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 £1m at the bank have this year been told they'll be pocketing over £5m. And that a small number will be making over £20m.
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.