It is obvious that the fundamental condition surrounding the predicament our world economy finds itself in is that of "liability". The main "actors" within this system have overstepped the bounds of their liabilities and upset the balance that is instrumental to exchange and trade.
While these facts have been mentioned time and time again for the last year and a half, why have we not even caught a glimpse of the fact that this is a serious problem and certainly a condition but not the primary factor? It is fairly common for individuals and firms to find themselves in a poor state and to face the consequences of poor choices.
The reason behind the "extraordinary" measures that have been taken to rectify our situation isn't these extended liabilities but the existence of "limits" to those liabilities. The State has chartered and subsidizes entities that are privileged with "limited liability". The taxpayer is not bailing out "corporations" per se, but instead reimbursing liabilities that exist beyond the "limited liability" status that the State itself has bestowed and enacted illegally into law in behalf of these corporations. They have been given by the State the right, which we are daily witnessing, to cause harm and injury upon others without penalty, in fact with reward.
Every bailout dollar is a direct payment from the working taxpayer through a "limited liability" corporation such as AIG or Freddie Mac. etc. to another "limited liability" corporation such as Euro or Asian banks or some American investment giant for the repayment of liability that exceeds the limits defined by law. While an individual is held liable, a corporation cannot be. By State charter they cannot be held responsible beyond the amount they have invested or the assets they have accumalated.
The trillions the taxpayer has coughed up through various federal bailout programs is but a drop in the bucket. The government and business actors are but hoping these payments in combination with the stimulus amounts and monstrous increases in money supply will restore consumer confidence and the illusion of prosperity, spurring the taxpayer to morph into the loose spending consumer, once again inflating asset values. This they hope, will restore the fictitious balance and diminuate the excessive liabilities. To get an idea of the amount of overextended liability that is present in the system have a look at Jake's article, The Money Matrix - Bring Light to Dark Derivatives! (PART 11/15)This "limited liability", which automatically distributes its excess liability outside of the incorporated source of the problem, has been geometrically increased by the interlocking worldwide financial network that has been fostered by the collusive actions of government and corporate players. They have been able through money creation trickery and capital direction to institute a financial system that bears little reflection to real economics and production. It is no coincidence that our economic slowdown started in the financial sector and then spread to the manufacturing sector. This is analogous to the mother being borne to the baby.
This interlocking web of "limited liability" would if left to its own doing, spread the risk and excess liability like a cancer from corporation to corporation. As each successive corporation exceeds its liability, there is no resolution until an entity outside the corporations, in our example the taxpayer, steps in to stop the progression. This is known as "too big too fail".
It is also no coincidence that the main tool used to interlink these "limited liabilities" is the "Credit Default Swap", a derivative that distributes excess liabilities among "limited liability" entities. This is all done while the actual capital is continually invested in a market that is artificially stimulated by the presence of these very derivatives and there ability to theoretically misplace liability. The absurdity of this is really beyond understanding.
Would an economy in which "limited liability" was exactly what it is, an oxymoron, be any different, any more adaptable to poor investment choices? Does water run downhill?
Without limited liability, there would be consequences. Shareholders are owners. Owners would bear responsibility. Would investors invest in a corporation such as AIG, capable of creating a couple hundred billion dollars worth of indebtedness for its shareowners to bear under the penalty of law? Would the executives and board of directors of Fannie Mae bear responsibility for billions in debt created for its shareholders when they entered into legal binding contracts for which they had no existing backing? Without limited liability these actions, many of which broke existing laws both contract and otherwise, bear the burden of their outcome.
Without limited liability the buck stops at the first failure, the first insolvency. It must be repaid by those responsible, the shareholders, the corporation itself. Risk is carried by those who gather return; it is not socialized through the government onto the backs of the citizen.
In a world without "limited liability" risk is also real. There is no displacement of liability, which is nothing other than the cost of risk, without real backing. This would increase and direct return to its rightful place next to the actual risk, not layers of paper derivatives distant.
The fact that "limited liability" is such a large part of the economic malaise that we are experiencing, yet hasn't been mentioned or even whispered publicly, shouldn't escape us. After all, who would bring it up? We have been hearing from a lot of "experts" and "leaders" lately, who out of all of them is outside the protection of "limited liability"? Who that has spoken does not benefit, but rather bears the cost of this protection? When that person outside the realm of incorporation speaks, listen, it is our voice.
Other Related Articles:
AIG upholds Executive Minimum Wage Law!
Mortgage Backed Securities, Whose Fault?
Non-Socialized Responsible Non-Investing
Fakete's Capital Erosion and the Economic Crisis
The Stimulus Package Could Work.
Theories of Value and the Recent Downturn
Deflation the Great Wealth Builder
Corporations and the Free Market
©2009 Gene DeNardo, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Wednesday, April 15, 2009
Last modified: Wednesday, April 15, 2009
The views expressed in this article are those of Gene DeNardo only and do not represent the views of Nolan Chart, LLC or its affiliates. Gene DeNardo is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: Walt Thiessen
Date: 2009-04-15 11:02:48
I couldn't agree with you more, Gene! I would only add that corporations get limited liability privileges, but individuals and non-incorporated businesses do not. This creates a class structure with corporations in the superior position and everyone else in the inferior position.
Posted By: EJ
Date: 2009-04-15 11:40:58
The fact that Corporations have limited liability should factor into your decisions to deal with them. If you do not do so, are you not at fault?
We are generally slack as individuals at insuring that those we do business with are up to the liability risk. But is still does not negate our responsibility. Whether it be the private contractor working on our deck, or the multibillion dollar insurance company, the responsibility flows back to us, the individual.
It's why I am FOR legalizing insider trading if it is reported in real time. AIG executives dumping their positions would have been a real red flag that any of us could have responded to. Instead we are kept in the dark until it is too late to react.
The Free Flow of information is the only thing that will resolve these issues.
Posted By: gene
Date: 2009-04-15 12:07:31
Hi Walt, I agree it is a class structure and I should have mentioned that.
Hi EJ, yes we should factor "limited liability" into our decisions, but the truth is we have little "alternative" outside of "limited liability" entities. Yes you are right about being kept in the dark, it is part of the whole scheme. Once "limited liability" is removed from the picture, there is no reason any type of legal trading should be discouraged or regulated.
Posted By: EJ
Date: 2009-04-15 12:30:06
Gene,
If you have the time, perhaps you could describe how a company with unlimited liability would have a different result. As a shareholder in AIG, I have had serious consequences. Had AIG had unlimited liability, would they now be coming after my assets to make ends meet? Would corporations even exist if there was unlimited liability? Who would invest in medical drugs in this over-lawyered society of ours?
As a side note, I still contend that AIG was making whole organizations damaged by the Feds. In this instance, I would have to take on the Federal Government to protect my assets. I do not want to put what I think my odds would be, but less than slim would be about right.
EJ
Posted By: Walt Thiessen
Date: 2009-04-15 12:55:51
EJ: The answers to your questions are "yes," "no," and "you're barking up the wrong tree."
Without limited liability, would they be coming after your assets? Yes, as they should! The idea that people should be allowed to make money off the efforts of others without bearing any responsibility for what those other people do is atrocious. It's like claiming the right to invest in Adolph Hitler without being dragged through a war crimes trial.
Would corporations exist without limited liability? Of course not! There'd be no point. Instead, stock-based companies would be smaller, leaner, and watched much more closely by investors and board members alike, and people who invested in a company (or sit on its board for uber-dollar salaries) without checking it out carefully in advance and without monitoring the company afterward would risk losing their shirts...again, as they should!
As for medical drugs, you've missed the primary reason why they're so expensive....FDA regulation. Just to release a single, new drug costs upwards of a billion dollars. Sorry, but that's not the fault of lawyers. That's the fault of the FDA.
Getting back to liability limits...the reason why lawyering is so big is not because of a lack of liability limits. Rather, it's because of a lack of responsibility built into the system of liability limits as they currently exist. Liability limits create and contribute to unscrupulous corporate behavior, thereby encouraging the judiciary to bend over backwards to partially compensate for the mess the system creates.
Posted By: gene
Date: 2009-04-15 13:29:43
Hi EJ, Walt is spot on in his answers to your questions.
Again, eliminating "limited liability" simply links risk and reward as it should be linked, no more, no less. The corporations have been collecting massive profits with diminished risk.
Also, consider the corporate "stock" phenomenom; People invest in corporations BECAUSE they have "limited liability". Shareholders can lose no more than what they risk [unlike individuals and unincorporated companies]. Because of this, corporations become funnels for funds. The return is great and the excess risk is shifted outside of the corporation.
Because of this investment and the "limited liability" factor, corporations can experience amazing growth with only "outside" investment. Those running the corps, only profit and have no stake themselves [although some could also be owners]. Why shouldn't they pay themselves 50 million?
Basically, we would be living in a different world. All the wealth that is concentrated within the hands of corporations [that is all the real wealth anyway, not paper] has been produced by us, not some privleged entity. This wealth would have to go somewhere once the constrains of "limited liability" no longer existed, and without forced direction, you would think we all would be better off or at least not in debt.
If this ideal situation was in place all investors would be informed. People would realize the high risk and go somewhere where the workings of a company are more visible and less confusing. The most transparent investment is ourselves. Those who wanted extreme risk and possible big return, would certainly have oppurtunities.
In simple terms, it is a violation of individual freedom to allow forced transfer of risk upon another individual or group. That is all "limited liability" is.
Posted By: Walt Thiessen
Date: 2009-04-15 13:36:49
EJ: I forgot to address your last point, which is an important one. You wrote, "As a side note, I still contend that AIG was making whole organizations damaged by the Feds. In this instance, I would have to take on the Federal Government to protect my assets. I do not want to put what I think my odds would be, but less than slim would be about right."
You would not be the only one in that position. So would everyone else, including the powers that be (for a change). Witness how fast their views would change on the issue of responsibility of the Federal Government for creating such messes! So long as the powers that be are shielded from such responsibilities, they will be glad to cozy up to their Fed friends. Remove those protections, and most of them end up switching sides.
Posted By: trd
Date: 2009-04-15 21:04:33
Walt:
I don't mean to be a dick, but what does the LLC in one of your companies name Nolan Chart LLC stand for? Isn't it Limited Liability Corporation? Don't take it the wrong way though. I know that if your companies expenses are higher than your income you are still responsible to make up for the difference unless Nolan Chart LLC files for bankrupcy... But even if Nolan Chart LLC files for bankrupcy, they can't come after your own personal assests, isn't it?
Just curious...
Posted By: Walt Thiessen
Date: 2009-04-15 22:31:19
Hi TRD,
No offense taken. Yes, that's exactly what it means. Want to know why I registered as an LLC? Because, in an economy that is legally dominated by corporations, it's the only way you can attempt to compete. The legal picture is just too dicey in the current legal climate without it. I'm not worried about my personal assets per se if liability limits are removed for everyone, because the legal climate would change for the big boys also.
Take away limited liability from all companies, and I'll be happy as a clam, because it'll mean that the courts will have the incentive to stop overbalancing their decisions to compensate for liability limits. It'll also be the beginning of the end for the uber-wealthy mega-corporation, dramatically improving the chances for a small, lean venture like mine.
Posted By: EJ
Date: 2009-04-16 07:14:12
Thanks for the replies gentlemen,
First, I did not say drugs were expensive nor imply that. My thoughts are that under a no liability scenario, no one would even develop them.
Second, all shareholders would not be created equally. If Bill Gates and I were both owners of XYZ Drugs, and it got sued, which of us in on the hook for the greatest sum? So Gates will keep his money at home, and my minor investment would get the firm perhaps a copier machine.
So, I only see those with nothing to lose as being the ones to take the risk in an unlimited liability environment. And those that are in business will have to price their services/goods to balance theriskof unlimited liability in case something does go wrong.
If this perception of mine is wrong, please let me know.
EJ
Posted By: gene
Date: 2009-04-16 08:49:33
Hi EJ,
I understand your concerns about "liability" of things like say drugs and ladders. Goods that may cause "liability" can be sold under contract law, releasing or stating liability. This isn't that common [or at least effective] now because of the FDA declaring drugs "safe" and the fact that monopolies [the cost of marketing drugs, again the FDA, and patents gaurantee monopoly] can concentrate on maximum profit ["safe" drugs can be sold for many times more than an "uncertain" drug].
All shareholders own a "percentage" of a company [relative to shares owned]. This percentage usually determines all risk and reward by that percentage, unless otherwise stated in the contract that is signed before the investment.
Removing "limited liability" simply presents the same risk and reward to ALL people, there are no liability exceptions for corporations,etc.. Anyone can take any risk or no risk and the reward will be determined by how much risk those involved believe exists. It is the FREE market, any constraints such as "limited liability" or other privleges, advantages and subsidies is a "controlled" market. And yes, prices will freely reflect the total "cost" involved when the market is free, unlike now when "costs" are "externalized".
Yes if something is determined to be "too risky", then no one or very few will do it. For instance under real liability, no one might ever be willing to manufacture chemical weapons or say DDT or dioxin. These are examples of products that cause harm and injury to others.
On the other hand, people submit themselves to experimental or risky medical treatments all the time by contract release. When the risk is accepted by the individual that is affected rather than passed on possibly harming others, the liability has been nullified, if you accept the freedom of the individual to make personal decisions affecting their own body.
Limited Liability is Socialism. We are instructed by the State that we all should accept the excess liability that occurs because of "limited liability" privlege being granted by law to corporations, for the "good" of all. Somehow in the minds of those who make our decisions for us, we cannot make our own decisions regarding liability but need it to be directed and decided by the State.
Posted By: trd
Date: 2009-04-16 18:43:20
Walt:
I get your point now.
You don't agree with Limited Liability but are somewhat forced to have a Limited Liability Company yourself in the same way I send my kids to public school even though I am against the public school system.
I don't like that my city forces me to pay through taxes a socialistic public school whether I use it or not, but send my kids there anyway because otherwise I would have to pay for both the public and the private school! How is a private school suppose to compete agaisnt that!
I don't like public libraries but I borrow DVD's from there because wheather I used those DVD's or not I will still be paying for them.
I don't like to pay taxes and we are enslaved to pay them, but if I don't pay them, I will be more enslaved in a jail.
Therefore, Walt, I can now see how you can have an LLC but still be against them without being a hypocrite. We are probably just cowards against the powers of the system since we are not willing to go out of our comfort zone to fight the system.
Posted By: trd
Date: 2009-04-16 18:53:58
Nevertheless, Walt:
I don't see your venture as having a HUGE liability or any liability other than your hosting costs. Seriously, nobody is going to sue your company or win a legal lawsuit against your company for something really bad happening from this website. Nolan Chart LLC does not have deffective products, nor harmful chemicals, etc... How much damage can words from multiple users incurr on others? You may not even need the LLC.
Maybe a computer virus spreading from one of your links? In wich case the liability is from the link and not from you.
Posted By: Jake, the Champion of the Constitution
Date: 2009-04-16 19:06:35
Gene - thanks for the reference!
My two bits on AIG (an "insurance" company) is this:
1) The bailout of AIG was all about protecting it from derivative losses, like LTCM. The "insurance" part of the company is a scam and provided equity for trading leverage
2) It appears AIG was (and IS) a key part of the global quant derivative and anti-gold cabal - Government Sachs controls the politicians and helped get competitors like Lehman and Bear Stearns liquidated.
On #2, I am still on an upward learning parabola on "quant" trading - and deciding whether it holds water since I am a skeptic at heart - so I havent written on it. Basically the theory goes like this - "quant" derivative traders analysts are "white knights" guys like Martin Armstrong, "Tyler Durden" aka Zero Hedge and a few others claim that something like 98% of all trading has zero to do with individuals and everything to do with the moneyed aristocrats. Big players in the quant trading are Govt Sachs, AIG, Renaissance Technogies, Highbridge (JP Morgan) and GETCO.
Here's my "get to the next level" learning library
http://www.classiccmp.org/transputer/finengineer/
and a nice example write-up for "investors" - as in 10s of millions millionaire investors
http://www.classiccmp.org/transputer/finengineer/%5BBNP%20Paribas%5D%20Guide%20to%20Structured%20Products.pdf
I'll figure this all out for myself eventually, but not sure how much it matters since eventually these SHOULD all evaporate, %^$&i$%# financial engineers, they should all hang for what they have done... but if its true that they control so much of the trading already, why collapse it instead of balancing it - unless it started collapsing on them already?
I cant believe I am not yet at the bottom of the rabbit hole I started traveling down a year ago, wanna bet a carrot who can get to the bottom first??..... spiral out!
http://www.nolanchart.com/article4454.html
Posted By: gene
Date: 2009-04-17 07:51:43
Hi Jake, interesting that I heard almost an identical figure, 97%, describing the amount of trading that "doesn't" have anything to do with the "real" economy. Well, judging from events, it seems the 97% does need the 3%.
One thing "unlimited liability" would do to a company like AIG would be to break it down and form it under "no longer too big to fail" category. the fire insurance division surely would want nothing to do with the financial derivative division if liability was actually experienced!
By the way, you've already earned the carrot!