The proposed "Financial Crisis Responsibility Fee" has problems of constitutionality, economics and basic arithmetic. And the fee -- a tax on bank debt with at least a 10-year life span -- will accomplish nothing that wouldn't be done more easily by simply retiring the Troubled Asset Relief Program.
Here's how the Treasury Department does the numbers:
While the Administration projected a cost of $341 billion as recently as August, it now estimates, under very conservative assumptions, that the cost will be $117 billion--reflecting the $224 billion reduction in the expected cost to the deficit. The proposed fee is expected to raise $117 billion over about 12 years, and $90 billion over the next 10 years.
The 15-basis-point fee on covered liabilities (assets minus Tier 1 capital minus FDIC-assessed deposits) will be applied on large financial firms even if they have paid back their TARP funds. When we refer to bank debt as "covered," doesn't that presume the TARP has created some kind of permanent insurance policy for financial institutions? Is the executive branch authorized to make such a determination? The Emergency Economic Stabilization Act of 2008 required the TARP to be reauthorized last month (Breathe easy; it was), and TARP technically only exists through October. So how can it be a basis for legislating a 10-year tax?
In his December 9 reauthorization request to House Speaker Nancy Pelosi (D-California), Treasury Secretary Tim Geithner made clear that TARP's goal in 2010 would be to encourage Americans to take on more consumer and real estate debt through "small and community banks," efforts to "mitigate foreclosure" and the Term Asset-Backed Securities Loan Facility. In that sense the proposed tax is kind of a reverse Ponzi scheme, which will try to take from the upper-level participants to pay out participants at the lower level. But if this "financial system" works the way they say it does, shouldn't that mean we need to encourage the upper tiers to go deeper into debt, so there will be more debt for everybody down the slope?
Coverage of the responsibility tax and the billions it will extract from cuddly audience favorites Goldman Sachs and JPMorgan Chase also helps Geithner's larger project: the war on math. Here Geithner explains to CNBC that the "ultimate costs of solving this financial crisis" will be in the $100 million range. So America has lost $12 trillion but the government will make us pretty close to whole with an expenditure of $100 million. Never doubt the power of the multiplier.
But let's assume that figure is correct. Doesn't that mean Treasury can start calling in all the TARP debts and winding down the TARP itself? If we end up losing only $100 million that will be money well spent to....eh, will it wasn't well spent to save the financial system but it did help calm down a bunch of middle-aged male hysterics in 2008, and middle-aged male hysterics do need our support.
Another point hammered home in Treasury's Responsibility Fee fact sheet is that the penalty will apply only to those who are too big to fail:
Apply to the Largest and Most Highly Levered Firms: 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.
First question: Who's the fuddyduddy on the Treasury copydesk who made the "We can't use leveraged as an adjective" call? That's a Profile In Courage.
Second question: Would you still need the deterrent to leverage if you got rid of all the incentives for leverage in the tax code? (We're not even talking about different departments here.)
Third question: Would you still need to put the too big to fail banks on this debt diet if they knew they'd be allowed to fail? You know, like the president says: Let them know they can't keep going deeper in the hole and "expect that next time, American taxpayers will be there to break their fall."