President Obama has introduced a new tax on banks that apparently will be part of the new regulations being worked up by the Congress to control dealings in previosly unregulated financial instruments, i.e. derivatives, securitized debt, mortgage backed securities, you know, “toxic assets.” He says this tax will collect funds from the banks to pay for their “bail-out” last year. He means the TARP or Troubled Assets Relief Program put in place by the Bush administration in late 2008 and budgeted at $700 billion.

It may be worthwhile to compare the TARP plan with the American Recovery and Reinvestment Act of 2009 called for by President Obama and nicknamed the “Stimulus Plan” that was budgeted at $787 billion. The TARP plan was paid for with borrowed funds, not one cent of tax revenues. The Stimulus Plan is one third tax rebates and credits which come directly from tax revenues in the form of a loss in revenue. The rest of the Stimulus Plan is mostly transfer payments, e.g. extended unemployment benefits, added medical assistance for the unemployed, more food subsidies, which may or may not come from current revenue or borrowed funds since these are “fungible” monies.

The Feds have recaptured almost all of the funds expended under the TARP plan as well as billions of dollars in interest payments. There remains a block of “toxic assets” that are calculated to represent an exposure of less than $100 billion by late this year. In all probability the Feds will hold these for some time to come continuing to pay interest on the funds borrowed to purchase these.

None of the Stimulus funds will be recaptured, they are spent as tax concessions and rebates and transfer payments. To make a long story short, the TARP program will utimately cost the Feds $2-3 billion in interest on the funds borrowed to hold the remaining portfolio of “toxic assets.” The Stimulus Plan will cost the taxpayer the full amount of expended funds which to date amount to about $500 billion.

It would appear that President Obama seeks to tax the wrong party. The bank “bail-out” residual cost of maybe $2-3 billion in interest payments will be more than covered by the interest earned from TARP loans. The Stimulus Plan will cost substantially more and will be paid for by the taxpayers. Using Obama’s logic it would appear that it would be more appropriate to tax those benefiting from the Stimulus Plan than those rescued by the TARP.

Don’t get me wrong. I applauded both the TARP and the Stimulus plan as being the right responses at the right time to save our economy. I even predicted that the TARP would eventually be a net gain, not loss for Uncle Sam, which remains to be seen depending on what happens to GM, AIG, and the remaining Fed holding of “toxic assets.” I urged rapid expenditure of the Stimulus funds and still do since not all has been spent. But I do question the wisdom of putting a tax on banks to “pay back the public.” Sounds to me like an exercise in “populist politics.”