by Jerome a Paris
Wed Jun 24th, 2009 at 06:06:39 AM EST
Martin Wolf has yet another hard-hitting article on the banking sector, which demonstrates with clarity how the sector has a structural incentive to engage in high-risk activities: betting with other people's money which is essentially guaranteed by the State, it can keep the profits during good times and dump a large part of the losses in bad times. His conclusion is simple:
A business that is too big to fail cannot be run in the interests of shareholders, since it is no longer part of the market. Either it must be possible to close it down or it has to be run in a different way. It is as simple – and brutal – as that.
His article is about the skewed incentives for bankers, but he fails to touch on the simplest solution: ultimately, this is about the oversized monetary gains that a relatively small number of people can make. The goal is to eliminate the possibility for these people to make such gains, and the way to do this is to tax such gains at massively increased rates. If bankers see that they will keep very little of what they can gain by betting the bank, they will have much less incentive to do.
The history of the second half of the 20th century rather strongly suggests a link between high marginal tax rates and the lack of banking crises. And if people threaten to move away to other places, cal ltheir bluff, and play hardball: how many people will be willing never to set foot in London or New York again in order to escape some taxes?
It's easy to do in practice; what's missing is the political will to do so - and the support from pundits who, so far, don't even seem to consider that tax increases could be a solution to many of our current problems (such as budget deficits, potential pension shortfalls and decaying infrastructure).
Higher marginal taxes! C'mon Martin, you can do it!