03.20.2013 2

How the government will steal your savings under Dodd-Frank

By Robert Romano — We are all Cypriots now.

The parliament of Cyprus has — for now — overwhelmingly rejected a €5.8 billion ($7.5 billion) tax on savings deposits that was being imposed by the European Union (EU) and the International Monetary Fund (IMF) to bail out banks that bet badly on Greek debt.

The decision leaves the bailout in doubt and if no other resolution can be found, could compel Cyprus to even drop the euro, sparking the start of a wider breakup of the Eurozone monetary union.

The tax itself would have totaled 32.4 percent of the country’s €17.88 billion ($23.15 billion) Gross Domestic Product (GDP). So it was hardly surprising that it was rejected.

The people of Cyprus care more about their life savings than propping up financial institutions that lost billions on poor investments in socialist governments’ debts. The idea that somehow they, and not the banks that made those decisions, should bear the brunt of those losses was always disconnected from reality.

Yet that is precisely the presumption the establishment has made — that rather than banks raising substantially more capital to address systemic risk, you and I should pay for bank bailouts — in response to the ongoing financial crisis that began in 2007, and has actually become the basis for such proposals considered all over the world, including the U.S.

In 2009, the G20 asked the International Monetary Fund (IMF) to come up with ways the financial sector might supposedly contribute to its own bailouts.

The IMF study released in 2010 essentially proposed two types of taxes: a levy on financial institutions to create a pool of bailout funds, and a financial transaction tax.

Interestingly, what the IMF came up with as a suggestion had already been implemented a few months earlier by the U.S. Congress in passing the Dodd-Frank so-called financial reform legislation.

Under Dodd-Frank, the Federal Deposit Insurance Corporation (FDIC) is allowed to charge assessments to about 60 bank-holding and insurance companies with $50 billion or more in assets to fund what is called an “orderly liquidation fund.” Really, it’s just a bailout fund allowing the government to take over systemically risky institutions, recapitalize them, and allow them to reenter the market under new management.

The law, as well as the IMF study, presumes that the financial sector will bear these costs. But as a Congressional Budget Office (CBO) analysis of a similar bank tax proposal by the Obama Administration at the time noted, “the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors, but the precise incidence among those groups is uncertain.”

Meaning, the assessments would actually be passed on to and paid for by savers and consumers of financial products through the indirect taxation of higher bank fees and other financial transaction costs. Americans for Limited Government warned lawmakers about just such an outcome prior to the legislation’s passage as an affront to private property rights.

Under Dodd-Frank, that can come in the form of fees for merely holding a checking or savings account. Such account fees are already being charged by many financial institutions and have in fact been increasing since the passage of Dodd-Frank, reports ABC News.

These fees are allowable and one might say encouraged under Dodd-Frank. In fact, the law grants the Federal Reserve broad rulemaking authority over fees imposed by financial institutions.

While on one hand this gives the central bank the power to limit the size of those fees, the same power could be used to lift limits on the fees and gouge depositors in the event of another major financial crisis.

Either way, to fund bank bailouts via the FDIC’s “orderly liquidation fund,” you and I are already paying taxes on our savings.

One might quibble with the notion that a fee imposed by a privately owned bank could ever be considered to be a tax. But if the purpose of the fee is to enable the financial institution to pay a government levy and to fulfill a regulatory requirement to bail out those same banks from their own poor investment choices, then what’s the difference?

In reality, the assessments imposed by Dodd-Frank on financial institutions to fund bailouts are even more sinister than an overt tax on savings to do the same. Such legislation if proposed would likely spark outrage in the public and easily be defeated in Congress. That is what makes this back-door approach to raising revenue preferable for all parties involved — except for the American people, that is.

It guarantees the banks will have sufficient ability to raise funds from their customers with government consent in order to bail themselves out. Meanwhile, the politicians get to avoid unpopular votes to stick taxpayers with the bill for those bailouts, and they can pretend they had nothing to do with the higher fees.

That is the difference between the U.S. experience and that of Cyprus. At least in Cyprus the people’s representatives there actually had an opportunity to vote against such a levy. Whereas here, those fees are and will continue to be imposed by the banks with the blessing of government agencies — all without any vote in Congress.

It may happen sooner than anyone realizes. U.S. financial institutions are said to have as much $641 billion of exposure to financial institutions in Portugal, Ireland, Italy, Greece and Spain (PIIGS) according to the Congressional Research Service.

Should the Eurozone really break apart, and U.S. banks are caught in the crossfire, with the American people suddenly paying exorbitant fees for the “privilege” of conducting business electronically, they can decide for themselves whether this was a good idea.

That is, for Congress to outsource and give unlimited grant of its taxing authority to faceless bureaucrats acting in concert with an international banking cartel with the goal of bailing itself out of its own foolishness.

Robert Romano is the Senior Editor of Americans for Limited Government.

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