FacebookTwitterGoogle+RedditEmail

Making the Banks Pay

President Obama proposed a tax on the country’s largest banks to help recover the money lost under the TARP program. This tax is a positive step. However, it will not come close to recovering the losses incurred in the bailouts and it will do almost nothing to change the way that the banks do business. For this we will need a larger financial speculation tax.

First, it is necessary to be clear on the extent of the losses incurred in the bailouts of the financial system. The losses in the TARP program are currently pegged at close to $120 billion, most of it due to the bailout of AIG, the giant insurance company. This money was virtually a direct handout to several large banks as the government’s money allowed AIG to make payments to Goldman Sachs and other large banks that would not have been possible if it had fallen into bankruptcy.

But these losses are far from the complete picture with TARP. On the night before Christmas, the Treasury Department lifted the $200 billion cap on the amount that both Fannie Mae and Freddie Mac can draw on the Treasury. They both now have unlimited lines of credit.

No one knows how much their bailouts will eventually cost taxpayers, but it is almost certain that their losses are not entirely attributable to the portfolio that the mortgage giants held on September 7, 2008 when they were put into conservatorship. Much of the losses incurred by Fannie and Freddie are almost certainly due to losses on mortgages they purchased from banks after they went into conservatorship. In other words, Fannie and Freddie were paying too much for the mortgages they purchased from the banks. This is exactly what the TARP was originally supposed to do.

In effect, the Treasury Department has run a version of TARP through Fannie and Freddie. If we want to calculate the money taxpayers lost from the TARP program we should certainly include the money lost bailing out these mortgage giants, which can now exceed $400 billion if events turn out badly. This means that if the point is to recover the money lost in the TARP, the bank tax is likely to fall short by a large margin.

The other key consideration in making the banks pay should be to structure a tax that changes the way the banks do business. This money lost in the TARP program is just a small fraction of what the banks’ greed cost the country. We will likely lose more than $4 trillion in output in this downturn, more than 40 times the projected revenue from the tax over the next decade.

The $9 billion that is projected to be collected each year is equal to about 5 percent of their annual profits and bonuses. It is unlikely to have any noticeable impact on the way they do business. In other words, we can still expect them to be pursuing short-term profits and giving little consideration to long-term investments.

A tax on financial speculation more generally, which would also apply to hedge funds and other financial institutions, would be a far more effective mechanism in changing behavior. It could also raise very substantial revenue. In the United Kingdom, a tax of 0.25 percent on the purchase and sale of shares of stock raises the equivalent of $30 billion annually in the United States relative to the size of its economy. A broadly based transactions tax, that would apply not only to stock, but also to options, futures, credit default swaps and other financial instruments could raise more than $150 billion a year in the United States.

Such a tax would also make the financial sector more efficient by reducing the volume of short-term trading that serves no productive purpose. The share of the private sector that is devoted to investment banking and commodities trading has nearly quadrupled in the last three decades.

By reducing the volume of trading this tax would make the financial sector more efficient, freeing up resources for productive uses. This would be comparable to making the trucking sector more efficient by reducing the number of trucks and drivers it takes to deliver goods to wholesalers and retailers. Industries are supposed to become more efficient as the economy develops. It is only finance that is becoming less efficient due to its ever-growing complexity.

In short, a tax on financial speculation is a win for just about everyone but the speculators. President Obama’s bank tax is a good start, but we have to go much farther.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

This article originally appeared in the The Guardian.

 

 

More articles by:

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

Weekend Edition
July 20, 2018
Friday - Sunday
Paul Atwood
Peace or Armageddon: Take Your Pick
Paul Street
No Liberal Rallies Yet for the Children of Yemen
Nick Pemberton
The Bipartisan War on Central and South American Women
Jeffrey St. Clair
Roaming Charges: Are You Putin Me On?
Andrew Levine
Sovereignty: What Is It Good For? 
Brian Cloughley
The Trump/NATO Debacle and the Profit Motive
David Rosen
Trump’s Supreme Pick Escalates America’s War on Sex 
Melvin Goodman
Montenegro and the “Manchurian Candidate”
Salvador   Rangel
“These Are Not Our Kids”: The Racial Capitalism of Caging Children at the Border
Matthew Stevenson
Going Home Again to Trump’s America
Louis Proyect
Jeremy Corbyn, Bernie Sanders and the Dilemmas of the Left
Patrick Cockburn
Iraqi Protests: “Bad Government, Bad Roads, Bad Weather, Bad People”
Robert Fantina
Has It Really Come to This?
Russell Mokhiber
Kristin Lawless on the Corporate Takeover of the American Kitchen
John W. Whitehead
It’s All Fake: Reality TV That Masquerades as American Politics
Patrick Bobilin
In Your Period Piece, I Would be the Help
Ramzy Baroud
The Massacre of Inn Din: How Rohingya Are Lynched and Held Responsible
Robert Fisk
How Weapons Made in Bosnia Fueled Syria’s Bleak Civil War
Gary Leupp
Trump’s Helsinki Press Conference and Public Disgrace
Josh Hoxie
Our Missing $10 Trillion
Martha Rosenberg
Pharma “Screening” Is a Ploy to Seize More Patients
Basav Sen
Brett Kavanaugh Would be a Disaster for the Climate
David Lau
The Origins of Local AFT 4400: a Profile of Julie Olsen Edwards
Rohullah Naderi
The Elusive Pursuit of Peace by Afghanistan
Binoy Kampmark
Shaking Establishments: The Ocasio-Cortez Effect
John Laforge
18 Protesters Cut Into German Air Base to Protest US Nuclear Weapons Deployment
Christopher Brauchli
Trump and the Swedish Question
Chia-Chia Wang
Local Police Shouldn’t Collaborate With ICE
Paul Lyons
YouTube’s Content ID – A Case Study
Jill Richardson
Soon You Won’t be Able to Use Food Stamps at Farmers’ Markets, But That’s Not the Half of It
Kevin MacKay
Climate Change is Proving Worse Than We Imagined, So Why Aren’t We Confronting its Root Cause?
Thomas Knapp
Elections: More than Half of Americans Believe Fairy Tales are Real
Ralph Nader
Warner Slack—Doctor for the People Forever
Lee Ballinger
Soccer, Baseball and Immigration
Louis Yako
Celebrating the Wounds of Exile with Poetry
Ron Jacobs
Working Class Fiction—Not Just Surplus Value
Perry Hoberman
You Can’t Vote Out Fascism… You Have to Drive It From Power!
Robert Koehler
Guns and Racism, on the Rocks
Nyla Ali Khan
Kashmir: Implementation with Integrity and Will to Resolve
Justin Anderson
Elon Musk vs. the Media
Graham Peebles
A Time of Hope for Ethiopia
Kollibri terre Sonnenblume
Homophobia in the Service of Anti-Trumpism is Still Homophobic (Even When it’s the New York Times)
Martin Billheimer
Childhood, Ferocious Sleep
David Yearsley
The Glories of the Grammophone
Tom Clark
Gameplanning the Patriotic Retributive Attack on Montenegro
FacebookTwitterGoogle+RedditEmail