Who had heard of GameStop a month ago other than committed gamers and punters on the stock market? The bricks-and-mortar computer game retailer burst to prominence in recent weeks as a pawn in a supposed David-and-Goliath story, a battle of wits between plucky nerds and the wolves of Wall Street.
Spotting a chink in a hedge fund´s armour, small investors organized themselves through a small corner of social media, a reddit bearing the fitting moniker #WallStreetBets. Basically, the hedge fund had reached the not-unreasonable conclusion that computer game shops were going the way of Xtra-Vision. They borrowed shares in GameStop and sold them, hoping to buy them back at a lower price before returning them to their original owner and pocketing the difference.
The problem was some punters realized that if the share price went up instead of down, the hedge fund was massively exposed and the nerds could make a killing. In the very short term, it didn´t matter whether GameStop was a good business or not. All that mattered were the mechanics of the market. A self-fulfilling pile-on ensued, egged on by superlative media coverage, sending the share price rocketing 25-fold in the second half of January before the bottom fell out.
David slayed Goliath. Fortunes were made and lost. Social and traditional media were flooded with blink-of-an-eye rags-to-riches stories. But, is there any deeper lesson from the story?
In a market, or even a mixed economy, there is a role for a sound financial system that facilitates payments, keeps savings secure, and promotes productive investment. Indeed, up to a certain point, financial sector development is associated with higher and more equitable economic growth. Ireland is probably past that point.
Likewise, stocks and shares and even many of the more esoteric derivative products all have a sound original basis. The stock market is an appropriate vehicle to channel excess savings into more or less risky investments. Futures originally allowed farmers to lock in a price for their produce ahead of harvest time, and to plan accordingly. Options, which were central to the recent GameStop saga, allow governments dependent on oil revenues to budget for the year ahead without having to worry about a collapse in prices. They function like insurance and can play an important economic role.
However, the same instruments allow speculators large and small – both hedge funds and punters with computers – to gamble for financial gain. Let´s call them ´Wall Street Bets´. For the most part, they serve no useful economic purpose. In fact, they can even be a source of financial instability. As we saw a decade ago during the financial crisis, unsuspecting taxpayers can be on the hook in a worst case scenario.
For policymakers, an important question is how to encourage saving and productive investment while discouraging pure speculation that poses systemic risk. Regulation and taxes are the tools of the trade.
Perhaps the easiest approach would be simply to ban speculation. But, sometimes the distinction between gambling and investment is in the eye of the beholder. How about a tax that weeds out the speculators but only puts the lightest of burdens on investors? Such a Financial Transactions Tax (FTT) is not a new idea, but maybe one whose time has come.
The idea is to put a tax on something that damages society, both to discourage that activity and to raise funds to spend on things that benefit society, like new schools or nurse´s salaries.
If you bet on horses or football in Ireland the betting company pays a 2% tax. Has that brought gambling to a shuddering halt? Hardly. A 1% tax – stamp duty – is also charged on the purchase of Irish registered shares, but nothing on government bonds, foreign shares, or most derivatives, like options.
Following failure to secure unanimous agreement among Member States in 2011 on the implementation of an EU-wide FTT, the European Commission tabled a proposal in 2013 that would allow an initial 11 countries forge ahead. The Irish Central Bank estimated in 2012 that such a tax – amounting to 0.1% on all stocks and shares, and 0.01% on derivatives – could raise up to 0.5% of GDP for Irish taxpayers. In 2021, this would amount to about an extra EUR 1bn in tax revenue. This takes into account the replacement of existing stamp duty on shares and the expected reduction in transactions provoked by the tax itself. Ultimately, Ireland opted out.
Frustrated with snail´s pace progress at EU level, Spain moved unilaterally. As of last month, they levy a small 0.2% tax – a tenth of the size of Ireland´s gambling tax on shares – on the purchase of shares in big Spanish firms. That is, it doesn´t affect day-to-day transactions of ordinary people. It is a tiny levy on households and businesses fortunate enough to be able to play the stock market. It is a small fraction of what people with a private pension pay every year to their money managers, for instance.
Very soon, once vaccination is approaching critical mass and the economic recovery gathers steam, the fiscal hawks will reassert themselves. There will be talk of ´paying for the pandemic´, as if we haven´t all already paid enough. Rather than reaching first for swingeing spending cuts or increased taxes on work, how about we start at the top?
It´s time to stop the games: tax the speculators.