Financial Regulation

"There will be no more tax-funded bailouts, period."

Technically, barring something unanticipated, President Obama told the truth when he said this today. If he could have left it there, he could have remained in truth...alas, he could not:

"Because of this law, the American people will never be asked again to foot the bill for Wall Street's mistakes,"

See, this statement is patently untrue. Is it a lie - who knows? Whether it is deception or ignorance, it is a false statement.

In order to see why it is false, we must examine how the regulation intends to deal with the possible (likely) failures in the future. The plan, in short, is to charge a fee (tax) to the banks which will be placed in a fund (haha, yeah, right...like social security and the highway fund). The fund will be used to deal with any financial failures which occur.

Now here comes the unspoken truth: where does the money actually come from?

Well the banks and financial institutions, of course. Right?

Wrong!

Self-evident truth of economics #1: businesses pay no taxes (fees, assessments, tribute). Businesses only collect taxes (etc.).

The way it works is that a business intends to make a profit. Now, since in the most basic sense, profit exists only when revenue exceeds expenses, if a business' costs increase, in order to stay profitable, it will have to increase its prices. (Of course there are other factors which could prevent the price increase, but lets set that discussion aside for the moment.)

A bank is a business which is organized to make a profit, therefore, if the bank is taxed or charged a fee, it will pass that cost on to the customer through increased prices.

Thus, the bailouts of the future will still be paid for by the American people - there just won't be a TARP to act as a lightning rod for public scorn (at least not at first).

Oh, by the way, the price increases passed to the consumer will be regressive, that is, the extra costs will cause greater harm to those with the least assets. If you want to know how that works, ask me.

This is just one of the problems with this legislation, but let's save them for another day.