As Shout Bits predicted in May 2009, the Obama Administration has no intention of letting US banks simply repay their bailout loans with interest. This week, Pres. Obama proposed a new 0.15% tax on uninsured liabilities for the largest banks. Aside from essentially adding 15 basis points to most mid-sized commercial loans over the next decade, the Obama tax simply proves that his motivations are purely political.

For starters, consider for whom the new tax does not apply: GM and Fannie Mae. Most TARP beneficiaries are well on their way to repaying their loans, and the TARP program has accrued something like a $50bln profit so far. While banks like BofA are executing their plans to get out of the government’s clutches, GM and Fannie have done nothing. GM and Fannie are comfortable being financed by a fawning government that will never call in their debts.

Obama tried mightily to prevent large banks from repaying their TARP funds by arbitrarily increasing their capital reserve requirements in the event of TARP repayment. Despite this, most banks decided that raising the extra equity capital was worth it so they could run their businesses as they see fit. Drawing from the Democrats’ one tool bag, taxes, Obama won’t let them off the hook. Obama wants a ten year (i.e. permanent) tax to punish the successful and favor the politically connected.

Lest anyone think the new tax will somehow correct whatever role big banks played in the financial crisis, take a deep breath. As everyone should know, businesses charge the market rate for their products. If every large US bank’s cost of funds goes up by 15BP, then loan interest rates must go up by the same. That is, except for very large borrowers that can get their foreign capital requirements from offshore sources like HSBC. Their cost of money will not go up. This will also have the effect of diverting capital offshore in general, where the .15% tax would not apply. So, Obama’s tax would benefit his big business allies like GM at the expense of their smaller competitors who can’t jet to Hong Kong to close a loan.

In the real world outside of Washington, capital flows to benefit the successful, while failed business models die off quickly. Of course Obama does not care about free markets, and is doing his best to eliminate them. In Obama’s world, every lever of power must pass through Washington. At the risk of hyperbole, the future of the US’s capitalist based prosperity rests on reigning in Obama’s ever more disgusting spread of government evil.