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Why a Robin Hood tax on filthy rich City types is the very LAST thing needed

The Nobel prize committee said so

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You can't short a house like you can a share

In our normal financial markets you can bet short or long. Place your money so that you profit if prices decline or alternatively so you profit if they rise.

The short side of the market is usually catered to by the futures and options markets: you can, of course, go long in both too, but the trick that these two markets do that others don't is that ability to go short easily (there are complex methods in some other markets).

Shiller has pointed out that in the US housing market there wasn't (and still isn't, not easily) any method of going short on the value of housing. You can't short it like a share: sell houses you don't have and hope to buy back later. There's no options or futures markets in housing.

If you're going to be in the housing market you can really only go long, by buying a house. Sure, markets can get into bubbles; there can be manias for things. But if you cannot register your bet that prices are going to fall then there is no pressure for prices to fall.

Nor is the information that some people think prices will fall incorporated into the prices in that market. The EMH isn't working as it should because instead of getting the news that some think we're in a bubble, those people just aren't in the market at all and thus the information is lost.

A new way of looking at prices

Shiller's answer to this was therefore to suggest that we have futures and options markets in house prices. Quite: he's identified the problem as being too little speculation rather than there being too much. And we should expand the markets so that we can indeed bring this speculation into the price-setting orbit of the EMH.

Which brings us to the FTT and Robin Hood peeps. They're arguing that in order to control prices and price volatility we should tax speculation and thus reduce the amount of it. The people who have just won the Nobel say that in order to control prices and price volatility we should have more speculation.

Therefore taxing speculation in order to reduce it is contraindicated. Thus no Robin Hood or FT tax.

True, you can indeed still say that you want the tax to spend on stuff. After all, whadda these economists know anyway? I would, however, very gently suggest that that's not the way to bet here.

The award of a Nobel is as close as we get to an affirmation that this is the scientific consensus. And as we're endlessly told with regard to climate change we really should be listening to that consensus, not to the ravings of a seemingly lunatic fringe. If that is indeed so, then we should be paying attention to the implications of this Nobel and not worrying about the shoutings of teenage Trots.

Speculation is the mechanism that brings information into financial markets which then process this efficiently to produce the prices that best reflect the current information available. It would be a very odd decision to start taxing that process just as we've had it declared to us that this is the scientific consensus of the day. ®

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