The $19 billion bank tax which was a cornerstone of the financial reform bill appears to be dead. But in the ever-changing negotiations to get legislation to the President’s desk next month, the fate of the plan could change again.
The tax, which would impact the largest banks in America and many hedge funds, would go to pay for part of the cost of financial reform. It could also be used as a buffer against future bank failures which were paid for by the TARP–taxpayer money–in the recent financial crisis.The new plan to cover past expenses of the bailout will probably be covered now by ending the TARP and putting money from the fund into the hole that the $19 billion would have filled. The FDIC may also increase what it collects from banks to help create the pool of capital.
The primary objection to the fund, voiced by Massachusetts Senator Scott Brown, is that the fees charged to banks would impair their ability to make loans to small businesses and individuals. Banks would hoard money to cover the cost of their payments to the government.
Money given by the government to help the government money taken to support reforms have similar effects. Money passed to banks by the TARP was supposed to increase their appetite for making loans. That did not happen. Taking money from the banks is likely to depress lending further, although it is hard to imagine that lending practices could get much worse.
Brown may be right, but for the wrong reasons. There may be no circumstances, at least as the economy still sputters, that banks will make loans at all.
Douglas A. McIntyre
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