Yesterday, I did a blog entry on the International Monetary Fund's proposal to hit the banks with a double tax that will see them bailing themselves out when they run into trouble.
I have been thinking about it and it worries me. First, it would increase moral hazard. Banks are more likely to engage in the kind of risky behaviour that resulted in the subprime crisis if they know they're going to be bailed out. Secondly, it would have to be global. If it wasn't, it would distort the flow of capital. If for example, American banks were taxed and European banks weren't, you can bet there will be a lot of capital flowing into Europe where there is less tax, distorting markets and economies. That's Economics 101.
Chris Giles raises similar points in the Financial Times, pointing out that this sort of tax would be paid by customers and employees, not investors or bank executives.
Commentator Allister Health says what's needed is a fee, not a tax. It's not for a bailout but it would allow special bankruptcy courts to dissolve and wind down failed institutions without endangering the rest of the economy. That way taxpayers and depositors would be protected while investors would be wiped out. Which is at should be as they took the risk in the first place.
no comment untill now