finance new companies or add to the capital of existing companies. We do that to the tune of about $200 billion a year in financing through Wall Street, or through the financial system. And yet we do some $40 trillion worth of trading every year. I'm selling my investment to you, and you're buying it from me, and it creates no value for society. Indeed, it subtracts value, because the guy in the middle gets his piece.
This wouldn't sound out of place at any Occupy G.A. and this is coming from the founder of the country's largest mutual fund.
Earlier this month a very enlightening report was issued by the New York Federal Reserve Bank that refutes the Republicans convoluted apologia for the economic catastrophe that the G.O.P. presided over along with the Free Market fundamentalists at Fed like Alan Greenspan.
Speculators, not the poor, at heart of real estate bust
Ever since the near-collapse of the American banking system in 2008, it's been an article of faith among many conservatives that poor people who took out mortgages they couldn't afford were at fault.
What the Federal Reserve Bank discovered was that in Nevada and three other states affected by the housing meltdown (California, Florida and Arizona), "investors played a disproportionate role in inflating prices to unsustainable levels," according to the Las Vegas Sun
The housing bubble, in other words, was just like every other speculation-driven bubble the world has experienced since the days of "tulipmania" in Holland.
Now we're even seeing speculators drive the prices of cancer fighting drugs to astronomical levels.
Fed: Flipping Fueled Housing Collapse
The study points out that house flippers drove up home prices between 2004 and 2006 -- right before the hammer fell on the housing sector. But in 2007 and 2008, when the housing market was teetering on the brink, speculators began losing serious ground and fell badly behind paying on multiple homes they hoped would sell quickly.
That helped lead to the first big cycle of property foreclosures, which in turn drove local property values down, further burying the housing sector. The study points out that in hard-hit states such as Arizona and California, 20% of all home sales were by buyers who already owned three or more properties. The Fed report says that's three times the amount measured back in 2000. Once property prices really began falling in such states, multiple-home speculators headed for the hills -- and left behind an avalanche of busted loans and foreclosed homes.
"Long-standing tradition in the mortgage lending business and the predictions of economic models hold that investors will quickly default if prices begin a persistent fall. This is what happened starting in 2006," the report says.
The New York Federal Reserve's report deserved to get a lot more attention than it got in the media.
Fed blames flippers for the housing bubble
The Washington Post reports:
More than a third of all U.S. home mortgages granted in 2006 went to people who already owned at least one house, according to the report. In Arizona, California, Florida and Nevada, where average home prices more than doubled from 2000 to 2006, investors made up nearly half of all mortgage-backed purchases during the housing bubble. Buyers owning three or more properties represented the fastest-growing segment of homeowners during that time.
And, “This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family,” the researchers noted.
So forget about cheap interest rates, expanded loan programs from Fannie and Freddie to put everyone in their own home, and Wall Street’s embracing of mortgage securitization. Nope, it was those darn flippers.
Then there is the Oil Market.
OPEC: Speculators to blame for high oil prices
DOHA, Qatar (CNNMoney) -- The head of OPEC said Wednesday that speculators are at least partly to blame for high oil prices -- not any lack of supply on world markets.
Speaking at a World Petroleum Congress panel, OPEC Secretary General Abdulla Salem El Badri said the world has plenty of crude but that the number of barrels of oil changing hands in the financial markets is 35 times greater than the actual supply.
The numbers he cited were 3 billion barrels per day traded on global exchanges, but only 76 million barrels per day in actual supply.
Also see the New Yorker's excellent 2009 piece by George Packer:
The Ponzi State; Florida's foreclosure disaster pdf
When I told Alex Sink about the house that had appreciated by almost fifty per cent
overnight, she said, "That's a fraudulent transaction." According to an investigative series in the Miami Herald, oversight by the state's Office of Financial Regulation and its commissioner, Don Saxon, was so negligent that more than ten thousand convicted criminals got jobs in the mortgage business, including four thousand as licensed brokers, some of whom engaged in fraudulent deals. Until the rules were recently changed, felons in Florida lost the right to vote but could still sell mortgages. (Under pressure from Sink, Saxon resigned this past August.) Kathy Castor, Tampa's representative in Congress, told me, "Florida was particularly lax when it comes to mortgage regulation." She connected the mortgage crisis and the lack of oversight with state politics and the political power of developers. "We were hit by two Bushes, George and Jeb"-Florida's governor from 1998 to 2006-"and there was very loose growth management. Because Jeb was aligned with the development industry, it was a speculator's paradise." Before running for Congress, in 2006, Castor was a commissioner in Hillsborough County. She said that developers held sway there, benefitting from "a very costly urban-sprawl model." The county sold off agricultural land "in places that are miles from the jobs." The Web site for Country Walk, in Pasco County, promised buyers "a comfortable distance from the higher prices, taxes, and congestion of big city living."
and my previous post: Speculative Frenzy pushing up prices of Oil & Wheat
Speculators are helping swamp the economy of Main Street here in this country, and are helping to drive a citizen uprising across the globe.
Our Tax Codes reward speculation over honest work. That needs to be near the top of any list of goals for tax reform.