So what will the financial sector look like after whatever financial reform bill passes? I want to raise some specific points.
There’s a lot of talk that the the potential negative effects of concentration and size in the financial sector can be corrected through the tax system. That we will get a tax on liabilities and/or a tax on TARP recipients to shrink the financial sector, and we can make our income tax more progressive to make sure that well all reap the windfall.
Doing these backwards: first off, many people at the top end of finance don’t usually pay the income tax. They pay a 15% capital gains tax because their income is considered carried interest. Warren Buffet pays less in as a percent in taxes than his secretary. The average tax rate of the top 400 earners in 2009 was 16.6%. Etc. When it comes time as a liberal society to determine how to set up our tax structure so that those who have benefited the most from a deregulated and bailed out financial industry will in turn benefit the least-advantaged members of society, it gets set up so that those who run massive hedge funds trading leveraged paper to each other contribute less than a teacher or a nurse. (Even behind a veil of ignorance, Magnetar can rip your face off.)
Here’s a 2007 report from EPI and here’s Dean Baker in February 2010 lamenting that we can’t move this after a financial crisis. (I would assume this would make for a great tea party talking point.) Either way, here’s hoping that the loophole is closed this year.
I’ve heard of a tax on liabilities and TARP coming for a long time, and I will believe it when I see it. It’s worth noting that this doesn’t sound like official policy since it would be an obvious “competitive disadvantage” for our firms, and anyone on the Hill who has been asked if it’s Treasury’s idea to shrink the largest banks, which are all bigger as a result of the financial crisis, the answer is a complete dodge.
And let’s be clear, the bailout was a series of events that concentrated the market. From Raj Date’s paper on the financial bailouts and resolution authority, here is how the bailouts look aggregated:
Of the bailout money and the debt guarantee programs, 75% of each went to the largest firms. That left the rest of the banking community to do their best to survive.
There’s a lot of talk about franchise value, and yes commercial banks had things like Regulation Q which prevent competition in interest rates and investment banks had their set commissions. I’d also probably add that during this postwar many firms were able to largely self-finance their expansions through their profitability, which kept a check on Wall Street from being able to do all that much that was interesting (my mind is nowhere near made up on what caused the calm). But I’d like to add that leaving the Great Depression, Roosevelt was able to keep a surprisingly diverse and robust system of banking in place. Especially compared to the number of people, banking and government, who wanted to intensely concentrate it for economic planning purposes. From David Kennedy’s Freedom From Fear:
Faced with effectively complete collapse of the banking system in 1933, the New Deal confronted a choice. On the one hand, it could try to nationalize the system, or perhaps create a new government bank that would threaten eventually to drive all private banks out of the business. On the other hand, it could accede to the long-standing requests of the major money-center banks-especially those headquartered around Wall Street- to relax restrictions on branch and interstate banking, allow mergers and consolidations, and thereby facilitate the emergence of a high concentrated private banking industry, with just a few dozen powerful institutions to carry on the nation’s banking business. That, in fact, was the pattern in most other industrialized countries,. But the New Deal did neither. Instead, it left the astonishingly plural and localized American banking system in place, while inducing one important structural change and introducing on key new institution…[Glass-Steagall, FDIC]
We didn’t leave the New Deal with a large concentration of powerful banking interests in play. Disclosure rules of the SEC and exchange reform removed a lot of the informational power the biggest players exerted. And there were clear distinctions between what kind of business lines FDIC insurance and the deposit window would support. Lord knows what the final bill will contain, but I worry we are definitely entering a brave new world here, and not replicating a financial system of the 1950s updated for today.