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Political Capital Gains -- By: The Editors

The Obama administration plans to propose a new tax on banks, arguing that such a levy would help recoup losses related to the Troubled Asset Relief Program and would discourage excessive risk-taking on the part of financial institutions. What kind of tax? The administration isn?t saying, and that says a lot: The bank-tax proposal is not about raising capital of the sort that banks deal in, but political capital.

The Obama administration is looking to create a villain for Democrats to run against in the next election, and TARP itself won?t do -- Senator Obama voted for it, President Obama expanded the bailouts far beyond what he inherited from the Bush administration -- but well-heeled Wall Street executives make a tempting target during times of high unemployment and record deficits. The transparently political thinking at work here was expressed succinctly by one of Obama?s most devout supporters, OpenLeft founder Chris Bowers: ?The Obama administration has to take the lead for the entire Democratic Party [in] creating a culprit for the current problems the nation faces. That culprit needs to be ?the banks,? or some other populist term for large financial institutions. Without a convincing culprit, the people in charge -- aka, Democrats -- will bear the brunt of the blame for our economic problems.? Just so.

A few things about ?the banks.? One, they are not in the main responsible for the losses the government has incurred or expects to incur under TARP. In almost every case, the banks either have repaid their TARP funds or are well along in the process of doing so. TARP losses are expected to come from other sources: from the failed insurance giant AIG, from the automobile companies and their finance divisions, and from Democrat-originated programs intended to prevent home foreclosures.

Insurance companies and car-makers are not banks, and they are the last subjects the Obama administration wants to be discussing at this moment. The government?s bailout of AIG has been a sewer of incompetence, and Obama?s man at Treasury, Tim Geithner, has been chin-deep in it from Day 1: When Geithner was head of the New York Fed, his institution ordered AIG to withhold details of its transactions, evading scrutiny from Congress and from a steaming public. If not for the work of Rep. Darrell Issa, the ranking Republican on the House Oversight and Government Reform Committee, Americans would not be privy to that fact. More investigations of Geithner?s role in AIG are likely to follow.

Likewise, it was under the Obama administration that the U.S. government became the majority owner of GMAC, which has proved a pit into which many billions of dollars have been dumped. And it was the Obama administration that decided to extend TARP spending into October 2010. Why? As Secretary Geithner tells it, that extension of TARP will be dedicated in no small part to a program created by Rep. Barney Frank and dear to his fellow Democrats: foreclosure mitigation, an initiative that, unlike the banks, is in fact expected to contribute to the government?s losses under TARP, to the tune of $30 billion.

In fact, Geither recently sent a letter to Congress in which he predicts that the government will see a ?positive return? from its involvement in the banks. While ?turning a profit? on TARP sounds perverse, the fact is that the ?positive return? the government is realizing from its bailout of the banks is being used to subsidize its TARP-enabled subsidy of favored Democratic constituencies -- the United Auto Workers, ACORN (which hustles itself a piece of the foreclosure-relief largesse), and the usual rogue?s gallery of Obama partisans. In return for making possible this subsidy, the banks are to be vilified and taxed.

The vilification hurts less than the taxes: The Wall Street banks and their leaders have done a lot of stupid things out of greed and short-sightedness (supporting Obama?s candidacy was one of them), and they ought to be viewed with gimlet eyes as the self-interested players they are. But they also are taxpayers: enormous taxpayers, in fact. Between payroll taxes, personal-income taxes, corporate-income taxes, and capital-gains taxes, the banks already are richly exploited sources of federal revenue. A new tax on them -- in whatever politically convenient shape the Obama administration settles upon -- would be an unnecessary burden that would further weaken an already struggling American financial sector, pushing capital and innovation away from Wall Street firms to competitors in London and Shanghai. Worse, it would represent a naked political abuse of the tax code: a high-risk gamble for short-term political profit.

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Full post as published by Bench Memos - National Review Online on January 13, 2010 (boomark / email).