February 26, 2014

Indeed... why not a tax on too-big-to-fail-banks?

Sir, I refer to James Politi’s and Gina Chon’s “Big banks pledge to fight tax on assets” February 26.

In May 2003, more than a decade ago, as an Executive Director of the World Bank (2002-2004), below is what I told some hundred bank regulators gathered at the World Bank for a Risk Management Workshop.

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

And while you're at it, Mr. Dave Camp, US Congress, House Ways and Means Commitee, look into this too