Obamabanking

Obama has announced a plan to tax the banks in the US.

Its been announced for populist reasons, but unlike our "bonus" tax in the UK it is likely to:

- raise serious money

- change behaviour

- be fair.

It is seeking to recover the cost of the bailout of the banks in 2008/9. The bailout was primarily successful because the taxpayer implicitly guaranteed the financial system. In some cases we had to put capital into banks (eg RBS) but even banks like Barclays which avoided public money (or Goldman Sachs in the US which has paid back money it took) have massively benefited from the stability and lower cost of funding resulting from the taxpayer standing behind all banks. It is right that we did this (although I am sure it could have been done better and quicker) because we need banks to support business and the economy, and it is right that banks become profitable again so they can rebuild their capital.

But as taxpayers we have not yet charged a fee for our service. I have said before that the problem with the super-profits in the banking system post credit crunch is the lack of such a fee, and that the banking system chrges fees that are too high. This is a competition issue.

The US tax deals with the first problem, and does it over the long term: it is designed to charge more to banks who rely on wholesale finance, rather than customer deposits - in other words risky banks will pay more.

The UK's silly tax on some bonuses but not others does not do this; its not based on the riskiness of business areas, its not seeking to encourage "good" rather than bad banking, and if it changes behaviour it will only be to put some business offshore. And although it will raise more money than expected it won't come from employees, it'll come from the bank's capital which will slow down the lending they can do. You know how Brown keeps on saying he doesn't want to stop the recovery by stopping spending. Well, this is going to have a bigger harmful impact than getting the deficit under control: this impacts real businesses immediately.

A final point: its another example of how the UK has not led the world in sorting out the credit crunch. We have been an inwardly focused country which has not been able to provide intellectual leadership because our system of financial regulation was ineffective and our levels of public debt hardly an example to follow. Hopefully, other countries including the UK will follow the US lead.