Philavore

As originally envisioned, this blog was supposed to be about promoting the local Philadelphia economy. Not a new idea. And by now, one that risks becoming somewhat hackneyed before it has even had a chance to create systemic change.

Typically, when folks think about buying local, they think about farmers and beer. But in essence, the benefits of buying locally apply equally to your local farmer as they do to your local lawyer.

In response to the whole "Too Big To Fail" wackiness, some have advocated that depositors return their money to local banks run by local businessmen as a method of avoiding the craziness that results from selling securitized mortgages to sovereign wealth funds. But that meme seems to have never caught on.

While not written with the tenets of localism in mind, an interesting article addressing pension funds appears in today's NYTimes. The specific issue raised is the recent trend of public pensions of seeking increased returns by investing in international markets. As evidenced by the article's headline - "Public Pension Funds Are Adding Risk to Raise Returns" - the author concerns herself with the increased risks implicated by such a strategy and not the strategy's effects on local economies.

It's interesting in that it provides a convenient foil for my thoughts on the public pension issue.

Today, in Paul Krugman's NYTimes Op-Ed, he discusses the structural similarities between the Irish and U.S. financial crisis.

Describing the effect of compensation in destabilizing our financial system, Krugman writes:

Third, key players had an incentive to take big risks, because it was heads they win, tails someone else loses. In Ireland this moral hazard was largely personal: “Rogue-bank heads retired with their large fortunes intact.” There was a lot of this in the United States, too: as Harvard’s Lucian Bebchuk and others have pointed out, top executives at failed U.S. financial companies received billions in “performance related” pay before their firms went belly-up.

My personal interest in the nexus between Limited Liability and "Moral Hazard" has recently led me to contemplate how limited liability legitimizes corporate management's over-sized compensation even where such payouts have the effect of leaving a corporation under capitalized vis-a-vis long-term risks.

In his op-ed, Krugman makes no mention of limited liability. No surprise as I'm the first to admit I'm pretty out there on this issue. Rather, he is discussing the fact that our current system of corporate management creates incentives for corporate management to create short-term profits without regard to the risks of long-term losses, however large they may be, such short-term profits create.

This disconnect between short-term and long-term interests was created when ownership and management was separated.

And that separation of management and ownership was made possible by limited liability.

As lawyers like to say, limited liability was the but for cause of this divergence of interests.

Been reading David Skeel's "Debt's Dominion." Like Kate Hopkin's in "99 Drams," his wanton use of "in order" causes me to grind my teeth. For my taste, he also spends a little too much time dabbling in the academic ins and outs of public choice theory. But when it actually gets into describing the history of bankruptcy laws, it's an interesting read.

While developing the history of Bankruptcy laws, he also happens to provide some interesting insights into the development corporations into "natural persons," a subject of my continuing interest.

A few choice quotes as well as my commentary appear after the jump.

So, been thinking about the nature of liquidity traps which led me to contemplate the following:

What's the fastest way to turn one dollar into one million dollars?

Wondering whether this whole Greek debt crisis will make people think twice about all the economic benefits that flow from hosting the Olympics.

More on finding information on the origin of corporations in the most unlikely places.

In addition to a frustrating overuse of the idiom "in order," Kate Hopkins' "99 Drams of Whiskey" provides an interesting history of the legal organization of the whiskey industry in England as well as a good excuse to read a book and drink bourbon.

Because that's what you do when you're an inveterate gambler, you ask the guys who run the casino to ban you from the casino.

“This is taxpayer money and it’s compromised... You’re playing roulette or you’re gambling with this money and it might work out for some areas, but for a heck of a lot of others it did not.”

The quote appears in today's edition of Bond Buyer and are the words of State Sen. Lisa Boscola. She uttered them as explanation for why she plans to introduce legislation that would ban school districts and localities from using financial swaps and derivatives (fancy words that dress up a transaction that is nothing more than a bet).

Hopefully Sen. Boscola gets the law passed. Folks should never enter into a financial transaction without understanding what exactly is going on. Because when you don't have a clue what you're buying, more often than not you're being taken. And that's precisely happened to PA's school districts when they entered into these types of transactions.

Bond Buyer notes that on one deal the Bethlehem school district ended up costing $10.2 million more than what the same transaction would have cost had the school district just gone with standard fixed-rate loan.

I'm reading Edward Chancellor's "The Devil Take The Hindmost." It's a "History of Financial Speculation." Maybe it's just confirmation bias, but it seems that just about everything I read these days has some interesting tidbit on the origin of corporations.

In the chapter discussing the events that led to the passage of the Bubble Act, it mentions all sorts of patents that were issued to establish commercial enterprises to carry out a specific form of commerce - from patents to raise shipwrecks to patents to produce imitation Russian leather. Some of the patents discussed clearly relate to what amounts to the commercialization of an invention while others definitely amount to business methods.

It is as if 17th century entrepreneurs faced a choice between organizing their business enterprise via patent or incorporation that is very similar to the choice between organizing as an C Corp, LLC or S Corp faced by 21st century entrepreneurs.

I got to thinking about whether a renewed commitment to the enforcement of Antitrust laws would be an appropriate remedy to problems caused by Citizens United. After all, if a corporation is so huge that its participation will warp the democratic process, it suggests that the corporation ought to be an appropriate target for an antitrust investigation.

Similarly, I always thought the use of the term "too big to fail" necessarily implicated antitrust laws. Unlike Amtrak or even AT&T, I never could understand either (1) the market failure that required government intervention; or (2) the public good that would otherwise go unfulfilled if in fact these too-big-to-fail firms failed. It was not that these firms created some product that was necessary to sustain our way of life. With neither predicate satisfied, I always thought that rather than being "too big to fail," the banks were too big to exist.

While occasionally discussed on the fringe, policy makers never gave consideration to imposing as a condition of the bailout a break up of the banks. Rather, the whole debate was framed as some sort of new-fangled ecological disaster.

OMG!!! Lehman and Bear Stearns have run aground!!! Their captains were drunk. Millions of barrels of crude CDOs have been spilled. [Images of dying otters; their fur matted with toxic CDOs.] The horror!!! OMFG!!! Goldman Sachs and its drunken sailors are going to crash too!!!

It was if the bailout addressed a new form of pollution. In my peculiar logic, I thought it made more sense to see the subprime crisis as the financial industry's Bhopal disaster. The bailout just being the cost of scrubbing clean all the CDO-smothered penguins.

But my plan is not to revisit my whole limited liability thing.

My plan is to address a thought I've been chewing on this evening - antitrust law as a method of managing systemic economic risk.