Europe's "Financial Transactions Tax" In One Easy Lesson

So Angela Sarkozy and Nicholas Merkel pow-wowed today in order to save Europe. What they came up with was a plan to support the European banking system, which, as we all know faces a potential crisis due to lack of capital to absorb loses on sovereign debt holdings. So Sarkel and Merkozy have proposed a tax on financial transactions in order to fund ongoing support of the banking system. This proposal follows an economic logic that, while not pioneered here, was recently tried here in the United States. Here's how it goes, follow along: Banks need capital to survive. Banks conduct financial transactions. The government will tax financial transactions, taking money that would otherwise remain in the banking system as capital. When the banks need additional capital for survival, the government will return the money they took. Viola!

Actually here is how it really works: Banks need capital to survive. Banks conduct financial transactions. Some banks will act smart and some will not, the consequences of which are unknown, unpredictable and out of governments' control. The government will tax financial transactions, taking money that would otherwise remain in the banking system as capital. When the banks need additional capital for survival, the government will return the money they took in such a way that they can control so as to reward their friends and constituencies. Viola!