It’s somewhat unusual for me to find anything palatable in the various economic offerings from the Democratic Party so when we do find one such let me praise it. And so we shall: Hillary Clinton’s proposal for a bank levy on the biggest of the Wall Street Banks is an excellent idea. No, not because it sticks it to The Man, not because Wall Street should get theirs and get it good. Rather because we’ve a macroeconomic problem here, one of systematic risk being posed by those very large banks. And the way to deal with such problems is through the use of a Pigou Tax. Which is just what is being proposed.

We might actually have something here which is both good economics and good politics. A rare combination that is.

Here’s one report on the matter:

In this she risks achieving little and, in some cases, causing harm. This is especially true for her two biggest and most interesting ideas — a so-called risk fee on the largest banks and a tax on high-speed traders.

The risk fee has been proposed before, including by President Barack Obama, and criticized as a bad idea. The fee is a surtax, essentially, levied according to a sliding scale of risk on institutions with more than $50 billion in assets.

Her aim is to make these too-big-to-fail banks think twice about using leverage, peddling derivatives, packaging subprime mortgages into bonds, and the like. The problem is that this annual fee would come out of a bank’s capital (money raised from the sale of stock and retained profits).

The complaint that the risk fee would come out of the bank’s capital is nonsense. Money is fungible: it would come from profits. Here’s the Clinton campaign site on it:

Impose a “risk fee” on the largest financial institutions. Dodd-Frank’s reforms and higher capital requirements on the largest banks are already helping address the problem of “Too Big to Fail.” But we need to go further to deal with the risk posed by size, leverage, and unstable short-term funding strategies.

Clinton would charge a graduated risk fee every year on the liabilities of banks with more than $50 billion in assets and other financial institutions that are designated by regulators for enhanced oversight. The fee rate would scale higher for firms with greater amounts of debt and riskier, short-term forms of debt—meaning that, as firms get bigger and riskier, the fee rate they face would grow in size. The fee would therefore discourage large financial institutions from relying on excessive leverage and the kinds of “hot” short-term money that proved particularly damaging during the crisis.[xii] Moreover, the strength of this deterrent would grow for firms with larger amounts of debt. The risk fee would not be applied to insured deposits and would therefore have no impact on traditional banking activities funded by insured deposits and equity capital.[xiii] In implementing the risk fee, Clinton would also call on regulators to impose higher capital requirements if she determines that such a step is a necessary complement to the fee.

The basic problem is that those very large banks pose systematic problems to the economy. If one of them were to fall over, go bankrupt, then we’d be looking at a repeat of the 2008 crisis, perhaps worse. We would not like that. In fact, we think that would be a bad idea. As a result of that everyone knows that none of those largest banks will in fact be allowed to go bust. They are, effectively, guaranteed by the Federal government.

Read the full article at Forbes.com: Hillary Clinton's Excellent Idea For A Wall Street Bank Levy