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In the new corporatism, where governments bail out banks and banks bail out the government, the question continuously arises: who’s the senior partner in the merger?

The government bailed out the banks, of course. The banks are now financing the deficits of governments. As I’ve documented elsewhere, the banks now are financing the government deficit. Give the banks free money and a steep yield curve, and they will borrow at close to zero and buy 2-year Treasury notes paying around 1% all day. The banks made the mistake of thinking their financial genius was the source of their profit; governments remind them that profits of this ilk are a gift from the government.

That is the nub of the latest flashes of genius from the International Monetary Fund:

April 21 (Bloomberg) — The International Monetary Fund is recommending the Group of 20 nations tax financial institutions’ non-deposit liabilities and the sum of profit and compensation to help pay for future bailouts of the industry.

The two levies, with those on liabilities taking priority, are part of a preliminary report the G-20 requested last year to review how the financial industry can help pay for government efforts to repair the banking system. While the IMF will deliver a final report to heads of state and government in June, France and the U.K. have already backed the idea of a tax on banks.

Rising government debt has replaced stress in the financial industry as the biggest threat to the global economy, the IMF said in its Global Financial Stability Report yesterday. Greece and Portugal, and Spain and Italy ‘‘to a lesser extent,” became the “main contributors to inter-sovereign risk transfer,” according to the report. Governments need “credible, medium- term” plans to reduce deficits and some nations need to do more to revive the flow of credit and boost growth, the IMF said.

Now, let me see–do I have enough fingers and toes to work this one out?–the governments are issuing gigantic amounts of debt to bail out the banks. The banks are making money levering up this debt, so it looks like there’s no more problem in the financial system. So to reduce the debt of governments, we should tax the banks’ balance sheet, which have ballooned as the banks bought government debt with zero-interest financing from the government, and made lots of profits…

Seems a cumbersome way to proceed. Why pay all these people to sit on a trading floor? It would be simpler to have the Treasury and Fed buy government securities back and forth from eath other at higher prices each time, booking a profit on the trade at each turn. In a few months, they would have so much profits that they could pay back the whole federal debt!

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