Tuesday, April 10, 2012

A more far-reaching answer than Barnanke's

The Federal Reserve of the US has several responsibilities to the US government and to the US businesses and people: to manage inflation, to regulate the money supply and to watch over the banking system, being the lender of last resort for banks. They have had difficulty recently in offering policy remedies to the US economic situation, since they have already put short-term lending rates at their lowest, they have already bought up US treasury bonds, they have already leveraged to support banks which were crippled from the bursting of the housing bubble.  

On April 9, the Chairman of the Federal Reserve was speaking on the next steps he expects the Federal Reserve to take to promote stability in the money system. His remarks included the topics of new liquidity requirements, shorter maturity limits, enhanced disclosure mandates, strengthening the tri-party repurchase agreement market, and . . .

Bernanke said that the wave of new rules created since the crisis are likely to push business into areas that will be tougher to regulate. “An inevitable side effect of new regulations is that the system will adapt in ways that push risk-taking from more-regulated to less-regulated areas, increasing the need for careful monitoring and supervision of the system as a whole,” he said. 

This appears complicated. And the effort appears to be only nibbling around at the margins of a problem that will mutate and demand constant monitoring as the markets evolve. This monitoring will not simply be watching the firms and actors, but rather will involve some level of intrusive monitoring to see how the firms and actors might subvert the intentions of the laws and regulations, keep their actions out of the sight of the regulators, and try to come up with even more creative ways to make even greater amounts of money. My speculation is that the actors to be monitored will be the ones who are striving personally to be among the richest classes, not those who are simply looking to find better deals for their investor clients.

"Bernanke said that infrequent use of emergency programs as well as new abilities to supervise different types of firms should help reduce moral hazard, or excessive risk-taking by firms that expect a government bailout. "Anytime you have a safety net" regulators need a mechanism "to minimize moral hazard," he said. (source finance.yahoo.com/news/bernanke-calls-regulators-curb-shadow-040100925.html Bernanke Calls on Regulators to Curb Shadow Banking Risks by Joshua Zumbrun and Steve Matthews | Bloomberg)

Bernanke then has named the root problem: a need to "help reduce moral hazard, or excessive risk-taking by firms" and I will add the risk-taking by the managers, executives, board members and owners of those firms. Those actors are taking risk in hopes of achieving greater earnings. The market forces do not curtail their risk-taking. The risks themselves do not diminish their excesses. As the business cycles and histories of recessions have shown, their actions put more as risk than their own fortunes and businesses. Their actions have (and presumptively will again) put the entire economic system in jeopardy. What can we do to prevent the excessive risk-taking, to prevent the moral hazard?

My answer is a more far-reaching policy: an annual individual income cap. Let's have the conversation!!

If every individual, world-wide, is restricted to earn no more than 10 million Euros per year (or the equivalent) then the actions of those who would have otherwise taken excessive risks will be altered. Earnings can be capped by a 100 percent tax on all earnings after the first 10 million. Each country can enforce this taxing authority within their own sovereignty, and hold other countries accountable by their international trade agreements. This is a tax that would never be collected. The intention is not to draw in revenue for any government. Rather, the intention is to diminish the risk-taking behaviors of those who wish to out-do each other in the business world or in the arenas of upper-class-society.

Research is needed to better understand how a gradual enactment and enforcement of this cap will alter the world of finance, and consumption, and trade innovation. We would need to worry about possibly some slowing of technological innovations. We could also start to piece together how corporate, partner and contract law will alter in the face of this restriction on individual earnings. Corporations and businesses would not be restricted by this tax. So how would business owners and managers rewrite their corporate bylaws in the face of not being able to earn unlimited amounts each year?? My speculation on the results to such areas would be useless. I do sense though that businesses would alter and become nearly unrecognizable to us within 50 years of the income cap.

Through this blog, I hope to start a conversation and see if I can encourage more ideas and more explorations around this idea. What can you imagine? What research would you suggest?

With all my best,
Auntie Greed 

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