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By Philippe Legrain ADD COMMENTS

It is outrageous that governments bailed out failed banks. There were better alternatives. But given that mistake, it is understandable that governments – and taxpayers – want to get their money back.

The IMF has therefore proposed that G20 countries levy a tax on banks’ balance sheets, to pay for future bailouts or the recent one. It sounds appealing. And since finance is global, global action would certainly be more effective than different countries going their separate ways. But the big danger is that the tax – like an insurance premium – entrenches the idea that banks should be bailed out when they run into trouble.

That would be a huge mistake. It would encourage banks to continue to run huge risks, safe in the knowledge that tails they win, heads taxpayers lose. As I argue in much greater detail in Aftershock: Reshaping the World Economy After the Crisis, there is a better way to break up this racket.

  • Tighten and improve regulation.
  • Restructure banks so that they can be wound up quickly and safely if need be.
  • And break them up, to curb their monopoly profits and political power and ensure they are allowed to fail.

To its credit, the IMF acknowledges the need for governments to create effective mechanisms to wind banks up. But I doubt whether such a commitment can be credible unless banks’ financial and political clout is broken.

Posted 21 Apr 2010 in Blog

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