Recent discussions about bailouts and regulations have got me thinking.<\/p>\n
Corporations enable capitalism.\u00a0 The main feature is limited liability, which limits owner’s losses to their original investment and employee’s to losing their jobs.\u00a0 In other words, if a corporation has obligations it can’t fulfill, the owners (stockholders) and employees aren’t on the hook.\u00a0 This feature lets investors risk capital without worrying about losing their homes.<\/p>\n
Moreover, this liability limitation is unbounded — if a corporation racks up $1 or $100 trillion of obligations, a bankruptcy cleans it up and everyone walks away.\u00a0 Unfortunately, as we’re learning, US and world economy does not have an infinite capacity to absorb losses.\u00a0 When corporations amass obligations so large and far-reaching (e.g. AIG, LTCM, etc.), we can’t (collectively) afford to let them fail.<\/p>\n
Now, we’re debating regulations to prevent this from happening again.\u00a0 Regulation has a number of problems, including the ability of free markets finding a way to route around, inventing ever complex financial structures, and making money in unregulated ways.\u00a0 Regulation may prevent this crisis from happening again, but won’t prevent the next one.<\/p>\n
There is an entirely different way to address this, by targeting the root problem.\u00a0 What if some personal liability phased in for cases of huge, “off the charts” liability?\u00a0 In other words, if your corporation amasses obligations so large that bankruptcy would materially affect the US economy, you might not be able to keep your houses and bonuses.<\/p>\n
I guarantee that a threat of the smallest personal liability will cause a whole lot of self-regulation.\u00a0 The art would be to do it in a way that it only applies to the extreme 0.01% of cases, and untended consequences (e.g. the problems with Sarbox) are minimized.\u00a0 It may be possible to make this work.<\/p>\n
It’s a slightly crazy idea, but not entirely crazy.<\/p>\n","protected":false},"excerpt":{"rendered":"
Recent discussions about bailouts and regulations have got me thinking. Corporations enable capitalism.\u00a0 The main feature is limited liability, which limits owner’s losses to their original investment and employee’s to losing their jobs.\u00a0 In other words, if a corporation has … Continue reading