Today, President Obama will announce plans to levy a big fee on “too big to fail” financial firms. The fees, as much as $120 billion, seem designed to attract a crucial support base: New York’s delegation in Congress. But a tax on finance won’t fix Wall Street — and New York should reject it.
The move is supposedly a response to furor over Wall Street bonuses. “Given the mood of the country, it is essential that we do it,” says Rep. Barney Frank (D-Mass.), who chairs the House Financial Services Committee.
But people aren’t moody because bonuses are high. They’re angry that they’re going to people at firms that got bailed out last year as “too big to fail” — going, as the public sees it, to the very people who caused the crisis.
In other words, the public’s angry that the government’s made the financial industry immune from consistent market discipline. Small businesses go under if their owners make catastrophic mistakes — but shareholders of failed insurer AIG live to see another day.
The popular impulse is right: Financial firms need more capitalism. That means making the economy better able to withstand financial-industry failures — so Wall Street knows that (orderly) bankruptcies will happen when warranted.
But a too-big-to-fail fee won’t do that — but just the opposite.
Normally, when you tax something, you get less of it. And Obama & Co. will likely claim they want to tax the borrowings of too-big-to-fail banks to make them smaller.
But the rule won’t work here: All imposing this fee will do is hammer home the idea in bondholders’ minds that the firms — reportedly the nation’s top 20 financial companies — are too big to fail, that the government will bail them out again the next time they screw up.
Financial execs may well cater to “Obama versus the fat cats” theater and fight the administration publicly — but this is a good deal for them. The fee would just be a price the firms pay for a huge advantage over competitors — the perception of access to bailouts in a future crisis.
Will New York’s congressional delegation bite? They’ve fought other recent tax-the-banks ideas, rightly viewing them as damaging to the local economy. In December, Reps. Pete King (R-LI), Carolyn Maloney (D-Manhattan), Anthony Weiner (D-Brooklyn) and others wrote to Ways & Means Committee Chairman Charlie Rangel opposing any tax on financial transactions, squelching a proposal from out-of-state lawmakers. Sen. Chuck Schumer, too, made his opposition clear.
But the delegation might support this one. Obama can couch it as regulatory, not punitive, and most of our House delegation voted to “fix” financial regulations last month. Also, the president can say that the fee is temporary, until banks have cut their liabilities and repaid taxpayer bailout losses — and argue that the fee helps Wall Street by defusing public anger and forestalling a more draconian “fix.”
Yesterday, Maloney, who ranks high on Frank’s committee, said she was “glad to see there are no rumors proposing a transaction tax, which I oppose — but I’ll have to wait and see what an actual fee proposal looks like before I can take a position.” Schumer and Weiner remained silent — which is rare for either, and so speaks volumes.
The delegation should realize: a too-big-to-fail fee would be a long-term disaster to New York’s economy. The industry (and thus New York, which depends on it) needs Congress to pass ra tional financial regulation — but lawmakers may well sell this to the public as a substitute.
Which simply sets us all up for the next financial disaster — one that the feds may not be able to rescue the economy from.
It also crowds out innovation in finance, which is bad for New York. Smaller, smarter firms will have a hard time competing with behemoths that are implicitly subsidized by the promise of future bailouts.
As for any bid to pitch the fee as “temporary”: The British last month announced a “one time” 50 percent tax on bonuses. But the opposition party won’t commit to removing it, should they win office — because Britain needs the money.
Our delegation should reject calls for an easy fix — and instead work on ending the whole too-big-to-fail approach. That may mean a smaller financial industry and more short-term pain for the city and state, but a healthier industry in the long run.
Kyle Bass, managing director of the hedge fund Hayman Advisors, testifying yesterday to the Financial Crisis Inquiry Commission, got at what real reform means, including: 1) limits on borrowing and 2) mandatory trading rules for financial instruments such as credit derivatives.
AIG used such derivatives to help bring the economy down, forcing its government bailout. “A key problem is the leverage,” Bass said — because with borrowing and trading limits, AIG could have bankrupted itself, but not everyone else.
Yet derivatives remain unregulated — and the bill the House passed last month to fix the problem was filled with loopholes. Meanwhile, the Senate is completely lost.
Taxing too-big-to-fail financial firms won’t make the problems go away. It’s more likely that the government will get addicted to another revenue source from an industry that retains the capacity to blow up the national — and New York — economies.
Nicole Gelinas, Manhattan Institute senior fellow, is author of “After The Fall: Saving Cap italism From Wall Street — and Washington.”