You guys are familiar with how we arrived at this particular regime of mispricing risk, right? It’s preferable to the alternative. This is why banks are tightly (but imperfectly) regulated.
Similar observations apply to that more fundamental instrument of mispriced risk - limited liability business entities. The worst possible arrangement, except for all the others.
Personally I prefer to tilt at the windmill of the asymmetrical payoff diagram of US CEO compensation structures. While it’s still the case that nobody much cares about my opinions on the subject, this one at least has less of an aspect of battle-tested socioeconomic optimality.
Americans didn't arrive at this particular set of institutional arrangements by some rational process that weighed the alternatives properly.
Really, have a look at eg https://www.cato.org/blog/there-was-no-place-canada for a comparison between American finance and Canadian finance. The Canadian arrangements were much superior to the old and new American system.
> Similar observations apply to that more fundamental instrument of mispriced risk - limited liability business entities. The worst possible arrangement, except for all the others.
I don't see what's wrong with it? In most countries you can form both limited liability business entities as well as unlimited liability business entities.
When you do business as a company you (typically) have to clearly declare what kind of business you are, and your counter-parties can decide whether they want to deal with you based on that information.
(At least for the most part. If a limited liability contractor paves my driveway, and they damage my neighbour's roses while they are at it, my neighbour never got a choice.)
> Personally I prefer to tilt at the windmill of the asymmetrical payoff diagram of US CEO compensation structures. While it’s still the case that nobody much cares about my opinions on the subject, this one at least has less of an aspect of battle-tested socioeconomic optimality.
Related:
In the years after the big financial crisis of 2008, Credit Suisse paid their bankers' bonuses in the form of 'toxic assets'. See eg https://archive.is/x3GKl
That make got the 'toxic assets' off Credit Suisse's balance sheet. It was also popular with the general public. And, the best part, over time those ostensibly toxic assets actually mostly paid off in full, so the bankers got a much better bonus than if they had gotten straight up cash.
The windmill I like to tilt at is the different tax treatment of equity vs debt in many tax systems around the world. Both shareholders and creditors demand a return on their capital. But when your business pays creditors, via interest and return of principal, that's usually with money that's less taxed ('pre-tax money') than when they pay dividends or do share buybacks ('post-tax money').
Most people agree that an economy with less leverage, ie less debt and more equity, is more stable and less prone to crises. But then we have tax systems that prefer debt.
We should at least treat them equally, or even better, tax debt higher than equity, to nudge company's in the direction of more equity.
(And, of course, there's also the big, big windmill of land value taxes being superior to almost every other form of taxation. But almost no one uses them.)
> If a limited liability contractor paves my driveway, and they damage my neighbour's roses while they are at it, my neighbour never got a choice.
Limited liability doesn't mean no liability. You can still go after them and get the assets of the company or its recent profits, which will generally be more than the value of some roses. You just can't get company owner's house.
But that sort of thing is always the case. There is no such thing as unlimited liability because nobody has unlimited assets. You can cause a million dollars in damage when you only have a hundred dollars to your name and there is nowhere for the money to come from.
Limited liability is just choosing the line at which we say something is closely enough associated with another thing to have to pay for its mistakes.
> But when your business pays creditors, via interest and return of principal, that's usually with money that's less taxed ('pre-tax money') than when they pay dividends or do share buybacks ('post-tax money').
It's worse than that. Corporate acquisitions use pre-tax money, which encourages business consolidation.
The real solution is to use consumption taxes instead of income taxes, which are much fairer, harder for tax laywers to avoid and less invasive of individual privacy, and are one of the best ways to tax international corporations. Then if you want a progressive tax system you just give each individual a tax refund in a fixed amount, which creates a progressive effective rate curve.
This would also have the benefit of disadvantaging debt, because you would have to borrow enough to pay the tax on whatever you buy and then pay interest on the higher amount, discouraging debt-based purchases.
But there are a bunch of misguided claims that it would hurt the poor somehow (even though they would be paying less in total tax after the refund), probably because it would actually work and the people who benefit from the status quo have to put out some argument against it.
Similar observations apply to that more fundamental instrument of mispriced risk - limited liability business entities. The worst possible arrangement, except for all the others.
Personally I prefer to tilt at the windmill of the asymmetrical payoff diagram of US CEO compensation structures. While it’s still the case that nobody much cares about my opinions on the subject, this one at least has less of an aspect of battle-tested socioeconomic optimality.