There’s more going on in Washington this week than health care reform. Giving up on efforts to get a bipartisan deal on financial regulation, Senate Financial Services Committee chair Chris Dodd today released his own plan – sans GOP support – for “fixing” the financial system. The goal, according to the plan, is to create a financial system that will not only prevent another financial crisis, but one that “works for and protects” Americans. It’s a fine sentiment, but there’s one problem: the new regulations being proposed will make the financial system worse, not better. And while claiming to make financial bailouts a thing of the past, it would actually make them more likely, in effect creating a permanent TARP program.
Among the key provisions of Dodd’s plan:
1. A new Consumer Financial Protection Bureau, to be located within the Federal Reserve Board bureaucracy. While not technically independent, the new agency would be largely autonomous, virtually guaranteeing conflict with other regulators focused on the safety and soundness of financial markets. Moreover, the new agency would do little to actually help consumers, instead limiting their options and increasing their costs.
2. A new $50 billion fund that is to be used in “emergencies” to settle the affairs of failing financial institutions. This fund is virtually certain to be used for bailing out politically significant financial institutions, and is nothing less than a permanent TARP program. And, although Dodd argues that this fund will be financed by fees on financial firms, not taxpayers, the real cost will doubtless be passed on to American consumers.
3. A powerful Financial Stability Oversight Council, made up of nine existing agencies, with power to “draft” financial institutions into a regulatory structure, and then to order any financial institution to break itself up, stop selling certain products, or even to go out of business. The bill would give the new regulator almost unlimited power, and is likely to stifle innovations and increase costs for consumers.
This is the wrong approach to fixing our financial markets. Bigger government and pre-funded bailouts will not fix the system. Instead, the focus should be on establishing an effective bankruptcy system for large financial firms to allow failures to be addressed in the same way failure is addressed in other industries. Congress should go back to the drawing board to get this right.
Co-authored by David John.
So President Obama wants to slap a tax on banks, but should you really care? Absolutely. Those taxes are going to wind up costing YOU money, whether you’re a customer, a bank employee or an investor, according to the non-partisan Congressional Budget Office (CBO).
As ABC News reports, the CBO wrote a letter yesterday to Sen. Chuck Grassley (R-IA) in which it highlighted that the American people will bear the true brunt of the President’s proposal. From the CBO’s letter:
[T]he ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government.
The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors.
Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them. Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution’s future profits.
President Obama announced his bank tax during his State of the Union Address in January and claimed it would be a way to recoup money dished out to banks as part of the Troubled Asset Relief Program bailout. The truth, though, is that those banks already paid-back the bailouts, with interest; the real deadbeat offenders are Freddie Mac, Fannie Mae, Chrysler and General Motors, who have yet to repay their debt. (Take a look at the above chart to see who has repaid – and who hasn’t.)
The President’s proposal was a not-so-thinly-veiled populist proposal, intended to play to an America disgruntled with government bailouts and those institutions that won government handouts.
He better brace himself for an America that finds itself even more disgruntled when they realize they’re getting hit with the very tax that was meant to appease them.