Skip to content

Why not tax the bond holders?

There are very few winners in this crisis but there remains nevertheless, one set of untouchables that benefit disproportionately from government bailouts.  They are moreover, neither innocent nor ignorant – the bondholders.   Atavistic memories about the old crime of usury creep into consciousness.  Were there wise economic reasons  for the Jubilee Years of the old testament requiring the forgiveness of  debt and redistribution of rented land every 50 years?  What has the Catholic and other Christian Churches to say about who should help pay for the current financial crisis?  Surely, the current bondholders can be accused of charging ‘unjust interest’ that is still disallowed under Christian ethics.   We know where the Islamic religion stands – no backsliding there on the prohibition on the charging of any interest.  Can we insist that the usurers share the pain?  Justin Fox explains why this is might be difficult.

The Great Bond Bailout, By Justin Fox @ Time News, Thursday, Mar. 12, 2009

But banks also borrow on wholesale markets, mainly by issuing bonds. About $2.6 trillion of bank funding in the U.S., 20% of the total, comes from such debt securities, according to the FDIC. At the most troubled of the big banks, Citigroup, the figure is 27%. (Citi’s domestic depositors account for just 16% — its main deposit base is overseas.) These bank bonds are mostly in the hands of large, sophisticated institutional investors — pension funds, insurance companies, mutual funds. It may be too much to ask small depositors to monitor the risks at the banks where they put their money and pay for getting it wrong. But these bond buyers are pros. If there is to be any market discipline of risk-taking by banks, bond investors ought to be the ones who enforce it by withholding their cash from the bad apples — and paying the price for misjudgments. Plus, a few concessions from creditors could ease the burden on taxpayers dramatically. If Citi’s $486 billion in wholesale debt were converted into common shares — admittedly a pretty extreme solution — the company’s balance-sheet woes would evaporate. Which is why these arguments have been gaining in popularity. “I think it’s very important that the creditors in this crisis take a hit,” said New York University finance professor Matthew Richardson at an NYU conference in March. “We need to try to transfer some of the risk from taxpayers to the financial system.”

Posted in News, Site Value Tax.

Tagged with , , , , , .

One Response

Stay in touch with the conversation, subscribe to the RSS feed for comments on this post.

Continuing the Discussion

  1. We are not alone! - Smart Taxes Network linked to this post on April 29, 2009

    […] Taxes has wondered about their apparent immunity to blame and pain before but we feared were missing something.  Not so.  The dam has burst – let the torrent […]