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?
I saw in tonight’s Evening Standard that the usual suspects are planning on occupying the London Stock Exchange this weekend. Given how the city is always a ghost town on a Saturday I really have to wonder what they hope to achieve, though it will be interesting to see how the media coverage compares with that of rally against debt in the summer.
Still, even though they are misguided they do have a point (as Alister Heath put it brilliantly in his column today,
bailouts helped launch the Tea Party (which wants more capitalism and fewer bailouts) as well as Occupy Wall Street (which wants less capitalism and fewer bailouts) – one on the right, the other on the left
Given that there is indeed a fair bit of overlap I’m tempted to pop along on Saturday for a bit of a chat with them. Anyone else up for it? If so drop a comment here and we’ll see where this goes.
I doubt will be very receptive, in which case can always have a laugh then head down the pub.
‘It is here that one can most ferociously blame Fed Chairmen Alan Greenspan and Ben Bernanke, and their decade and more of irresponsibly cheap money. By distorting price signals throughout the economy, and producing burst bubble after burst bubble without any significant improvement in living standards except at the very top, they have not only gravely damaged the economy, but enabled the Left to claim that free markets “don’t work” so we must bring in government and the unfortunate taxpayer to solve our economic problems. Of course, this crisis is not a failure of free markets and not even a failure of capitalism- unless you accuse modern managerialist crony capitalism, in which case you would be right’
Alchemists of Loss: How modern finance and government intervention crashed the financial system by Kevin Dowd and Martin Hutchinson, pages 154-5.
I swear reading the Evening Standard is bad for my digestion. Case in point, a piece in Friday’s business section by Anthony Hilton entitled ‘What Banks is need is Nationalisation” which caused my jaw to hit the floor.
the public interest demands that someone performs the basic banking function. That requires capital and if it is not going to come from shareholders then from where?…. conclusion is that banks should be state-owned. State banks should provide basic deposit and lending services which meet the core needs of the economy.
Sweet Jesus, aren’t there enough examples from the 20th that state-owned firms don’t work? If you think customer service at your local branch is bad now, wait until it it is run with the same mentality as the post office. No doubt getting a bank account (note singular, because no one will need more than one) will be as easy as getting a phone line installed in the days of the GPO.
Of course, there would have to be some rationalisation as well, we wouldn’t need numerous, wasteful branches in the average high street, but what’s a few job losses compared to the efficiency to be gained? How about calling the new group British Leyland Bank?
The sad thing is that there are already alternative models for retail banking, like Building societies and Savings banks. Sadly it seems the statist mentality is alive and well at Evening Standard. I also noted in Friday’s paper that their city editor has been appointed the new editor of the Independent. Hopefully he’ll take Anthony Hilton with him.