BANKTHINK

New 'Bank Tax' Proposal Is More Destructive Populism

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In their new book on the history of banking, "Fragile by Design," academics Charles Calomiris and Stephen Haber make the compelling argument that a country's propensity for frequent banking crises is linked to the ability of populist elements to hold the banking sector to ransom.

Banking systems are crisis-prone not because the participants are "too big" or because banking activity is inherently unstable and needs to be tightly regulated, Calomiris and Haber say. Rather, it is forcing banks' investment decisions and actions to be dictated by the whims of the majority rather than by consumers and the bottom line that makes them fragile. Countries that avoid this trap, such as Canada and Singapore, have suffered no banking crises even during periods when their real economies have floundered.

Calomiris and Haber find numerous examples of this destructive populism in the United States' own checkered banking history. Prohibitions on branch banking and interstate banking led to successive banking crises in the late 19th and early 20th centuries as small banks and their local regulators jealously protected their turf. Similarly, the proliferation of subprime mortgages to create an "ownership society" contributed to the conflagration we all lived through in 2008.

Viewed through this lens, Rep. Dave Camp's rumored "big bank tax" is more of the same. His attempts to lower individual and corporate taxes and to simplify the tax code are highly commendable. But including a complex tax on selected participants in a lone industry would seem to undermine the spirit of a "simplifying" proposal.

More importantly, levying a tax on large banks will not enhance systemic stability (in the way that asking banks to increase capital may do). Nor would these funds go towards reducing risk in the banking sector such as financing a resolution mechanism. The bank tax is nothing more than a transfer payment an attempt to force a small group of wealthy, but politically unpopular institutions to finance everyone else. I would call it un-American, were it not clear that with respect to banking, it is oh-so-very American.

On the bright side, at least Rep. Camp's proposal calls a tax a tax. Dodd-Frank levies many "hidden" taxes on banks, large and small. Indeed, the ongoing and seemingly endless litigation by regulators against some of the country's largest banking institutions in some cases for actions encouraged by those same regulators is a tax by another name.

Which brings us to the key issue do we really want banks to be stable, profitable and internationally competitive or do we want them to be cash cows for Congress? The research by Calomiris and Haber suggests that in the interests of financial stability, keeping Congress out of the banking sector would be the best course of action.

Louise Bennetts is the associate director of financial regulatory studies at the Cato Institute in Washington.

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Comments (6)
I will definitely have some of what Calomiris and Haber are smoking, if it's legal. Their premise that consumers and society are two different entities is disingenuous. Their view that the Canadian and American marketplaces are anywhere near comparable, especially in the banking and financial segment, is myopic. And their conclusion that "if only American bankers were left to their own devices, there would be no financial market turmoil" flies in the face of the winter of 2008 when the American banking system was frozen with fear and needed "those people" to give them courage, money, and instruction on how to get over themselves. Is the CI promoting to a new genre of Financial Fiction? Or just pumping up the troops with motivational angst?
Posted by mdillon | Thursday, February 27 2014 at 10:11AM ET
Thank you for posting this. The Cato Institute is a delusional crowd of amateur grifters, thanks to the Koch brothers' assumption of control, and the clownish results are a delight to anyone with a sense of humor.
Posted by Ed Walker | Thursday, February 27 2014 at 3:01PM ET
When academics - the vast majority of whom are on public payrolls - find politicians blameless, bank bashers laud them. When they don't they (and those who report their results) are vilified. Politicians haven't been using Fannie Mae and Freddie Mac as well as TBTF banks as cash cows? What planet are you on?
Posted by kvillani | Thursday, February 27 2014 at 3:14PM ET
I commend Ms Bennets for succinctly pointing out a veiled truth that has existied for too long. There is far too much congressional meddling in banking affairs, both overtly and in less visible ways through tangling and misguided over-regulation. This has allowed for too much pandering to special interests. In the long run, it is both the economy and the consumer that suffers from such an abuse of power. Serve-serving politicians and the administration of sound economic policy founded upon well proven principles do not mix well.
Posted by brcurry | Thursday, February 27 2014 at 3:16PM ET
I think the book will be interesting. Obviously anyone that reads the AB knows that banking is one of the most regulated and intertwined with the government in the U.S.A.
I find it shocking that some people are willing to find the govenment blameless in a banking crisis. I wonder what the banking sector would look like if FDIC insurance limits were say $25,000 or less? If consumers had to actually think about how well run the bank they had their deposits at was.

Will have to see how strong a case they make and what specific points are but putting "credit quality " back into the deposit equation could correct all kinds of sins.
As for the the GSE's mispricing the mortgage risk they were taking off the hands of banks to perpetuate the real estate boom, while hinding behind the implied guarantee of governmnet. How can that be the banks fault?
Posted by Frederick J | Thursday, February 27 2014 at 3:38PM ET
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