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Banks Own the US Government
There are smart ways to raise money and regulate the market, but Wall
Street is working to kill any meaningful financial reform
http://www.guardian.co.uk/commentisfree/cifamerica/2009/jun/30/congress-fina
ncial-reform-banks
by Dean Baker
Published on Wednesday, July 1, 2009 by The Guardian/UK

Last month, when the US Congress failed to pass a bankruptcy reform measure
that would have allowed home mortgages to be modified in bankruptcy,
senator Dick Durbin succinctly commented: "The banks own the place." That
seems pretty clear.

After all, it was the banks' greed that fed the housing bubble with loony
loans that were guaranteed to go bad. Of course the finance guys also made
a fortune guaranteeing the loans that were guaranteed to go bad (ie AIG),
and when everything went bust, the taxpayers got handed the bill. The cost
of the bailout will certainly be in the hundreds of billions, if not more
than $1tn when it is all over.

More importantly, we are looking at the most severe economic downturn since
the Great Depression. The cumulative lost output over the years 2008-2012
will almost certainly exceed $5tn. That comes to more than $60,000 for an
average family of four. This is the price that we are paying for the
bankers' greed, coupled with incredible incompetence and/or corruption from
our regulators.

Under these circumstances, it would be reasonable to think that the bankers
would be keeping a low profile for a while. That's not the way it works in
Washington. The banks are aggressively pushing their case in Congress and
Obama administration. Not only are we not going to see bankruptcy reform,
but any financial reform package that gets through Congress will probably
contain enough loopholes that it will be almost useless.

In this political environment, the poor might get empathy, but Wall Street
gets money, and lots of it. Even when the issue is global warming Wall
Street has its hand out. The fees on trading carbon permits could run into
the hundreds of billions of dollars in coming decades. A simple carbon tax
would have been far more efficient, but efficiency is not the most
important value when it comes to making Wall Street richer.

This is why it was so encouraging to see congressman Peter DeFazio's
proposal to tax trades in oil options and futures. DeFazio proposed a tax
of 0.02% on trades in oil futures and options as a way to make up a
shortfall in the federal government's highway trust fund. This tax could
raise billions of dollars each year in revenue and make speculation in the
oil market a more dangerous affair.

The logic is very simple. For someone using these markets to hedge, the tax
will be inconsequential. For example, a farmer that hedges a $400,000 wheat
crop will pay $80 when selling a future. Similarly, airlines that hedge by
buying oil futures will barely notice the higher cost. In fact, because
trading costs have fallen so much in recent decades, a tax at this level
would just be raising costs back to their levels of two decades ago, a
point at which there was already a very vibrant futures and options market.

However, even a modest tax will make life much more difficult for
speculators. Many of them expect to make quick short-term gains, often
buying and selling the same day. For these traders, an increase in
transactions costs of 0.02% would be a burden.

Of course, a modest tax will not drive the speculators out of the market
altogether, it is just likely to reduce the volume of speculation. For this
reason, even a modest tax can still raise an enormous amount of money in a
market where tens of trillions of dollars of derivatives changes hands each
year.

This tax can best be thought of as a tax on gambling. Gambling is heavily
taxed in every state that allows it. DeFazio's bill is effectively a tax on
gambling in the oil markets. It will not stop it, but it would discourage
it, and in the process raise a huge amount of money that could go to
productive purposes.

The bill faces an enormous uphill struggle in Congress. As Durbin said, the
banks own the place, and they are not going to just step aside and let
Congress impose a tax on such a lucrative business. But, it is important
that people know about the DeFazio bill. First, DeFazio deserves a place on
the honour roll for standing up to Wall Street.

Also, it is important for the public to know that there is a relatively
low-cost way to make up the shortfall in the highway trust fund. When
Congress raises some other tax and/or cuts a useful programme, people
should know that there was a better alternative. It just didn't happen
because, as we know, the banks own the place.
C 2009 Guardian News and Media Limited

Dean Baker is the co-director of the Center for Economic and Policy
Research (CEPR). He is the author of The Conservative Nanny State: How the
Wealthy Use the Government to Stay Rich and Get Richer (
www.conservativenannystate.org) and the more recently published Plunder and
Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat
the Press," where he discusses the media's coverage of economic issues. You
can find it at the American Prospect's web site.