Guido on ownership

Guido had a good post the other day commenting on how one of the main causes of the recent crisis was the change of ownership structure of the banks. For the majority of their history investment banks were partnerships with unlimited liability, compared to now when they are public listed, limited liability companies. As he puts it, flotation:

transferred all the risks from management partners to the firm’s shareholders who had no idea what risks were being taken. Now we have huge financial combines with managements incentivised to bet the shareholders capital big, win and get out with their annual bonus. If they lose, the shareholders lose, or if they lose really big the taxpayer eventually bails them out because they have retail banking High Street subsidiaries which democratic governments are terrified will be dragged under as well. Capitalism with the risk being taken with Other People’s Money has the same fundamental problem associated with socialist governments spending Other People’s Money. Why worry if it isn’t your money?

This is in keeping with one of the best books I have read this year, Alchemists of Loss by Kevin Dowd and Martin Hutchinson, who good things to say about the partnership model and how this kept banks ‘dull and respectable’. (a more in-depth review is on my to do list)

Certainly I’ve long had felt that the publicly traded company isn’t the best way to organise ownership of larger organisations, and that partnerships like John Lewis are much better (there is no better motive that being a stakeholder in an enterprise, again more thoughts on this warrant a more detailed post).

Only question is how could a move in this direction come about? One idea I’ve had is to have a lower rate of corporation tax for firms, say a 10% discount for firms that have 10% of stock owned by an employee trust, increasing by each extra percentage of shares owned by the staff.

What do you think? Is this something Libertarians could support?

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Tags:

Banks, Discussion points, Economics

Date:

November 8, 2011

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5 responses to “Guido on ownership”

Andrew Westlake

November 9, 2011 at 12:59 am

Real Libertarians do not support or endorse theft as a way to finance anything. The entire premis of your question is flawed.

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Mavis Stott

November 9, 2011 at 9:42 am

Saying ‘Real Libertarians’ = fail.

You don’t have the monopoly on what makes a ‘real’ libertarian.

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Simon Gibbs

November 9, 2011 at 10:23 am

Liability should be double the invested sum. Simple, and morally clean too because investment is a volitional act and companies are a legislative creature.

Corporation tax is indeed a reprehensible act of aggression (as income tax would be if the company did not exist) but is lowering it in certain circumstances a step in the right direction? It could be.

Also, there should be charities activily supporting creditors efforts to sue the directors of firms that go under in questionable circumstances.

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Andy Janes

November 9, 2011 at 8:29 pm

*sign*

leaving aside the issue of what a ‘real libertarian’ is, and what we might like to see in libertarianopia, given the world as it is now how can we move it a direction we’d prefer?

Unless you’re an ancap and believe in no government at all (which I’m not), then there is goving to have to be some taxation (how much and of what is something that needs a post in itself), so reforming the current system and ‘nudging’ in a certain direction are options to consider.

Another recommendation Dowd + Hutchinson make which I didn’t mention in this post is a tax on assests to make firms that are too big to fail uncompetitive and so break up into smaller ones which would not cause systemic risk if they get into difficulty.

Good points Simon, something else for me to consider

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James Rigby

November 10, 2011 at 4:33 pm

If shareholders are dumb enough to invest in a company that is not wholly transparent about its dealings and current/future liabilities and the risks associated with the assumptions underpinning the information, then more fool them. They deserve to lose their money.

If people are dumb enough to arrange for their pension and investments pots to be invested with companies that don’t take an active approach to holding companies to account in whom their funds are invested, then those individuals who invested with the fund deserve to lose their money.

Problem is, people think the government won’t let the worst happen, or the government will bail them out and not let them starve. This idea actually encourages people to not properly investigate where their money is invested. Government bail outs create moral hazard – which effectively increases the chances that more bailouts will be required. Time to break the vicious cycle and tell everyone to wise up on where their money is invested.

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