Will taxing big banks really help the middle class?

In President Obama's State of the Union address he will reportedly call for a tax on banks and use the revenue from that and a capital gains tax increase to fund tax breaks for the "middle class". The tax would not just be on any banks but only big banks, who, by virtue of being successful, are viewed by the Left as far more nefarious than their smaller counterparts.  Specifically, the banks it would apply to must have at least $50 billion in assets. Since the left has no idea how to create wealth, they only way they can give it away is to redistribute it.

So what could be wrong with that? Take money from big, rich banks and give it to the middle class. The only problem, I think, is that this attempt at redistribution would also adversely affect the middle class.  

But it's not quite that simple. Where do banks get their money from? In the Liberal mind, it's always there, sitting in large "Goldfinger" style vaults, evil capitalist bullion just waiting to be redistributed into the hungry hands of the landless peasantry. But money that banks hold actually come from somewhere else, a source known as "investors". Some investors put their money in banks because it's a safe place to store their money, but many put it in to get returns on their investments (such as certificates of deposit). If the banks have a new fee to pay to the Federal Government, that has to be paid for, and one way to pay for it is offering lower rate CD's. Lower rate CDs mean less investment. Less investment means less money available to give loans out to... you guessed it... the middle class!

Alternatively, banks could recoup the cost of these fees by charging higher interest rates for people who take out loans. By people I mean the middle class who get loans for cars, homes, or even small businesses. Once again, the middle class gets socked.

The theoretical purpose of this tax is to punish “the largest and most risky borrowing in the system” that can still hurt middle-class, which is quite ironic, because it is the government who has given incentives and even required by law that banks engage in risky lending.

The most prominent example of this is the Community Reinvestment Act. The government found that people in low-income neighborhoods didn't get as many loans as people in high-income neighborhoods (can you guess why?). The CRA requires banks to make risky loans to people in low-income neighborhoods.

In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had. For banks, simply proving that they were looking for qualified buyers wasn’t enough. Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers. Thus, a law that was originally intended to encourage banks to use safe and sound practices in lending now required them to be “innovative” and “flexible.” In other words, it called for the relaxation of lending standards, and it was the bank regulators who were expected to enforce these relaxed standards. (Spectator)

And guess what--when loans are made to people who can't afford it, more of them default!

The other aspect of risky lending comes from Fannie Mae and Freddie Mac. These quasi-government agencies buy up vast pools of mortgage loans, effectively guaranteeing them. Once banks saw that the government was guaranteeing so many loans, they no longer felt any "moral hazard" by lending, because they saw their own money was no longer at risk--the government was buying up so many loans, even the rotten ones.

These are the major factors that contribute to "risky" lending. A tax on banks is not going to reduce it. If President Obama truly wanted to help the middle class (a marxist term--why must any of us be reduced to "class"?), why not stop the guaranteeing of mortgage loans and relax the CRA requirements? That will help banks, and ultimately the middle class in the form of lower interest rates, much more than taxing big banks.

 

Pedro Gonzales is editor of NewsMachete.com, the conservative news site.

In President Obama's State of the Union address he will reportedly call for a tax on banks and use the revenue from that and a capital gains tax increase to fund tax breaks for the "middle class". The tax would not just be on any banks but only big banks, who, by virtue of being successful, are viewed by the Left as far more nefarious than their smaller counterparts.  Specifically, the banks it would apply to must have at least $50 billion in assets. Since the left has no idea how to create wealth, they only way they can give it away is to redistribute it.

So what could be wrong with that? Take money from big, rich banks and give it to the middle class. The only problem, I think, is that this attempt at redistribution would also adversely affect the middle class.  

But it's not quite that simple. Where do banks get their money from? In the Liberal mind, it's always there, sitting in large "Goldfinger" style vaults, evil capitalist bullion just waiting to be redistributed into the hungry hands of the landless peasantry. But money that banks hold actually come from somewhere else, a source known as "investors". Some investors put their money in banks because it's a safe place to store their money, but many put it in to get returns on their investments (such as certificates of deposit). If the banks have a new fee to pay to the Federal Government, that has to be paid for, and one way to pay for it is offering lower rate CD's. Lower rate CDs mean less investment. Less investment means less money available to give loans out to... you guessed it... the middle class!

Alternatively, banks could recoup the cost of these fees by charging higher interest rates for people who take out loans. By people I mean the middle class who get loans for cars, homes, or even small businesses. Once again, the middle class gets socked.

The theoretical purpose of this tax is to punish “the largest and most risky borrowing in the system” that can still hurt middle-class, which is quite ironic, because it is the government who has given incentives and even required by law that banks engage in risky lending.

The most prominent example of this is the Community Reinvestment Act. The government found that people in low-income neighborhoods didn't get as many loans as people in high-income neighborhoods (can you guess why?). The CRA requires banks to make risky loans to people in low-income neighborhoods.

In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had. For banks, simply proving that they were looking for qualified buyers wasn’t enough. Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers. Thus, a law that was originally intended to encourage banks to use safe and sound practices in lending now required them to be “innovative” and “flexible.” In other words, it called for the relaxation of lending standards, and it was the bank regulators who were expected to enforce these relaxed standards. (Spectator)

And guess what--when loans are made to people who can't afford it, more of them default!

The other aspect of risky lending comes from Fannie Mae and Freddie Mac. These quasi-government agencies buy up vast pools of mortgage loans, effectively guaranteeing them. Once banks saw that the government was guaranteeing so many loans, they no longer felt any "moral hazard" by lending, because they saw their own money was no longer at risk--the government was buying up so many loans, even the rotten ones.

These are the major factors that contribute to "risky" lending. A tax on banks is not going to reduce it. If President Obama truly wanted to help the middle class (a marxist term--why must any of us be reduced to "class"?), why not stop the guaranteeing of mortgage loans and relax the CRA requirements? That will help banks, and ultimately the middle class in the form of lower interest rates, much more than taxing big banks.

 

Pedro Gonzales is editor of NewsMachete.com, the conservative news site.