Tax the Banks? Who’s Obama Kidding?

January 22nd, 2010 at 9:20 am David Frum | 75 Comments |

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Yesterday, President Obama announced his plans for new restrictions on financial firms.  The President is right to insist that taxpayers recoup their investment in the TARP program, but as I pointed out in the below post last week, the administration should reconsider the proposed bank tax.


Some questions about the administration’s bank tax plan.

  1. Does the administration seriously think this tax is a good idea – or is it all political positioning? The flow of comments from the administration on record and on background strongly suggest the latter.
  2. TARP losses are now projected at $120 billion. If that projection is correct, about 75% of the taxpayer contribution will be recouped. How much of the remaining loss is attributable to banks – and how much to expected losses on the aid extended to GM and Chrysler? 1/4? If so or anywhere near it, why is the tax to fall on banks only? Why not on auto companies too? Auto suppliers? Residents of Michigan?
  3. Who got the biggest windfall out of the mortgage boom? If I had to guess – people who sold homes in 2005 and 2006 and then redirected the money out of real estate. Their individual gains may be small, but collectively very large. Should anything be clawed back specifically from them? Why not?
  4. Wasn’t the whole point and purpose of the administration’s actions in 2009 (and the Bush administration’s actions in 2008) to restore profitability to the banks by any means necessary? Didn’t the administration consciously and knowingly reject policies such as direct investment in the banks that would have enabled the government to share in the proceeds if profitability were restored? In other words – they got the result they wanted. Why complain?
  5. Why is the non-bank financial sector exempted from the administration’s wrath? Hedge funds etc. – don’t they benefit just as much from the ability to burrow near zero in the United States and lend at higher rates abroad? And if the answer is that this “carry trade” is very risky and the hedge funds have earned their returns, why is the trade not just as risky (and the returns as earned) for banks?
  6. If the tax is based upon the size of a banks’ portfolio of loans, does that not contradict the administration’s stated goal of encouraging banks to lend more? If the tax is based upon the riskiness of those loans , why are we confident that we are better at judging riskiness today than we were in 2006?
  7. Which committee of Congress will have jurisdiction over this new idea for holding bankers to account? Would it be … Ways and Means, chaired by Charlie Rangel? Why yes I believe it would. It will be interesting to hear Chairman Rangel discuss the importance of honest disclosure and full responsibility for one’s obligations.
  8. Is 2010 to be the year of the Obama tax increase? As I count them, in addition to this proposed new tax on banks, there are 1) the jump in tax rates as the Bush cuts expire; 2) the increase in the Medicare payroll tax proposed to fund health care reform; 3) the excise tax on high-value health plans; 4) the implicit tax increases in cap-and-trade; 5) the implicit tax of the health insurance mandate. Not saying they are all bad ideas – but there sure are getting to be lot of them. And I’m sure I forgot some – didn’t I?


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75 Comments so far ↓

  • Kanzeon

    WillyP:

    C’mon. Don’t be a troll. I asked two specific questions: how are people less free than they were in 1900 and what do you mean by “seizing power.” You haven’t answered. You went on a tangent about how you had to school me about money to explain “seizing power,” which is positively childish.

    As to your link, I acknowledge that one of the authors of the book cited in the NRO piece (David Wiedmer) holds a PhD in economics. Maybe the book is quite good, but the article doesn’t say much except that the dollar is the next bubble. I wouldn’t necessarily disagree. Have you read it? If you wanted to change the subject and talk about the future of the dollar, I’m game.

    But, first, why not answer the two very simple questions? I asked: what do you mean by “seizing power” and you answer: here’s an article about the precarious status of the dollar. That’s not answering a question.

    It isn’t liberals you seem to dislike: it’s linear thought.

  • WillyP

    What does power mean to you? Would not stripping people of their ability to purchase goods and seizing their private property constitute seizing power? Or do we need to reach a point in society where the government is burning books to achieve Kanzeon’s definition of power?

    Look, if you don’t think being able to legally commit theft is a powerful privilege, what’s the point in having any discussion.

    Maybe you believe yourself above those who would act so petty as to defend property rights. Maybe you’d prefer to be taxed at a higher level and receive some ambiguous and fleeting “social benefits.” Fine. But I’m sure that even you would agree we’d be living in a far more stable and happy country if we eliminated the boom/bust cycle caused by credit expansion.

    I’m talking about what is arguably most powerful institution in the world, that has created a scenario (the current depression) which has dominated news cycles for 2 years. Again, if you cannot comprehend this as “power,” besides being utterly speechless, I would add that it seems you’re acting in bad faith.

    My thought is quite linear. You asked about Keynes, I provided you with an excellent piece on Keynes. You asked about how the Fed seizes power, and I gave you an introduction to money. The authors of those pieces, Murray Rothbard and Frederic Bastiat respectively, were two outstanding economists, writers, thinkers, and defenders of sound money.

  • Kanzeon

    WillyP

    “What does power mean to you? Would not stripping people of their ability to purchase goods and seizing their private property constitute seizing power?”

    OK, now we are talking about the Soviet Union, I suppose. Why change the subject again?

    Unless you are so out of touch with reality that you can go down to the mall, buy yourself a computer, a cell phone, a pair of jeans, wolf down a hamburger, in the process making some people very wealthy, then go back to your privately-owned residence and rant about how the government is seizing private property and you have no power to buy goods and services. I hope that isn’t the case.

    “if you don’t think being able to legally commit theft is a powerful privilege”

    I thought we were talking about the gold standard a minute ago. Now you think somebody’s stealing. You’re changing the subject again.

    And again, in case you think your words have some reference to reality, go down to the mall, and ask the merchants if someone is stealing from them (other than shoplifters). Ask Bill Gates, Donald Trump, Steve Jobs whether someone is stealing from them. Take pictures of the WTF looks on their faces and post them here.

    “Maybe you believe yourself above those who would act so petty as to defend property rights.”

    No, some of my best friends are real estate attorneys. Nice people, on the whole.

    “Maybe you’d prefer to be taxed at a higher level and receive some ambiguous and fleeting “social benefits.””

    I wouldn’t want to be taxed for anything ambiguous. That sounds a little shifty. Is there an ambiguous social benefit to monetary policy? And why are we back to taxes again? I don’t follow the flow.

    “I’m talking about what is arguably most powerful institution in the world, that has created a scenario (the current depression) which has dominated news cycles for 2 years.”

    OK, now we’re onto Goldman Sachs. Back to the bank tax again? I take it you’re in favor, now, but I thought GS was exempt.

    “I would add that it seems you’re acting in bad faith.”

    A little ridicule, because I think you’re only half-aware that you’re talking in meaningless stream of catchphrases. Whatever you think you are saying only has reference to a world in your head. It’s not bad faith to live in the world – it’s bad faith not to.

  • WillyP

    I’m tempted to write “earth to Kanzeon.”

    I am speaking, fluently, the language of economics. That you are thick-headed and ignorant is not my responsibility.

    Do you have any education or background in finance, accounting, or economics? Have you ever run a business? Do you have any practical life experience that tells you that before something is purchased, it must be paid for?

    What if you had access to a credit card with no limit, and that you could pay back by writing checks with money you conjured up by pressing a few numbers on a keyboard? This is the state of affairs we’ve had for a long time in our government, and, as with all other like schemes in history, our government is abusing its power, stagnating the economy, and destroying the currency.

    When you have an unbroken connection between banks, government, and taxpayers, you have a system that has no theoretical limit on how much can be fleeced from the public. Deposits are unprotected. When you, additionally, have a public that is totally ignorant of the nation’s monetary establishment, you have a recipe for disaster.

    The bottom line is you want to tax the banks and tax the wealthy. Nothing – not reason, not substance, not explanation – will change your mind.

    Speaking strictly for myself, it is lonely at the top.

  • race42008.com » Blog Archive » Joe Biden (Remember Him?) Pretends to Fight the Big Banks

    [...] David Frum lays out the broader implications of this non-idea: Wasn’t the whole point and purpose of the administration’s actions in 2009 (and the Bush administration’s actions in 2008) to restore profitability to the banks by any means necessary? Didn’t the administration consciously and knowingly reject policies such as direct investment in the banks that would have enabled the government to share in the proceeds if profitability were restored? In other words – they got the result they wanted. Why complain? [...]

  • Kanzeon

    WillyP

    “I am speaking, fluently, the language of economics”

    No, you aren’t. Here is Greg Mankiw, a conservative (chairman of Bush’s council of economic advisors) professor of economics are Harvard on the bank tax:

    “In the presence of a government subsidy, firms tend to over-expand beyond the point of economic efficiency. In particular, the expectation of a bailout when things go wrong will lead large financial institutions to grow too much and take on too much risk.”

    “Alternatively, we can offset the effects of the subsidy with a tax. If well written, the new tax law would counteract the effects of the implicit subsidies from expected future bailouts.”

    “But it is possible that it will be better than doing nothing at all, watching the finance industry expand excessively, and waiting for the next financial crisis and taxpayer bailout.”

    That is the language of laymen’s economics. He doesn’t really use the language of ecomomics, but he is discussing economic principles clearly.

    Note, he isn’t talking about stealing, or engaging in ridiculous analogies about credit cards. He is suggesting that a tax can reduce the moral hazard. Getting back to the original point: do you agree?

    “When you have an unbroken connection between banks, government, and taxpayers, you have a system that has no theoretical limit on how much can be fleeced from the public. ”

    When you have a society in which everyone has a car, you have a system in which theoretically all drivers would run over pedestrians, just for fun. When you have a country with a military, you have a system in which, theoretically, the government could kill every last person standing. When you have a government that is allowed to put floride in the drinking water, you have a system in which they could also put ascenic in it as well. When you allow men to marry men, you have a system in which one day they could marry cows.

    We have had this “unbroken connection” between the government, taxpayers, and banks, in various forms, virtually forever, and the fed for just under a hundred years. The result, theoretically, could be a robust economy based on private enterprise. The result also, theoretically (according to you), could also be some sort of totalitarian nightmare. We have the first. Again, no one is getting fleeced, nothing is stolen, we have a society of laws and private property, in which you can purchase an incredible array of products that people offer for profit. That is true regardless of whether I own a business or am a bum typing on a library computer.

  • Mandos

    WillyP effectively admitted, earlier, that you could present all the empirical and logical evidence that redistributionist policies can lead to greater overall well-being than a New York College Republican’s 19th century Dickensian dystopic fantasy, but he would still reject it as being immoral with respect to his principle of inalienable property.

    Consequently, I propose a 100% wealth tax on anyone commenting on FrumForum calling himself WillyP. So there.

  • WillyP

    I could refute on you on sound economic ground, derived from methodological individualism. It would be a labor, and you would likely just say something like:

    “Then explain THIS!,” and supply a generalization of history, like, “The U.S. economy grew at a fast rate post WWII.” To which I’d be forced to respond and reference counter-factual logic. I.e., what would have happened with a lower tax (as was stated above). This would all be easy enough for someone fluent in the logical method of the economic science. But since you’re apparently very against studying the topic you enjoy refuting me on, clearly I am not an employed teacher of the subject, and have very little interest the layman who is reluctant to learn.

    So instead I’ll say this: How do you reconcile thieving with your ethical beliefs? I cannot, and therefore I must remain consistent to my grounding and defend my position.

    Mandos, Kanzeon – I don’t disagree – if Obama charges a fee, the “public” will get it’s money first. But the logic of a tax is such that simultaneously, THE PUBLIC will be the one’s paying it through LESS CREDIT AVAILABLE. In other words, you’re not seizing a bank’s assets; you aren’t saying, listen, we are taking two of your buildings and selling them. Instead, the tax’s effects are realized through a now altered cash flow.

    From a newstory: http://www.financial-planning.com/news/Obama-Tarp-TLGP-2665407-1.html
    He also said it was unlikely banks would pass this cost along to consumers because it would put them at a competitive disadvantage.

    “If your competitors are not bearing the fee, smaller banks, community banks, medium banks, if you choose to pass it on you are going to be raising your prices to your customers when your competitors are not,” the official said. “That provides a pretty good disincentive.”

    OK, let’s think for a minute.
    So he is admitting that one likely affect COULD be that banks might restrict lending. That’s what “raising their prices” [i.e., interest rates] means. We can be sure that this official realizes what it will do, because he brings up the point to then dismiss it. But if you are eating from a bank’s capital base – what they LEND OFF OF – through this fee, they will have NO CHOICE but to restrict lending, and to remain at low rates would be risky and unsound business practice assuming competent management. In other words, this tax highly incentivizes the restriction of lending. And to remain at very low rates would mean eventual bankruptcy for a number of banks, due to bad management.

    Those of you who like this idea, please explain to what good this would do the public now. How would you like to approach this “liquidity trap” we’ve been in for 2 years. Would you take more money out of the lending pool so government can get its money? Because that’s what your doing, all things rightly considered.

  • WillyP

    I would like to add an observation, which is helpful for anyone who would ever read this to learn…

    Notice the words we’re using are very frank; we’re now talking on in naked term. I said earlier, and someone it pointed out,

    “Hence, the only viable way to emerge from depression is to return to market principles, which are fostered not in bureaucratic government, but in the private sector.”

    Mandos was blatant enough:

    “WillyP effectively admitted, earlier, that you could present all the empirical and logical evidence that redistributionist policies can lead to greater overall well-being than a New York College Republican’s 19th century Dickensian dystopic fantasy”

    We can here observed someone being a defender of the private property laws, and explaining why tampering with private property leads to bad consequences, and a redistibutionist, who would like professional governments to start redistributing wealth, private property be damned.

    Thought I’d point that out.

  • Kanzeon

    WillP:

    “So he is admitting that one likely affect COULD be that banks might restrict lending.”

    Yeah. That’s why Mankiw (the conservative economist) likes it, I think. Because the banks in the “too big to fail” category are essentially government subsidized, knowing they will be bailed out, they are expansionist, and take unreasonable risks. See post 57.

    “what good this would do the public now”

    If it reduces the moral hazard, then there is a long term good. When you suggest that this would “restrict” lending presently, I’m not so sure. It will not restrict lending by smaller banks that aren’t hit by the tax. Banks aren’t making their money from lending at the moment.

    “How would you like to approach this “liquidity trap” we’ve been in for 2 years”

    Increase aggregate demand.

    “How do you reconcile thieving with your ethical beliefs?”

    You do you reconcile deliberate misuse of language with fair debate?

  • Mandos

    I don’t know why you’re surprised, Willy. I told you above that I support the majority voting to steal from the rich. The alternative is, we could eat them. As I know that you won’t be talked down from your propertarian cliff, why wouldn’t I use plain language?

  • WillyP

    both you are immunized to logic, and complacent in your moral relativism.

  • WillyP

    as for kaneon’s textbook “increase aggregate demand,” two recommendation to rectify your delusion:

    1) realizing that demand, in the economic sense, means more supply
    2) studying say’s law

    human have unlimited demand, and there’s nothing the government can do to “increase” the wants and desires of its people. human want is insatiable.

  • WillyP

    It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J.B. Say, 1803: p.138-9) [2]

    He also wrote:

    It is not the abundance of money but the abundance of other products in general that facilitates sales… Money performs no more than the role of a conduit in this double exchange. When the exchanges have been completed, it will be found that one has paid for products with products.

  • Mandos

    Considering that we reject neoclassical economics as a matter of course, I don’t see why quoting Say at us is a useful activity.

  • WillyP

    Mandos,
    How else would one go about refuting such nonsense as “increase aggregate demand?”

    You can reject valid propositions (nearly tautological in their exposition) all you want. However, I don’t think you’ll find this more useful than I would rejecting the physical law of gravity, and subsequently deciding that I’m going to fly, unassisted, to my next vacation spot.

    I may inform the physicist that I emphatically reject his “theories,” and politely hint to the aeronautical engineer that his inventions are superfluous if he’d but join me in my post-physical enlightenment, but that will help me get off the ground.

    Likewise, you and kanzeon live in a fantasy world where printing money, redistributing wealth, and raising taxes stimulates business activity and increases output/supply/production. You may really wish that this were true, and might go so far as to cherry pick evidence to support your case. But in the face of a massive failure of our Federal Reserve to prevent the business cycle (…instead it contributes prodigiously to this spectacular phenomenon) and the running 2-year failure of government to stop the job losses from mounting, you might want to reconsider the foundations of your analysis.

    You two won’t, of course, because you’ve proven yourself not disinterested truth seekers, but partisan hacks whose fealty lies with Obama and the Democrat party.

  • WillyP

    As for a short summation of how to conquer a recession:

    PRODUCE YOUR WAY OUT. Shut up, put your head and hands down, and get to work! There IS no other way!

  • Kanzeon

    WillP:

    If you want to consider the real world – the one in which economists like Mankiw live, and in which a triving capitalist economy sustains all of us everyday – to be a fantasy world, in favor of quoting a handful of 19th century economists as if they were Moses, then there is no basis for a discussion – not because we are partisan hacks, but because you have chosen to be irrelevant to debate in a 21st century economy.

    If “aggregate demand” isn’t something you are not capable of discussing without hissing and spitting, then don’t pretend you know anything about economics. Someone who would say “produce your way out” – as if this were advice, as if every failing business and every distressed household wasn’t working to capacity already – is clueless beyond words.

    Don’t bash other people for your intellectual fetishes. Go ahead and rant, but don’t pretend that anyone who disagrees with you is outside the mainstream or politically motivated. Just accept that you cling to marginal, fringe theories for reasons personal to you.

  • WillyP

    haha, good one there kanzeon. some real zingers…

    To you, would Thomas Sowell and Milton Friedman qualify as fringers? Are you aware that Mr. Sowell, a professional economist, has written an entire book called “Say’s Law, An Historical
    Analysis.”

    From http://www.friesian.com/sayslaw.htm
    But Hoover, Roosevelt, and Keynes had it all backwards. The proper economic principle is called “Say’s Law,” for Jean Baptiste Say (1767-1832), that “supply creates demand.” This means that “overproduction” in a free economy is actually impossible. This happens to have been the topic of the doctoral dissertation of the great economist Thomas Sowell, now available as Say’s Law, An Historical Analysis [Princeton University Press, 1972]

    You might like to marginalize me, but most of what I’m talking about is very much in the mainstream. The hypothetical world where Thomas Sowell is fringe is not one we live in.

    So yes, if you’re going to call me fringe for advancing non-positivism in economic analysis, I cannot disagree. If you’re going to call me fringe for not jumping on the TARP bandwagon, I am on the fringe as far as economists go, but with approx. 75% of the American people. However, if you think I am on the fringe for believing that government growth inhibits economic growth, you have it backwards. With the exception of Keyne’s disciple Krugman, for many economists the 1970s discredited the centrality of Keynesian prescriptions, being replaced by quasi-Keynesian Monetarism. This school of thought understands markets, but for some odd reason does not extend this understanding to the field of money.

    Most economists sit somewhere in the middle, because (I postulate) this stance protects their (government) funding. Others, like Krugman on the left and the Mises Institute on the “right” advocate fully considered prescriptions based on strongly held beliefs. And here we have the true, philosophical difference. The “mainstream” economic policy comes from Congress, who finds its apologetic ministers across academia and the media.

  • WillyP

    Ah, and for being on the fringe for advancing non-positivism, I would sum it up fairly simply.

    You cannot numerize human volition. And even if you could, you could never know all the factors that go into the decision render the mathematics meaningful. Furthermore, because you lack the dispersed knowledge that informs market decisions, you can prove a “theory” in each individual case at a time. Unlike physics, the laws of human volition are not entirely predictable. They therefore do not fit into a mechanical system in which you may offset the increase of one variable by a predictable and precise decrease of another (or many). You can do this if you can work with equations, but since volition is by definition is not equal, its erroneous. There are simply too many variables to know, on a set of value scales also unknown, and unknowable from an individual point of view (discovered not through economic but psychological research).

    So I view positivism with deep skepticism, and basically can see all sides making claim of “proofs” through statistics.

  • Kanzeon

    WillP:

    We are in agreement, then.

  • WillyP

    I’d say we’re in very sharp disagreement, actually.

  • WillyP

    If yesterday’s announcement doesn’t convince you drones that the President himself is actively looking for ways to punish the American citizen, nothing will.

    Obama has an insatiable taste for attacking certain classes of people. He is an ideologue, just like those “crazy” talk radio hosts have been explaining for years. And just like FDR, he is putting us on the ice for a permanent recession.

    Thanks, drones, for ruining the nation!

  • Obama Tax Cuts

    Are they really cuts if we still have to pay them?…

    Is Obama for real? he must think we are stupid….