Battle4Liberty

There is a common misconception that CEOs are, by definition, capitalists. But this is not always the case. Executives—especially those in large firms—often welcome government intervention when it serves their own purposes. A recent example illustrates this principle well.

The CEOs of two large financial institutions—Deutche Bank and Barclays—recently announced support for a global bank levy to help cover the cost of any future “too big to fail” bank bailouts. Why would these executives support another tax? The answer is quite simple.

These executives are not being “socially responsible” by volunteering to pay more taxes. They are looking out for their own interests. Note that they are asking for a GLOBAL tax, which means no banks would be exempt based on nation. Everyone must pay, so no bank would get any cost advantage relative to any other. This means each bank could simply pass along the tax to its customers through higher fees of its own, knowing that its competitors must do the same. The net cost to the banks would be minimal, and its customers would pay the freight. Hence, they are really arguing for a tax on their customers.

But this is not the end of the story. In exchange for the tax, banks would obtain access to a rescue fund if they find themselves on the verge of bankruptcy. Such a plan actually encourages banks to make risky decisions without a fear of failure. Under such an arrangement, bank customers would finance a system that covers banks in the event that their risky decisions fail. All of this would be done in the name of stability and responsibility. No wonder bank executives are excited about this scheme.

There is a better approach. Banks should seek PRIVATE INSURANCE to cover their losses in the event of financial hardship. Private insurance companies would have a financial incentive to monitor bank activity more closely. A bank could disclose its private insurance to prospective customers, who would consider details of the arrangement and make informed banking decisions accordingly. In the end, only the most efficient approaches to limiting bank losses would survive. It is wasteful and counterproductive for governments to offer special protection to banks or other firms that are supposedly “too big to fail.” They should seek their own private protection—if they think they need it—and let their potential customers make their own decisions.

The truth is that corporate executives often act more like opportunists than capitalists. They appreciate free and unfettered access to markets and limited intervention while establishing their firms, but welcome government intervention that creates competitive barriers for up-and-coming rivals. We should not blindly support the interests of business per se. When executives stray from the tenets of capitalism, we must insist that they play fair. We should argue for liberty for buyers and sellers, and for the limited, rational governmental role in the process. Nobody should get special favors from the government.

Source: Financial Times, 30 January 2010 (page 1). “Bankers in favour of paying global tax.”