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).

A system like this will make the financial markets work as smoothly as the local fruit market.

Too much capital inflows? Tax them. Tax them heavily enough that speculation (short time profit) simply stops. Or tax short time profit, say, like 90%. That way governments will have plenty of cash to deal with potential problems speculators create. Also losing 90% potential profits simply means that it is probably not worth taking risk.

Most of the problems come from everyone rushing to gain short-time profits. This is what must be stopped, it will only violently go worse over time. Tax short time investment / speculation profits. Very heavily.

Yes, make the money stop once it invested for a while. Then you will see true risk assessments for longer periods.

Now that the tax does not accrue to the broker-dealer market, apparently it’s un-American.

I think other comments here imply the same question, but I’ll make it explicit: how does a country impose capital controls and retain the credibility that (a) the controls will not be operated entirely for the benefit of select insiders; (b) the controls will not be turned into a ratchet, where money simply cannot get out?

One of the lessons I would hope people take of the events of September is that even the US, with deep markets and a stated fidelity to the rule of law, will throw all of that over the side in a perceived crisis. The steps the Fed/Treasury took would have been considered absurd a year earlier.

How does a nation with less of a reputation – in the case of three of the BRICs, not even a reputation for governmental stability – implement this?

Also, as China has demonstrated, the existence of a tobin tax (which like all good Pigovian taxes actually raises revenue while discourage bad behavior instead of good behavior) can be used both to both decelerate and accelerate money in asset markets – meaning it will need to be controlled by an independent agency (and insulated from political forces).

I do wonder what form those capital controls might take, since deterring inflows is rather a different business from arresting outflows. And the overseas Chinese are an opaque group, to put it mildly.

What is the right way for authorities to manage inflows and outflows on the capital account, Simon? For how long should money be required to stay onshore before penalties are lifted? When should the Tobin Tax be raised? How much should they allow repatriation? To what extent ought the government allow locals to invest abroad?

I totally agree that some limits on hot money (especially short-term external debt that is used by local banks to fund domestic investment) is a great idea. But the best way for advanced, large financial systems to be run is not the way Argentina or Venezuela or Russia or China do it — by dictat — but to develop deeper local markets, have an appropriate exchange rate (which BS has commented on recently) and coordinate fiscal and monetary policy properly. At least try orthodox tools before going down the unconventional route!

1. A capital account open to foreign inflows (no capital controls)
2. A fixed exchange rate
3. Independent monetary policy (ability to adjust interest rates at will to curb bubbles)

Pick two of the three.

It’s not just the United States under the Clinton Administration that pushed the combination of 1 and 3—let’s not forget the IMF (including during Professor Johnson’s tenure). It seems to work pretty well for very well established economies with low to moderate growth rates and stable industries. Not so much the victims of the East Asian financial crisis in 1997, for instance.

China, notably, has been doing quite well with 2 and 3. The disappointment from US critics of Chinese currency policies is largely due to the fact that they are missing out on the investment opportunities here.

Sometimes they raise it:
http://www.nytimes.com/2007/05/30/business/worldbusiness/30cnd-yuan.html

Sometimes they lower it:
http://www.bloomberg.com/apps/news?pid=20601087&sid=anrG7MXuH4eI

Such a tax might help in the US, as well, but preventing certain wall street firms from taking advantage of faster-than-normal information on trading activity using flash-execution trading programs… which apparently accounts for a large portion of increases in “trading profits” over the last 5 years at places like Goldman Sachs…

http://www.nytimes.com/2009/07/24/business/24trading.html

It will be interesting to see the outcome of this one. There is a natural alliance between certain factions of Wall Street who don’t use the high-frequency trading programs and using a Pigou/Tobin tax on trades (like China).

But in the other corner of the ring we have Super Heavy Weight Champion of the World, Goldman “The Insider” Sachs.