President Obama taxes banks not bankers

The President has failed his economics test. His decision to tax banks will make things worse. His tax is a levy on banks’ liabilities other than deposits from the public. It is designed to encourage banks to have smaller balance sheets. That makes it a way of limiting growth or acting as an incentive to reducing banks assets, as assets equal liabilities. Banks’ assets are Joe Public’s mortgages, company loans for investment and working capital, and other borrowings by Main Street. This is the opposite of what is needed.

I hasten to add that I am not today riding to the help of overpaid bankers, or acting as an apologist for the bad banking that occurred in the heady days of the Credit explosion. I just think this is the wrong punishment at the wrong time. It is also a bit rich coming from authorities which played such a big role in bringing on the banking crisis.

The President has designed a tax which will act as a disincentive to banks to lend more money to people. It is a tax on banks borrowing to lend more. When getting out of recession is the priority, you need to do the opposite. You need to encourage banks to find more money to lend on.

This tax might have been a good idea in 2006 to try to limit the excess credit banks were pushing out. Then, of course, banks were more popular with politicians because politicians were some of the worst offenders at encouraging too much lending and borrowing in the private sector. Now politicians like Obama are against more lending and borrowing in the private sector, wanting all the extra borrowing to be by the state.

So why has the President done something so foolish? He has done it because bankers are unpopular. He wants to show some backbone against bankers who are about to receive large bonuses again. He wants to deflect any criticism from the Adminstration for the Credit Crunch and its aftermath. The bankers are an ideal scapegoat.

In its own terms it is a misdirected policy. It will not harm the bankers very much, or limit their bonuses this year. It hits bank shareholders more. Bank shareholders include a large number of Mr Obama’s own voters, as they are the ultimate beneficiaries of pension, Trade Union and insurance funds who own the banks. It is a levy that will cut bank profits more than bonuses. If he wants to hit highly paid bankers, he needs to increase income tax. Unfortunately for him that would also hit high incomes that are not earned in banks. It would be closer to what he says he wants to do than this banks tax.

Mr Obama’s strong rhetoric says this 10 year levy is being imposed so the banks pay back the American people. As many commentators have pointed out, the banks have already paid back the American people with interest for the loans they needed or were forced to take out by the authorities during the crisis. Now apologists are having to say that this extra repayment is to take into account the benefits the banks received from the AIG and motor company bailouts. Surely those bail outs were designed to help Main Street as well as Wall Street? The bankers would argue so were the bank bail outs, but that is another more difficult argument.

The irony of the policy is this. The authorities did much to undermine banking profitability in 2007-8. In the last year they have deliberately created an easy money low interest rate regime that will allow banks to make big profits. They did this because they decided that only if banks recovered could they get out recession and avoid depression. Now this is happening in the USA the authorities blame the banks for making the extra profit!

This policy will encourage banks to put more things off balance sheet, and to make more profits out of trading instruments and arranging fancy deals. It favours the investment bank at the expense of the Hig Street bank. Is that what he really wants to do? Look forward to a new set of banking distortions, as they flex to limit the levy.


  1. JohnOfEnfield
    January 15, 2010

    Obamah has "form" on imposing socialist ideas on the Banking Industry.

    His role as an activist in Acorn was aimed at getting Banks to lend mortgages to people who couldn't afford them on the grounds that it discriminated by race. This process was aided by the implicit guarantee given to Freddie Mac & Fanny Mae and one could say that this eventually led to the toxic loan saga which brought the whole system down.

    It will all end in even more tears. As Thatcher said "Socialism is running out of other people's money".

  2. Ian Jones
    January 15, 2010

    The aim of the tax is to force the banks to split up so they are under the 50bn thus increasing competition and reducing the systemic risk to the economy.

    The American banks have paid back their loans because they were given free money by the Fed to gamble with. This is not real money which is why the economy is still in the shape its in.

  3. Brian Tomkinson
    January 15, 2010

    As normal, it will not be the bankers who suffer or the shareholders but the customers as the banking cartel act together to increase their charges and margins.

  4. Norman
    January 15, 2010

    Taxing success does seem to be a foolish policy but with his approval rating plummeting on health reforms and Democrats looking at large electoral losses in the elections later in the year he needs to do something and, like our government, they seem to think the ideal scapegoats are the bankers.

    It also must be galling for banks and their shareholders who didn't receive any TARP money to be hit with this tax while other recipients, such as AIG, GMAC, Freddy Mac, Fanny May, will not be.

  5. Pete Chown
    January 15, 2010

    I've just read that Virgin Money will buy a small bank for £12M. This will "allow it to control a banking licence" according to the BBC ( ).

    Can we really say that there is a free market in financial services, when the cheapest way in is to buy an existing player for £12M? If the regulatory system was functioning properly then Virgin would simply give the regulator details of its business. Subject to any concerns about capital, management team and so on, it would then receive a licence.

    What has actually happened is described by the Telegraph ( ). "Recent reports suggest up to 30 organisations have recently applied for a UK banking licence. However, the FSA is only thought to be looking at two or three credible applications."

    I wonder what you have to do to be "credible". Perhaps the Telegraph report exaggerates the problem, but it sounds as though there are no objective criteria. If your application isn't credible (whatever that means) it will get filed in the bin, and never properly looked at.

    People find the large bonuses offensive, but they come about because of regulatory failure. There isn't enough competition in banking, because it has become effectively impossible for new entrants to establish themselves. Fix that and the bonus issue will probably go away by itself.

    1. alan jutson
      January 15, 2010


      I believe (if my failing memory serves me correctly) Tesco applied for a banking licence in 2008 (reported in the Press a while ago) they are still being investigated by FSA to see if they are a suitable organisation, with a suitable model.

      Yes thats right investigated by FSA (who have failed to see many Insurance Companies dodgy dealings, and failed to see the Banking crisis)

      Hence my understanding that Richard Branson decided to go the route he has taken. Its quicker, as it would seem no one checks as hard if a new organisation takes over an existing one.

  6. David B
    January 15, 2010

    It will be interesting to see if this policy plants the seeds of the next banking crises.

    Governments seem to feel tighter and tighter regulations are the answer. In reality the tighter you draw a regulation the more effort people put into breaking it without getting caught.

    For regulations to work they need to incentivise people for doing the right thing. In this case ensuring all the banks liabilities are properly reported on the balance sheet with transparency. This tax creates the incentive to do the opposite, and that leads us back to where we started – off balance sheet, toxic loans that the regulator did not know how to deal with as they were not against the strict letter of the regulations

  7. Javelin
    January 15, 2010

    OK so here are the facts – lets deal with them.

    In a large bank there are few people who influence the trading of a risk instrument and a few more involved. For example for Credit Derivatives (or any other instrument)

    20 Manager and directors
    20 Traders
    20 Risk and Compliance
    20 Operations
    20 Business Analysts
    20 IT Support Staff

    If these the 20 Managers and directors have a positive say on strategy and make large bonuses. The traders make large bonuses and it could be argued have a moral obligation not to do it. The risk and compliance officers can only influence negatively.

    The rest could have an indirect influence and it could be argued if they were aware of the risk have a moral obligate to resign. In fact most would have no idea about the risks involved.

    So there are about 120 people involved in a bank of 20,000. Where about 30 of them have a direct responsiblity for trading the instrument.

    The bigger picture is that alot of Mortgages were sold to alot of risky customers. The people responsible for that were the financial advisors and the managers and directors of the mortgage brokers, lenders, banks and estate agents. Perhaps 30 people in each of these were responsible for the credit crunch.

    On top of that you have the FSA, BofE, Treasury and Government. Perhaps 30 people in each of these also have a responsiblity to regulate a risky instument.

    I would argue that we need to find the person who set the compliance rules for mortgage backed bonds who needs to carry the can – they are at the regulators.

    Back to the banks. Is it fair to tax banks like HSBC to kept their house in order and has been prudent with their mortgages? Absolutely not.

    New Labour have always claimed to be fair with taxes – well not any more.

    President Obahma and Gordon Brown are willing to break through the Deep Red Lines Tax Governance for political gain.

  8. Hugh
    January 15, 2010

    John, my old friend Richard Spring looks nothing like the comely image that appears when one clicks the links to the left.

    I am hung up on the simplistic thought that the banking problem was about the the hole in balance sheets which appeared when the US sub-prime market went bust. Virtually all the other gambling activities have continued unabated, though the insurance aspects of some of the deals through AIG and the Lehman's etc ( bust.

    Do you think that I am correct in arguing that Gordon Brown as the pinnacle of the UK tripartite arrangements (and possibly the European central bankers) encouraged this with lax money and bank reserves policy.

    Also how much fault do you think the European bankers carry in this situation.

    reply: Yes, I wrote at the time about the lurch from boom monetary policy to bust monetary policy by the UK authorities. European bankers, like US and UK ones, enjoyed the party whilst the authorities were offering it, and are having to rein in now the authorities have shifted their stance.

  9. Alan Wheatley
    January 15, 2010

    In the enterprise economy, is not disproportionately high reward a pointer to a business opportunity for someone else who can offer the same service at lower cost?

    In an effective free market would not market forces put a natural cap on the rewards service providers can take from the business and remain competitive? Government intervention can be limited to regulating the market, with no need to intervene in the results of trade.

    Is banking a free market? It seems that some think that even if banking is not actually a cartel then it is operating much as if there is one.

  10. Mark M
    January 15, 2010

    What is it about politicians and this crisis? Every decision made by governments is making the crisis worse. We're bring in pro-cyclical policies but not realising it. As you say, the time to limit lending is the top of the cycle, not the bottom. Everyone knows this and yet politicians are getting the regulation completely wrong.

    In fact the UK taxpayers is in more of a position to hurt 'bankers' financially as we could easily cut pay and bonuses of those employees at the banks we own. Sadly our government lacks the bottle for that kind of fight. We lacked the bottle in September 2008 too, when we ended up caving in first and gave the banks all the money they needed with practically no strings attached. No clause that said 'no bonus while the taxpayer owns this bank', no clause that said 'the money we take now will go into lending out' – nothing. The government bottled it, they gave the banks what they wanted and now the executives are sitting pretty on a huge pile of taxpayer cash while business across the country go bust because they can't gain access to credit.

  11. Mike Stallard
    January 15, 2010

    I am very glad that our financial problems are not (yet) as critical as the American ones! That debt! WOW!

  12. Matt
    January 15, 2010

    Surely this tax is purely a political move to demonstrate to the American people that the government wants to do their will – i.e. get something back from the banks. To have done nothing would have been a real kick in the teeth for those who voted for the president.

    The sums involved are irrelevant to the banks and this approach could go a long way to making banks more acceptable again as people will start to feel they have paid for their incompetency. All in all everyone wins – except the poorest customers who end up paying the tax – as is pretty much always the case.

    There is no great mystery in this – it is politics.

    Every government imposes and/or reduces taxes for political appeal.

  13. refinance house
    January 24, 2010

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    Reply: there's a new post every day by 9 am

  14. Conrad Jones
    June 23, 2010

    I agree with you John, there should be no Bank Regulation whatsoever.

    The Banks should however be forced to provide an Insurance Policy to their depositors stating that in the Event of a Collapse of the Bank that the Depositors Money will be repaid in full. Bank CEOs will be allowed to receive Bonuses, Golden Goodbyes or whatever assets of the Bank they wish to have – just like now – but not until other responsibilites are met. The difference will be that there should be NO Government support and absolutely no external influence from the IMF. When a Bank goes Bankrupt – the depositors get their money first. Money owed to Bank is sold to other Banks – at a loss if necessary – but in the open market. Shareholders – excluding CEOs – are then reimbursed – probably at a loss. The Bank then goes through the normal liquidation that other Businesses (especially manufacturing businesses) have to endure. A Full audit is then carried out using Board Members Assets (planned bonuses, share options etc).
    The results are then made public and those responsible for the Failure are made known to the public so that if they then seek roles within other Banks – the general public can be warned that their savings may not be in a secure place.

  15. Conrad Jones
    June 23, 2010

    The Debt backed Pound is the road to ruin. All recent events have been predicted before they occurred as they have happened many times before in recent history and also pre-medievel history. The U.S is about to do an action replay of the Roman Empire. Invading other Countries and paying for it by expanding the Money Supply. It seems that the UK is now controlled by the President of the United States who – himself – is heavily influenced by the FED.

    With 60% of the total UK money supply being based on mortgages, a 56% drop in the value of mortgages will mean a 33% drop in the nation's money supply.

    The Great Depression is reckoned to have been caused by a 27% drop in the money supply.

  16. Conrad Jones
    June 23, 2010

    I would suggest going back to a gold coin based money supply but I would expect that coin clipping would return.

    The Art of Politics is to pretend to cut taxes – like in the eighties … well any decade; and then sell Government Bonds, to pay for all the things that normal taxation can't afford. The Government debt increases – that money is spent and the Money (Currency) supply increases; then the savers pay the cost .

  17. Conrad Jones
    June 23, 2010

    The Banks are the only organisations to benefit from Government Debt. If no one borrows currency – how can they make a profit? Do we really need Banks in the Current form? They mainly only inflate the Housing Market – they only lend 3% of their total allocation to Manufacturing, and 17% to businesses. Are they a necessary Evil – or should we have a different form of Bank?

  18. Conrad Jones
    June 23, 2010

    Who makes money during Wars and Recession?

    Every War has seen a dramatic inflation of the money supply. Now we're involved in TWO Wars. With Iran looming on the Horizon, maybe even North Korea – it looks like we're going to be starting another TWO Wars, That'll keep the Banks Happy – all that lovely PROFIT. Don't forget we still have a Military Presence in The Falklands – and that was 28 (Twenty Eight) years ago. How much does all this Cost? Why do we need WAR?

    When a Bank CEO recieves his Bonus – does he quantify that in terms of dead and injured British Soldiers? Maybe I'm thinking of Arms Dealers – or both.

  19. Conrad Jones
    June 23, 2010

    Thank God we still live in a Nation where free speech is encouraged.

    p.s. I thought the Budget was OK, but wondered why the Bankers had such an easy time – £2 bn? – their profits are in the Hundreds of Billion. Agree with Public sector workers getting a Wake up call, we in the Private sector have had a pay freeze for the last two years – it's the Public Sectors turn now.

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