In June, most Western governments, more or less in unison, mulled a "bank tax" that promised to spare taxpayers another trillion-dollar bailout for investment banks in case of another credit crunch. And most Western governments, more or less in unison, turned it down.
Why? By the end of June, the tax had dropped out of the financial reform bill moving through Congress; it had dropped off the G20 agenda in Toronto; it had found support, and then resistance, in Canada and the U.K. But the tax is a fundamentally sound idea. Forged and applied in Sweden, after a credit crunch there in the '90s, it would take a small percentage from high-risk investment behavior to create a pool of money against the day when the investments massively tank and the bankers have to come begging — again — for government cash.
The argument against the tax is that it would punish responsible banks by forcing them to pay for the sins of their reckless competitors. But isn't putting a whole industry on the hook for these catastrophes better — more limited — than forcing a whole society to pay? (The argument against the tax is just a version of the argument in favor of it.)
"Based upon our principles," Swedish ministers wrote to The Economist in May, "a bank's shareholders, subordinated debtholders, and management cannot expect to be rescued by taxpayers."
The alternative is to let the reckless large banks fail, but no political leader has proved willing to do that. And the bank-tax idea is the sequel to a Swedish solution that President Obama and other leaders decided to follow in 2008 and '09. If part one was, "Revive stalled credit with a massive injection of government cash," then part two is, "Set up a kitty for the banks, using their own money, to ensure it never happens again."
The U.S. version that Congress dropped from the financial reform bill in June was meant to recoup the money Washington handed to Wall Street in 2009 (rather than build a kitty for future crises). The proposal rubbished at the summit in Toronto was an international agreement for all G20 members to introduce bank-tax laws. Both of these failures are unfortunate, but neither should prevent a revival of the idea by any individual government, in Europe or North America. The risk of another credit crisis is real.
"We are dealing with a worldwide phenomenon," wrote George Soros recently in the New York Review of Books, "so the current situation [with the euro] is a direct consequence of the crash of 2008. ... The continental European banking system was never properly cleansed after the crash of 2008."
In other words, not only can it happen again; it easily could. In fact, the Bank of England expects a U.K. credit squeeze over the next few months.
One argument against a bank tax is that the very existence of a kitty might make banks feel reckless — the absolute promise of bailout cash creates a "moral hazard" in banking.
Sweden minimized this problem by focusing on preserving important credit institutions rather than their owners' equity or their managers' jobs. "The policy priority of saving the banks, not the owners of the banks, kept moral hazard at bay," writes Lars Jonung, an economic adviser to the European Commission. The "genuine threat" of receivership or nationalization, he notes, does wonders for getting bankers off the stick.
A bank tax won't cleanse the banking system, either in the U.S. or Europe, and it won't cure the euro's ills. But it would build a sensible buffer of money in case high-risk trading threatens the credit system again. The Swedes swear by it, and you'd think Americans angry about the massive Wall Street bailouts in early 2009 would have risen up by now to demand it. But Americans are a funny people.