January 15, 2010
Obama’s Plan: Pointless But Not Without Potential
President Obama unveiled his “Financial Crisis Responsibility Fee’ plan yesterday. Below are some quotes and thoughts.
President Obama said the goal of the bank fee is "not to punish Wall Street firms but rather to prevent the abuse and excess that nearly caused the collapse of many of these firms and the financial system itself."
Try as I might, I fail to see how taxing Wall Street serves to prevent a repeat of the financial crisis.
“I urge you [the banks] to cover the costs of the rescue, not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives.”
And if the banks fail to roll back the bonuses will President Obama admit that he ‘stuck-it’ to shareholders, bank customers, and/or citizens?
“More broadly I’m continuing to call on these firms to put greater effort into helping families stay in their homes, to provide small businesses with needed loans, and to embrace rather than fight serious financial reform.”
But what if a family can no longer afford to live in their home? What if (for various reasons) making loans to small businesses today is considered less advantageous than other pursuits? Finally, why in the world would Wall Street embrace serious reform if any such reform is likely to infringe upon their profit-making abilities? Finally:
“…my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people.”
But President Obama, if you are so upset about these bonuses why not try to do something other than ‘urge’ Wall Street to stop them?
Just so there is no mistake: I find Wall Street bonuses as appalling as anyone else. However, save placing more power into the hands of the shareholders, there is no satisfactory way for politicians to set compensation standards (nor should they try).
Will Real Reform Ever Arrive?
Real reform begins with auditing/breaking up the Federal Reserve System and ends with ensuring any and all financial firms can fail without threat of taking down the entire financial system and/or robbing the American taxpayer. If President Obama had any serious regulatory aspirations his words and actions would be charged with these ideologies. Unfortunately he does not, and is instead focused on taunting Wall Street for what are, arguably, political reasons.
With this said, there is one idea in Obama’s proposal that does have promise:
“The fee the President is proposing would be levied on the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms. By levying a fee on the liabilities of the largest firms – excluding FDIC-assessed deposits and insurance policy reserves, as appropriate – the Financial Crisis Responsibility Fee will place its heaviest burden on the largest firms that have taken on the most debt. Over sixty percent of revenues will most likely be paid by the 10 largest financial institutions.”
While unimpressive in its current form, a more aggressive template could serve to radically change the financial system. To be sure, if the fees were to increase every year and the size of the firms being penalized decreased, risk-taking (in theory) would eventually have to be spread out among more financial market participants...
Forcibly dispersing risk-taking (or allowing the big banks to slowly break themselves up or get taxed to death) may seem draconian. Then again, it surely beats the current non-policy of allowing the firms that almost brought the entire system down to grow larger and even more systemically crucial…
And yes, a correction is required: I do see how taxing Wall Street (or threatening to do so) could serve to prevent a repeat of the financial crisis.
The President to Wall Street: "We Want Our Money Back, and We're Going to Get It” WH