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There are two reasons for the hefty tax on banks announced last Thursday by President Obama.

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Obama’s Bank Shot

There are two reasons for the hefty tax on banks announced last Thursday by President Obama.

There are two reasons for the hefty tax on banks announced last Thursday by President Obama. One relates to the here and now, the other is rooted in the past, but intended to affect the future.

His plan is to extract $90 billion in a special tax from the 50 largest banks, ostensibly to make them pay for the amount the government expects to lose from the Trouble Asset Relief Program (TARP). The tax would be in place for 10 years. (Congressional Democrats never met a tax they didn’t like, so if they are in control 10 years from now you can bet the tax will be extended.)

There is a disconnection between the banks and the loss they are supposed to make up. The money advanced them has been repaid already–with interest. The losses are expected to come, instead, from bailouts of the automobile industry and AIG, the insurance company.

That brings us to the here-and-now reason for the tax. There is widespread anger about “Wall Street.” Obama wants to capitalize on it in order to distract attention from the unpopularity of his health care scheme.

This is “bonus” season on Wall Street; thus public anger is recharged. Pay in the financial business is largely based on something called “variable compensation” by which individuals get a large portion of their annual pay based upon theirs and their firm’s performance at the end of the year. These payments have come to be called “bonuses,” although they are not like, say, a manufacturer’s Christmas bonus. Those payments represent a small potion of an employee’s annual compensation and are not always expected. The Wall Street “bonuses,” on the other hand, are counted on by employees and are sometimes covered by contracts.  So, the term has become, in the public mind, a symbol of unduly large rewards for those who put the country into a recession.

To build public anger, Congress last week put on a kangaroo court in the form of a hearing in which the chief executives of the largest banks delivered mea culpas and were made to look foolish.

Thus, Congressional Democrats succeeded in further distancing themselves from their role in causing the recession. Its roots come from the Community Reinvestment Act, passed by a Democratic Congress. By the time of the Clinton Administration, its officials used the CRA as a reason to press FannieMae and FreddieMac into leaning on banks to ignore normal standards for granting credit in order to give mortgages to people who couldn’t afford them. It’s true that Wall Street was complicit, by buying up many such questionable mortgages, “bundling” them as securities and selling these to investors. The rest is history.

This brings us to the historical reason for the proposed new Obama tax on banks. Mr. Obama has no business experience.  He has not studied economics, nor does he understand it. As a community organizer in Chicago, his mission was to show people who didn’t qualify for home loans how to get them. His constituents, taking a leaf from the playbook of radical Saul Alinsky, engaged in bank sit-ins, picketed bank officials’ homes and engaged in other activities intended to disrupt bank operations. They kept this up until a  bank they were tormenting cried ”uncle” and agreed to lower loan qualifications.

To this day, Mr. Obama sees bankers not as people whose job is to attract deposits, make loans, cover costs and have something left over to pay out to shareholders.  His view seems to be that bankers were born evil. In announcing his new bank tax, he snarled, “We want our money back, and we’re going to get it” (ignoring the fact banks had repaid the TARP money sent to them.) He spoke of “obscene bonuses” and the “twisted logic” of senior bank executives.

Because banks do not have a large constituency among voters, this bashing appears to be cost-free–but is it?  Ronald Reagan once said, “Businesses don’t pay taxes; they collect taxes.” The cost of this new tax is likely to find its way into the fees banks charge customers for services. Or, if they swallow the tax instead, the result will be a reduced pool of money to lend to businesses and qualified home buyers who already have a hard time getting loans. Either way, the public loses.

Waging class warfare seems to come naturally to Mr. Obama.  His health care scheme, if passed, will be a major step toward nationalizing the system. His cap-and-trade legislation, coupled with the EPA’s sweeping new “greenhouse gas” regulations will make utilities vassals of the state. Now, his bank strategy seems to be to make them dance to whatever tune he concocts, regardless of the economic consequences.

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