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Posts Tagged ‘Property Rights’

Banking by corporations and limited liability companies is not essential to free markets. Like bankruptcy, all of these arrangements involve shifting some of the harm caused by risk-takers onto those who did not take the risks. There may be good reasons to socialize (i.e,. disperse) risk. People may be improvident or need some paternalistic guidance. A certain amount of risk-taking perhaps should be subsidized, i.e., venture capital, homesteading. But there are other means to amass capital and spread risk–not least debt obligations and insurance respectively–without shielding decisionmakers from personal liability to creditors and others in the case of civil offenses and breached contracts. The possible value of tying corporate decisionmakers and stockholders to the downside of corporate risk-taking should be obvious, considering the heads-I-win-tales-you-lose mess we’ve gotten into under the influences of many factors that have spread risk: limited liability, financial engineering, leverage, and the ethos that on the downside these firms (and investors in the same) are simply too big to fail. I wrote something about this many years ago along these lines here and Hillaire Belloc, to his credit, long ago distinguished between the character of real property and the “paper wealth” with which it shares so little in common as far as social benefits goes. Conservatives who are found of free markets should be rethinking their attitudes towards banking, corporations, and the combination of loose money and weak regulation we’ve recently experienced.

An interesting symposium at the liberal-leaning American Prospect discussed the problems of risk, particularly risk with public consequences. It offered an interesting defense of the welfare state along the same lines as the bailouts; namely, that it frees people up to take certain risks. Of course, like FDIC insurance, bailouts, and bankruptcy, that’s part of the problem when it becomes too generous.

The polymath Richard Posner weighs in, concluding that sensible bank regulation failed, and combined with easy money this brought about the recent crisis:

Finally, let’s place the blame where it belongs. Not on the bankers, who are not responsible for assuring economic stability, but on the government officials who had that responsibility and failed to discharge it. They failed even to develop contingency plans to deal with what everyone knew could happen in a context of escalating housing prices (it had happened in Japan in the late 1980s and the 1990s). Lacking such plans, the government responded to the crisis with spasmodic improvisations, amplifying uncertainty and mistrust and thus retarding recovery.

And let’s not forget to apportion some of the blame to the influential economists who assured us that there could never be another depression. They argued that in the face of a recession the Federal Reserve had only to reduce interest rates and flood the banks with money and all would be well. If only.

Finally, in a tour de force, Allan Meltzer eviscerates the continuing inflationary practices of the unholy triumverate of Obama, Geithner, and Bernanke, viz.:

IN the 1970s, with inflation rising, I often described the Federal Reserve as knowing only two speeds: too fast and too slow. At the time, the Fed’s idea was to combat recession by promoting expansion, printing money and making it easier for businesses and households to borrow — and worry only later about the inflation that resulted. That strategy produced a sorry decade of slow productivity growth, rising unemployment and, yes, rising inflation. If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflationary years.

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Just as we don’t allow strangers to take out life insurance policies on those to whom they have no real relationship, it would be appropriate to scale back the huge credit-default-swap markets to those who are actually parties to the underlying transactions. What has happened instead is that a secondary markets many times bigger than the real markets purported to be insured have developed, creating paper obligations and exposure greater than the entire world economy. George Soros opines on this matter sensibly in yesterday’s Wall Street Journal, suggesting that until this is resolved and CDS is brought down to earth, the threats of “systemic risk” will remain from this newfangled financial instrument.

Along these lines, Hernando de Soto suggests that clear property rights are important to avoid fraud and the lack of transparency in commercial paper markets, and that some public registry of various paper assets (much like UCC or real property registries in US states) would smooth out some of the confusion generated by MBS and ABS assets. His analysis makes a great deal of sense since some MBS holders, it turns out, do not have clear title to the security, can’t easily identify and examine the collateral their paper is putatively secured by.

Sadly, our political class is more interested in peacocking about bonuses, when the real problem has been the decoupling of Wall Street’s activity from generating productive economic assets, its penchant for creating impossible-to-value byzantinely-complex financial instruments, and the perverse incentives from the combination of loose money and accounting rules that allow banks and bankers to get paid today while shift the cost to others (lately the taxpayers) tomorrow. Some attempts to reduce the scale, increase the transparency, and align incentives in the financial industry more closely with the public good would make a great deal of sense. Outright attacks on property, pay, and the basic profit motive, of course, are very dangerous and hurt the most productive classes and productive corners of the economy in general, most of whom work far from Wall Street.

So long as Obama, the Congress, and various interests aim to switch rules in midstream and threaten to micromanage every aspect of business, nothing done to reform and recapitalize banks will work, because these efforts will be eclipsed by the infinte costs imposed on potential borrowers in the form of uncertaity, redistribution, and the anti-productivity pet issues (like capping carbon emissions) of Obama and the far left.

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