"Both reasons reflect a massive failure of our economic institutions. The first reason betrays a lack of trust that governments can and will do the job that they learned how to do in the Great Depression: keep the flow of spending stable so that big depressions with long-lasting, double-digit unemployment do not recur. The second reveals the financial industry’s failure adequately to mobilize society’s risk-bearing capacity for the service of enterprise."
Yes. That's the problem. Investors are shunning stocks because they are essentially upset that current government policies aren't closer to FDR's New Deal policies.
Excellent article. Banks that government decides are "too big to fail" are no longer subject to the normal rules of free market economics. These firms now have more in common with corrupt and politically connected Russian or Chinese "state enterprises" than they do with free market firms. That's because true free market firms are allowed to fail. Ordinarily, this risk of failure is supposed to incentivize management to prudently manage their risks. But when there is no risk of failure (or a large golden parachute), then management has nothing to lose by taking reckless bets with shareholders' money. It is an agency problem.
To paraphrase the WSJ article questioning Lee Bollinger "The people who run global megabanks get the upside when things go well – they are paid based on their return on equity UNADJUSTED FOR RISK, so they prefer a lot of debt piled on top of very little equity. Doing this maximizes a portfolio's leverage. When things go badly, the downside is someone else’s problem – in the first instance, typically, the Federal Reserve’s. Ultimately, society pays the price for this distortion of the market clearing mechanism."
Another important fact to consider: Enron was not a Texas company any more than General Motors can be said to be a Detroit company. Similarly, none of the giant investment banks are truly New York firms. All of these companies were infact incorporated in the state of Delaware. Why? Because Delaware corporation laws are the most management friendly in the nation. Delaware laws of incorporation allow unethical managements to enrich themselves without accountability to shareholders. People don't realize this fact, but it is lax state law regulating corporate governance that permit the Dennis Kozlowskis and Bernie Ebbers of the world to act with impunity until it is too late. again, it is a simple agency problem.
1. Your model assumes that the government expenditure will be "worthy". The fact is that not all government expenditures will pay for themselves or be economically productive. For instance, suppose the government borrowed the $10 million by issuing the bond. At some future period, government will have to repay $10 million + interest. Next assume that, after borrowing this $10 million for a fixed term of years, a new government is elected and decides not to spend this $10 million, leaving it in non-interest bearing cash in a bank vault. At the end of the period, government will still have to repay the $10 million + interest. In nominal terms, government will have a net loss equal to the interest now owed on the $10 million. Additionally, society will have a lost opportunity cost equal to the lost economic productivity of deploying that $10 million in a worthy manner. This is basically what Greece has done.
I find this article quite vague. "reach across party lines"well, duh. Of course this needs to be done. It is always better for citizens when their self-serving politicians act like disinterested statesmen. But the trick is to think of a way to incentivize them into doing this in a reliable manner. For example, both term limits and being elected "President for life" are possible solutions to the problem of politicians being obsessed with short term political gamesmanship. But these two solutions may raise other problems. The author does not offer any realistic SOLUTIONS for actually accomplishing this aspirational goal.