Why Washington Won’t Spank the Bankers

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One of the great things about writing on financial matters is the chance to engage some intelligent critics. That happened today when the Columbia Journalism Review's Ryan Chittum took issue with my column for The Big Money on why America is unlikely to impose superbonus taxes on investment bankers, the way the United Kingdom, France, and Greece did.

Chittum and I agree on two things: The windfall tax won't happen in the United States, and it is partly because of lack of political will. We disagree about why this is the case. Chittum took particular exception to my first point, which is that a U.S. bonus tax on bankers wouldn't have much practical purpose because it would make hardly a dent in the cost of the bailouts. Chittum writes,

On the list of reasons to slap a windfall tax on gubmint-cheese-fed bankers, reducing, much less solving, the deficit is so far down as to not even really be a factor in any such decision. ... But the main point is deficit reduction isn’t the point. It’s a small ancillary benefit of such a tax, not a reason not to do it....The real point is to punish the bankers while forcing them to shore up their capital or even lend the money to the productive economy.

There is obvious appeal to any taxpayer in the image of the government lashing out like the angry Old Testament God, sending biblical floods of taxes to clear the earth of greedy bankers. But Washington won't act on a bonus tax precisely because Washington doesn't want to punish bankers. It wants to keep those fat lobbying donations flowing in. Wall Street's crisis has brought politicians a ton of money and ample opportunities to grandstand in Congressional hearings. Anger against Wall Street is probably what got most of Congress re-elected last year. Wall Street's crisis is probably the best thing to happen to Washington's political fortunes in years. Washington thrives on this kind of drama. 

That means Washington politicians are largely going to keep on treating Wall Street with kid gloves. Consider how many times the government squandered its chance to punish bankers. The United States already had the idea to "punish the bankers while forcing them to shore up their capital or lend money to the productive economy," as Chittum puts it. It was called TARP. It had a particularly juicy aspect in that pay czar Kenneth Feinberg had the power really to punish bankers by cutting down the size of their bonuses in the first place. If Washington had any desire to punish bankers, it would have kept Citigroup, Bank of America and Wells Fargo under TARP restrictions at least through the end of bonus season in February. But it didn't.

And as of this week—just weeks before bonuses are handed out—all six of the nation's major banks don't have to stick to any TARP limits. Besides, the House already proposed a 90 percent bonus tax earlier this year, and it died quickly in the Senate. If a bonus tax was going to happen at all, it would have happened then. Legislation usually doesn't get reborn.

When it comes to punishment, in fact, the government has thrown the game entirely. As of now, the banks are profitable; the government is running at a $1.4 trillion deficit and the Fed's balance sheet is exploding with $2.25 trillion, mainly in toxic securities adopted from Wall Street. Wall Street took all the profit, and Washington took all the loss. In finance, profit and loss are the means of reward and punishment. Washington doesn't know how to—or doesn't want to—master the rules of that game.