"The Obama administration has altered its approach to recouping bailout funds from the financial industry, after objections that its previous concept—a fixed-rate tax on bank liabilities—could harm the market for U.S. Treasuries and other safe investments. Treasury Secretary Timothy Geithner, in a Tuesday appearance before the Senate Finance Committee, outlined a tax that would apply to assets on a firm's balance sheet, with riskier investments having higher taxes," reports the Wall Street Journal.
This tax on risk is itself a risky endeavor, because it necessarily involves the government judging what's risky, and what's not, a judgment that might be wrong. Remember, a couple of years ago, everyone thought AAA-rated mortgage-backed securities weren't risky -- and that's a part of why so many banks had so much of them on their balance sheets -- but they turned out to be more risky than people thought. Now the Wall Street Journal touts U.S. Treasuries as "safe," but they could lose a lot of their real value in a period of hyperinflation, and some investors are shorting treasuries the same way that others were shorting the housing market a couple of years ago.
Judging risk is a core function of banking. Mr. Geithner's move both betrays his real priorities -- keeping it easy for the American government to keep borrowing at low interest rates to finance deficit spending -- and risks shifting responsibility for risk assessment and control to the government and away from bankers.
People will say that because the government will end up bailing out failing banks anyway, the government may as well have a role up front in managing risk. And people will say that the government already is supposed to be keeping an eye on bank risk. But the financial reform is supposed to prevent the need for bank bailouts, not institutionalize the practice and make it normative. And if the government was supposed to have been keeping an eye on bank risk already, aren't the events of the past couple years an indication that it doesn't do that good a job of it?