The battle between Reddit traders and the Wall Street elite has renewed calls for a financial industry crackdown in Washington.
“As the GameStop controversy has illustrated, the unbridled greed of hedge fund managers, reckless speculative traders, and ultra-wealthy finance executives over the several decades has completely broken Wall Street,” said Rep. Peter DeFazio (D., Ore.) in a statement to Yahoo Finance. “They’ve gamed [the] system to their complete advantage, and it’s beyond time to make sure the Street and economy work for everyone, not just the wealthy elite.”
The House Financial Services Committee and the Senate Banking Committee plan to hold hearings. Lawmakers ranging from Sen. Pat Toomey (R., Pa.) to Rep. Alexandria Ocasio-Cortez (D., N.Y.) have called for investigations, and Sen. Elizabeth Warren (D., Mass.) has demanded answers from the Securities and Exchange Commission.
The chaos has also revived calls among progressives for a financial transaction tax — and supporters hope all the attention on Wall Street will lead to real change.
“Anytime the veil behind the stock market is lifted and the American public sees this is more like the curtain shielding the Wizard of Oz, it helps build popular support for a very, very small increase in existing tax to tame the mammoth deficit or address our substantial government funding needs,” said Aaron Klein, a senior fellow in Economic Studies at the Brookings Institution.
Rep. Ro Khanna (D., Calif.) tweeted, “this shows the need for a financial transaction tax on hedge fund shorting and SEC regulations on short-selling practices.” Rep. Ilhan Omar (D., Minn.) tweeted, “How about this: financial transaction tax. Now.” in the midst of the GameStop saga’s fallout.
“Wall Street exploiting and capitalizing on the suffering felt by millions of Americans isn’t a new phenomenon. They have made billions on the back of the worst recession since the Great Depression, and fought to deregulate finance to pre-2008 levels,” said Omar in a statement to Yahoo Finance.
Wall Street has made billions on the back of the worst recession since the Great Depression, and fought to deregulate finance to pre-2008 levels. And the moment regular folks beat them at their own rigged game, it’s “SHUT IT DOWN.”
How about this: financial transaction tax. Now.
— Ilhan Omar (@IlhanMN) January 28, 2021
Omar and Sen. Bernie Sanders (I.,Vt.) introduced legislation to tax trades in 2019, though it didn’t advance through Congress.
“A small tax – 0.1% – on each Wall Street trade would reduce high frequency trading, a practice which drains profits from retail investors and benefits only the very rich. We could use the close to $1 trillion it would generate to fund basic living standards like student debt cancellation or tuition free college,” said Omar.
Earlier this year, DeFazio re-introduced his legislation that would place a 0.1% tax on the sale of stocks, bonds and derivatives. The Congressional Budget Office estimates a tax of 10 basis points on trades could raise $777 billion over the next decade.
“It’s clear that comprehensive reform must be undertaken [to] repair the damage. This reform must include robust oversight from the SEC and regulators and ensuring wealthy Americans pay their fair share through appropriate capital gains taxes,” DeFazio told Yahoo Finance. “I also firmly believe any reform must include my financial transaction tax legislation. The FTT would rein in the worst behaviors of Wall Street and help create a more level playing field for Main Street.”
Opponents say a financial transaction tax wouldn’t just hurt big-time traders on Wall Street, but every day people saving for retirement.
“We need people to be able to save tax-free, we need to be able to save long term for retirement savings. We need more of that in our society,” said Rep. Patrick McHenry (R., N.C.), the top Republican on the House Financial Services Committee.
McHenry told Yahoo Finance Live the financial transaction tax “doesn’t work and it doesn’t function.”
Yes @aoc. We need an investigation into RobinhoodApp’s decision and who influenced that. And this shows the need for a financial transaction tax on hedge fund shorting and SEC regulations on short selling practices. https://t.co/mYX8Ab3JwH
— Ro Khanna (@RoKhanna) January 28, 2021
“There’s obviously some hostility towards Wall Street as an institution. The financial transaction tax is probably a way to get back at them,” said Ulrik Boesen, senior policy analyst with the Tax Foundation.
Boesen argues the tax would result in lower trading volume, lower liquidity and potentially increased volatility.
“I don’t want us to destroy our capital markets in the name of going after some Reddit users, which is really what I see with these folks proposing this in Washington,” said McHenry.
Klein points out if there had been a 0.1% FTT in place as trading surged in a handful of popular stocks last week, tens of millions of dollars would have been raised that could have, in theory, gone to COVID-19 relief.
“The opponents of a financial transaction tax — to defend their money — have hid behind fallacious arguments that stock markets are efficient and more trading is always good. The events of GameStop over the last week show that trading for trading’s sake may be profitable, but it’s not inherently socially desirable,” said Klein.
President Joe Biden indicated he supported the idea of a financial transaction tax in an interview during the 2020 campaign. White House Press Secretary Jen Psaki told reporters on Monday that the administration would “welcome working with Congress” on policy issues relating to recent market volatility, but declined to comment on specific policies.
Yahoo Finance has reached out to the White House for further comment.
Jessica Smith is chief political correspondent for Yahoo Finance, based in Washington, D.C. Follow her on Twitter at @JessicaASmith8.
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