Felicia Muftic – A new tax you can bank on
January 24, 2010
Scott Brown rode a wave of anger to victory in Massachusetts last week. It was not a win for the Republican Party. Even in his concession speech the word Republican never crossed his mouth, just as he never uttered it in his campaign.
President Obama must capture the same spirit if he ever wants his agenda to succeed. The irony is that he owed his election to the same sentiment, though it was not as clearly defined or as publicly expressed as it is now. The message of change he delivered in his campaign was about no longer doing business as usual in Washington. Instead, this past year he co-opted and looked as if he was co-opted by politics as usual. He made deals and he stood by while Congress made their deals on health care. It is not too late to rekindle his original message.
Obama made a beginning the week before the Massachusetts election when he proposed a tax on banks to recover “every dime the people are owed” from the TARP losses in bailing out big banks. The emails and the conversations applauding that one resonated from the financial entrepreneurs in Greenwich, Conn., to Florida southerners and Tea Partyers across the country.
The tax would do three things: Recover the estimated losses on TARP money, help reduce the federal deficit, and discourage banks from taking on too much leverage to pursue potentially very risky behavior. The cost for taking risk will go up; the cost of sound business practices will not. The only sour notes came from the big banks and Republicans whose mantra is “no new taxes” no matter if the tax is a fair way to cover expected taxpayer losses from TARP. I always suspected that reduction of the debt was secondary to their goal of protecting the bottom lines of insurers and investment banks. They risk a blowback of populist anger if they persist.
Here is where the impact of the tax will be. Banks borrow money to invest it in financial instruments so they do not have to cough up or risk their own capital. That borrowing practice is called “leveraging” and it was that kind of practice carried to an excess that resulted in the house of cards bringing down Wall Street, main street, and the economy. The proposed tax is on the money big banks are borrowing.
The truth is, most commercial banks, those with which we do our day-to-day business, and our local community banks, will not be affected, because they may not have an investment bank or their investment business is not as large as their commercial side.
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Who will get it in the gut will be the investment banks, such as Goldman Sachs and Morgan Stanley, who have acted more like massive hedge funds recently than responsible and ethical intermediaries between capital providers and capital consumers. In short, they have been very busy at trying to make money out of money.
Will the tax be passed on to us, customers of the commercial side who use them for savings and checking accounts, credit cards, or secured and unsecured business and consumer loans? It does not need to be if the banks cut their outrageous salaries and bonuses to their executives that got nearly everyone’s ire and disgust raging. Besides, big banks are fat with capital thanks to the U.S. taxpayer bailout.
Will it slow down the economy? There is plenty of capital on the sidelines waiting to be deployed in jobs-producing investments and loans. Will Wall Street move offshore? No. Even London, the European Union and the Cayman Islands have just levied taxes on financial transactions and bonuses.
By fighting the tax, big banks are inviting pressure to break them up and separate commercial functions from their investment banks. Breaking them up would be the death knell for their ability to hold us hostage to a bailout because they were “too big to fail” or their threat to take it out on consumers if government cracked down on their outrageous investment banking practices.
One threat big banks fear the most is the reinstatement of the Glass Steagall Act. In 1999, this common sense Depression-era legislation was reversed, thereby allowing commercial banks to merge with providers of investment banking and insurance services. The end result was the creation in a very short period of time of financial behemoths that were too big to fail because their demise would destroy the entire economy.
We should dare the Republican party or Senator Brown try to block the tax on banks’ borrowing money. We should dare either to block reinstatement of Glass Steagall. If they block them, it will be clear to the public whose side they are really on and it is not on the side of the angry middle demanding real change.
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