A tax on banks is a tax on you!

According to Bloomberg:

As many as 50 financial firms with assets greater than $50 billion each would be hit by a levy President Barack Obama will propose today to help recoup taxpayer bailout money and trim the federal budget deficit, an administration official said.

The article continues:

The fee targets the country’s biggest financial institutions and aims to recoup losses from the Troubled Asset Relief Program, which the Treasury Department now estimates to cost $117 billion, the administration official said.

Banking, like any other enterprise, is a profit-seeking venture. Simply put, banks are in the business of making money. If government chooses to increase the cost of doing business for these banks, this in turn will result in higher costs for consumers. To quote:

“Using tax policy to punish people is a bad idea,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, 53, said after testifying yesterday at a hearing of the Financial Crisis Inquiry Commission in Washington. “All businesses tend to pass their costs on to customers.”

To be frank, this approach does not truly address any of the problems that lead to the bank bailouts. Regardless, if we truly want to fix the problem we must end the Federal Reserve, return to a gold standard, and do away with fractional reserve banking and the FDIC.

Banks are required by law to keep only 10% of their reserves on hand at any given time. This is called fractional reserve banking. What this means in practice is that if you deposit $1,000 into a bank account, the bank can turn around and make a loan to someone else for $10,000 at an interest rate higher than what they agree to pay you to hold your money. This is how banks make money (as an aside, the inflation caused from the increased money supply makes each dollar that you own worth less). Eliminating fractional reserve banking would force banks to keep customers' money on hand in cash reserves, much like a warehouse, effectively giving them less money to play around with. In turn, this would force banks to be more selective about the types of loans they issue, thus resulting in a sounder financial system.

We need to be honest with ourselves; we are never going to see that TARP money back. If government does by chance recover some of that money they will simply spend it on something else. The most practical course of action is to properly identify and eliminate the root causes of our current financial crisis and to take effective steps to mitigate moral hazard.