Thursday, December 15, 2011

Three Ways to Fix Europe Without Europe’s Help

How can we, here in the US, lower volatility to break this negative feedback loop that is choking Europe? I propose three solutions that have absolutely nothing to do with the EU:

1. Bring back the uptick rule – I'm sorry, but I don't care how many studies you show me "proving" that the uptick rule was ineffective. Removing it was an enormous mistake. We know from behavioral finance that people feel the loss of a dollar about twice as much as they feel the gain of a dollar. The uptick rule slows down the rate at which that pains expresses itself and can reduce as a result the emotional response to losses. This would lower volatility and financial stress.

2. Tax high-frequency trading – we have a long-term capital gains tax and a short-term capital gains tax. Why can't we also have an ultra-short capital gains tax? All of this nanosecond trading, which does not add anything to the normal functioning of markets, increases price swings. Taxing nanosecond trades would make them less profitable, which in turn would bring the market back to retail investors. This would lower volatility and financial stress.

3. The Fed should explicitly state an inflation target – this has been debated for some time internally within the Fed, and it is beyond my understanding why this has not been done already. The best way to counter deflation fears is to tell the market that there is an explicit inflation target the Fed will reach at any and all costs. Increased inflation expectations are bullish for risk assets and would increase the velocity of money. This would lower volatility and financial stress.

This is via Minyanville from: 

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