Accounting 101 and the New Bank Tax

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4 Responses

  1. That is an odd definition.

    I’m not familiar with the contours of the proposal, but I wonder, do they mean equity in the colloquial sense of aggregate stock value?

  2. Lawrence Cunningham says:

    Kaimi–Thanks and interesting possibility, so creating incentives to boost stock market capitalization, though perhaps fraught with peril!

  3. Kaimi says:

    I haven’t followed the details; it just seems like that would be one politically popular approach. There were frequent media discussions of the ways in which high leverage contributed to the financial crisis. I saw the definition you mention in the post, and I wondered if this was a political statement: “We will tax the Bear Stearns’s of the world if they make $400 billion bets with money they don’t have.”

    It doesn’t really make much policy sense (if we’re worried about risk and leverage, why impose a tax rather than a higher reserve requirement?), but it puts money in the coffers, and it also castigates the bad actors at Bear Stearns (boo! hiss!), both of which would be likely to be play very well with voters.

  4. Ken Rhodes says:

    I suspect the formulation means “equity” in the traditional accounting sense. Yes, that would simply invert the normal computation sequence, but think how much easier it would be to do that calculation, instead of having to examine the books to determine which “liabilities” should count.

    Also, if there is a tendency for the “bad actors” to inflate their reported assets, thus justifying more loans and/or speculative “investments,” this formulation would be a strong incentive for more honest accounting.