On Bank Profits, And The US Midterms
So far, the political response to excessive bank profits has held up a mirror to party identity. Labour thinks the level of bank profits is “open to question” but offers no action in response. National thinks the problem must lie with the state (not the banks), and wants to investigate the role of the Reserve Bank. The Greens say that the profits are excessive and its three options include a windfall tax. The ACT Party has said next to nothing, presumably because it believes profits can never be excessive.
When is profit excessive? Like pornography, you know it when you see it. Currently, the banking sector is on track to record $10 billion in annual profits, with individual banks each making $1-2 billion profits
per quarter. The banks have reaped the rewards of the government’s successful efforts (e.g. the wage subsidy scheme) to keep the economy relatively buoyant during the pandemic. Not only did those government schemes and capital injections save the banks from suffering the bad debts and mortgage defaults that they’d expected.
In addition, the Aussie-owned banks are also now in line to reap further profits from the Reserve Bank’s current efforts to curb the inflation that those initial Covid interventions inadvertently helped to generate. For months, the banks have been able to crank up their lending rates. They’ve also increased their profit margins.
In sum, Covid has been something of a joy ride for the banks. Not only were they cushioned from suffering the potential impact of the pandemic. They were also gratuitously invited on board to clip the ticket on the liquidity injected into the economy by a Reserve Bank and Treasury which could have chosen instead to handle that process strictly between themselves. Finally as indicated above, the Reserve Bank efforts to curb inflation have involved the jacking up of interest rates on bank lending.
In total, if this whole process doesn’t call for a windfall tax on excess profit, it's hard to know what on earth ever would. Plus… Keep in mind that the bank economists appear to be in agreement that curbing wage inflation will require an increase in unemployment. If so, the government will have to find the money from somewhere for the additional welfare payments this will involve. Why not get some of the money right now from the banks that routinely enjoy returns within New Zealand well in excess of what their parent banks earn on their home turf in Australia?
Much is made of the return on capital – said to be “only” 12-14% annually – as a measure of whether bank profits are excessive. Supposedly, this puts the banks on average in the middle of the pack of stock market returns. Well… Computing an “average” annual return on capital when behemoths like the banks are being placed on the same footing as medium size firms and speedy little start-ups (which can have firecracker initial gains) seems to be an entirely bogus exercise. The immense size of the banks makes a 12-14% return on capital socially intolerable.
Footnote One: In Britain, a Tory government is considering imposing a windfall tax on the excess profits that energy and oil companies are making from the Ukraine war. According to the BBC, the idea of a windfall tax is “to target firms lucky enough to benefit from something they were not responsible for - in other words, a windfall.” Exactly. The Covid response here– and this year’s cost of living inflationary surge that’s arisen partly because of the steps taken in 2020 to keep firms afloat and people in jobs – has been a windfall for the banks.
Ironically, if a National government with its “let it rip” attitude to Covid had been in power since 2020, the banks would have suffered worse bad debts and more mortgage defaults. They would almost certainly have made smaller profits than they have been enabled to do under a supposedly left wing government.
In Australia, even the conservative coalition led by Scott Morrison has imposed annual taxes on major banks, including the ones that dominate the banking system in this country. As Bernard Hickey has pointed out:
Australia imposed an annual 'Major Bank Levy' of 0.06% of the liabilities of banks with more than A$100 billion of assets in mid 2017, which included Commonwealth Bank (the owner of ASB), ANZ Bank, Westpac, National Australia Bank (the owner of BNZ) and Macquarie Bank. That extra tax on banks was imposed by a conservative Liberal-National Federal Government in July 2017 and is expected to raise A$1.85b per year by 2024/25.
If that can be done by a conservative government over there, why not by an allegedly progressive one right here?
Footnote Two: Labour is like a possum in the headlights when asked to take a progressive position on tax. It had a panic attack when confronted with a capital gains tax, a wealth tax, a GST exemption on fruit and vegetables and now, with calls for a windfall tax. Labour seems deathly afraid of being seen to be a “tax and spend” left wing government, and rather prides itself on being seen instead as an orthodox servant of capital. See how trustworthy we are!
Banks and supermarkets and other sectors that operate within a virtually captive market know they don’t have much to fear from a Labour government. And yet Labour still gets labelled as a tax and spend government by its opponents, regardless.
Victory for the midterm-inators
Ron Johnson is a Republican multi-millionaire from Wisconsin facing re-election to the US Senate. You might well ask: Why would anyone worried about the cost of living vote for Johnson, who wants people who buy private jets to be able to write them off as a tax break? Plus, Johnson wants to raise the Social Security entitlement age to 70. Meaning: many people who have worked all their lives in tough physical jobs and paid into Social Security will die before qualifying for it.
Oh, and Johnson is also a Christian who says God saved him from Covid, and since faith is more effective than vaccines, you should be relying on faith alone, too. Yet in a tight race with black Democratic candidate Mandela Barnes, Johnson has a 3.3% polling lead on the 538 polling website as of this morning.
By tomorrow NZ time, we will probably know whether the Republicans have won control of both the Senate and the House. It has been evident all year that the Democrats will lose the lower House but until very recently, the control of the Senate still looked like a tossup.
However, if the Republicans manage to win the Senate as well, President Joe Biden will be a virtual captive in the White House. Biden will be able to pass only legislation with the approval of a Republican Party still in thrall to Donald Trump. Even worse, the Republicans would be able to weaponise the debt ceiling, and force the administration to make cuts to Medicare and Social Security ( not Defence spending) in a newly found zeal for balancing the same books the Republicans were happy to see Trump blow out of the ater with his last round of tax cuts.
The Voting System
There are 100 or so members of the US Senate, two for each state. Weirdly, this means that Wyoming (population 578,803) enjoys as much clout when it comes to passing or blocking legislation as California, despite California having a population of 39.24 million. Currently, the voting in the Senate is split exactly 50/50, with vice-President Kamala Harris commonly casting the crucial vote that gets legislation passed. Regularly, even conservative Democratic senators (like West Virginia’s Joe Manchin) have been able to block Biden’s agenda.
Of the 35 Senate seats that are up for grabs in this week’s midterm elections, nine have been ranked by the non-partisan Cook Political Report as cliffhangers, or close to it. They include Republican-held states like Pennsylvania (a must-win for Democrats if they are to have any hope of retaining control of the Senate) and also Democratic-held seats like Nevada, Georgia and Arizona.
Losing in Georgia would be particularly galling for the Democrats, given the chasm in quality between the candidates. Raphael Warnock, the Democratic incumbent is an impressive community pastor with a track record of improving access to health and income support for the state’s needier residents. His opponent Herschel Walker is a famous former American football star whose past is marred by scandal – including allegations (which Walker denies) that he arranged abortions for two women he had impregnated, while publicly opposing abortion access for everyone else.
In addition, as Vox News has pointed out, Walker has had to field allegations of domestic violence, and scrutiny over how he’s mis-represented his business record and experience in law enforcement. Yet Walker has been strongly endorsed by Donald Trump. As of this morning, Walker has a 1% lead over Warnock in the polls.
In Arizona, the Democratic incumbent (and former Marine) Mark Kelly is 3% behind in the polls this morning. Kelly’s challenger is a venture capitalist called Blake Masters who has enjoyed significant campaign funding from the billionaire investor (and honorary New Zealand citizen) Peter Thiel. Thiel has also bankrolled the campaign of Hillbilly Elegy author J.D. Vance in the Ohio race. Vance leads in Ohio by 5.5% as of this morning.
Basically… The cost of living crisis and fears about crime seem to have overwhelmed the Democrats’ rallying calls to combat the Republicans who, if they prevail, will attack the remains of the abortion rights shredded by the Supreme Court. If the Republicans do prevail in both Houses, their dream of a nationwide federal ban on abortion (after 15 weeks) will be within reach. Republican senator Lindsey Graham already has a draft bill to that effect waiting in the wings.