Who Pays for Financial Reform?

| About: Financial Select (XLF)

First, since I know many are wondering, I wasn’t invited to today’s signing of the financial regulation reform legislation.

The President is speaking as I write this. Once again, he, as is the case with many others, is saying that bank failures put the burden on taxpayers. If he, and others, had attended the signing of reform legislation in the mid-1930s, they would realize that the Federal Deposit Insurance Corporation was formed to insure bank deposits. The FDIC’s insurance fund comes from premiums on banks, based on deposits. Since its inception, the FDIC has done a good job and its resolution of bank failures have all been funded from these premiums paid in by banks. The taxpayers, as taxpayers, have not lost a cent in the process over these many decades.

The FDIC is currently running a little short, and is borrowing to supplement its fund. This borrowing will be repaid from premiums paid by banks.

Unfortunately, bank bashing—including misrepresentations—has proven to be good politics. Hence, banks are blamed for the sins of nonbanks and Wall Street investment banks alike, the latter having been regulated by the SEC.

“Banks” and “Wall Street” are terms that are routinely used interchangeably by politically-motivated advocates, despite the fact that there are about 8,000 banks and thrifts serving their customers throughout the country. They, along with their big-city brothers and cousins, will have dramatically higher costs as a result of the huge—2300 pages—financial reform bill being celebrated today.

As I said in the past, banks don’t pay taxes; people pay taxes. The higher costs will have to be passed along to bank customers, and there may not be a direct correlation between the source of the higher costs and the services that will experience higher fees or interest rates. The incidence of the ultimate burden of more regulation is similar to the incidence of the ultimate burden of taxes that go by that name. It depends on the relative inelasticity of demand (insensitivity to price) for the various services.

One of the amazing things about the politics leading up to today’s signing is how important are different names for the same things. Some vowed to withhold their votes if certain “taxes” were included in the bill, while ignoring the fact that regulation itself involves higher costs to taxpayer / customers.

Disclosure: No positions

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