Johnny One Note's Last Refrain

House Minority Leader John Boehner and his GOP colleagues wrongly think tax breaks will fix this crisis.
House Minority Leader John Boehner and his GOP colleagues wrongly think tax breaks will fix this crisis. (By Brendan Smialowski -- Getty Images)
  Enlarge Photo    
By Steven Pearlstein
Saturday, September 27, 2008

If you worked at Saturday Night Live and had to construct a parody of what Republican wing nuts might come up with as a solution to the current financial crisis, you simply couldn't do better than the loopy plan served up by House Republicans this week.

Minority Leader John Boehner and his crew have never met a problem they think couldn't be solved by attracting private capital, and never met a dollar of private capital that couldn't be lured with a tax cut. So it should have been no surprise that they would try to use the same approach to plug the trillion dollar hole that's been blown in the American financial system.

That's right, my fellow Americans, we can lick this financial crisis just by offering an additional capital gains tax break to any investor or hedge fund that agrees to invest in a bank or Wall Street investment house. It seems the prospect of forfeiting a mere 15 percent on their investment profits to the government is what's discouraging investment in financial institutions, and not that mountain of bad loans and toxic securities that are weighing down their balance sheets. What exactly the optimal capital gains tax rate would be, Republicans aren't saying. But my suspicion is that, if they could have their way, they'd bring it down to zero.

Of course, every tax break for investors needs companion tax breaks for corporations, and our Republican friends have two in mind.

The first is one of those "carryback" provisions long favored by lobbyists for all ailing industries -- allowing companies to apply those massive losses from this year and next, and "apply" them to the massive profits made over the past five years, generating a humongous tax rebate. Just imagine it: Next April 15, checks for billions of dollars will go out from the U.S. Treasury to Citigroup, Morgan Stanley, Bank of America (Countrywide), J.P Morgan (Bear Stearns, WaMu) and the Swiss bankers of UBS and Credit Suisse. Think of it as a small token of our gratitude for having done so much to create and sustain our innovative and efficient financial system.

And while they're at it, Republicans aim to free up capital that is now "trapped" in such tax havens as Liechtenstein and the Cayman Islands by allowing hedge funds and big corporations to bring it home tax-free. As Republicans see it, that money will be plowed back into a financial system now starved for investment capital. Should they make any profit from those investments, they can stash it back in Liechtenstein and the Cayman Islands until the next financial crisis.

It is not just tax barriers, however, that prevent capital from flooding into the financial industry. No siree. According to Republicans, there are also those "burdensome" regulatory barriers, such as rules that prevent or discourage hedge funds, private-equity funds and sovereign wealth funds from gaining control of banks and regulated insurers.

Think about that for a moment. At a time when just about everyone else in the country, including top members of the Bush administration, have come to realize that overzealous deregulation led us to the current crisis, the top Republicans in the House of Representatives actually think the problem is that we haven't deregulated enough. And now they want to finish the job they started by enticing into the banking system a group of money managers who are renown not only for their determined secrecy and lack of transparency, but for taking on even more leverage and more risk.

In theory, there is merit in the other Republican idea of selling government-backed insurance for some of the mortgage-backed securities on the balance sheets of financial institutions -- the ones that are in such bad odor these days that the market is under-pricing them. By giving investors confidence that the securities will pay off in full, the market in these securities could recover and new capital could be attracted.

But wait -- government-backed insurance for mortgage securities? Haven't I heard of that idea before? Why of course, that's what Fannie Mae and Freddie Mac do -- the same Fannie and Freddie that this same group of Republicans has been trying to kill for more than a decade. Apparently Republicans have changed their minds just in the knick of time, since the government now owns them.

What we witnessed this week was the last death rattle of the Republican old guard in Congress, whose zealotry for tax cutting and deregulation, and whose hostility toward any government involvement in the economy, has now brought the global financial system to the brink of a meltdown. The ideas that brought them to power in 1994, while useful at the time, have since become so corrupt that they now are bankrupt -- intellectually, politically and morally. And though they may have succeeded in delaying passage for a day of a badly needed rescue for the financial system, they failed miserably in their ultimate goal of making themselves relevant again.

Steven Pearlstein can be reached

© 2008 The Washington Post Company