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Richard Stallman's Solution To 'Too Big To Fail'
lcam writes "A Richard Stallman opinion piece appears at Reuters addressing the 'Too big to fail' view that has recently caused large corporations to be bailed out by taxpayer dollars. His solution is elegant: 'We tax a company’s gross income, with a tax rate that increases as the company gets bigger. Companies would be able to reduce their tax rates by splitting themselves up.' However, it could use some refining. For example, his measure would create a required minimum 'Return on Investment' scale that corporations need to follow to be viable, and these types of metrics are very industry specific. Another issue is that many large corporations stay in business because they don't take unnecessary risk. Companies like Intel, Lockheed, Walmart are very large and have a very low chance of failure, yet Stallman would have them split up as a result of the excessive risks that banks and insurance companies were seen to have taken. It also has the potential to cause problems with the global market; some multinationals may find it better to simply 'move out' to a country that doesn't compromise their business models. How can this idea be made better?"
First of, the economy isn't a machine, it's organic, and this engineering approach generally fails. Companies react to regulation, and regulation itself is the result of government, another organic entity. When this type of laws are enacted, the first thing that happens is that concentrated business interest will make sure they actually benefit from the regulation. It can take many forms. Maybe some corporations will be grandfathered in and therefore manage to keep at bay competitors who can't reach a competitive size, maybe the law will have exemptions that only politically connected firms can obtain. It's misguided to push for a law without taking into account the way it will be distorted by the political process. Contrast this to the viral - hence organic - approach the GPL took.
Second, too big to fail is about the systemic risk that some financial firms exhibited. Walmart is big, Google is big, but they're not too big to fail in the sense that their failure wouldn't particularly cause havoc. If Walmart fails, many different sellers can buy the stores and keep supplying them with goods. In the case of financial companies, the argument went as follow: if a bank fails, many other financial companies may be in trouble if they hold financial instruments whose collateral ultimately is guaranteed by that bank. Unfortunately, it can take a long time to sort out who is really it, and during that time, it becomes very risky to lend to anyone, for fear that they might be exposed to the failing institution. This in turns cause more financial companies to fail in a domino effect. That's the theory at least. I don't know if I buy it, but at any rate, it makes the case that the banks were too heavily interconnected to fail, not too big. Columbia professor Rama Cont has suggested that the solution to this problem is to emphasize clearing houses to bring in transparency in who holds what.
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The founders of the United States banned a state religion in the First Amendment ("Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof") because they realized churches were competing power structures.
Nowadays, we have the new church, corporations and specifically corporations of the financial sector.
You really want to know who runs this country? Here are four data points from which you can draw your own conclusions:
1) The head of Goldman Sachs goes before Congress and admits he was selling bad products to clients, products which he was betting against. A classic swindle. Nothing ever came of it. Or any of the other revelations.
2) There was a PBS show called "The Untouchables" which chronicled why Wall Street executives were never prosecuted for fraud.
3) However, someone you'd think was powerful and connected, a former Michigan state Supreme Court justice is facing jail time for lying to a bank which she was working with in order to get a short sale completed for a house she owned. Her crime? She tried to hide another asset, a paid off house, from the bank.
4) Another person you'd think is powerful and connected, the chairman of the Washington DC City Council, Kwame Brown, was removed from office and convicted of a felony for lying about his income on a pair of loan applications, totaling around 200,000 dollars. Absolute small potatoes. Also a very common practice in the mid-to-late 2000s, on home loans.
Noticing a trend? If you're a financial sector executive, you run the show. It doesn't matter that you've swindled billions of dollars from the country, nothing is going to happen to you.
However, If you cross the financial sector, even over relatively trivial matters and sums, it won't matter if you're the elected head of the city council or a justice on the state supreme court, you will be removed from office and suffer significant consequences.
The financial sector runs this country.
Considering that the banks are making higher profits than ever while the economy continues to slump along tells me that we made the wrong choice.
No, considering the government has pretty much made back all of the money it put in (plus a profit in some cases) I think that was exactly the right choice.
Would it really have been better to take on another trillion dollars in debt covering all of the losses with no way to make it back? And in situations that weren't insured by the government (like universal life insurance) just tell millions of people they are fucked? At least this way the banks PAID their loans back - and then of course went back to making money hand over fist as usual, but that's really an entirely different argument that definitely needs to be addressed.
And of course, this claim that the economy is continuing to slump along today really seems to be as much a fabrication of the media as anything else. Or at least it's highly dependent on the industry. The market is on fire, tech is going great, and as you said finance/banking is back in the black. Yes, there are a lot of people who were in manufacturing who are out of work, but honestly that is not recession, that is a fundamental shift and those jobs are not coming back any time soon. But certainly letting all of the largest banks and insurance companies fail and potentially doubling the unemployment rate wouldn't have helped that no matter what you think of the economy...