White House To Announce TARP Fee On Banks

The White House is contemplating a new tax on the banks to recover some of the government money used to help bail them out last year. David Wessel, economics editor for The Wall Street Journal, talks to Steve Inskeep about the proposal, and the animosity toward the banks.

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STEVE INSKEEP, Host:

And the pressure on banks is not limited to their bonuses. The White House is also considering a new tax on banks. Let's bring in David Wessel. He's economics editor of the Wall Street Journal and a regular guest on this program.

David, Good morning once again.

DAVID WESSEL: Good morning, Steve.

INSKEEP: What's the administration have in mind?

WESSEL: Well, the administration sees a lot of political pressure to do something about the fact that the banks that were bailed out during the financial crisis seem to be making a lot of money and, as Jim's piece said, seem to be paying big bonuses. So one thing the government can do is take away some of their profits.

And what the president is likely to detail tomorrow, on Thursday, is a tax on banks to recover some of the costs that the government incurred during the bailout - a tax of about, maybe as much as $120 billion. Because the bailout bill says that the banking system, broadly defined, is supposed to reimburse tax payers for any costs that the government incurs before 2013.

INSKEEP: I guess that they're describing it as a fee rather than a tax here, but in any case it's a big bill for the banks if it goes through, right?

WESSEL: Absolutely.

INSKEEP: Why would you do this when the banks are still kind of in control of this situation here? They can pass on the cost to consumers if they want. They can say hey, we'll make even fewer loans than we've been making say.

WESSEL: Well, right. So the bank lobby is saying that we will just pass it on to consumers and they'll be worse off or they're saying if the government of the United States taxes U.S. banks that'll just be unfair because foreign banks will escape. But banks are a ripe target now because they're making money, because we still have very high unemployment, there's a lot of anger at them, and of course, there's a big deficit hole to fill and $120 billion would be a down payment on paying it off.

INSKEEP: A trillion dollar deficit at the moment, or more than a trillion dollars, $120 billion would help, I suppose. But it sounds like you think this is as much about the politics as it is about the numbers.

WESSEL: Absolutely. I mean we just see all over Washington, all sorts of ways of trying to squeeze some money out of the banks. As Jim's piece said, the Federal Deposit Insurance Corporation is talking about trying to change banks behavior by - they're competition behavior - by levying a fee on banks that have risky compensation.

A number of members of Congress are talking about a tax on bonuses, like the one that has been proposed by the government of the United Kingdom. The International Monetary Fund is investigating whether we could have a global tax on financial transactions to raise money. So it's like everybody hitting at the piñata. There's a lot of money there and they want to shake it out.

INSKEEP: Well, let's remember the argument that was made at the time of the bailout and before, though, David Wessel, when they were rescuing firms. They talked about the problem of moral hazard. Many people spoke about the problem of letting people get away, in a sense, with their own bad financial risks and their own bad use of other people's money. Do you correct that moral hazard if you do impose this $120 billion fee or tax on banks and make sure that they pay some of the cost of cleaning up their own mess?

WESSEL: Well, I think that would probably be one argument for doing this. Of course, the people who actually take the risks aren't necessarily the people who, five years later, are going to have to pay this after the facts tax. So, I think resolving the moral hazard, the question of encouraging bad behavior by letting people expect a bailout from the government, is probably best addressed by other things like the discussion about having a new system where the government could take over a firm like Lehman Brothers or Bear Stearns and decide who gets paid off and who doesn't, this so-called resolution authority that president Obama is asking Congress to give him.

INSKEEP: David, thanks very much.

WESSEL: You're welcome.

INSKEEP: David Wessel is economics editor of the Wall Street Journal.

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