Dan and the editors have noted that the banks were not responsible for the losses on TARP (those would derive from AIG, the automakers, and the administration’s ill-advised foreclosure-mitigation plan). But even though most banks have repaid their TARP funds, TARP granted them a subsidy which they cannot repay, which is the subsidy of “too big to fail.” Creditors will plausibly assume that the government would backstop these banks again in the event of another crisis. That assumption will lower the banks’ borrowing costs and allow them to take more risks.

I think the rhetoric surrounding this tax is idiotic. (Will Fannie and Freddie also be required to pay this “Financial Crisis Responsibility Fee”? They certainly deserve the lion’s share of blame for the crisis.) But if revenues from the tax were walled off to fund a “systemic dissolution fund” along the lines of what Rep. Louis Gutierrez has proposed in the House (think of an FDIC for megabanks), it might be tolerable. If, however, the eventual legislation gave the administration the authority to allocate the money to its ever-expanding portfolio of domestic spending programs (as Obama has said he wants to do with the “leftover” TARP funds), I would oppose it.

The bank tax, by itself, would not discourage risk-taking or reduce moral hazard, but a dissolution authority could do that by giving policymakers a credible alternative to the open-ended, ad hoc bailouts we’ve sadly come to expect. It’s not ideal, but neither is federal deposit insurance. Ending “too big to fail” is going to require doing things that conservatives don’t like, because the ideal free-market solution — re-establish market discipline as a check on excessive risk – is both unlikely and partially beyond policymakers’ control. A large financial institution would have to default, and the government would have to let it go bankrupt. In a post-Lehman world, I just don’t see that happening.