Depressionomics

Ministers are planning a windfall tax raid on banks. What?!

Let's put this in context. Banks are expected to have much higher capital ratios (knee-jerk reaction from the regulator) so are trying to build them up, with low interest rates (so no-one wants to save money to build them up) yet are still expected to lend out money.

So acting in a government-like way, you could say, they also plan a huge tax on profits. This will only have the effect of delaying any recovery. The financial services sector is the bedrock of our economy; if we hold it down, we won't recover. Additionally this tax will hit the banks that made profit and generally weren't bailed out - Lloyds et al made losses and won't suffer. Rewarding failure anyone?

It doesn't inspire anyone with any confidence, in two ways - will banks be able to hold up their capital ratios in the future to be able to lend? How? And as well as this, another policy clash shows no sign of direction from the government. It's just a populist, knee-jerk measure. They are trying to win an election (or minimise their losses), not create growth in the economy.

Not only is this a stupid proposal, but it also extends the idea that bankers are totally to blame for this - ignoring the real problems - too low interest rates and too loose credit suddenly tightened to very high interest rates and tight credit, coupled with the hopeless FSA who didn't enforce capital ratios during the boom and pushed them up far too high in the bust. Government was the primary cause of this crash, not the bankers - they were just doing their job in the conditions available.

And wouldn't a windfall tax on profits make bankers pay themselves higher bonuses, in order to reduce the overall profit level? I'm sure this government could come up with another stealth tax though.

John Redwood called it putting one foot on the accelerator and one foot on the brake; now the government is planning to pull up the handbrake too.