January 20, 2010, New York Times, Taxing Wall Street Down to Size , by David Stockman.
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.
Not surprisingly, the bankers are already whining, even though the tax would amount to a financial pinprick a levy of only 0.15 percent on the debts (other than deposits) of the big financial conglomerates. Their objections are evidence that the administration is on the right track.
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.
Meanwhile, by fixing short-term interest rates at near zero, the Fed planted its heavy boot squarely in the face of depositors, as it shrank the banks cost of production their interest expense on depositor funds to the vanishing point.
The resulting ultrasteep yield curve for banks is heralded, by a certain breed of Wall Street tout, as a financial miracle cure. Soon, it is claimed, a prodigious upwelling of profitability will repair bank balance sheets and bury toxic waste from the last bubbles collapse. But will it?
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 kind of Robin Hood redistribution in reverse is not sustainable. It requires permanently flooding world markets with cheap dollars a recipe for the next bubble and financial crisis.
Moreover, rescuing the banks yet again, this time with a steeply sloped yield curve (that is, cheap short-term money and more expensive long-term rates), is not even a proper monetary policy action. It is a vast and capricious reallocation of national income, which would be hooted down in the halls of Congress, were it properly brought to a vote.
National economic policy has come to this absurd pass because for decades the Fed has juiced the banking system with excessive reserves. With this monetary fuel, the banks manufactured, aggressively at first and then recklessly, a tide of new loans and deposits. When Wall Streets heart attack struck in September 2008, bank liabilities had reached 100 percent of gross domestic product double the ratio of a few decades earlier.
This was a measurement of the perilous extent to which bad investments, financed by debt, had come to distort the warp and woof of the economy. Behind the worthless loans stands a vast assemblage of redundant housing units, shopping malls, office buildings, warehouses, tanning salons and fast food restaurants. These superfluous fixed assets had, over the past decade, given rise to a hothouse economy of jobs that have now vanished. Obviously, the legions of brokers, developers, appraisers, contractors, tradesmen and decorators who created the bad investments are long gone. But now the waitresses, yoga instructors, gardeners, repairmen, sales clerks, inventory managers, office workers and lift-truck drivers once thought needed to work at these places are disappearing into the unemployment statistics, as well.
The baleful reality is that the big banks, the freakish offspring of the Feds easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. This is why the Obama tax is welcome: its underlying policy message is that big banking must get smaller because it does too little that is useful, productive or efficient.
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. During recent quarters, for instance, the preponderant share of Goldman Sachs revenues came from trading in bonds, currencies and commodities.
But these profits were not evidence of Mr. Market doing Gods work, greasing the wheels of commerce and trade by facilitating productive financial transactions. In fact, they represented the fruits of hyperactive gambling in the Feds monetary casino a place where the inside players obtain their chips at no cost from the Fed-controlled money markets, and are warned well in advance, by obscure wording changes in the Feds policy statements, about any pending shift in the gambling odds.
To be sure, the most direct way to cure the banking systems 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. But Ben Bernanke, the Fed chairman, and his posse are not likely to go there, believing as they do that central banking is about micromanaging aggregate demand asset bubbles and a flagging dollar be damned. Still, there can be no doubt that taxing big bank liabilities will cause there to be less of them. And thats a start.
David Stockman, a director of the Office of Management and Budget under President Ronald Reagan, is working on a book about the financial crisis.