So the IMF proposes a FAT tax on banks. It offers this as its idea of how to regulate banks and avoid another banking crisis.
I would be more willing to accept this proposal at face value if it was likely to work but it won’t. And because it won’t I think this proposal isn’t really about bank regulation but about IMF power.
The problem with their FAT tax proposal is that the sums raised by such a tax are wholly inadequate to prevent another bank collapse or crisis, so long as leverage levels are left at their present insane level.
It was Paulson, when he was still head of Goldman Sachs who lobbied twice, (the second time successfully under Clinton if memory serves) to get leverage levels lifted from the then limit of 14.:1, to what they are now – no limit. Leverage levels have gone up and up without restraint or thought. It surelu says something that every one of the major bank collapses in the US has been at a bank or institution that had insane leverage and it was that leverage which killed them and made them un-saveable. Bear Stearns, Lehman, Fannnie May and Freddie Mac to name only the first few.
Yet the IMF says nothing about this. It says nothing about th critical need to regulate the CDS market or the naked shorting via cds contracts that creates such systemic risks.
I am not saying a tax is bad. On the contrary, I think its a start. But only a start. A transaction tax would be good. Breaking too-big-to-fail banks would also help. And force mark to market and outlaw mark to model.
What seems clear to me is that the proposal is woefully inadequate for avoiding another financial crisis BUT perfectly suited to grab new power for the IMF for when another crisis DOES occur.
The IMF and everybody else, knows there is a move to regulate banks internationally and a desire to have an cross border power to bail out banks. They want to grab as much of that power for themselves as they can. And let’s remember power IS the ability to TAX. If you have the power to tax you have POWER. It’s why the EU wants the power to tax directly. The IMF proposal is, I believe first and foremost about getting that power to tax for itself. That, I believe is what the IMF proposal is about.
There is also a strong political element to this idea. The IMF is in Washington. Like all Bretton Woods era institutions it is one dollar one vote. The US has a 16% say. The EU has threatened to global hegemony of the IMF, simply by saying ‘hands off’, we regulate and deal with Europe, the worlds largest trading block. This has infuriated the IMF. Witness the jostling between the EU and the IMF over Greece. The Eu saying we must deal with Greece and the IMF constantly saying, ‘we will send a team to Athens anyway, just to observe, advise or in case we’re needed. Like a nosey neighbour who insists on stopping by ‘to lend a hand’. And of course as the EU has dithered so the IMF has edged its way in. The IMF’s desire to ‘help’ goes beyond friendly concern. It is, I believe, motivated by an ideological dislike of what the IMF sees as the EU’s rather more Keyesian outlook. What we are seeing is a classic power struggle over who grabs what international regulatory power. The EU may get the right to tax and create a bail out fund – the IMF wants the same.
I believe what the IMF does not like at all about the EU, is the way the EU is open to pressure form its member governments. Pressure which leads it to stray from the path of financial righteousness.
The IMF is irrevocably on the side of ‘bail the banks but slash and burn public spending’.
Go into debt to support the financial sector if you must, and call it stimulus to protect the economy. BUT when it then comes to social spending there can be no debt and no support. Public spending is bad and must be cut in the name of fiscal responsibility. Spending on banks is wise. Spending on people is evil! Save the system not the people. We have many people and they breed new ones. We only have one system to pay our bonuses. Misery among the people is why we have police forces. Change to the system might threaten us. _ OK letting anger poke its head in here sorry.
The EU, unlike the IMF, tied more closely to its member governments, is open, even if only a little, to spending to support public needs. The IMF opposes such ideas with the fanaticism of a religious fundamentalism.
I believe you can see this tension between EU and IMF played out across Europe right now.
In London you have financial leaders in the CITY saying out of pure self interest ( I believe), if Tories spending cuts were implemented then unemployment would rise dramatically, as the public sector was forced to shed 200000 or so jobs and this in turn would cause house prices to crash a further 20%. This in its turn would lead to a double dip recession and cause banks to have to seek further help as more mortgages defaulted. Financial experts worried about their own skins if cuts were made, stand up, stand up for the salvation of public spending and stimulus. So too in Spain and in Portugal.
At the very same moment in Greece, however, were it is all going wrong, the local financiers are in retreat, and our financiers care less, you have the IMF view in the ascendant, insisting on draconian cuts. The richer EU countries simply don’t want bail out a poorer one. and start a precedent. The German’s support the ideas, even if they’re not keen on the the IMF itself. The plan that all the experts, from the IMF, the EU, its assembled finance ministers, and experts from the Bundesbank and BoE, all agree on, insists on precisely the sorts of draconian cuts so they think are ‘unwise’ here in the UK or in other richer nations.
My point here is let’s not be blinded to what is going on. Power elites are jostling for who gets the power over our fate next time. No one is willing to talk about really taking the obvious actions that would regulate the banks and prevent another crisis. Because no one wants to.