Harper's bank tax rejection harms international relations

In the midst of a world financial crisis, Prime Minister Stephen Harper has mounted an international campaign to thwart the efforts of European leaders to force major banks to take out -- and pay for -- compulsory bad loan insurance. The insurance principle that lies behind the European proposal is that in bad times, banks less affected by crisis, should shoulder responsibility along with those in trouble. Harper has decided to use his position as host of June's G8/G20 meetings to oppose prudent measures to restore some order to out-of-control banking practices. The prime minister's campaign is designed to sabotage proposals made by conservative leaders from France and Germany.

Both the U.S. and the new British government are considering introducing their own form of bank tax. Others think it would make more sense to first agree to a global levy. In Britain, a campaign favouring a Robin Hood tax on financial transactions is well underway. A financial transactions tax modeled on ideas first put forward by the late Yale economist James Tobin (often called the Tobin tax) was endorsed by outgoing Labour prime minister Gordon Brown.

A global bank tax assessed on bank balance sheet totals has been suggested by the IMF as one way of building a fund to insure the global banking system. Banks would pay so that money would be ready to help out institutions that got into trouble. The IMF has also called for a financial activities tax or FAT tax to be considered. Banks would pay a FAT tax on their profits, and on their salary and bonus payments.

Understandably, the FAT tax idea has wide political appeal. Higher bank taxes would act as a disincentive to sky high salaries and bonuses currently being paid, and return a greater percentage of financial profits to public treasuries hard hit by recession.

Not least, around the world, communities are tired of seeing banks being bailed out while people lose their homes. In the aftermath of the global meltdown in 2008-09, many banks have restored their profitability, while the unemployed have not been finding new jobs.

Harper is playing up to the big five Canadian chartered banks, which oppose the tax. Bay Street argues that since Canadian banks have not been losing money, they should not have to pay for insurance to cover the losses of other banks.

Having lobbied for years for the right to sell insurance, the Canadian banks should now show they do understand how insurance works. All must pay because no one institution can afford to cover the losses it might suffer. Bad loan losses can strike any institution, and it can take others down, forcing governments to mount costly ad hoc rescue operations.

The Canadian prime minister does not want to acknowledge how much better it would be for the world community if all the banks had to pay for the bailout when loans went bad. Currently, banks loans are effectively backed by central banks which are prepared to act as lenders-of-last-resort to national banks in difficulty. In other words, banks have direct access to national credit. Making them pay premiums to cover eventual bad debts, only recognizes the principle that all banks benefit from privileged status, not accorded to non-financial institutions.

Harper, ever the faux nationalist, is masquerading as a champion of Canada, when in fact he is denying the obvious financial problems that plague the world economy. Discussion of how issues that affect every country need to be addressed and acted upon by national leaders is what international summit diplomacy is all about.

Harper does not seem to realize that at the G8/G20 meetings he will chair in June he is expected to provide leadership. Instead, he is creating a diversion by talking about how the Canadian financial system is sound. The prime minister of Canada will welcome world leaders in Toronto and Muskoka with the message his government has no intention of pursuing a dialogue intended to address problems not experienced by Canadian banks. This must surely register as a new low for Canadian internationalism.

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