The uncertainty about federal economic policy is greater today than at any time in the past 40 years. On the one hand, we have policymakers calling for increasing already massive budget deficits, locking in the looser monetary policy imaginable for the foreseeable future, and raising taxes on businesses, Wall Street and the wealthy, if the inflation rates are skyrocketing. On the flip side, we have a president and senior economic officials who are strong members of an alliance between mainstream liberal academic economists and Wall Street executives who have dominated Democratic economic thought since the Carter administration. .
In the absence of clear statements from senior officials, a recent article co-authored by Treasury Secretary Janet Yellen’s husband, Nobel Prize-winning economist George Akerlof, may be our best insight into the intentions of the Biden administration. . Although the document does not represent any official policy, Yellen is thanked for his thanks.
The paper is valuable because it focuses on an issue of dispute between liberal academic economists and Wall Street leaders: the Tobin taxes. The idea dates back to a 1972 conference by Nobel Prize-winning economist James Tobin, who suggested that a tax on short-term financial transactions could make markets more stable and efficient. Many liberal economists find the idea appealing. Wall Street hates it.
So while Akerlof could have written about the Tobin taxes without thinking of any political backlash, and his wife could have helped only with technical comments, this could suggest that Wall Street’s contribution will be excluded from policy making. and that liberal economists will try to find common elements. field with progressives.
In arguing for a Tobin tax, the newspaper views the scheduled disclosure of information about a stock, such as corporate profits. He assumes that dealers, market makers, and trading companies will buy if the news is good and sell if it is bad. Despite the oversimplifications, the model correctly predicts that dealers and market makers position their inventories ahead of scheduled announcements to better match the expected order flow. This is normally considered a good thing, as it mitigates the impact of events in the market. One of the complaints about the Dodd-Frank rules is that they discouraged holding long or short positions, leading to less efficient markets and widening bid / ask spreads. The paper then presents some transparent rhetorical tricks to make inventory positioning look bad. Market makers who hold inventory are called “front runners”. Front running is a crime where a broker or other agent trades for themselves before executing a client order. Akerlof broadens the definition to refer to any preventive action by a broker. This is no minor expiration, with the phrase used 100 times throughout the document. Thus, the fully legal and ethical practice of inventory management is tagged with a phrase referring to a criminal act.
Most market makers manage stocks passively. If they want to accumulate positive inventory, for example, they become a little more aggressive in executing sell orders and a little less aggressive in executing buy orders. In Akerlof’s model, market makers build an inventory by looking for “unsophisticated” investors. He seems to imagine that retail investors are ignoring the planned news release and may be enticed to part with the securities by bidding slightly above the last transaction price. Either way, whoever they are, we’re supposed to want them to make more money. When “pioneers” reduce their transaction costs by spreading their orders, “unsophisticated” investors make less money. Finally, the newspaper points out that a tax on short sales of futures transactions would discourage the positioning of stocks and generate greater profits for “unsuspecting” investors. Other objections aside, taxing all financial transactions for the small fraction that represents the inventory positioning trades of market makers with unsophisticated retail investors is grossly disproportionate.
I can’t think of any scheduled news release of the kind that the newspaper takes into account. Gains and other big news are usually scheduled when the market is closed, or are made during trading stops. Government statistics released during the trading day are for thousands of securities, and no market maker adjusts stock positions for thousands of securities minutes before their release.
But it is the absurdity of the newspaper’s political arguments that lead me to suspect that this is a signal. The economists who read the newspaper will reject it. Non-economists who read second-hand accounts will grab an article by a Nobel Prize winner that supports taxes on financial transactions. Liberal economists can shut up and let progressives win on an issue that for many of them is not a bad idea – certainly not as crazy as, say, modern monetary theory.
Aaron Brown is a former Managing Director and Head of Financial Market Research at AQR Capital Management and author of “The Poker Face of Wall Street”.