One test of how real this financial market crisis is to those markets, as well as a check on abuses arising from conducting such a massive bailout, would be to impose a Capital Security Tax to cover the bailout costs in full. Just as Social Security and unemployment taxes cover the costs of labor security, the Capital Security Tax should cover the costs of capital security. This tax could consist of taxes on capital gains and financial transactions, the rates determined by the funds needed for a Capital Security Tax Trust for current and likely future bailouts. In addition, firms using funds from Capital Security Tax Trust should be required to pay them back over time in the form a restitution surcharge, not unlike unemployment insurance paid by employers and workers.
A Capital Security Tax would keep inflation down by not increasing the national debt and encourage market regulation needed for more orderly financial markets, since orderly markets would mean a lower Capital Security Tax. It is obvious that, unless the financial crisis is paid for by the capital sector, the current crisis and bailout will be far more expensive, and yet another crisis and bailout is sure to follow. On the other hand, if the financial industry is made to bear the burden of this bailout, it is far more likely to be tightly managed and limited to essential institutional bailouts. The Capital Security Tax creates a built-in self-interest for adequate regulation and prudent management to keep the Capital Security Tax low and limit the need for future Capital Security Tax Trust funds.
The current financial crisis, while real, is limited, in that the triggering subprime mortgages are concentrated in a few markets (Florida, Texas, Arizona, Southern California, basically the Republican “New South”) and only a few large financial institutions that borrowed too much money to buy securities based on these mortgages. When an increasing portion of these mortgages defaulted and the value of real estate underwriting all mortgages dropped as the Federal Reserve raised interest rates, these financial institutions could not come up with the cash to cover the short fall, nor could AIG pay up on the investment insurance policies that were used to create the illusion of low risk.
While many ordinary people are hurting from a host of pressures increasing their impoverishment, mostly recreated by corporate policies, a vast majority (about 90%) of mortgages are being paid on time and almost all banks and insurance companies did not catastrophically overextend themselves. Of the remaining 10% of likely “bad” mortgages, at worst a considerable portion are salvageable by preventing lenders from burdening late payers with crippling fees and by adjusting loan terms with limited loss, with the remaining sadly going into foreclosure and likely bankruptcy, both well known and regulated processes. Instead, the current crisis arises because of the uncertainty about the extent of loses, which are likely limited but unknown, and the refusal of the wealthy and their institutions to risk their capital during this uncertainty. If the Capital Security Tax Trust is pledged to buy all defaulting mortgages and its funding is secured, then this uncertainty no longer exists.
If this is such a terrible crisis, is the financial community ready to pay a Capital Security Tax to help pay to fix it? If not, then perhaps this is not yet serious enough.
Unfortunately, the U.S. Congress is no more ready to pass a Capital Security Tax than they are to stay in session prior to the election to hold serious hearings and actually think about what they are doing. Instead, they will pretend to get tough about a host of red herrings such as executive pay and tax payer "participation", rather than address how the bailout is going to be paid for and who will benefit. As an alternative to a Capital Security Tax, they are going to do what they are told by the people who own them, which is to burden ordinary tax payers and their decedents with the huge bailout proposed by the Bush administration, increasing the national debt and reducing the willingness of foreign investors for finance that debt, with the bailout spinning out of control as it turns into the biggest Congressional pork barrel of all.
As an alternative to the Capital Security Tax, lets examine the elements of the current bailout “solution”:
~ The biggest debtor of all, the U.S. government, is going add to its over eleven trillion dollar debt to buy over one trillion dollars ($700-800b bank bailout, $200b for Fanny and Freddie, $85b AIG and $50b for money markets, etc.) in potentially bad debts from U.S. and foreign corporations to "save" the financial system. Clearly this is not a serious long term solution and the U.S. government’s creditors know it.