The Financial Crisis Responsibility Fee is too low

Though the proposed FCRF will recover the remaining costs of the fat cat bailout package, there is a strong case to be made that it should raise even more revenue. The TARP bill only says that it has to be repaid but never that revenue above and beyond the cost of the rescue cannot be raised. And as our country heads deeper into fiscal insolvency because of our genuflection to the lords of finance and temple of Reagan, we need to obtain as much revenue as possible.

James Kwak points out that the tax only covers about about 20% of the implicit subsidy too big to fail banks receive (their cost of lowering is much lower because everyone knows they won’t go bankrupt):

From Q4 2008 through Q2 2009, large banks had a funding cost that was 78 basis points lower than that of small banks, up 49 basis points from 2000-2007. Closing that gap could lead some of those customers, faced with lower interest payments on deposits or higher fees, to take their money elsewhere. (Of course, they are already getting lower interest and paying higher fees, so there may not be much of an effect.)But the tax isn’t nearly big enough! It’s being calculated as 15 basis points of uninsured liabilities, calculated as assets minus Tier 1 capital minus insured deposits. 15 basis points is a lot less than 78 basis points. And if the FDIC cost of funds data are based on all liabilities (not just uninsured liabilities),* then charging 15 basis points on uninsured liabilities only increases the overall cost of funds by about 7 basis points (at least in the administration’s example). This doesn’t come close to compensating for the TBTF subsidy.

Matt Yglesias wants to see the financial sector as a whole pay more in fees as a recompense for the larger social dislocation the crash has caused:

Even though that’s a dramatically lower figure than the total social cost of the crash, it might—might—make sense to set our sights so low if the country were swimming in revenue or something. But it’s not. We’ve got to decrease the deficit in the long and medium term. Higher taxes has to be part of the picture. And there’s a good case to be made that shrinking the financial sector would be desirable for larger economic reasons. That makes a tax on finance a larger way to get the higher tax revenue we need. Getting the cash to cover TARP expenditures would be nice, but this is a disappointingly cramped proposal.

Naturally, Congressional Republicans have no sense of decency, logic, or morality.  Rhetorically, they want to punish banks but not through fees because that might harm lending, but, as the Wonk Room points out, they were recently yelling at Obama for asking banks to encourage lending:

Rep. Scott Garrett (R-NJ) “has said any tax or fee could hinder the economic recovery and further limit the industry’s ability to extend more loans.”

Rep. Jeb Hensarling (R-TX): “How you are going to tax banks and expect them to lend more is frankly lunacy.”

Rep. Spencer Bachus (R-AL): “The tax will only drain capital from the financial system at a time when it’s needed to create jobs and fuel economic growth.”

Rep. David Camp (R-MI) said “while he and other Republicans find bonuses being paid by banks that got bailouts ‘irresponsible’ and ‘outrageous,’ they are concerned that taxing banks will hurt lending, and thus job creation.

When Obama tried to encourage banks to make more loans, Republicans criticized him for doing “the exact same thing that caused the [financial] problem.” Now that Obama wants to implement a fee on the biggest banks, though, lending is paramount!

The Republicans are dishearteningly funny.

Related articles by Zemanta

• Wall Street Suing over Bank Tax? (baselinescenario.com)
• Barack Obama’s proposed bank tax is unfair. But then again, so was the bailout. (slate.com)
• Economists React: Tax On Banks “Not All Political” (blogs.wsj.com)