Sunday, January 17, 2010
President Obama has recently said that he will impose a 0.6% tax on the largest banks in order to recoup the money that the taxpayers gave them. These financial geniuses are saying that they will merely transfer the costs on to their customers because clearly none of them have taken any economic classes in their lives.
Here is a little secret that is only taught in Economics 101 and above. No one can become rich in a true free market economy. Under classical economic models as soon as someone develops a product or system that gives them a benefit of $1 over the current product, competition will close that gap. So profits are actually derived by inefficiencies in the free market, not caused by the free market itself.
So huge profits are signs of weakness within the economy, not a sign of strength.
When mega-banks made the huge profits that they did before the meltdown it wasn’t because they made a better product, it was because the regressive tax system and perverse regulations created barriers to competition.
As the tax system changed in this country to favor the financial industry over the manufacturing industry money flowed to that sector. When the financial regulation system changed so that banks could shop around to find who could regulate them, it created a system where the bigger the bank the less regulations it had on what it could do with its customer’s money. So the system was gamed towards having the bigger banks make a larger profit on the virtue of being big. Under that system a smaller bank, and there are tons of them, has to work harder and more efficiently to achieve the same results. This uneven playing field would have crushed the smaller banks if the big banks weren’t so incompetent.
Placing a higher tax on the biggest banks works to balance out this uneven playing field so that if a small bank is able to invest smartly with its customer’s money and grow responsibly it can compete with the big banks.
Even it the playing field was evened out having a tax on largest players in any industries actually helps the free market. The economic bubbles are the effect of an inefficiency in the market, if the companies that gain the most from this inefficiency need to work 1% harder than the smallest companies in their field it gives them an incentive to continue to develop better products than the smaller companies. It also encourages the smaller companies to try new things hoping to gain an even larger advantage than the 1%.
This leads the larger, mature companies to work on continuous improvement in their products and the smaller companies taking risks coming up with “outside the box” improvements, instead of the largest companies in a sector rolling the dice with the economy and hoping the smaller companies will save it.
It also offsets the effects of the bubble bursting as when the bubble is at its peak the federal government is taking money the most out of it. When it starts to decline, the federal government takes less. So while the growth of the bubble is slowed so is its decline. So the massive economic devastation of an economic bubble bursting is lessened.
So to the heads of the nations largest banks who stand before congress and boldly proclaim that they don’t understand a simple concept that is taught in Econ 101; I say, “Shut-Up Stupid” either stop lying or go to your nearest community college and take a class in Economics.