Rewarding The Financial Industry And Undermining Green Energy: A Double Win For Hockey And Costello

@ nobody456

THe short answer is no! But that also goes for "Another Liberal party", the ALP.

Surely Ian there will be Public input to the next tax review where you can raise this issues.

Or have you concluded that politicians no nothing of Economics or Business Incentives?

As hinted at here it is all part of the Corporate takeover of nations and their inconvenient laws. Failing that and in the meantime, their supporters like to own politicians, although many pollies don't get to understand that untill they sit on the government benches. [I believe it's behind all the back pedalling Tony Abbott has had to do]

The first budget was clearly aimed at setting the Corporate world's agenda - seeing how little empathy was in it. Fortunately for the rest of us it was mishandled so badly we cottoned on and now they are aware that it's not an easy one to get approved. They are also doing damage by stealth. Abbott and Hockey's incompetence was a blessing for us IMO. 

If the other liberal party aka Labor, wants to do better it should adopt a stance contrary to what the Corporate world masters intend for us. They should redirect their energies to Full Employment [=< 2% unemployment] , something obviously not part of the Liberal agenda.

And they should learn about Modern Money, before another  party cottons on[!]

swarmi they won't let us. 40 years on, same brick wall, but now the oceans are 90% depleted, 50% of the worlds vertebrates are extinct, and we're losing farmland at a rate of knots. And the little matter of climate change. All this and they just tightened their grasp on power. We didn't act, and now our children are held hostage.

We had a chance, once. Now we have to suck it up and watch the world collapse. And then rebuild it, having firmly crossed laissez faire capitalism off the list of ways to organise a global civilisation. With the death screams of billions lingering in our childrens ears, hopefully they won't repeat the mistake for a while.

As someone who advocated a Speculative Gains Tax in my submission to the 1982 Campbell Inquiry, I have over three decades of pedigree in making this sort of argument, which dissuades me (for once) from chiding Ian for his misuse of the term "speculation", which is technically confined to buying something (a share, a house in the suburbs, a gold bar, a wad of foreign currency) with the intention of selling it at a profit within the same financial year.

One of the justifications Costello advanced for his 1999 "reforms" was that speculators would pay tax (at their marginal tax rate) on 100% of their capital gains, since the 50% discount only applied to an asset held for longer than 12 months, so the new regime would work as a disincentive to speculation (in the technical sense).

It should be noted that the 50% discount is only available to private individuals; companies, trusts etc still pay capital gains tax on 100% of their gains. Once again, Costello claimed this would act as an incentive for "Mum-and-dad" investors and as a disincentive to hedge funds and the like to work their distorting effect on Australian markets.

I am surprised that an old Leftie like you, Ian, isn't at least pleased that post-1999, CGT became progressive in line with the income tax scales. That is, the more your income in the year you made the gain, the higher the percentage of the gain you paid in tax, whether the gain was discounted or not. 

Are you advocating a return to the flat rate, as well as removing the discount and restoring indexation?

@musikki

It is certainly true that shortselling increases the volume of shares on offer, since you add to the number of shares being offered for sale by people who already own those shares the number being offered by short sellers.

Short sellers include "covered" short sellers who have "leased" other people's shares for the purpose of pretending to offer those leased shares for sale when in fact intending to buy other shares genuinely available for sale tomorrow to cover their position once they make a sale at today's hoped-for higher price, pocketing the profit, and "naked" short sellers who have no actual shares to sell yet but can be trusted to cover their position by buying the shares they sell today tomorrow.

Liquidity is a good thing in any market, but if it is an adequate justification for allowing people to sell something they don't own on the sharemarket, then we can increase liquidity in second-hand car markets by allowing people to sell cars they don't yet own, we can increase liquidity in the domestic property market by letting people sell houses and flats they don't yet own, we can increase liquidity in the iron ore market by allowing people who don't own iron ore mines to sell iron ore they don't yet own.

I agree with you that shortselling is pure gambling in the casino of capitalism, without the tiniest figleaf of investment value. The fact that defenders of its continued legality can prattle on with this sophistry about liquidity just goes to demonstrate how far their minds have been corrupted by the transformation of the sharemarket from the world's most efficient and effective mobiliser of savings for the purpose of investment in future productive capacity into the betting shops of today.

One of the things the Chinese government did to arrest the crash of the Shanghai market (although they moved far too soon, before shares had fallen back to anything remotely approaching fair value, before the speculative premium had been taken out) was to ban shortselling. If they were smart, IMHO, they would never lift that ban.

@musikki

Yes, it was, but if memory serves only for a month for stocks generally and for perhaps six months for financial stocks (say from a couple of days after the collapse of Lehman Bros to the end of the first quarter of 2009), and the longer period for Financials was mostly in response to the Tricom collapse, where a big securities firm was unable to return "leased" shares to their owners after losing them in short-selling bets where positions were inadequately covered by bets "on the other side". 

It was also the view – and some temporary suspension of shortselling was bi-partisan policy, part of the in-all-ways superior package of measures put forward by the Liberal Party as their alternative response to the GFC – that most of the bets by shortsellers were directed against companies with significant shareholdings secured against margin loans at a time when such loans were being called in in a manner which led to the bankruptcy of otherwise-viable businesses, with predictable knock-on effects for unemployment, loss of tax revenue, and more downward pressure on the contracting business cycle.

If there had been any justice in the world, Macquarie Bank, the architect of a lot of the schemes which made the fabric of Australian business so vulnerable to a sharp downturn like the GFC, would have gone bankrupt itself. St George Bank should have gone bankrupt for its immoral support of property spruikers, with its retail banking business falling back into the hands of account-holders as it had been in the days when it was the St George Building Society. Instead St George Bank was so severely weakened it was easy meat for the takeover merchants at Westpac, headed up by a former St George CEO (and aided by a toothless ACCC, itself shamed into a corner by its "light touch" approach to regulation pre-GFC, and a weak treasurer in Wayne Swan).

That weak treasurer was also persuaded that what Australia most needed to recover from the GFC was a return to business as usual, and in the stock market that meant shortselling. If you like conspiracy theories, a number of Securities firms who drew the bulk of their larcenous profits from shortselling made large donations to the Labor Party at the time. 

By the "profits from shortselling" I include the profits made from various options contracts, warrants, swaps, and share-linked derivatives where the underlying shares are shorted in order to insure or hedge against the risk of losses – one of the rationalisations you will hear for shortselling is that like desirable market derivatives such as commodity futures, this otherwise purely speculative practice operates as a kind of insurance against the vicissitudes of future market movements, that it can and is used to minimise risk and is therefore a positive for market stability. What this spin obscures is that while individual risks may be reduced, the massive volume of shares being shorted at any one time overhangs the market, gravely increasing the chances of the kind of precipitous fall we saw post-GFC (and indeed in all other sharemarket collapses which have had significant knock-on effects for the Australian economy and for the jobs of ordinary Australians).

It was also said at the time the ban was lifted – and I'm pretty sure our World's Best Treasurer said it too – that banning shortselling and therefore reducing liquidity had increased market volatility, an assessment which completely ignored the inevitable impact of mass-panic in the wake of the GFC on volatility indices, and the fact that countries which implemented shortselling bans, including Australia, were either no more volatile or actually less volatile than other stock markets where such bans were not implemented.

It is true that there are real economic losses from the banning of shortselling for financial services firms, and not just in losing brokerage fees etc on the artificial business – which is like sympathising with a drug dealer for losing business when an addict goes cold turkey – but also because the loss of liquidity leads to a broadening of spreads, particularly the spread (or difference) between the price asked by a real seller on the stock market and the price offered by a real buyer, where the narrower the spread the greater the volume of shares traded in the real investment world and the lower the costs of investing for superannuation funds, for example, including much-reduced costs for hedging. But in my view this tiny upside to allowing shortselling has not come remotely close to compensating for the downside, even if you can ignore the inherently-immoral nature of selling something you don't own.

@musikki

Please, spare my blushes, I never need much encouragement to blather on about these matters!

Many derivatives are in themselves very valuable to the enterprises that use them and to the wider economy and thus to the material well-being of us all. You would be hard-pressed to find a single farmer in the developed world who would want to see agricultural futures outlawed, and given the considerably greater volume of cropping prompted by the predictability of ultimate price conferred by taking out a futures contract, it can be easily argued that these derivatives have led to an increase in the quantity of food in the world and therefore to a reduction in hunger (and even starvation).

They have certainly given us Westerners cheaper food.

Similar arguments can be made for mining etc.

It may be possible to draw a clean line between derivatives which are traded on public and regulated open markets, like the Chicago Mercantile Exchange or the London Metal Exchange, and so-called over-the-counter derivatives which includes most of the Securitised/Collateralised Debt Obligations and the Credit Default Swaps which helped export America's sub-prime crisis to the globe in 2008, so that a stronger case could be made for outlawing any derivatives not tradable on a public market.

Even if banning the buggers can't be justified, I would certainly argue that there is a clear public interest justifying much tighter regulation of privately-traded derivatives.

By the way, one of the more mind-blowing statistics to emerge from a GFC replete with mind-blowing statistics was the sheer volume of Credit Default Swaps circulating in the "dark pools" of the economy – the dollar value guesstimated for all CDS's on issue worldwide at the end of 2008 exceeded the multi-trillion-dollar value of the debts from which they derived their value.

This is like having the value of house insurance exceed the value of the houses insured.

Of course, clever scallywags argue that almost all of those CDS's were bets on opposite sides of a particular default event and thus cancelled each other out, but still…

Actually, I believe a great deal of what was done by merchant bankers, ratings agencies, stockbrokers etc that deepened the GFC (if not actually causing it) was largely illegal, and where not clearly illegal could have been "outlawed" by a vast range of regulators had any of them chosen to exercise the regulations at their command.

The same timidity that gave us "light-touch regulation" prior to the GFC now gives us the obscenity of not seeing a single white-collar criminal whose crimes gave us so much world-wide misery face a single day in court.