Fisher Investments Editorial Staff
Others

“Crime” and Punishment

By, 06/23/2010

Story Highlights:

  • The financial panic's fallout is winding down, and the FDIC—funded by banks—flexibly handled its part of the most significant financial crisis in two decades.
  •  Yet it's recently become trendy to do more to mitigate financial risk by way of castigatory bank levies. The taxes have more to do with punishment than risk.
  • Businesses will (as they ever have) move out of harsh countries in favor of more business-friendly environments.
  • Little as we agree with the rationale, we'll give politicians a few small bank taxes in exchange for the enormous benefits of free markets generally.    

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Though stocks ended the session in a late-day slide, we had some good news Tuesday—the FDIC delayed a planned bank-premium increase, citing steady (not rising) bank failure projections. The FDIC also projects failures will peak this year and decline in the next five years to the "very low levels that preceded the financial crisis." The fallout from the financial panic is winding down, and the FDIC—funded by banks—flexibly handled its part of the most significant financial crisis in two decades.

Most countries have a competent industry-funded deposit insurer along the lines of the FDIC. Yet it's recently become trendy to do more. The UK's new budget, announced Tuesday, placed the Brits alongside other European nations with their planned levy on bank liabilities to reduce risk. Funny, we thought it was already entirely in the government's purview to address risk by way of capital requirements. But, of course, pending levies have little to do with risk.  

 

UK Chancellor of the Exchequer George Osborne explained it thusly: ‘"The failures of the banks imposed a huge cost on the rest of society" and they must "make a more appropriate contribution, which reflects the many risks they generate."' Translation: Bank levies will subjectively punish an entire industry for the subjectively calculated cost of a few players' overextension of risk. All this in the name of some nebulous assessment of the public good, and assuming banks provide no value to society for the many responsible risks they take.

 

Bank levies are more accurately labeled "windfall profit taxes"—the punishment of success made acceptable by a group's unpopularity. The proceeds will little dent government budgets, the size of banks, or figure heavily in their calculation of risk. And in the event of another crisis, the money from a general tax on banks will most likely have "mysteriously" disappeared, making way for additional levies.

 

Britain, France, and Germany have all announced castigatory bank taxes to ensure a "level playing field."  Good for them, but this isn't the 19th century—old Europe has a few more competitors these days. Bank rules will never be "level" across the globe, even if a few more countries do sign up at the G20, as the above three hope. (Misery loves company.) Businesses will (as they ever have) move out of harsh countries in favor of more business-friendly environments.

Little as we agree with the rationale, the magnitude of these taxes is minor in the grand scheme—a political fee for allowing (at least most of the time) free markets to work. We'll willingly satisfy politicians with a few paltry bank taxes if it cools broader anti-market sentiment. A small price to pay.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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