James Pethokoukis

American unions. Democrats, anti-globalization wreckers and British regulators may love the idea of financial transaction, or Tobin, taxes, but not me. Here is why (some of these points came from a great article by  Dan Matthison of Credit Suisse):

1)  Even a 0.10 percent tax would double the cost of US stock trading where the average commission cost is just under a dime. Welcome back to the pre-Internet early 1990s.

2) It would reduce market volumes and make the equity market less attractive. Kind of dumb thing to do in a time of constrained credit markets where it is tough to raise money.

3) That supposed $100 billion-$150 billion in revenue wouldn’t appear out of thin air. It would come from investment firms who would pass along costs to customers.

4) It would drive trading activity to less costly trading centers, such as the Toronto Stock Exchange (at least if we are talking about the US). Goodbye US jobs.

5) It is a solution in search of a problem. Trading didn’t cause the financial crisis. What did? As William Beuiter puts it:

The financial sector is too big throughout the overdeveloped world in part because much of it enjoys a free state guarantee against default on its unsecured debt. Retail deposits are explicitly insured, but at premiums that imply a taxpayer subsidy. Other counterparties of banks and other systemically important financial institutions also benefit from implicit default guarantees. The cost of capital to the banking sector is subsidised, causing the sector to be too large.

6) We are already going to raise cap gains taxes here in the US. A Tobin tax seems like piling on given the huge losses folks have suffered in their portfolios.

Bottom line: Tobin taxes were hijacked by anti-globalists (James Tobin himself says so) who view capitalism and the financial sectors as a leeches on the “real” economy and destructive to developing nations. (I wonder if China agrees?) Today, they are pushed by folks who are looking for a way to raise taxes in a politically palatable way. Just like instead of raising healthcare taxes in the US, we might raise taxes on healthcare insurance companies — who would then pass along the costs. Phony.

It certainly looks as if Senator Chris Dodd, at least, isn’t too big too fail. The powerful Connecticut Democrat and chairman of the Banking Committee trails his likely 2010 Republican opponent by nearly 10 points in polls and can’t even crack the 40 percent level, an ominous sign for an incumbent.

While history hints that next year should be tough anyway for Democrats like Dodd — the president’s party has lost an average of four Senate seats during midterms since the 1940s — the five-term lawmaker has plenty of troubles of his own.

There are questions about the circumstances surrounding his purchase of a pricey “cottage” in Ireland. And Dodd was only recently cleared of accusations that his mortgages from Countrywide Financial broke Senate gift rules.  Indeed, a Quinnipiac poll found that just 35 percent of those surveyed believe Dodd to be honest and trustworthy.

But it’s Dodd’s role as Banking Committee chairman that may be his biggest problem. The position continues to link him to the financial meltdown, which has made virtually all incumbent politicians look feckless.  Not all incumbent politicians, however, have been the biggest recipient of campaign cash over the past two decades from Fannie Mae and Freddie Mac. Those would be the same failed mortgage giants whom Dodd called “fundamentally strong” just before their government bailout and takeover.

So it’s no surprise that Dodd is thought to be leaning toward giving up the chairmanship of the Banking Committee for that of the Health Committee, formerly run by the late Edward Kennedy.  Though being closely linked to that issue is hardly without risks — just ask all the Democrats who got the boot in the 1994 midterm elections — at least it’s something that average voters can easily relate to. Most Americans probably don’t dwell much on which government agency should monitor systemic risk.

But the departure of Dodd from Banking would be a real loss, if for no other reason than he is dubious about making the Federal Reserve the super-regulator of the American financial system. (His likely successor, Tim Johnson of South Dakota, is an unknown quantity.)  Earlier this summer, Dodd told Reuters that “those who are advocating the Fed’s role in all of this as a systemic risk regulator ought to be prepared to then concede a good chunk of independence of the Federal Reserve. I think that poses some serious issues.”

Indeed, it does. The more the Fed is involved in the regulatory process, the more it will be open to political scrutiny, since regulation creates winners and losers — both of whom probably have political action committees and Washington lobbyists.

As it is, the Fed has been in the congressional cross-hairs as never before because of its efforts to stabilize the credit markets and U.S. economy.  Witness, for instance, the hammering Fed Chairman Ben Bernanke took from a House panel concerning his role in the Bank of America-Merrill Lynch merger.  And then there’s the effort, one gaining momentum, to audit the Fed. That could open the central bank to far more intrusive congressional critiques of monetary policy.

It’s also worth mentioning that the Fed, despite its reputation as a regulator extraordinaire, has a poor track record at dealing with systemic risk, or even identifying it in a timely manner.  As noted Fed historian Allan Meltzer told a House panel in July, “I do not know of any clear examples in which the Federal Reserve acted in advance to head off a crisis or a series of banking or financial failures.”

Dodd, for now, appears to be cooking up his own approach, creating a U.S. version of the Financial Services Authority of Britain, that would actually strip the Fed of its regulatory portfolio.  Of course, a new regulator might not be any more prescient or proactive than the existing ones. But at least it wouldn’t compromise the independence of America’s central bank in the process.

What is POTUS going to say that is any different, really. The risk of the Tune Out factor is growing. This, from a pro-ObamaCare blogger:

The problem is – Obama has already been specific about nearly all of this — frequently! The 8 insurance regulations he favors are not only in both bills, they’ve been the centerpiece of the “Health Insurance Reform” attempt at rebranding in August. Obama has already specified his preferred way of paying for reform — a cap on charitable deductions for those making over $250,000. And he spent an entire presidential campaign saying that he didn’t want to raise taxes on those making less than $250,000. None of these items are particularly suspenseful, and it would indeed be a surprise if he deviated from what’s been his normal script.

Granted, he hasn’t before specified the level of subsidies he wants to give to the uninsured. But if it’s 400% of the federal poverty line ($88,000 for a family of 4), it’s no surprise as both the House and the Senate Health, Education, Labor and Pensions Committee provide subsidies to that level. If it’s less than that – say the 300% that the Senate Finance Committee is rumored to be toying with – then it would be a surprise. It would also be a bad policy concession.

An interesting bit from the WSJ:

Dave Anderson, chief financial officer of Honeywell International Inc., said the stimulus package actually froze business activity at first as firms tried to figure out how they could benefit from the government spending. The $787 billion package “created actually a slowdown in order activity in terms of the flow that we would normally have anticipated,” Mr. Anderson said at a conference sponsored by Morgan Stanley. “We anticipate that that’s going to actually pick up in the second half of the year. I think it’s not unreasonable to see several hundred million dollars of orders.

Me: This sounds similar to what seems to happen when cutting taxes. If the start date is a ways off, economic activity is delayed.

Former Bush White House economist Keith Hennessey lays some odds on how healthcare reform will proceed from here:

I see five possible paths for the President and Democratic Congressional leaders.  I will list them in the order in which I think they will be considered, and I will assign my subjective probabilities to each.

Cut a bipartisan deal on a comprehensive bill with 3 Senate Republicans, leading to a law this year;  (10% chance)

Pass a partisan bill through the regular Senate process with 59 Senate Democrats + one Republican, leading to a law this year;  (10% chance)

Pass a partisan bill through the reconciliation process with 50 of 59 Senate Democrats, leading to a law this year;  (25% chance)

Fall back to a much more limited bill that becomes law this year;  (50% chance)

No bill becomes law this year. (5% chance)

And here is his bottom line:

You can’t make the insurance “reforms” work by themselves.  In addition, insurance reforms without the individual mandate would cause insurers to awaken from their confused slumber and enter the debate with vigor (in opposition). … For this reason, I think it’s easier to “build up” to a smaller bill.  There will clearly be a bipartisan consensus to increase Medicare spending on doctors (the so-called “doc fix”).  I will guess that this path leads to $100B — $200B of spending over 10 years:  more Medicare money for doctors, combined with expansions of Medicaid for the poor.  To offset the deficit effect, they would cut Medicare Advantage and nick at other Medicare providers, and maybe do some of the Kerry tax increase proposal.  This would be an “incremental” package that advocates would argue is a small step in the right direction.  I would oppose such a package, but it might be able to get 60 votes, and could almost certainly get the 50 votes needed through reconciliation, and without any significant procedural hurdles.  … This is what Democrats do when all else has failed, to make sure the President has something to sign.  It’s a failure path that they would unconvincingly argue is a first step toward a larger reform.