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Obama's New Bank Tax

Today the Obama administration unveils a new tax on large banks. It's the (partial) answer to a policy dilemma and a political dilemma that were dying to be solved together.

The policy dilemma is that the administration is having trouble crafting a long-term fix to the financial crisis. Large financial institutions have an inherent tendency to threaten the entire economy. Those institutions know that if they make huge risky investments, they get to keep all the upside if they pay off. If they lose, then the whole institution would go down, which means the government has to step in to bail them out or else the economy will face a massive crisis. In turn, the knowledge that the government is implicitly backing these risks gives the big firms a leg up over the smaller ones, which aren't too big to fail and lack the same guarantee.

The administration is trying to craft a regulatory fix to limit the amount of risk exposure the large financial institutions can undertake. But, of course, those institutions have a lot of clout on Capitol Hill -- especially but not exclusively with Republicans and moderate Democrats -- and the administration's plan is getting watered down and appears likely to come out too weak.

Meanwhile, a significant part of the administration's political problem is the perception that it's too close to banks and Wall Street. Obama has born the blunt of populist anger at Wall Street titans who destroyed the economy, got bailed out by taxpayers, and are now paying themselves enormous bonuses.

Levying a tax on those institutions helps alleviate both problems. As policy, the tax helps to level the playing field between large and small financial institutions, reducing the benefit of being "too big to fail." (It doesn't go nearly far enough, but it does advance the cause.) As politics, it puts the administration back on the opposite side of the Wall Street bad guys. And it exposes the Republicans, who have indulged in a lot of anti-Wall Street rhetoric that they've had no intention of backing up with any policy substance.

Thus far the Wall Street bad guys are playing their part. " Using tax policy to punish people is a bad idea," complains J.P. Morgan Chase Chief Executive James Dimon. (In reality, it's more like a user fee to pay for a government benefit, but please -- whine away, Mr. Dimon.)

And the Republicans are playing their assigned role, too. Their ideology and donor base won't allow them to support a new tax on banks. The usual play for Republicans is to portray such measures as a tax on regular people. That's what they're doing so far:

Rep. Scott Garrett (R., N.J.) has said any tax or fee could hinder the economic recovery and further limit the industry's ability to extend more loans. Mr. Dimon, when asked how any tax could be felt by consumers, said "all businesses tend to pass their costs on to their customers."

"How you are going to tax banks and expect them to lend more is frankly lunacy," said Rep. Jeb Hensarling (R., Texas).

I don't see this working. Obama's frame -- it's a "financial crisis responsibility fee" -- seems awfully powerful. Barney Frank, unsurprisingly, got off a bon mot:

 [Frank] also played down concerns that talent would leave the industry.

"I don't know where people would go for comparable salaries," Frank said. "I guess perhaps they could star in major motion pictures."