We have a new proposed tax, and here you can find a short commentary from many sources. I would like to approach the entire issue in a manner which is unconventional. We need to start with the new financial instruments somewhat laboriously called credit default Swaps. They were designed on a very basic level with the Intent to displace liability from the issuance of debt. They did this by selling the liability mixed within a lot of other debt liabilities, with an offered promise to the Purchasers of these Swaps that the liabilities were so mixed that a Profit was bound to be derived. Understand that this was all to escape from the potential loss of extending Credit. A secondary problem appeared when regulatory law was changed so that these Swaps could be considered as capital reserves when purchased from other banks. Soon there was overextension of debt, where the placement of liability was absent. Banks were soon assuming a central bank role of creating Money; the problem was this Money was not backed by either Government contract or asset assumption. All that was required was debtors not paying the contracted payments in large measure, and We had a wealth of Monopoly money.
We are currently attempting to find a solution saving Us from this overpopulation of Dollar bills. We are, almost more importantly, trying to forestall a repetition of the financial crisis We have just endured; something almost impossible to do because of the opposition of bankers dedicated to such a lucrative practice. The President has proposed a Tax, which will always be reduced to much below any level of impact reliable as an effective deterrent from effective practice. Obama has opted for a tax level which is ineffective from the Start, and destined to Sunset exactly when a need for restriction becomes pressing. A better methodology must be found.
My suggestion is that We revamp the entire process of capital reserves. These should be forwarded to the Fed as loans are actually issued; something about 8% of the total value of the loan. Interest will not be paid on these capital reserves, which will be used to purchase US Treasuries, and funds not returned to the issuance bank until the loan made has been repaid. The capital reserves will be forfeit if the loan fails of performance. The banks stand center-targeted in liability, credit default Swaps can still be entertained, and the Fed has a continuous, large capital reserve in it’s own right; by which it can handle any constituent elements for which they might have to pay. The entire issue of ‘too big to fail’ becomes irrelevant as We have acquired a capital reserve capable of matching the performance of the big banks. The lack of payment of Interest on the capital reserves by the Fed limits the Profits of the banks, and We do not have to intrude into the inner management of such banks. The sheer placement of funds, and controls of those funds, can often serve better than any form of micro-management. lgl