Comment & Debate
James Surowiecki. “The two worst arguments against the bank tax.” The New Yorker. January 15, 2010: “The second argument [against the bank tax] is even more dubious, namely that the tax will crimp lending. Jon Hilsenrath offers up a sophisticated version of this argument, saying that since banks need to increase liabilities to fund new loans, any tax on liabilities will also reduce the number of loans. Now, in the first place, it isn’t true that banks have to increase liabilities to fund new loans: they can also fund them by raising capital. In other words, instead of borrowing money that then re-lend, banks could raise money by selling equity, and then lend that out.
More concretely, Hilsenrath’s argument implies that the banks are currently lending to their full capacity, so that if they want to do any more lending they’d need to expand their liabilities, which the tax will discourage. But this isn’t even close to being true: banks currently have more than a trillion dollars in reserves, which is effectively cash just sitting in the bank. If they wanted to lend—and if there was sufficient demand for lending—they have more than enough capacity to do so without taking another dime in liabilities. In other words, the impact of this tax on lending will be, to the nearest approximation, zero.”