Wednesday, January 20, 2010

Taxing Wall Street Down to Size

I do not agree with the prescription in this NYTimes Op Ed, but I agree with much in the description.
WHILE supply-side catechism insists that lower taxes are a growth tonic, the theory also argues that if you want less of something, tax it more. The economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system. In this respect, the White House appears to have gone over to the supply side with its proposed tax on big banks, as it scores populist points against the banksters, too.
At a structural level, the economy needs a financial sector that adds value, and that is certainly a smaller one. But it also needs more net private savings, which a bank tax (or any tax) will not do.
Make no mistake. The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class. To be sure, it was lured into these unsavory missions by a truly insane monetary policy under which, most recently, the Federal Reserve purchased $1.5 trillion of longer-dated Treasury bonds and housing agency securities in less than a year. It was an unprecedented exercise in market-rigging with printing-press money, and it gave a sharp boost to the price of bonds and other securities held by banks, permitting them to book huge revenues from trading and bookkeeping gains.
A bigger problem than low interest rates was poor capital controls. Capital controls are what limit lending, not reserves, and capital controls have absolutely stunk for a while now at every level. The situation is worse now as private capital is no longer in a first loss position.
In supplying the banks with free deposit money (effectively, zero-interest loans), the savers of America are taking a $250 billion annual haircut in lost interest income. And the banks, after reaping this ill-deserved windfall, are pleased to pronounce themselves solvent, ignoring the bad loans still on their books.
This is an excellent point that is totally lost on the monetary fanatics who walk the halls of the Academy -- low interest rates rob the private sector of interest income, and thus have a deflationary impact as well as their supposed inflationary impact. The harder one looks for an inflationary mechanism though, the harder it is to find. Low interest rates may, net, hurt the economy.
To argue, as some conservatives surely will, that a policy-directed shrinking of big banking is an inappropriate interference in the marketplace is to miss a crucial point: the big Wall Street banks are wards of the state, not private enterprises.
This is another, excellent point, but if anything too narrow. Banks in general are public private enterprises, with their access to reserve accounts giving them money printing ability that other parts of the private sector do not have. The Federal Reserve is technically a private organization too, but that's obviously nonsense -- it is part of the Government. Banks and GSEs have more in common than they realize.
To be sure, the most direct way to cure the banking system’s ills would be to return to a rational monetary policy based on sensible interest rates, an end to frantic monetization of federal debt and a stable exchange value for the dollar.
Monetary policy has almost no impact on the economy. The most direct way to cure the financial system's ills would be to fund the demand for private sector savings via a payroll tax holiday. Banks should be restructured to an extent that makes Glass Steagal look like Barak Obama's financial "reform" act.


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