Wednesday, January 13, 2010

By Barry Ritholtz


Yesterday, the news broke about a tax on the large banks — it was ostensibly designed to close the deficit. Instead, I’d like to rename it the Too Big Too Fail Tax (TBTFT).

What I found interesting about the tax is the somewhat misleading way it has been premised — namely, that it is payback for all of the Non-TARP subsidies the banks have been enjoying at the expense of the taxpayers. Further, went the MSM narrative, such a tax at a time of populist outrage over big bonuses is a slick political move calculated to assuage the angry masses.

I am not sure how clever the Obama brain trust is — so far, the answer has been “Not very” — but there is an opportunity here for a third basis for this tax. Let’s call it the TBTF tax.

Allow me to explain:

So far, we have learned that Wall Street has become impervious to regulation. Our Parliament of Whores is bought and paid for, well greased by the Street’s lobbyists. Wrap your lips around this big purple legislation and suck. Even the most benign regulation — i.e., a basic disclosure of mortgage costs relative to a plain vanilla, 30 year fixed — has been thwarted.

When lobbying prevents even the most simple of consumer disclosure legislation, you have a broken political system. Such failures can only occur when a democracy has been lost — when corporations own Congress, when the will of the electorate is ignored, when money has utterly corrupted the political process. Have no doubt about this: Our experiment in Democracy is nearly over; we have morphed into a Corporatocracy — a government by and for large corporate interests. Let’s pray it is only temporary.

Pushing regulation through the front door may have become impossible due to this corruption; However, a TBTF tax can be passed because it raises money to close the deficit. It will be difficult to vote against, given all the undirected anger against banks and wall street during big bonus time.

And, her’s the interesting part: It could potentially do more than reduce the deficit — if it goes far enough, it could actually solve the TBTF problem. Exempt small regional banks with under $25 billion in deposits. Make the tax progressive so it become increasingly larger as deposits become greater. $25-$50 billion in deposits is one fee (Let’s say 0.1%, that’s $25 million on $25 billion in assets). Have it scale to the point where its punitive — 1% on a trillion dollars in deposits.

The goal here isn’t to raise money — its to force the TBTF banks to become smaller — to break up the Citigroups and the Bank of Americas. This tax will restore competition to the banking industry.

These jumbo firms are the ones that can and will bankrupt the FDIC; They are the ones that put the entire system at risk. The bailouts reduced competition for them, and allowed a concentration of power that has been unprecedented.

Penalize them.

It could in theory appeal to both parties out of a sense of self-preservation: The GOP recently rediscovered the evils of Deficit Spending (now that they don’t control the White House); Democrats (excepting Clinton) tend to be big tax & spenders, and have usually paid mere lip service against the deficits. But a TBTF Tax could have bi-partisan appeal.

If we as taxpayers are on the hook for past and future excesses of bankers, we have the right to a) protect ourselves and 2) exact a payment, both after the fact and in anticipation of the next crisis.

Despite the theatrics we are likely to see today from the Financial Crisis Inquiry Commission hearing, there is a possible solution. If our broken Congress cannot regulate the Too-Big-To-Fail banks, at the very least, we can tax the hell out of them.

NJlou Says:

Even taxes won’t solve the problem here. You are assuming that the banks are engaged in productive banking activities, that is, they are making money from the traditional banking method of taking in deposits and lending it out. Most of the banks’ income is coming from ‘proprietary trading’ that hardly creates any worthwhile economic activity that leads to economic growth. No factories are being built requiring inventory, transportation and lots of workers.

The banks are simply ‘borrowing’ money at 0% from the Fed and buying treasuries at some higher percent in the usual carry trade. Then the bankers are paid on a percent of REVENUE generated from cheap government money.

The problem is moral hazard. The government is printing up massive amounts of worthless dollars and funneling it in covert and overt ways to insolvent banks to give the impression that the domestic economy has not yet collapsed.

Had Allan Greenscam and the government not bailed out the savings and loans, Long Term Capital, the and now the housing speculators with massive liquidity, massive government deficit, 40-year low interest rates and massive tax cuts for the wealthy, the U.S. would hardly been in its current financial Ponzi/debt pyramid scheme that has imploded. The speculators grew accustomed to making risky bets knowing the government would bail them out.

Even the mark-to-market accounting rules were changed to permit insolvent banks to pretend that they are still a going-concern, in a yet another fraud to hide the imploded domestic economy.

All of this is now irrelevant in the grand scheme of things as there are no economic theories/miracles left to try. The U.S. has tried them all and all of them failed to reverse its economic decline. The government, consumers and businesses can NO longer absorb any more debt.

We already knew that the carcass of America’s “benevolent” empire was decaying in the sands of Iraq and Afghanistan with the vultures circling above picking at the putrid remains of flesh and bones.

Then we received the shocking news from the Far East this very week:
China had surpassed Germany as the world’s top exporter;
The automobile market in the China is now the largest;
China is now the biggest market for Internet users and China resumed its fast-paced economic growth.

But what are the ignorant media owners and the chattering classes feeding the functional illiterates in America?: A steady diet of the O’Brien/Leno saga, Cowell leaving American Idol and Clinton/Reid racist comments on Obama who has already extracted his revenge on the Clintons.

Obama now needs to go on a massive cost cutting exercise eliminating all forms of foreign aid, pointless foreign wars and all those useless foreign military bases that have impoverished Americans and now wasting our dwindling resources.

Second, all the insolvent banks and industrial companies propped up by TARP and other government spending efforts need to go bankrupt allowing the survivors to emerge.

Third, the Glass-Steagall act needs to be re-instituted.

Finally, there should be no more moral hazard that permitted the risky bank speculation in the first place.

This will be the first start in an economic recovery after a rather painful period.

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