Bank Profits: Fair Game For a Special Tax?

The record revenues and profits being reported by JP Morgan Chase and Goldman Sachs ought to have made you think a little about the nature of the banking industry.

I applaud anyone’s ability to make profits – that’s why these folks are in business – but its a little unfair that they are doing so well on the backs of the taxpayers. So I suggest we all start lobbying for a special tax on these profits by way of clawing back the cost we have all borne providing both these giant organizations with a risk free zone for money making.

Risk free? Well sort of.

Neither Goldman Sachs nor JP Morgan Chase is as smart as they would have us believe, and those massive bonuses they are getting set to pay out are not as deserved as all that.

This is because we taxpayers have removed the downside risk by guaranteeing that banks as large as these two are will never fail. So both are free to go about their business in the most carefree fashion and take as much risk as they like. They can foul everything up and yet know they will survive. There is no market discipline on them despite the fact that both constantly laud the free market system and beat the drum for competitive capitalism. The truth is that neither is doing business in the world they describe. They are coddled and protected oligopolists who have been able to gobble up weaker competitors and have thus grown to become not just ‘too big to fail’ but even bigger than that.

Case in point: JP Morgan Chase’s earnings jumped in part becauseof the contribution made by the business lines added after the absorption of the old Washington Mutual.

Any CEO can look really smart if the regulators avert their eyes to the kind of industrial concentration we have just gone through.

And: those great trading and speculation profits? They are inflated by the same kind of process. The industry lost two of its largest players last year when Lehman and Bear Stearns imploded. That has left easy pickings for the survivors who are benefitting not just from the lack of competition, but also from the incredibly easy monetary regime we are having to sustain in order to pull the economy from the wreckage the banking industry created. Wide spreads and risk guarantees are the stuff trader’s dreams are made of. We are providing them a feather bed equivalent set of trading conditions: if they weren’t making record profits I would be concerned about their ability.

So: if we taxpayers are underwriting the world in which these banks are making such profit, and if we only doing that to save the economy from the mayhem these same folks created last year and the year before that, I see no sensible reason why we shouldn’t say ‘well done guys’ and then ask them to ante up an appropriate compensation for our continuing assistance. After all we are essentially partners with them. We deserve a return on the risk guarantee we are providing.

If you are skeptical think of it this way: were the risk guarantee to have been provided by an insurance company – let’s call it AIG – none of us would be surprised to learn that the insurance company demanded a fee for such a service. That’s good business. And very normal in a financial market. So why not us too? If the word ‘tax’ puts you off, then let’s just call it a ‘fee’.

They are making record profits because we are creating the conditions in which that is possible. Further we have let it be known that they can take inordinate risk, and thus make extra profits, because we will not let them fail. That’s about as explicit a risk guarantee as it can be.

What makes it even more urgent that we get paid for our help is that these people are about to reward themselves record bonuses – I demand that we get our bonus too.

So are those record profits fair game for a special tax fee?

Absolutely.