More From Eric Dixon at

Support Independent Investigations With Bitcoin:
Send Bitcoin Here: 171GMeYRD7CaY6tkXs8dSTjLbAtFazxhVL

Top 50 Twitter Rank of Worldwide Startup Advisors For Much of 2014
. Go to my professional site for solutions to your legal, business and strategic problems. The only lawyer who is a co-inventor of multiple, allowed-for-grant patents on blockchain technology!!! Blockchain and Digital Currency Protocol Development --
Top Strategic Judgment -- When You Need A Fixer -- Explore Information Protection and Cryptographic Security -- MUST-WIN: JUST DON'T LOSE -- SURVIVE!: Under Investigation? Being Sued? Handling Extreme Stress -- Corporate Issues -- Startup Issues -- Investor Issues -- Contracts To Meet Your Needs -- Opposition Research -- Intellectual Property, Media and Reputation Issues -- Independent, top-notch legal, strategic and personal advice -- Extensive ghostwriting, speechwriting, book writing, issue research, press and crisis management services. Listed by American Bar Association's Law Bloggers (Blawgers). Contact European Union audiences: This site uses a third party site administrator which may use cookies but this site is intended for AMERICAN clients and prospective clients only!

Monday, August 12, 2013

Stiglitz's Detroit Bankruptcy Solution: The Road To Serfdom

STIGLITZ: BANKS SHOULD BEAR BURDEN OF DETROIT BANKRUPTCY. Joseph Stiglitz's Monday New York Times op-ed calls for investors and lenders to assume most if not all of the burden of -- that is, the loss from -- Detroit's bankruptcy so that essential municipal obligations, i.e., workers' pension payments and jobs, remain untouched. Stiglitz argues that banks and insurers got their return and now must accept the risk, even the risk of total loss. (In other words, the opposite of the bailouts of AIG, Chrysler, et al. in 2009.)  

Of course, Stiglitz ignores that his proposal would add to creditors a risk for which they did not bargain. Call this the risk of government interference. But unilateral reformation of contracts to allocate a "fair" amount of risk to select parties (which is really a different way of adjusting the risk/return relationship, so you might as well cap their "fair return" at the same time), will cause every party to a contract to think twice to making any investment, loan or transaction. 

As many of us know, reducing the potential return on a given assumed risk reduces the incentive to take any risk. You cannot function in this system, not with your own money, unless you don't mind capital losses by bureaucratic fiat. This is the same type of risk as Powerball -- you can lose everything -- but your upside is limited to what's "fair" and your odds aren't very good either. It's an impotent Powerball.  

As for Stiglitz, the problem is not that he fails to understand this relationship; rather, he very much understands it. This is why arguing or reasoning with people with his perspective is meaningless. This is not a difference of the theory of how risk and reward and economic incentives interact.  The difference is one, a fundamental one, of values.

We need to understand Stiglitz's moral judgment -- that lenders and investors are by definition suspect classes which are "fair game." This is not so much an economics debate as it is one of values. The argument is that it is permissible -- no, it is desirable -- to stick bankers, insurers and investors with losses.  It is their fair and just return, goes the sentiment, to reward them thusly for their untoward desire to make money on an investment.  And the flip side is equally cruel; it's perfectly fine to have these groups lose 100% of their investment.  After all, it's a risk you take with an investment. Of course, it is conveniently ignored -- not because it's not understood but because it is the value -- that the possible return that will be allowed will not adequately compensate you for your risk.

I think we need to understand the goal of this theory.  Discouraging and penalizing investment is not merely the unfortunate collateral result.  I think it is the object of the moral judgments underlying Stiglitz's column.  This is a column that seeks to move us towards a command-and-control economy.  But when it's open season on the capital class, is it any surprise that banks are not lending, even in an era of quantitative easing?  These sentiments will encourage more hoarding, and this is an entirely rational if not foreseeable response.

No comments:

Post a Comment