Today, the Senate Finance Committee is holding a hearing to examine the Obama administration’s proposal to implement a bank tax on the biggest financial firms, in order to recoup any losses that result from the Troubled Asset Relief Program (TARP). The administration wants the fee to only be used to ensure that all TARP money is repaid, and then sunset.
However, there is a growing consensus that a permanent levy on the very biggest firms makes sense for a variety of reasons, including raising funds to deal with future banking crises and evening the playing field between large and small institutions. Sen. Jeff Bingaman (D-NM) pressed Treasury Secretary Tim Geithner on why the administration is not embracing that approach:
What you’ve described is a way to pay back the taxpayer for the TARP funds that would have the effect of discouraging risky behavior, but why don’t we consider both a ex-post fee, which is what you’ve proposed to recover TARP outlays, and also a so-called ex-ante levy to deter risk-taking at the expense of taxpayers going forward?…You could take the fee you’re talking about as a way to pay back the TARP funds and still add to that another fee which would go to the government so that the government would be more capable of doing whatever it had to do in the future.
Geithner’s argument is that the very existence of an industry-fronted pot of money will lead to moral hazard, as banks will anticipate being bailed out should they fail. I think this worry is overblown, so long as the financial reform legislation pending in the Senate makes it abundantly clear that the fund can only be used to liquidate, not perpetuate, a firm. As Rep. Luis Gutierrez (D-IL) put it, banks don’t rush towards destruction because the FDIC deposit insurance fund exists, so there’s not much reason to think that a pre-funded resolution mechanism will induce moral hazard.
Plus, we already have pre-funded mechanisms for cleaning up other national messes. In yesterday’s Progress Report, we explained that some of the economic costs of the current Gulf oil spill will be covered by the Oil Spill Liability Trust Fund, which is built up over time by a tax on oil produced in or imported to the United States. As Tim Fernholz argued, the same principle should be in effect for cleaning up after financial disasters, to ensure that banks are “paying their fair share of the bill.”
David Leonhardt wrote in the New York Times last week that “a bank tax is akin to an insurance policy that taxpayers would require Wall Street to hold. The premiums on that policy would keep Wall Street from making big profits in good times while foisting its losses on society in bad.” It would be nice if the administration would at least consider the economic case for making the tax permanent, instead of relying on a moral hazard argument that seems pretty thin.