The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the longterm prospects and to those only.” – John Maynard Keynes

In Keynes’s book, The General Theory of Employment, Interest and Money, the idea that financial markets were flooded with speculation and being treated like casinos is clear.  Keynes discusses that by allowing financial markets to be incredible liquid and allowing individuals to follow the ignorant masses around them, individuals will do more harm the markets and themselves, than they will do good.  Keynes also discussed that by allowing individuals to speculate, the financial markets around them, such as the New York Stock Exchange, would transition from a place of earning long term income to a place for quick money.  Keynes’s spoke about this transition in a very negative manner, saying that a financial market should not be the location for an easy dollar or a place where ones “good feeling” dictates their investment—instead a financial market should be a place full of calculated investments. The solution, Keynes proposed, to resolve the transition and attitude of financial markets, was to implement a tax on the earnings gained through the financial market.  His hope was to deter individuals from making risky investments based on speculation and trends surrounding them, and instead focus on the longer likelihood of success of the investment.  Keynes felt it would make investors more responsible for their actions and decisions, which would in turn create a more stable and efficient economy.

Keynes’s thought and analysis applies more today than ever before and this can be supported by the financial market crisis in 2008.  In 2008, the financial market crashed due to investors and banks wanting to make quick money through mortgage-backed securities and real estate.  In the eyes of Keynes, real estate would be the speculation aspect of the transition and mortgage-backed securities would be the enterprise.  The idea and way to make it rich quickly in the early 2000s was to buy and sell real estate—housing prices were inflated and rapidly growing every day.  The idea was that individuals could buy a house for a specified amount of money today and sell it tomorrow for 10% more than what that person purchased it for.  This inflation of prices was not due to an increase in the quality of the home, but instead an increase in the speculation surrounding the home.  Individuals who were trying to decide whether to buy a home or rent during this time were encouraged to purchase homes instead of renting due to extremely low interest rates—sadly, the majority of the time, the individuals were signing loan agreements that they could not pay.  All of the loan agreements were packaged together and bought by banks as mortgage-backed securities.  Banks were convinced that the securities were riskless or contained relatively low risk, when in fact that was not the truth.  These securities were full of risk and waiting for the housing market bubble to pop.  Once the bubble popped, banks and individuals were able to see the situation that had been created, specifically the damage to future interest rates and consumption.

If Keynes’s suggestion had been implemented, investors/individuals would have not instilled the desire to buy and sell real estate as quickly and at such high quantities as they did in the early 2000s.  Investors would have not only been deterred by the taxes Keynes suggested, but housing prices themselves would not have appeared as bountiful.  The tax in this situation would have removed the speculation aspect from the housing market, which would have in turn prevent mortgage-back securities from containing as much risk as the previously did.  This removal of risk and high housing prices could have prevented the financial crisis from occurring.

 

 

Keynes: Why gains earned from financial markets should be taxed