Skip to main content

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions

eebc6a0046f86fa80bf7cb03_dr1189c.jpg

The False Promise of Crisis-Resolution Funds

Ever since financial markets began to stabilize late last year, the idea of making the financial sector pay for the costs incurred by taxpayers to keep it afloat has gained increasing support among policymakers and the wider public. But the idea of a resolution fund is at best a distraction – and at worst a harbinger of further financial instability.

ROME – Ever since financial markets began to stabilize late last year, the idea of making the financial sector pay for the costs incurred by taxpayers to keep it afloat has gained increasing support among policymakers and the wider public. France and the United Kingdom have introduced a temporary tax on financial-sector bonuses, and the United States government has proposed legislation envisaging a “financial crisis responsibility fee” to recover the costs of America’s Troubled Asset Relief Program. There is also a discussion about how best to reform taxation of the financial sector, which is on average lighter relative to other corporate income and unduly favors borrowing over equity financing.

But a lump-sum charge to recover past costs will not change the financial sector’s incentives concerning excessive risk-taking. Furthermore, it is unclear what, precisely, the costs are that are to be recovered.

While the direct fiscal costs of supporting the financial sector were 2.5-3% of GDP in developed countries (with peaks around 4.5%), the total fiscal impact of the crisis is much larger, amounting to the total expected increase in public debt – an estimated 40% of GDP. And even larger yet is the total cost suffered by the economy – including output and job losses, and the attendant destruction of material and immaterial capital, which, according to the Bank of England’s Andrew Haldane and others, could rise to a multiple of annual GDP.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

https://prosyn.org/VzhGqbT;
  1. marin8_Bernd von Jutrczenkapicture alliance via Getty Images_germanyfinanceminister Bernd von Jutrczenka/picture alliance via Getty Images

    Germany Can Reduce Its External Surplus

    Dalia Marin

    For years, Germany's ballooning current-account surplus has rankled the rest of the world, and German policymakers have thrown up their hands as if powerless to do anything about it. But the external imbalance is a result of policies that are fully within the government's power to change.

    0
  2. op_campanella7_Aurelien MeunierGetty Images_billgatesrichardbransonthumbsup Aurelien Meunier/Getty Images

    Abolish the Billionaires?

    Edoardo Campanella

    Even many of the wealthiest Americans would agree that the United States needs to overhaul its tax policies to restore a sense of social justice. But, notes Edoardo Campanella, Future of the World Fellow at IE University's Center for the Governance of Change, such reforms would not be enough to restart the engines of social mobility and promote greater equality of opportunity.

    11