IMF/World Bank

Is the IMF’s proposed bank tax a good idea?

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.

Inefficient markets

Doha derailed — who to blame?
So much for the lofty rhetoric about freeing trade and aiding development; when it came to the crunch, governments instead bowed to corporate protectionism. Thus the Doha round — launched after 9/11 as WTO members rallied around America in a show of unity — has collapsed in acrimony, with most blaming the US for its demise. This is not fair. America was guilty mainly of being too ambitious: it offered to prune its agricultural subsidies if others sheared their farm tariffs, but India and the EU refused.

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Fantasyland for the Fund

As I explained in a recent post, the notion that the IMF can act as a global economic policeman is pure fantasy. But that won’t stop the Fund from trying. It is sending crack teams to the US, the eurozone, Japan, China and Saudi Arabia to examine how their economies contribute to the worrying global trade and currency imbalances. The IMF will then suggest how governments should change their policies to reduce the imbalances while supporting economic growth. And then?

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The IMF lacks the teeth to be an effective watchdog

If you believe the hype in today’s Guardian and FT,
leading governments achieved "a breakthrough in the governance of the
global economy" over the weekend, transforming the International
Monetary Fund into a "world economic watchdog". Larry Elliott’s
ebullience can be explained by his closeness to the UK Chancellor, Gordon Brown, who
happens to chair the IMF’s key policy making committee, while the FT is
adopting an increasingly tabloid style to sex up its financial
coverage. But in fact, what was decided at the weekend was pretty
modest.

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Listening banks

The protesters who make a habit of disrupting big international financial gatherings have wrought at least one desirable change. The sprawling annual meetings of the IMF and the World Bank have been slimmed down this September. But this gesture of modesty has not silenced the critics. The global financial establishment is under unprecedented attack-not just for the alleged harm it causes, but for its perceived lack of legitimacy.

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