Simon Johnson is a smart guy, but he is off-base in this Financial Times column:
This week, the US Treasury pulled its latest rabbit out of the hat: a tax on the liabilities of large banks. The Obama administration argues that, by penalising large institutions with such taxes, we can limit their future risk-taking. This logic is deeply flawed. Why would higher funding costs mean you gamble less? If you know Tim Geithner is waiting to bail you out, you may gamble more heavily in order to pay the tax. The UK “reforms” look equally unpromising.
(Emphasis mine.) Except that is not even remotely what the Obama administration is arguing. They argue that the tax is a good way to recoup lost revenues from the TARP program, they argue that it is good politics, they argue that it will shrink the huge bonuses being paid by the banks. Sure, there may be some side benefits from making these banks a little smaller, especially those on the cusp of being considered Too Big To Fail, but the tax is really a pittance to the large banks. No one thinks of this proposal as a solution to the problems of the financial crisis, except Johnson. The Obama administration thinks that the regulatory overhaul working its way through Congress is the way to solve the systemic problems in the financial sector, as Sam Stein reported yesterday.
The administration's proposal, as passed in the House, bears a remarkable similarity, in fact, to what Johnson says is needed -- higher capital requirements, an end to bailouts, and breaking up the banks -- except that the administration's plan offers all of those policies with more regulatory discretion or on a smaller scale. It would be really useful if Johnson were to write an op-ed explaining specifically how the policies in Congress can be improved to his standards, instead of writing an attack on an argument no one is making.
-- Tim Fernholz
