The Commons: A great show of strength

Before it was just the Liberals, socialists and separatists who wanted our hard-earned money. Now apparently most of the western world is out to rob us.

by Aaron Wherry

The Scene. The Prime Minister was, just yesterday, lamenting the tawdriness of this place. ”I’ve been very clear with the Canadian people our number one focus week in and week out remains the economy. When we sit down as a caucus or when we sit down in cabinet, that’s 80 percent of our discussion,” he recounted to a group of young people. “Everything else that often gets so much attention from your former media colleagues, Mike, these are sideshows. The economy is what matters and it’s got to be what matters everywhere and it’s got to be what matters at these meetings in June.”

That the Prime Minister was, at that very moment, participating in an actual sideshow is an irony that seems to have gone uncommented upon by Senator Mike Duffy, the former journalist assigned to host this little infomercial on Parliament Hill. “Prime Minister,” Mr. Duffy is recorded to have assured, “we’ll be watching with great interest.”

Still, so apparently inspired by yesterday’s display were at least five of Mr. Harper’s cabinet ministers that they set out today in hopes of bending the world to Mr. Harper’s will. To Mumbai went Jim Flaherty, to Shanghai went Stockwell Day, to Washington went Peter Van Loan and to Ottawa went Lawrence Cannon and Tony Clement: each determined to explain why talk of an international bank levy was both unwelcome and possibly disastrous. Once more, apparently, dark forces are aligning against this nation’s economy. And once more, apparently, the only thing standing between us and total doom are Mr. Harper’s high principles and unshakeable resolve.

“Obviously Lawrence and I are here along with other ministers spanning the globe today to speak with one voice for Canada,” Mr. Clement explained, deftly employing an odd metaphor to describe the sound of at least five different individuals speaking.

Mr. Cannon, seated to his right, look concerned. Mr. Clement was insistent, struggling to control his hands which were obviously quite eager to plead for reasonableness.

“Canada is and will remain opposed to a tax that would penalize financial institutions that remained strong and prosperous while many of the world’s banks failed,” Mr. Clement explained. “And of course the most important reason why we oppose the bank tax is because it is unfair to Canadian consumers who would ultimately foot the bill as they use their banking services.”

Previously it was merely the Liberals, the socialists and the separatists who wanted our hard-earned money. Now apparently most of the western world is out to rob us. But the first to ask the ministers a question, alas, wasn’t entirely clear on what exactly could be said to be the problem here. “You’re saying that Canada won’t apply a bank tax so why would anything that the United States or Europe does, they view the bank tax as justifiable and a good policy, why would that affect Canada?” the reporter asked.

“Those who advocate for this tax on financial institutions are not saying simply that the United States must do this or the UK must do this,” Mr. Clement responded. “They’re saying globally as G20 countries, as OECD countries even, this has to be something that has to be applied to all countries regardless of individual circumstances. And we’re saying that is the wrong approach.”

This did not seem to quite explain why we couldn’t simply beg off and proceed in our own way, but Mr. Clement had more complaints.

He warned, for instance, that a bank tax might lead to higher service charges, the sort of thing, if memory serves, that man with the funny accent from ING is always warning us about.

What’s more, this bank tax—like almost everything else, it seems—is a shiny object that threatens to lead us astray. “We do believe that this is a distraction,” Mr. Clement testified, “that for many countries that there are other reforms that can and should be done.”

And if that’s not bad enough, there’s the other thing.

“Regardless of that decision,” he continued, “what you’re doing as well is you’re rewarding bad behaviour on the world stage. There’s a moral hazard issue whereby if  if this tax creates a bailout fund, then what you’re doing is you’re encouraging risky behaviour.”

Mr. Clement was rife this day with metaphors—”The wheels of advocacy are grinding in motion right now,” he mused at one point—and happy adjectives. Our national approach to finance and banking was this day said to be all of admirable, steadfast, strong, robust, stable and secure. But one cynic wondered if, given the Finance Minister’s admission that a financial reform agreement was unlikely to be arrived at this summer, the G8 and G20 meetings might not be worth the trouble. ”What,” he wondered, “are these summits going to do other than create more traffic in Toronto?”

Mr. Clement shooed this away with hopeful words about “progress” and “discussion” and “moral suasion.”

“There are other countries that we feel share the same position so we want to exercise some global leadership,” Mr. Clement had said at another point.

Thus can our global leadership now be said to be well-aired.




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The Commons: A great show of strength

  1. I don't think our Prime Minister nor his colleagues speak for me on this 'anti bank tax' campaign.

    • Certainly they speak for me. No to this stupid tax.

      • I think one of the points here is: what tax?

        This is all bogeyman stuff.

        No country has any ability to impose a tax on us. So it is a big distraction, waste of time and effort and resources to be sending 5 cabinet ministers, together with all of their travelling staff to the corners of the world to advocate against something that will never and could never be.

        One might call it all a sideshow, in fact.

        • I agree, except let's say we had Dion in charge. We'd have the carbon tax, guaranteed by now. Don't know for sure if he'd let the bank tax get implemented, but all it would require is a politician blinded by socialist ideals to jump headlong into this ridiculous idea.

          • I don't know if having Dion's tax shift would be worse or better than Harper's carbon tax, but regardless, that's democracy.

            The point here is: there is no tax unless we agree so why the sideshow and bogeyman when "The economy is what matters and it's got to be what matters everywhere and it's got to be what matters at these meetings in June"?

        • Exactly – as Paul Martin has been basically spelling it out the last day or so.

          Harper and co. are out on a one-note campaign against a tax that has very little likelihood of ever being levied or paid by anybody. Meanwhile the real issue is getting lost.

          Canada currently has this sterling rep for solid banking AND we are hosting the G8/G20 – we should be leading the charge for realistic (tighter) regulations on banks. We are not.

        • Harper's campaigning/posturing again. Wants to look like the big rough, tough leader – who's afraid to talk to kids.

        • So the Harper govt should just ignore the IMFs endorsement of a global bank tax,
          and sit at home and watch re-runs of Iffy's latest speech… right Ted, wouldn't want our government to be proactive.
          (like the brain GAIN with 19 world class scientists coming to Canada)

          ''…The proponents of a bank levy have used it to make their case — a case that was bolstered last month when the International Monetary Fund released a draft of the report the G20 leaders commissioned last year that endorsed a general levy on banks and a tax on compensation and dividends….''

          • You are indeed a funny one Wilson.

            Who said he should ignore it? No one is talking about ignoring except you. Turn your hyperbole dial down below 11, ok?

            But he sent 5 cabinet ministers out to the four corners of the earth, literally, to "fight" this tax. They talk on and on incessantly about the negative impact of this "tax" when there is no chance in hell it will ever come to be.

            It's a strawman and a bogeyman rolled into one big scarecrow.

          • I don`t know who is instructing you to say the Canadian position on this bank tax is " a waste of time and effort and resources ". but you would be better to just say the bank tax is a bad idea ( which you also seem to say ) and leave it at that.

          • But who in Canada disagrees with that? That's the point.

            No one in Canada is calling for a bank tax, no one can impose a bank tax on us or our banks. Yet 5 cabinet ministers are gallavanting all over the planet, with their staff, burning up global goodwill, on an unnecessary tax fight, just before the G8/G20.

            It is not the position that is wrong or a waste of time and effort and resources, but the lengths to which Harper is going to create some sort of bogeyman to fight against because he remains rudderless and directionless at home.

          • Oy, you don't get it. We can avoid the tax, but we cannot avoid the increased global risk such a scheme would create. Frankly, it is the bailout, not the tax that should rightly have people shaking in their boots. A global financial crisis will engulf Canada. For that reason it is in the interest of our government to fight for the best possible global financial architecture.

            On the other hand Harper is an evil baby-eater, so he probably has a bad reason for this. You're right.

          • Oy, you don't get it. You are most definitely right that a global bailout scheme would "engulf Canada". But Harper is not talking about that.

            Harper and his cohorts are talking about an imaginary threat of a bank tax on Canadian banks: eg, "Canada is and will remain opposed to a tax that would penalize financial institutions that remained strong and prosperous while many of the world's banks failed,” Mr. Clement explained. “And of course the most important reason why we oppose the bank tax is because it is unfair to Canadian consumers who would ultimately foot the bill as they use their banking services.”

            It is in our interest to fight global regimes that will harm our economy, but Harper is not talking about those. He wants to scare you into thinking some big Internationale can impose a tax on our banks and only he will prevent that from happening.

            On the other other hand Harper is a god and does nothing wrong, so he probably has Canada's interest at heart in doing this bogeyman thing. You're right.

          • Ted, the point of the tax is to fund a bailout. The bailout will create perverse incentives which Harper's criticism has mentioned. For instance see Tony Clement's references to the moral hazard issue.

        • Canada can opt out of the tax, but Canada cannot opt out of the global financial system. A global bailout fund will create perverse incentives for countries to allow their financial systems to take on excess risks. Instead of re-regulating their domestic financial systems, many countries will instead rely on a bailout. Due to financial contagion effects we will also be hit when this scheme implodes.

    • "I don't think our Prime Minister nor his colleagues speak for me on this 'anti bank tax' campaign."

      Nope. And they certainly don't speak for me in the area of "moral suasion" either.

  2. This did not seem to quite explain why we couldn't simply beg off and proceed in our own way, but Mr. Clement had more complaints.

    Aaron, it is not only a dumb idea for Canada and Canadian banks. It is a dangerous idea for the world banking system, as Minister Clement explains later in your very essay. Sapping wealth from the successful in order to reassure the incompetent with a safety net paid for by the successful is many things. What it is not, for the world banking system, is wise. Or safe.

    If governments see the need to force themselves on failing banks, then regulation (to outlaw risky ventures that lead to high probability of failure in the first place) is the way to go.

    • "Sapping wealth from the successful in order to reassure the incompetent with a safety net paid for by the successful is many things. What it is not, for the world banking system, is wise. Or safe."

      Are these the same "successful" who, in most parts of the world, after making bad and very risky speculative bets, required billions or even trillions of dollars in taxpayers' money to keep from folding entirely and thus taking the entire world economy down with them?

      Canada's banks, admittedly, are doing better than some countries' financial institutions. Ironically, this is mostly because the Liberals refused to let them merge and indulge in the same wild orgy of speculation that other world banks were allowed to indulge in. (Of course, the Conservatives are now taking credit for this, but that's politics.) However, I'm not sure that the G20 would allow Canada to opt out of a worldwide bank tax – that could give Canadian financial institutions an unfair advantage in the global market. Presumably, this could be worked out at the G20 talks.

  3. The bank tax is a bad idea because

    1) It encourages banks to be too risky, because they know they are paying into a fund to bailout banks for risky behavior.
    2) The bondholders of the bank won't discipline bad bank behavior because the bondholders know they will be bailed out like they were last time in the US and Europe.

    Harper/Canada is proposing a better idea. Contingent capital, where if a bank gets into trouble the regulator can force the automatic conversion of the bondholders into equity. This means that the bondholders in a bank will discipline bank behavior themselves or risk paying for the mistakes of the banks seeing their bonds converted to equity.

    On this issue, Harper and Canada are clearly on the correct side.

    • Agreed. Wherry has obviously become so consumed with contempt for Harper and his government, Wherry is now incapable of identifying those occasions (however rare) when Harper & Co. are actually on the correct side of an issue.

      • I don't think anything Wherry has written indicates he's opposes Harper's position on this or thinks it is wrong.

        It seems the point might be – when you are braying on about sideshows and focus on the economy – a ton of energy, time, cost and resources are being expended on fighting a "tax" that can't be imposed on us without our consent.

        In other words, a lack of focus on the economy.

        • Actually, I think hth hit the nail on the head, below.

      • I don't know about that. Wherry's problem is that he is pathologically snarky. Snarkiness is probably necessary for covering parliament, but is detrimental to a discussion of real issues like this one. If Wherry told me my house was about to burn down I wouldn't know whether to take him seriously or not.

    • Asking this as much out of ignorance as anything – what say do bondholders really get in bank behavior, short of choosing whether or not to buy those bonds? I was under the impression that their ultimate power was minimal (unlike say, shareholders, who have a say in company functioning if they comprise the majority), so placing more of a burden on them wouldn't do much to prevent bad behavior.

      • As I understand it, Craig, there would be a plan afoot where a special class of bonds (or maybe it's the usual bank-issued bonds?) could get converted into equity if the bank gets into deep stew. You (as such a bondholder) lose your cash but you get a diluted piece of ownership in the limping bank that scrapes by (and is therefore not a dead bank) with your infusion of equity. All other shareholders end up with diluted ownership of the limping-but-alive bank given that you are now also a shareholder instead of a lender. And a government-run regulatory scheme monitors things and orders such a conversion from debt to equity when the bad debts become scary. Or something like that. Anyone better versed in finances is certainly welcome to correct as necessary.

        • That's how I understood the scheme, but that in no way gives bondholders a say in how the bank is run, which is the question I was hoping to get answered.

          I also worry about the fact that the increase in equity comes solely from a decrease in debt rather than an increase in capital. Without additional capital, a failing bank has no extra tools to deal with the issues causing its collapse, and I believe, would collapse anyway, leaving the bill once again squarely on the taxpayers.

          • Well, don't underestimate the power of "choosing whether or not to buy those bonds." When triple-A-plus becomes A-minus becomes not-A-at-all becomes junk, that has a tremendous ability to focus the mind of the suits in the corner office. Lessons can get learned pretty quickly. Just ask Greece — oh, never mind.

            As to your question of increased capital versus decreased debt, these are essentially one and the same beast; they move the net position in the same direction. In other words, "increasing capital" while maintaining the same debt is pretty much identical to paying down the debt by the same amount. Relief from debt is additional capital.

          • Choosing whether or not to buy bonds only matters if the public is aware of the faults of a company's practices. In the crisis we saw play out over the last few years, that was clearly not the case, and this proposal does nothing to change that. Besides, the bonds would need to lose market confidence while the poor practices are occurring – as we see with Greece, what's happening is that the bonds are losing market confidence when their mismanagement left them screwed, not when they actually engaged in the bulk of the mismanagement. Given that most international banks, like most governments, are run by people who have a short-term stake in the organisation rather than a long-term one, I don't see bondholders having any more influence than they do now.

            And no, I don't believe decreasing debt is ultimately the same as increasing capital. Capital, loosely speaking, is what a bank will have to pay its creditors and unless debt can be brought down so significantly that what's owed to the creditors in the short-term is covered by existing capital, it's meaningless. Say I borrow $100 from you at 5% interest and it's time to pay up that interest, I can only do this if I have $5 or more of capital to do so. If I have less capital, say $2.50, what I owe you would have to be reduced to $50, a huge drop. If I have no capital, then any debt will push be into bankruptcy. Basically, the amount of debt relief needed to offset an increase in capital is huge, and given the size of the recent bank bailouts (hundreds of billions), I just don't see how relieving bondholder debt will be sufficient to reestablish solvency in a failing bank.

          • Just an addition to this line of thought that just sprung to mind – in the event of a collapse, typically banks (or countries) try to raise capital quickly through bond sales. Greece is doing that very thing, though the slashing of their credit ratings have skyrocketed the interest on those bonds, making it quite difficult.

            However, if a collapsing bank is having its bondholders converted to diluted shareholders, or is about to, wouldn't this make it much more difficult for them to raise capital? No one would buy bonds if they know they're unlikely to stay bondholders. This could just spur on the collapse of a bank, as they become unable to deal with any unresolvable debts, while at the same time lose the ability to raise capital.

            I would really love some criticism of this line of thought, because if this is the case, it's a bit troubling.

          • I believe the embedded contingent capital is a special class of bonds. Most bondholders would not be affected. The conversion of the embedded contingent capital should free up cash to pay other bondholders, making the remaining bonds more attractive.

          • If so, what would be the incentive for anyone to buy the ecc bonds? Perhaps there would be a higher rate, but in that case, why would banks offer them, essentially having to pay more?

            Besides, as I've been trying to get my head wrapped around, the ecc bond conversion wouldn't free up cash, it would relieve debt, so unless the problem is the ecc debt itself, there's little hope of resolving solvency to a bank. Any non-ecc debts or obligations would still need to be financed somehow.

          • Craig, I haven't been articulate enough. But relief from ANY debt improves the position of the company by the amount of the relief.

            (A) If the bank can pay back everyone, there is no problem.
            (B) If the bank cannot pay back everyone (and cannot raise anymore through borrowing), and some bondholders lose their own "debt equity" in exchange for bank shares, and there is still a bank that can pay back other creditors and continue operations, and taxpayers were not dragged in to prop up.
            (C) If the bank cannot payback anyone, it either dies (and depositors may or may not be covered by taxpayer supported deposit insurance) or government burns more tax dollars in keeping the bank afloat.

            The regulators order when (B) must take place, so there is not a (C). You are free to invest in the "embedded contingent capital" class of bonds (TY, Fraser) or not.

          • I understand that situation myl, but my point all along has been that this isn't the issue in a failing bank unless what is owed to the ecc bondholder represents a large enough share of the bank's short-term liabilities to make relieving that debt worthwhile. (B) and (C) are not mutually exclusive – the bank, even after ecc bondholders are converted to shareholders, could easily still owe other creditors money. And, as bonds are comparatively longer-term debt, relief in that form would likely do little to alleviate short-term solvency issues.

            And, as I asked before, if both types of bonds are to be offered, what incentive is there for bondholders to take on additional risk? Taking it a step further, if that extra incentive is to be provided by the bank, what incentives do they in turn have to offer these ecc bonds which simply serve as a form of rough insurance that they'd rather not have in the first place?

          • The markets for the two types of bonds are different, and would, I suppose, command different interest rates and be bought-sold at different prices, depending on the market's wisdom. Do not assume that there would be no market for the ecc bonds. Further, do not assume that ecc represents the higher-risk product.

            Non-ecc: you get your interest and principal, if the bank can afford it. If the bank cannot afford it, you only get your interest and principal if the "ecc" bonds are converted and that other class of debt is wiped away. If the bank STILL cannot afford it, the government, scaredy-cats that they are, will sacrifice your offspring's adult wealth in order to shovel more money at the bank to pay you your principal and interest, or to negotiate however-many-cents-on-the-dollar.

            Ecc: you get your interest and principal, if the bank can afford it. If the bank cannot afford it, you are the class of investor who gets the IOU's converted into share certificates.

          • what incentives do they in turn have to offer these ecc bonds which simply serve as a form of rough insurance that they'd rather not have in the first place?

            The government is telling them they must participate in this form of self-insurance, as a first layer of protection prior to taxpayer bailout, because the "global bank tax" is a stupid way to go about financing an eventual taxpayer bailout. So if they want to be a bank, and if them's the rules, they will set up that structure.

    • After all, the moment I get my insurance papers for my car, I drive like a maniac because I know I'm paying into a fund that will bail me out if I wreck the thing.. oh wait.. I don't.

      You mean like how the bondholders disciplined the bad bank behavior in Greecewhen there was no assurance that the EU would even be able to bail them out? Oh wait.. they didn't.

      The bank tax may or may not be a bad idea, but those aren't very good reasons.

      • Thwim, you may not drive like a maniac when you get insurance, but do you drive more cautiously?

        We have a situation where the banks (well, other countries' banks) already drive like maniacs – insurance won't stop that. Also, and I could well be wrong on this, I don't believe the current fund would really be like insurance, in that a bailed out company would have to pay higher rates later (they also likely wouldn't get to keep the money provided, it would still be a loan from what I'm reading). The bank tax provides no punishment for bad behavior, past or future, it just punishes banks for being banks, regardless of their behavior.

        • Actually, yes. My premiums are adjusted based on my past behaviour – accidents, speeding tickets – and twitch upwards at the slightest provocation.

          I agree with Thwim; there may be arguments against taxing the banks, but this isn't one of them.

          • Your premiums are based on past behavior, but if you had no insurance, you'd have to pay the entire costs of any misdeed. Sure, a proper insurance has disincentives against bad behavior but not necessarily more than a lack of insurance does – I would argue, much much less.

            And again, the bank tax isn't insurance, it's a prepaid bailout fund. Past behavior doesn't seem to factor in, riskiness doesn't seem to factor in taxation rates, etc. Regardless of behavior, banks are paying for it, and the only ones to benefit from the scheme are the ones who act recklessly.

            I agree that the bank tax wouldn't significantly encourage recklessness more than the current system, but I see little reason why it would discourage recklessness more than the current system either. And since reckless behavior has become the norm, that makes the bank tax ultimately ineffective in preventing collapses – all while being punitive to sensibly managed banks.

      • Your analogy presumes that your being in a car accident is equivalent to a bank failing. However the situations are not comparable at all. If you are in a car accident you still suffer considerably, even if you have insurance. You might die, and will probably be injured (that said seat belt laws did result in higher rates of accidents, so there may be modest tradeoffs).

        If you bail out a firm that just made bad bets it doesn't die, and often doesn't suffer particularly.

  4. Selling Canada by the bank

    Canada is strongly opposed to the US and European Union proposal for a banking tax.

    Seeing that the momentum for a global bank tax is gaining ground, Canada Industry Minister Tony Clement and Foreign Affairs Minister Lawrence Cannon expressed their opposition today. Visiting Mumbai, Canada's Finance Minister Jim Flaherty, did the same. Instead of the tax, they propose the contingent capital concept, a bad deal for shareholders and bondholders. In fact, the global financial crisis exposed important deficiencies in the international banking community. The need for a global bank tax comes from the same weak banking regulations that Canada wants.

    European countries and United States need the bank tax. The G20 pledge to ensure taxpayers never again pay the cost for bailing out a bank can only be fulfill by it. In its most popular version it imposes a broad levy that creates important links between the level of the possible risk of financing with borrowed capital and the level of the tax to be paid.

    There is no international clash about global bank tax. Canada is standing alone in its opposition. Other nations having reservations about the tax mostly realize that it is now needed to make the international financial system works. It is now clear that Canada will resist a bank tax. Germany's Angela Merkel should now take note of this fact. This opposition should be managed and must not create distortion in the market. This tax likely to be the hot issue at the G8 and G20 meetings next month…in Canada!

    • If your preference is FOR stronger financial regulations I fail to see how a bank tax accomplishes this. Governments are less likely to reform their own financial systems if they know they will be bailed out in a crisis. Harper's capital contingency scheme may not be ideal, but at least it doesn't create an incentive for governments to internationalize the risks in their financial systems.

      Taxing on the basis of how much risk a bank takes on will not solve the problem. The thing about risk is that it is complex and difficult to quantify. Consider sub-prime loans. Most of the bundled assets sub-prime loans were based on were NOT considered risky investments. They were AAA loans because they were securitized by third parties. Alternately, new forms of leverage can emerge that will be difficult to capture in a taxation scheme. For instance, nobody paid attention to the massive liabilities Lehman bros. held should their credit default swap contracts fail.

      I agree with you that regulation is the ideal approach. However, a global bank tax doesn't just take the wind out the sails of the regulation – it starts blowing the other way.

  5. It's an interesting idea they've put forth, for sure, but it doesn't seem like it would prevent any bank collapses, only spread the damage of a collapse to the bondholders first, before jumping right to the taxpayers. Basically, it seems like it's bankruptcy before actual bankruptcy, which certainly has its advantages in hopefully shifting some pain from taxpayers to those who had a stake in the country. But I don't see how it prevents bailouts, as any crash is unlikely to be averted by simply forcing bondholders to become shareholders because that wouldn't raise equity for failing firms (what they need to avert a crash), it only lowers debt (what they need to do to rebound from an averted crash).

    Ultimately, I like this idea better than the bank tax proposed by other countries, which puts financial burden on good banks as a hedge against bad, yet provides no extra incentive for banks to stop being bad – banks pay the tax regardless of their own behavior, good or bad.

    However, neither of these plans really do what's needed to fix the system. The financial sector is too large to be realistically propped up by any sort of realistic private contingency plan (the bank tax has a pool far too small to hold against a real collapse) and ultimately, no government will let that financial sector collapse, which would bring down the rest of the economy with it. So rather than finding stop-gaps against bailouts in the event of failing banks, it's far more prudent to minimize the chance and severity of those collapses in the first place.

    One idea that was floated about, that I wish was getting more attention, was a different type of bank tax, one on transactions. It was to be minimal, fractions of a percent, but it would significantly raise the cost of trading for the sake of trading itself, rather than the proper use, trading for the sake of the maximal allocation of resources.

    • I agree with the need for regulation, but I am not sure that a Tobin tax is the best way to get there. Some of the volatility experienced by markets may indeed the result of a short-term oriented trading mentality. However, I think the real problem is one of moral hazard. The risk-taker can avoid taking on the consequences of risk. For instance I could make a loan to some shifty company, and let Lehman bros. insure it with a credit default swap.

      This is one transaction, and one I intend to hold onto, so a Tobin tax would provide a very minimal disincentive for action. Moreover, if the proceeds of that Tobin tax were used to create a bailout fund the policy could even increase my incentive to make a loan with a high chance of default.

      Whereas a Tobin tax focuses on investors, I would shift attention instead to the time horizon of CEOs. CEOs are rewarded on the basis of short-term profits. However, one can always increase profits by adopting an investment portfolio that takes on more risk. Those risks may not manifest themselves right away – even a ponzi scheme can appear profitable for years. We need to change the way in which CEOs are rewarded. How exactly, I'm not sure, though I think Obama's "say on pay" is a good first step (it gives shareholders more influence over how CEOs are rewarded).

      Prudent investment isn't just good from a stability standpoint, it is also good from an economic standpoint. In the USSR the economy was centrally planned, in capitalism, it is capital that allocates resources between different business enterprises. If people aren't doing their homework and investing on the basis of fundamentals, then we are shafting the next Bill Gates or Henry Ford in favor of the next Bernie Madoff.

      The real issue is at the level of

      • Oh, I agree, a Tobin tax wouldn't solve the issue – ultimately, that rests on transparency, active and capable regulators, and executive accountability. Tobin taxes can't solve one-off stupid decisions, or the kind of "economic innovation" that set up the house of cards that crashed in 2008.

        What a Tobin tax could do is prevent wide swings in the marketplace due to speculation, where money changes hands not because it would be more useful in those hands, but because financial players are trying to use knowledge of the market to extract wealth from it. Basically, while it wouldn't make companies more inclined to focus on the long-term rather than the short-term, it would make transactions made for short-term goals less profitable.

        Absolutely, prudent investment is a wonderful thing and is what makes the financial sector worthwhile, but what we're seeing a lot of money changing hands that doesn't result in prudent investment.

        However, thinking about it, the Tobin tax is a bit of a tangential topic to what's being discussed and this probably wasn't the right setting to bring it up.

  6. Gee, could it be that Harper opposes the proposed 'bank tax' because Canadian banks oppose it?

    Harper was all for LESS regulation of banks – remember when?

    Oh, perhaps he's a kinder gentler Harper, but I suspect not.

    • I'd say he opposes it for the same reason he opposes carbon taxation: it's just another socialist scheme. Seems like it's always up to Harper to lead Canada and the world. Crazy.

      • Yes, that is crazy to even think of the world being led by Harper.

      • Except he is implementing carbon taxation.

        He is all words and he'll say anything.

    • What specific policies has Harper enacted that reduced the level of regulation of the financial sector?

  7. Have we not seen, recently, that the modus operandi has been to privatize the gain and socialize the loss? Would this relatively non-punitive levy – more like a value added tax – not redress this imbalance? Canada has undoubtedly been an anomaly in its relative sturdiness where the vicissitudes of global banking and finance are concerned. Yet, as Flaherty hisself recently noted, we are not an island. Regulation will never be trans-global. But this small measure seems like it has a chance to be.

  8. Have to say I'm amused at how high they ride on that banking horse, the one they tried to sell for glue.

  9. The bank tax maintains privatized gains and socialized losses, because the bondholders remain whole and the taxpayer pays for the bailout.

    Contingent capital gets rid of too big to fail, and forces private capital, i.e. the bondholders, to take losses, NOT the taxpayer.

    The bank tax is a bondholder protection plan.

    • But who would be crazy enough to buy these bonds given the banks bad track record?

  10. By all means,

    we should follow the US and Europe in banking policy, so successful that they are (sarc off)

    "Standing alone" on the issue? Maybe. Standing alone atop the world in the strength of our banking sector? You bet.

    Frankly, I'd prefer us to stand alone as long as we can.

  11. Thanks to myl and Craig and others for educating us somewhat on what this bank tax is all about.
    I shouldn`t have bothered reading Mr. Wherry`s post………..just the usual cutesy stuff about metaphors and the continued obsessiveness with Mike Duffy.

    • I agree, and it seems that neither of the proposed solutions would actually solve the next occurence of this problem to our liking. Although, I would agree that the bondholders should go first.

      Is there a Plan C? Would it be possible to tweak the bank tax idea such that the contingent capital plan is implemented as a part of it, and that this tax is applied only on certain (risky) transactions? I mean, it seems unfair that I would have to pay each time I deposit or withdraw from my savings account so that someone somewhere in the world can get a mortgage with no money down.

  12. Oh don't be silly. If there was a recession we'd have had one by now.

  13. The Conservatives might have trouble bending the world to their will. They can't launch attack ads against the entire world, nor threaten it with an election. They will actually have to use reasoned, well thought out arguments – in other words, govern. Are they capable of or willing to do that?

    • Actually, this may be one time in global economic affairs that our advice will be given extraordinary attention.

    • ''The Conservatives might have trouble bending the world to their will''
      Remember Copenhagen?
      Your Prime Minister is a genius in negotiations, credit where due, eh.

  14. Interesting document, but for the financial transfers tax, I find it's arguments very unconvincing – they give statement about why the authors believe an FTT is unhelpful, but provide to supporting evidence or reasoning (and what reasoning they do provide is unconvincing for me). I just think of an FTT as a consumption tax, which decreases unproductive transactions by raising their cost – trades that have minimal profitability would thus become unprofitable and, if capitalism applies at all to financial institutions, they would decrease in volume.

    Anyway, I agree, what the Canadian government is proposing would work best as an element of a broader solution, and that the Conservative's posturing on the situation is likely has some ulterior, political motives.

    However, I have to agree with them, wholeheartedly, that a bank tax is not the right solution for the world, and definitely not the right situation here. It's an unnecessary cost for our banks, and the bank tax, as currently being discussed, would be too low to be effective – I think Obama wanted a fund of $50 billion, which is less than half the bailout AIG got. As it stands, both the bank tax and the Conservative's plan seem like token gestures that wouldn't do much to prevent a taxpayer bailout in the event of a real collapse of the banking sector, but at least the Conservative's plan provides a response proportional to the number and size of failing banks, and at least preserves some aspects of capitalism in that the first to suffer are the ones with a stake in the company, rather than the public at large.

    • Craig, my reaction to the government's plan was a question. Is there enough private capital in the world willing to support the government's plan? Any insights?

      • I'm probably misreading the question (I'm at best an armchair economist), but it doesn't seem like the government's plan needs those with private capital to be willing to accept the plan, only that they're still willing to buy bonds if they know that they could suffer steep losses if the bank collapses.

        I suppose it could become an issue if bondholders are really afraid of bank failures, but in that case we're kind of back to square one in the issue – that banks are too likely to fail. I guess I'm back to my central point, that this plan doesn't really solve the problems in international banking, only that if those problems manifest as crises, the responsibility doesn't fall solely or immediately on taxpayers (though they'd likely wind up at our feet anyway).

        But, I don't think I've really answered your question, and I don't really think I know how to…

        • I agree we are probably back to square one. I would be quite leery of buying bonds in these banks. Way too much risk, given their track record.

  15. I'll say our banks are doing fine – they've been in control of the Cdn money supply for the last 30 years, and on government debt alone have collected in the neighborhood of two trillion dollars, and the tap is still running at ~50 billion per year – whilst our government cry poverty and slash and slash at things our tax dollars are meant to provide. Why your average Canadian is so pleased about this is something I am somewhat less able to understand. An interesting consideration of some things financial you aren't apt to get in the mainstream media – What Happened?http://www.rudemacedon.ca/what-happened.html

  16. Charity begins at home. We have to keep ourselves strong and safe. This global, one big house for all, is going to crumble because of too many different ideologies. We have to protect our own country from the greed of others too. Globalism will see strong countries eat up smaller ones. We will turn into a world of mutts instead of unique diversified peoples.

  17. Technically, Banks & Oil Companies are a BASIC Necessity in this day & age. Unless you're stinking rich and can afford to buy luxurious houses, cars, business', or whatever, you NEED a bank to keep your money in, (or do you keep it in your mattress ?) But all the people that can't, they HAVE to get a loan. And to pay off that 'loan', how do they get to work ?
    WALK, CYCLE ? NO, they HAVE to use some sort of vehicular transportation, (bus transit, taxi, or even car-pooling). Getting back to banks, "Why do they charge you a 'Fee' to keep your money in their bank and to use Interac ?" For a 'Bank Tax', what they're saying is….MORE COMMUNISTIC CAPITALISM ! Anybody agree ?

  18. Harper et al dance the dance of the seven veils by donning them. There is no chance of this bank tax going ahead. Easier to defeat a bogey man who does not exist and claim great moral victory and world power and influence because of it than deal with real issues that threaten 1000 years of human evolution to liberal democracy such as the torture of foreigners by ourselves or others.

  19. The TheoCon windbags insist that Canada should go it alone and ignore their "good citizenship" within the larger global markets. Precisely what nailed the coffin of the Sept. '08 meltdown.

    This arrogant denial of the reality that Canada is a member of the GLobal Village and as such much contribute equally is anathema to these short-sighted neanderthals who've diminished Parliamentary Democracy in this country steadily for the past 4 years–having destroyed most institutions by stealth and increment until Canada becomes unrecognizable….but a shadow copy of a Bush-league ideology long ago bankrupt.

    I wonder if the theocons will change their shortsighted, meanspirited approach before the Battle of Armageddon!

    Lord please help us endure the Republican Party of Canada…and eventually defeat its demonic transplant of foreign values. Amen.

    God save Canada!

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