The latest quarterly oversight report on TARP concludes what’s been obvious all along:
1) Too big to fail banks are now bigger.
2) Paying back TARP means the banks are free to do whatever they like.
3) Contrary to TARP’s stated aims, credit provision by the banks has actually been declining since TARP was created.
4) Banks are using cheap money to continue risk-taking, using a “heads I win, tails I win, if I lose the government bails me out again” approach.
5) When not engaging in further risk-taking, banks are simply hoarding assets to offset against the very large real estate loan losses to come.
What could change things to reduce further moral hazard and get the banks lending again?
1) The Fed could levy a negative interest rate on all the money banks are hoarding in the Fed’s vaults.
2) The Fed and other government regulators could raise substantially the capital requirements on banks: somewhere in the 15-20% range is needed.
3) The government could introduce a “Tobin tax” on all financial transactions to compensate the taxpayer in part for the trillions that have been expended on the banks’ behalf.
4) The government could tax all hedge fund managers’ income at ordinary marginal rates.
5) The government could initiate a windfall tax, on the order of 50%, for all bonuses paid by Wall Street in 2008-2010.
6) The government could ban proprietary trading by all commercial banks.
7) The government could set a maximum size limit on banks: no larger than 2% of GDP, and force larger banks to divest.
And how many of these and many other good ideas will be adopted, either legislatively or by executive order?
Gorilla says: “…”