American Unemployment Rate Approaches 10%

[Berkut]

What about a system where capital is allocated into a liquidity pool, a leveraging pool, and an operational pool, with allocations determined by the risk presented by officers within the firm?

I have no idea what you are talking about.

Essentially, I'm talking about requiring that the companies show they can cover their asses with a rainy-day fund or something similar before going public; I was talking about a dedicated fund to cover temporary market downtrends (the liquidity thing; I just couldn't think of how to phrase it) and another to cover potential creditor claims- I'm convinced the publicly traded companies should be akin to institutions, and not constantly wobbling on the edge of bankruptcy.

That is utterly unworkable.

Since when has that stopped anyone from passing more laws?

[DontSayBanana]

That is utterly unworkable.

How? Cents used on the dollar for operational expenses is how we already classify non-profit organizations- why can't that be extended to publicly traded companies? Grandfather in ones that are already on the books, and while it'll take companies longer to get an IPO together, they'll be so sound when they do that you could bounce rocks off them.

And Berkut, shut up. The grownups are talking.

[Admiral Yi]

How? Cents used on the dollar for operational expenses is how we already classify non-profit organizations- why can't that be extended to publicly traded companies? Grandfather in ones that are already on the books, and while it'll take companies longer to get an IPO together, they'll be so sound when they do that you could bounce rocks off them.

And Berkut, shut up. The grownups are talking.

Cents on the dollar for non-profits refers to admin costs, completely different than what you're talking about.

As to your proposal, why not simply allow investors to not purchase shares in companies that they think don't have sufficient cash reserves?

[DontSayBanana]

Cents on the dollar for non-profits refers to admin costs, completely different than what you're talking about.

As to your proposal, why not simply allow investors to not purchase shares in companies that they think don't have sufficient cash reserves?

Actually, it's not. I'm just saying that rather than be forced to show the money being spent before being classified a not-for-profit, I'm saying that they should have to show the money is being saved before the IPO is issued and possibly at intervals afterward.

Investors already have that right, but that goes back to what I was saying in another thread about not being able to assume that company officers are acting ethically; that assumption cost investors in one of my previous employers about $80 million when he fibbed to them and burned through the cash in a quarter. The jobs fluctuation, the court costs, and the overall headache could have been avoided if there were more of a focus on fiscal responsibility and transparency in the regulations.

Anyone has a right to do business, but with those particular businesses being seen as synonymous with the US economy, there should be greater control as well as self-control.

[alfred russel]

How? Cents used on the dollar for operational expenses is how we already classify non-profit organizations- why can't that be extended to publicly traded companies?

It is true that non profit accounting is different than for profit, but the differences aren't that significant in terms of the balance sheet. What you are referring to is the financial metrics to measure the organizations: some derivation of earnings is usually used for for-profit enterprises, while overhead cost metrics are usually used for non-profits. I don't see why or how that should change.

The income statement for the two is very different, for obvious reasons.

Grandfather in ones that are already on the books, and while it'll take companies longer to get an IPO together, they'll be so sound when they do that you could bounce rocks off them.

That doesn't make sense. It sounds like you want to effectively end the ability of a company to carry liabilities if it goes public. Think about it this way: lets say Ford has $30 billion in assets under management. These assets must be financed. If you add the total claims of creditors (debt capital and trade liabilities, primarily) and the total equity capital contributed, you will by definition come up with $30 billion. It is theoretically possible for any company's assets to fall to $0. That being the case, it seems that you want any company that goes public with $30 billion in assets to also have $30 billion in equity capital, leaving no place for debt in the economy.

In any event, why do we want to end the ability of companies to go bankrupt? As has been said before, capitalism without bankruptcy is like religion without sin. You need bankruptcy to weed out the less efficient, and also need the risktaking that makes bankruptcy possible if we are to have any kind of growth.

[dps]

That doesn't make sense. It sounds like you want to effectively end the ability of a company to carry liabilities if it goes public. Think about it this way: lets say Ford has $30 billion in assets under management. These assets must be financed. If you add the total claims of creditors (debt capital and trade liabilities, primarily) and the total equity capital contributed, you will by definition come up with $30 billion. It is theoretically possible for any company's assets to fall to $0. That being the case, it seems that you want any company that goes public with $30 billion in assets to also have $30 billion in equity capital, leaving no place for debt in the economy.

In any event, why do we want to end the ability of companies to go bankrupt? As has been said before, capitalism without bankruptcy is like religion without sin. You need bankruptcy to weed out the less efficient, and also need the risktaking that makes bankruptcy possible if we are to have any kind of growth.

Beyond that, the purpose of going public is to raise funds for operations and expansion.  DontSayBanana's plan would essentially mean that any company that would be allowed to go public wouldn't really need to raise those funds in the first place.

[Admiral Yi]

Anyone has a right to do business, but with those particular businesses being seen as synonymous with the US economy, there should be greater control as well as self-control.

I don't know what you mean by that.

[The Minsky Moment]

Causes of the Economic Crisis - in order

1) Long-term underlying economic trends i.e. low inflationary, low nominal interest rate, low asset price volatility environment in the context of large imbalances in international trade and financial flows. 

2) Government subsidization of the mortgage market via Fannie/Freddie and the interest deduction combined with light regulation of the secondary and derivative markets.  Privitization of gains and socialization of losses.

3) Fed unwillingness to prick bubbles.

Everything else -- CRA, eliminating Glass-Steagal, etc is minor or non-factor.

[Savonarola]

2) Government subsidization of the mortgage market via Fannie/Freddie and the interest deduction combined with light regulation of the secondary and derivative markets.  Privitization of gains and socialization of losses.

I'm curious why this was such a major factor; the government has subsidized the mortgage market since the National Housing Act in 1934 and interest deductions on loans has existed since the beginning of the income tax.  Why did those factors cause a bubble now?

[DontSayBanana]

[snip]

Fair points, though I think part of our problem is that the growth needs to happen in inches, not miles. There's also a difference between "risktaking" and "gambling," and with tech in the 90s and housing in the 00s, we were doing more gambling than responsible risktaking.

I realize I snapped to the far end of the spectrum, but considering we've been looking at potential deflation and negative GDPs, I do seriously believe it's time to reset the sliders to aim for smaller, safer gains.

[Berkut]

I would not be TOO quick to look for large systemic changes.

After all, the basic free market capitalist system we have been using for quite some time has resulted in rather astonishing economic growth and quality of life increases for the vast majority of people over the long run.

I am worried about the viability of that model as it relates to sustained resources than I am about the ups and downs that are experienced at any particular point. I suspect the current recession will, in the long run, be just another dip in the cycle, rather than the cataclysmic disaster everyone thinks it is right now while demanding large scale changes.

[alfred russel]

[snip]

Fair points, though I think part of our problem is that the growth needs to happen in inches, not miles. There's also a difference between "risktaking" and "gambling," and with tech in the 90s and housing in the 00s, we were doing more gambling than responsible risktaking.

I realize I snapped to the far end of the spectrum, but considering we've been looking at potential deflation and negative GDPs, I do seriously believe it's time to reset the sliders to aim for smaller, safer gains.

I don't think that is as attrative as it might seem. If people want to invest their money in traditional equity investments, it is going to be hard to stop. Sure you can regulate public markets in the US, but people can just move their money to international public companies and to private companies in the US. From the perspective of a company wanting to raise funds, why not then go public overseas, rely on private money in the US, or sell yourself to a large public company here (that in your example would be exempt from regulation).

In fact, after the Enron/Worldcom debacles, we ramped up our regulation of publicly traded companies to a level arguably higher than the rest of the developed world, and all these trends have played out since then. In a globalized economy where it doesn't really matter whether a company is nominally American or foreign--we all share the same systematic risk--what could end up happening is the next wave of growth occurs overseas, without the oversight of the American government, and whose American investors don't have the benefit of SEC oversight (and are exposed to foreign currency risk).

[DGuller]

I hope what you're talking about is not completely true.  We don't need a world-wide regulatory race to the bottom.  I do think that the boom and bust cycles we've been stuck in for the last 30 years are destructive, and they're not a necessary evil that we just have to live with.

[Jaron]

It seems to me, and I'm no economist, that the way to lower unemployment is to either:

a) create more jobs
b) gives employers incentive to hire people
c) kill the unemployed

[alfred russel]

I hope what you're talking about is not completely true.  We don't need a world-wide regulatory race to the bottom.  I do think that the boom and bust cycles we've been stuck in for the last 30 years are destructive, and they're not a necessary evil that we just have to live with.

It is hard to race to the bottom when discussing what CC is talking about, because everyone is sitting on the bottom.