Monday, July 5, 2010

Wall Street or Main Street?

John Cranford at CQ:

This [bank] tax would have collected $19 billion over four years starting in 2012. It would have been levied on the very largest financial companies--not just banks with insured deposits, but also hedge funds and the like...

The tax was added at the last minute during conference negotiations on the measure, mostly to keep it more or less deficit-neutral by offsetting the expected costs of cleaning up future failed financial companies...

But objections were heard from some Republican senators who had voted to pass the bill in May, among them Scott P. Brown of Massachusetts and Susan Collins of Maine. In a letter to the bill’s sponsors, Brown complained that the cost of the tax would be passed along to "millions of American consumers and small businesses" who use large financial institutions for banking services.

Well, from an economist’s point of view, Brown is right that the cost would be passed along. But every cost a company incurs is paid by someone--a combination of shareholders, customers and employees. So, too, the price of the economic collapse was passed along to all of those people--and also to the taxpayers who may never get back all the money used to keep the system lubricated.

The issue in this case is whether the $19 billion tax was the right financial offset for the future. The intention was to target very large institutions, the ones that were in the thick of the mess the last time and that benefited directly--and indirectly--from government intervention...It’s hard to imagine that [Brown or Collins] would prefer that this cost be more broadly levied on Main Street. In effect, though, that will be the case.

The bill now would require the FDIC to increase deposit insurance premiums paid by a wider universe of banks, not just the biggest ones--and hedge funds wouldn't be assessed at all. Do Brown and Collins not think that deposit insurance premiums are a cost that will be passed along to millions of consumers and small businesses?
(Emphasis mine.)

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