naked capitalism

Gee, Warren Buffett happens to own a chunk of Wells Fargo, and also provided an equity injection to Goldman Sachs. So it should come as no surprise that he has come out in a Bloomberg interview arguing against the so-called TARP fee, a charge to be levied against the non-deposit liabilities of large banks.

Now this little bit of lobbying via the media should end any delusions that Buffett is a friend of the little guy. But what is even more striking is his failure to mount a serious argument. It’s an insult to the public’s intelligence.

Here is the substantive part:

“I don’t see any reason why they should be paying a special tax,” said Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., in an interview on Bloomberg Television today. Supporters of the plan to tax the banks “are trying to punish people,” he said. “I don’t see the rationale for it.”…

“Look at the damage Fannie and Freddie caused, and they were run by the Congress,” said Buffett. “Should they have a special tax on congressmen because they let this thing happen to Freddie and Fannie? I don’t think so.”

This is corn pone in lieu of logic. The idea that the fee is to punish the banks is a convenient fiction pushed by the banksters and their backers. The public is angry, but the anger is correctly founded: the banking industry got massive, unwarranted subsidies for failure, the safety nets are still operative and clearly will be redeployed in the event of future errors and chicanery. Yet no one has been brought to justice, and virtually nothing has been done to prevent a recurrence.

You can argue about the design of the tax, but there is nothing wrong with the logic. Banks pay deposit insurance for the goverment’s deposit guarantee, which adds considerable value to a business franchise (and BTW, over time proves inadequate to reimburse the full costs of rescuing depositors), Big banks have an even more generous safety net these days, and no correspondingly more aggressive regulation. Hence the fee is a valid way both to cover the cost of their more generous safety net and to discourage banks from being in the big bank category.

And Buffett is unlikely to have missed the arguments in favor of the bank fee in the Financial Times op-ed column in recent days. Mohamed El-Erian came out in favor of the fee but think the risk is not the fee per se, but that the fee will serve as a way to avoid the heavy lifting of real regulatory reform (something Buffett would not be keen about either, since reform with teeth would also crimp bank profits):

Seldom will you find a tax proposal that is viewed by so many as having so much going for it. Consider just four arguments.

First, it is politically popular….

Second, it targets a sector whose visibly higher earnings have benefited enormously from the exceptional measures taken in 2008 to save it…

Third, it is consistent with longer-term regulatory objectives….

Fourth, it generates budgetary revenues at a time when fiscal deficits have soared, domestic debt is growing at unprecedented rates, and the scope for corrective measures is limited…..

The real danger is that the selective taxation of banks may divert attention away from growing policy inconsistencies and, thus, may inadvisably substitute for urgently needed structural and regulatory measures.

Peter Boone and Simon Johnson focus on that very concern, that much tougher measures need to be taken, to rein in banks:

There is growing recognition that our financial system is running a doomsday cycle. Whenever it fails, we rely on lax money and fiscal policies to bail it out. This response teaches the financial sector a simple lesson: take large gambles to get paid handsomely, and don’t worry about the costs – they will be paid by taxpayers (through fiscal bail-outs), savers (through interest rates cut to zero), and many workers (through lost jobs). Our financial system is thus resurrected to gamble again – and to fail again. Such cycles have been manifest at least since the 1970s and they are getting larger….

For our top bankers, the fact that the system will only change marginally is fine….

First, we must sharply raise capital requirements at leveraged institutions, so shareholders rather than regulators play the leading role in making sure their money is used sensibly. This means tripling capital requirements so banks hold at least 20-25 per cent of assets in core capital.

Second, we need to end the political need to bail out every institution that fails. This can be helped by putting strict limits on the size of institutions, and forcing our largest banks, including the likes of Goldman Sachs and Barclays, to become much smaller.

Let me tell you, increasing capital ratios to 20% to 25% will have a much more dramatic impact on bank returns on equity that the paltry proposed TARP fee. Buffett should thank his lucky stars that Team Obama remains true to form and is letting banks off so easy. The rest of us should demand much more stringent measures.