“Main street punishment bill”
March 17, 2010 | federal legislation, industry | Comments (0)John Berlau, a Competitive Enterprise Institute, scholar, posted this on Big Government yesterday:
“Never again should the American taxpayer be asked to write a check because of an implicit guarantee that the federal government will bail out a company.” Dodd said at a news conference unveiling the bill on Monday. But Dodd’s bill not only doesn’t prevent taxpayer bailouts of failing financial firms, it ensures that they will continue. What the bill’s supporters call a “prefunded resolution authority” can be more simply defined a permanent bailout fund with a specific tax to subsidize the failure of any reckless firm.
Dodd’s bill summary puts great weight on the bailout fund’s “costs to financial firms, not taxpayers.” As the summary states, the bill “charges the largest financial firms $50 billion for an upfront fund, built up over time, that will be used if needed for any liquidation.” Similar to the Obama administration’s justifications for the bank tax or “financial crisis responsibility fee,” Dodd’s summary explains that “industry, not the taxpayer, will take a hit for liquidating large, interconnected financial companies.
How reassuring, not! Both of the explanations for the Obama bank tax and the Dodd “upfront fund” amount to a distinction without a difference. Unless taxpayers never open a bank account, borrow money, nor engage in any economic transaction whatsoever, the cost of the tax on financial firms will fall on them. And the failure is still not borne by the imprudent actor, but by the industry as a whole and its customers and shareholders. And an “upfront fund” will encourage more risky behavior, or what economists call “moral hazard,” by forcing prudent firms to set aside billions of dollars to essentially prefund the high-rollers risky bets.
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