It was a nice try but short term financing wasn’t a root cause of the crisis. Highly leveraged, incompetent financing, along with a host of agency problems and too little, not too much, trading share most of the blame. Since “nobody knows anything” about the future, how will forcing longer term financing in itself lead to better outcomes?
More generally, even if short term trading increases short term volatility, Paul Krugman must realize that the public doesn’t care about daily volatility. The public cares about longer term booms and busts in asset prices, which short term trading naturally has less to do with. Short term traders buy and sell. If you make exiting positions more expensive, serial correlation rises, which is exactly what you would expect when liquidity declines. Paul Krugman must realize that this makes extended booms, imbalances and busts all the more likely.
At some point the argument of transaction tax proponents comes down to the following: Hey, short term traders are “socially useless,” so screw them. People will agree with Krugman’s article because of that sentiment, not because of the economic quality of the arguments presented there.
Krugman has to dig in and elaborate on an anti-transparency theory of “constructive ambiguity”
Oh, and so much for that “London as financial capital of world again” idea, unless finance continues to decline in influence.
