Last September, Lehman Bros. collapsed, AIG became a ward of the state, and the US woke up to the financial havoc that can be caused by greedy bankers speculating on the financial system with exotic derivatives and no regulation. After billions in bailouts, it may be that the financial system has survived the disaster.
IN the meantime, the very bankers that caused the systemic problems, and the investors that made hay off of it, continue to benefit. Bqnker bonuses are intact--soaring again as banks make money by lending very dearly, charging enormous fees for doing almost nothing (credit card banks, especially), and using the bailout monies to make acquisitions giving them even greater market share.
So one would think that the government would now have already stepped in to re-regulate the banks and ensure that we have safeguards in place to prevent the kind of "you lose, I win" speculation that the investment banks engaged in. But it hasn't happened yet. Why not? Is it that the bankers and the bank owners have so much power over elected politicians that they can fail so abysmally yet still get away with bailout dollars and no oversight?
At least there is one watchdog making recommendations for change that sound reasonable. The Wall Street Journal reports today on the Bank for International Settlement's study of 20 of the largest banks (unnamed), suggesting that the systemic risk from big banks increases even more than proportionately with their increase in size. These financial giants, it says "should pay higher taxes to offset their potential threats to the system." The BIS sees "a clear rationale for having tighter prudential standards for larger institutions." Natasha Brereton, "BIS Advises Higher Taxes for Big Banks," Wall ST. J. at C1 (Sept. 14, 2009).
Sounds like a start to me. The US, for example, could impose a surcharge on banks' earnings, for banks that have a certain market share and market capitalization. That surcharge would result in their paying a higher percentage of their earnings in taxes than they have in the past, when they have managed to have one of the lower effective tax rates. Along with the surcharge, Congress should remove some of the other special "tax loopholes" that it has enacted to benefit big banks, removing the special tax breaks like the "active financing exception" that permits the big multinational banks to avoid paying current tax on their passive-type income. (The banks, of course, have lobbied heavily to get Congress to make that "active financing exception" permanent and they aren't exactly eagerly awaiting the creation of a consumer financial products protection agency or a single banking overseer with power to ensure adequate capital and limited risk-taking. Will Congress have the will to resist the appeal of big campaign contributions from Big Banks?)
Imposing a higher tax rate on big banks, to offset the high costs to the government of an implicit governmental guarantee, would make sense, at least until Congress gathers the will to break up the big banks so that they do not impose such systemic risks. But it isn't enough. Congress also needs to institute sharp curbs on derivatives. Banks should not be permitted to speculate by inventing financial products that do nothing to help companies finance real business. Derivatives should be reserved for real hedging, and they should be managed through a clearing house with limits on exotic products that primarily allow speculation and even tax evasion. Congress should also change the rules for sourcing income from derivatives.
But again, banks (and other industries that claim derivatives are essential for hedging) are pushing back. See Matthew Dalton, "EU Derivatives Proposals Draw Pushback," Wall St. J. at C5 (Sept. 14, 2009) ()noting that the EU proposal to limit th risks that derivatives pose fro the system by requiring standardizedderivatives, traded through a clearing house, has encountered problems from industries who complain that suuch regulation will increase their costs). Yes, regulation of derivatives may increase costs. But nonregulation imposed tremendous costs. Do we really want to go back to "business as normal" pre Sept. 2008? If we do, banks will continue to trade in risky derivatives, some used as genuine hedges and many not. There will likely be money made, and the cost will likely be imposed, again, on taxpayers who did not benefit from the boom. Ultimately, we should strictly regulate derivatives products so that more real money is put into businesses and less money is roaming the markets in speculative play between financial institutions.
A few actions by Congress could make a difference in the future; without it, we can expect the speculative risk-taking, which makes big bucks for bankers and their investors and forces the losses on ordinary taxpayers, to grow again into a dangerous giant.
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