Tag Archives: financial services

10/13/2004 – Do We Need This Market?

Do We Need This Market?

Recently I heard a report on NPR that included the information that international currency transactions now exceed TWO TRILLION DOLLARS PER DAY. This seemed astonishing to me since the US GDP is around $12 trillion PER YEAR. After doing a bit of Googling, I have discovered varying estimates that 95% to 98% of these transactions are currency and interest speculation. And, many see this speculation as not just unproductive but deeply involved in financial crises like those involving Mexico, Russia, Brazil, Southeast Asia, just to mention some recent crises.

This speculation serves no productive purpose except to allow speculators to extract their pounds of flesh. No new products or services are funded or created by this. No people are made healthier or better educated by this activity. Economists don’t even argue vigorously that this speculation adds liquidity or responsiveness to the financial system. Many, though, see how these massive flows can easily destabilize national economies in a manner that leaves them defenseless.

Not surprisingly, I am not the first to notice this speculation. George Soros has made billions engaging in it; activist groups lobby against it; and academics write papers. James Tobin, the eminent economist, made suggestions in the early 1970s and again later to reform the international monetary system in part to discourage this destabilizing activity. You can find his paper here: http://www.globalpolicy.org/socecon/glotax/currtax/original.htm.

For those of you who still think that a market is a wonderful self-regulating engine of rational allocation I can only point you to Charles Kindleberger’s book: Manias, Panics, and Crashes: A History of Financial Crises, New York: Basic Books, 1978, revised and enlarged, 1989, 3rd ed. 1996. In fact, even if you lived through the Dot Com boom and were left thinking that markets might not be so rational, this book is a must read and a trip through a history not covered in your standard history or economics courses.