With its talk of new taxes on banks, is Team Obama reverting to its
now well established pattern of crony capitalist giveaways with the
occasional phony populist reform as an increasingly ineffective
disguise? The extraordinarily unenthusiastic, perhaps inept by design,
discussion of its plans to tax banks in some yet undetermined manner
certainly says so.
First, let's consider Exhibit 1: the truly piss poor job the Obama
Administration did of selling its health care reform plan. Recall the
remarkable disconnect of people saying they did not want "socialized"
health care, yet they also did not want Medicare touched. It does not
take Madison Avenue credentials to see the sales pitch: "We already
have successful, popular, government funded health care in the US. It's
called Medicare. We want to build and improve on that. Here's how." Did
we see anything like this from the Administration message-meisters? And
where were the President's famed communication skills? Funny how he
seems unable to articulate a vision that will actually shift public
opinion.
If you believe in neuro-linguistic programming, Obama's formal
presentation often uses what I believe NLP calls hypnotic speech. It
sounds wonderfully uplifting while you are listening, but when you get
done, you scratch your head, because there was so much abstraction and
imagery relative to content that very little of substance is said.
Despite its creepy sounding name in the NLP lexicon, it's common in
political speeches. The audience is left with a favorable impression of
the speaker but not much in the way of concrete ideas that it can
recall, which is perfect for campaigners who studiously want to avoid
making promises. Hypnotic speech is good for creating a positive image,
not good at all for conveying content of any complexity.
Now before we get to the "how" of any bank taxes, something Team
Obama clearly has not figured out, we also need a "why": why are these
taxes warranted and necessary now? Well, the Adminsitration is either
punting (as usual) in giving a rationale, or worse, is just 'fessing up
loudly and clearly that it really does not have much appetite for this
exercise, but is responding to its sliding poll ratings.
Get a load of these remarks from the usual MSM suspects. In each
case, we have chosen the first sentence which says why the
Administration is planning to move ahead:
Wall Street Journal: "The White House hopes the fee will soothe the public's anger at financial firms."
Financial Times (subhead on first page summary): "Aim to address anger over bonuses." From the story itself:
"The proposal comes as the administration faces increasing pressure
from Democrats in Congress to take punitive action against banks. The
White House is trying to contain anger in a week in which banks will
begin announcing billions of dollars in new bonuses."
New York Times
(which does give two objectives): "The general idea is to devise a levy
that would help reduce the budget deficit....But the president also has a
political purpose - to respond to the anger building across the country
as big banks, having been rescued by the taxpayers, report record
profits and begin paying out huge bonuses while millions of Americans
remain out of work."
From Politico.com
(which broke the story): "A fee on banks would help solve two political
problems for the White House. First, the administration would benefit
politically from tapping into the populist anger about enormous 2009
banker bonuses that will be announced in coming days. And second, it
would help stem some of that backlash from the GOP about runaway
federal deficits."
Yves here. This "we need to appease the peasants" logic tells all.
It says the Administration is so profoundly captured by the banksters
that it sees nothing wrong with what is happening, save the political
fallout. It's perfectly OK for banks to go right back to status quo
ante, looting their firms by paying themselves too much in bonuses and
not retaining enough in the way of risk buffers. And why should they
change behavior, now that it has been conclusively demonstrated that if
they screw up in a big way, the government will run in, and they make
even more money as a result? These are the worst imaginable incentives;
intervention is the only solution, with the only question what form it
should take.
Seeing the problem merely as "the public is angry" implies that the
collective reaction is simply emotional, and by implication,
unjustified. That is 180 degrees wrong. To use an expression I heard in
Venezuela, Team Obama may have changed its mind on where it stands
relative to the banksters, but it has not changed its heart. And it
hearts bankers, big time.
So what should these fees be about? They should, correctly, be
depicted as windfall profits taxes. The US has implemented them from
time to time, most notably in the 1970s oil crisis. The idea that the
extraordinary profits the banks are enjoying are the result of their
efforts needs to be assaulted, head on. They are almost entirely the
result of continuing government intervention.
As the BBC's Robert Peston explains (hat tip reader Tim C)
First, what proportion of investment banking profits can
be seen as an exceptional windfall, stemming from the unprecedented
financial and economic support provided by governments and central
banks to lessen a recession that was caused in large part by the
recklessness of banks?
This question can be broken down into two parts.
(1) How much has been earned by what investment bankers style as a
"carry trade" with central banks? This is the business of buying assets
that yield 5, 6, 7 or 8 percentage points over the official lending
rate, and then refinancing those assets with the central bank at that
official lending rate. Borrowing at close to zero from the central bank
and lending almost risk-free at 6 or 7% is not the most stressful or
challenging way to generate bumper profits. Investment bankers tell me
this carry trade has been happening on a system-wide scale, in spite of
central banks' precautions to prevent it.
(2) How much of the investment banks' profits is the result of a
generalised rise in asset prices, caused by the easiest monetary
conditions for a century, which has led to a recovery in the price of
securities that in the previous year generated spectacular losses for
the banks? This gain from marking investments to the market price
should not be seen to be the consequence of management genius, since
the main reason the banks didn't sell the securities in the previous
year is that they were unsellable.
Bankers tell me that a vast proportion of all investment banks'
profits stem from these factors. It is visible in the sharp increases
in revenues from so-called trading and principal investments - a
doubling in some cases - which in turn is the main driver of banks'
overall profits growth.
There is an acknowledgement by some bankers that these gains are in
effect an unrepeatable jackpot, the consequence of the authorities'
bail-out of the economy, and not the result of their great prowess.
Or to put it another way, only the generation of losses in these
benign market conditions would require a very special talent. Making
profits? A suited monkey could do it.
And some of these suited monkeys are doing exceptionally well:
At RBS, for example, I am told that executives in its
Global Banking and Markets division who have previously never earned
more than PS1m at the bank have this year been told they'll be pocketing
over PS5m. And that a small number will be making over PS20m.
The bailouts of a relatively small number of capital markets firms
that have made themselves the providers of a crucial service, debt
intermediation, and their stuffee AIG, constitute the greatest transfer
of wealth in the history of man. There is ever reason to challenge the
legitimacy of this operation and demand that restitution be made, and
not of the limp-wristed "pay back the TARP" variety. But Obama is so
unwilling to make demands that he won't even insist that bank CEOs show
up to meetings with him. So he's certain to cave when we get to what
bankers really care about, namely, their sovereign right to seize
everything that is not nailed down.
