Chrysler, Ford, and General Motors should not receive a bailout. Furthermore, their requests for a bailout, and likewise the financial sector, should demonstrate something about power in modern society. If a firm employs a large proportion of the population then it can argue that it needs state support in bad times because the effects of failure on the rest of the economy would be profound. This firm then has undue power over the rest of us. Its failures are automatically the problem of society at large. It has too much power. In this situation government could act in one of three ways to limit this power. 1, It could take a minority stake in the company so that the State benefits from the good times as well as helps pay for the bad. 2, The state could forcibly break up this company into smaller parts under anti-trust legislation. 3, The company is forced through legislation to create its own safety net. Bank bailouts are currently taking option 1. This, however, is a crisis measure and probably not a sensible strategy in the future. It could be made more subtle by giving every citizen shares in the company, rather than the State. However, it is still to probably be avoided. 2, This can not always occur due to economies of scale and practicality. The principle that no company should get too large stands and anti-trust legislation will be used. However, it is not a total solution. 3, I envisage this for the financial sector. Each financial institution should have to pay a very small (.015 perhaps?) transaction tax, which will go into a fund managed by the institutions collectively themselves. If the interbank lending market seizes up, or there is an irrational run on a bank, this fund can be used as a bail out. It will be their money, not ours.
What do you reckon?
Saturday, 22 November 2008
Bailouts and the problem of power
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5 comments:
James,
Just a quick point here which I think you have missed; if our proposals were to go down the Post Office route rather than a new bank dont you think that might put pressure on the banks and in some ways be a contribution towards point 2?? It also might be quite a boon for Post Offices which are in need of some saving...
On point 3 I think it would have been more helpful a year ago but the horse has somewhat bolted I think...
Ford and GMC should merge. Massive savings would be made by stripping out duplication.
Their business models and products are hardly differentiated as it is and their target audience isn't that different either.
I also doubt the culture clash which marred the DaimlerChrysler deal would be repeated.
Your transaction tax is exactly how the Lloyd's of London market operates. (Although Lloyd's itself is a statutory corporation, its role is to run a marketplace for its member syndicates, so it's actually not a bad analogy for the banking market.) Member syndicates pay a levy into a Central Fund, which in the last resort bails out members who become insolvent. Lloyd's survived its own version of the credit crunch (the so-called "LMX spiral", resulting from careless underwriting of liability insurance much as the current crisis results from reckless lending) without needing to resort to Government funds, and every valid insurance claim was paid. The only people who lost money were the investors who had stood to gain if there had been a profit in those years - as it should be. I've been saying for a while that if banks had been run and regulated like insurance companies, the economy would be in a much better state than it is today.
Darrell,
what do you mean by the post office route?
On point 3 its a future proposal. Obviously not to fix this crisis.
Oranjepan, maybe they should, maybe they shouldn't. It should be their decision and the state shouldn't be overly involved.
LizW, great analogy. It is exactly what I meant.
Well exactly. Just let me broker the deal and take the fees!
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