CEPR: Statement on President Obama’s Financial Crisis Responsibility Fee

baker_thumbnailFor Immediate Release: January 14, 2010

Washington, D.C.- Center for Economic and Policy Research Co- Director Dean Baker released the following statement on the Obama administration’s proposal to impose a fee on the financial institutions that received TARP funds.

Today, the White House announced a proposal to impose a Financial Crisis Responsibility Fee (FCRF) on the Wall Street firms that have benefited most from the TARP program. Now that executives of the too big to fail banks are again enjoying huge bonuses while the rest of the nation suffers through double-digit unemployment, the Obama administration is taking action against the banks whose reckless actions wreaked havoc on the U.S. economy. It is encouraging that the President is working to recoup taxpayer money far earlier than the 2013 deadline mandated in the TARP legislation.

While this proposal represents a step forward in getting the big banks to repay the American taxpayers, stronger action will be required to protect the economy from future abuses and recoup more of the public funds used to rescue a bloated financial sector.

In its proposed form, the FCRF would only be in place long enough to recoup the money lost through TARP. This means that the FCRF will not recoup money lost by Fannie Mae and Freddie Mac. Many of the losses incurred by these government sponsored enterprises (GSE)s (which could exceed $400 billion) likely came on mortgages purchased from banks after they were taken into conservatorship in September of 2008.

This means that Fannie and Freddie were losing money effectively doing exactly what the TARP program was originally intended for, buying up bad mortgages from banks. It would be reasonable to insist that the banks cover these losses as well.

The FCRF will also do little, if anything, to shrink the bloat in the financial sector. The financial sector has quadruped as a share of private sector GDP in the last three decades. In contrast to the FCRF, a financial transactions tax (FTT), along the lines recently introduced by representative Peter DeFazio in the House and Tom Harkin in the Senate, would go far towards reducing the volume of transactions that serve little or no productive purpose. Such a tax could also raise more than $100 billion annually, which would go far towards repairing the damage caused by this downturn.

The Obama administration’s proposal is a positive step toward holding the banks accountable for the damage that they have caused. However, it should not prevent the stronger actions needed to fully cover the cost of the damage and to restore efficiency to the financial sector.