Heartland Ideas

Free Market Solutions in Finance

June 05, 2012, 12:51 PM
June 05, 2012, 1:30 PM

The financial industry consists of banks, thrifts, credit unions, stock markets, futures and options markets, and investment firms. (Insurance and real estate are addressed separately below.) Congress has been active in overseeing the financial sector, yet attacks on investment firms and lenders have become everyday occurrences as politicians seek to assign blame for the nation’s economic downturn on “speculators” and demonstrate they are “doing something” about it.

Following the financial collapse of 2007-2008, governments greatly expanded their interference in financial markets, bailing out and subsidizing some businesses while imposing considerable and unnecessary regulatory costs and uncertainty on investors and other financial service providers.

Heartland is working to repeal unnecessary regulations and fend off new regulations and discriminatory taxes on financial services. A free-market approach to public policy issues in finance focuses on six key ideas:

Freedom of transactions

Derivative instruments, including futures and options, are important tools to manage risk and they produce enormous economic benefits to businesses, investors, consumers and even the government. Efforts to restrict the freedom of investors and investment managers to come together to discover and utilize new forms of mutually beneficial transactions should not be limited by government regulations. The government should not monitor or tax financial transactions except to the extent necessary to deal with serious crime. We oppose Dodd-Frank as unnecessary, ineffective, and extremely burdensome regulation. We oppose efforts to impose transaction taxes and other discriminatory taxes on the financial industry, such as the Carried Interest Fairness Act of 2012, Wall Street Trading and Speculators Tax Act, and Closing the Derivatives Blended Rate Loophole Act.

Freedom of capital

Goods, services, capital, and labor should be free to cross international borders. Foreign direct investment helps create opportunities for U.S. businesses, including access to new markets and marketing channels, cheaper production facilities, and access to new technology, products, skills, and financing. Legislation introduced in Congress that would toughen the U.S.’s foreign investment rules could hurt the country’s ability to acquire foreign investment. Taxation of offshore transactions, likewise, must be treated with suspicion and should never result in long-term effective rates significantly different from the long-term effective income tax rates. Bad policy threatens to put U.S.-based financial services companies at a competitive disadvantage with those elsewhere in the world and hurt U.S. consumers.

Pro-investment tax reform

The tax code should promote investment by individuals and businesses to promote productivity and stimulate economic growth. Savings and investments should not be taxed, since these dollars were typically taxed when they were earned. Capital gains and dividends should not be taxed at all and corporate investments should be deductible against corporate profits. Taxes on banks or financial transactions should be opposed because such taxes are likely to be passed on to consumers and will lead to more distortion of investment decisions.

Tax-sheltered savings accounts (e.g., Individual Retirement Accounts and 401(k) accounts) are useful to encourage people to save for retirement, control a larger share of the dollars used to pay for health care (e.g., Health Savings Accounts), and in some states to save for children’s college tuition. Retirement Savings Accounts (RSAs) and Lifetime Savings Accounts (LSAs) are promising ideas to help Americans retire with financial security.

Less regulation of depository institutions

Institutions should compete on the basis of products and service, not on arbitrary government regulations. More regulated institutions such as credit unions should receive less regulation overall, while less regulated institutions like thrifts should not be re-regulated. While creating a level regulatory playing field would produce benefits, it is vitally important that regulations be ratcheted down, not up. Some financial services should be deregulated so that investment companies, hedge funds, and other non-bank institutions remain free to innovate and act quickly to move capital.

Financial responsibility

Insofar as the government backs any deposits at all, it should do so only for ordinary individuals, not on behalf of big businesses. Hedge funds and investment firms should not receive explicit or implicit government backing and, as a result, should not be subject to the rules that come along with it. Firms that receive loans from the government should, to the extent practicable, have to pay them back or otherwise compensate taxpayers. Firms that have already paid back these loans or never took them should not be held responsible for the loans taken out by other firms.