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Consider the Incentives

January 12, 2010, 10:03 am

Consider the incentives for a bank trying to set the risk profile of its investments.  Should it go for higher returns at higher risk, or dial back the risk at a cost to near-term profits?  Now consider this decision in the context of two actions from the past year:

  • Large banks that took on too much risk are bailed out and management mostly preserved
  • Banks that eschewed higher profits by avoiding bad risks are now forced to pay for the bailout of those that went wild:

Obama administration officials and lawmakers are scrambling to find a way to funnel some of the financial industry's record earnings back to the taxpayers who helped rescue the industry from looming disaster.The White House is considering a fee on banks and other financial companies

as one approach, with revenues earmarked to help recoup any losses from the government's $700 billion bailout fund, a senior administration official said.

Some in Congress want to add a new tax on bonuses or assess a small fee on all stock transactions, which would hit large banking companies the hardest.

Note that there is no attempt here to only charge banks who received bailout money, but all banks will be charged equally.  To each according to his need, from each according to his ability.  This is moral hazard in spades.

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Category: Economics, Government

3 Comments

  1. Fred:

    "All banks are equal but some banks are more equal than others"

    Is that the sounds of pigs squealing?

    January 12, 2010, 10:19 am

  2. stan:

    to each according to his lobbying clout, from each according to his lack thereof

    January 12, 2010, 12:49 pm

  3. JamesLBurns:

    Actually it's more perverse.

    According to Treasury, TARP has made money on bank lending -- $15 billion from the Capital Purchase Program and $4.4 billion from bank investments, guarantees and other bank lending programs -- and Treasury has reported that it will make a profit on the bank bailouts.

    At the same time, TARP has spent $30.4 billion on AIG, $30.4 billion on the automakers, and $27.1 billion on the Home Affordable Modification Program. Sounds like Treasury is treating these as losses.

    So, Congress proposes a tax on bank (because the banks are evil) when the government didn't lose money on the banks and to the extent it's a tax on trades, a tax that will just get passed on to customers.

    January 12, 2010, 3:02 pm