Topic: Economics
Freeing the Limits of Incorporation: Final Solution. The fundamental way in which we view and interpret the Creditor-Debtor relationship resolves the very same issues Liability creates.by Gene DeNardo
(libertarian)
Saturday, June 27, 2009
In the previous article, Freeing the Limits of Incorporation. a solution for the State chartered advantages of incorporation was offered. In essence, it was suggested that the taxpayer "bailout" system we now have of funding corporations who exceed the limits of their liability be replaced with funding by the corporations themselves. This would be simply done by "pooling" their resources into either an "insurance" type fund or better, a proportional fee levied to all corporations when one becomes insolvent. This type of solution has in its favor the relative ease of transitioning from a taxpayer funded system to one where those who are the cause of the problem and who benefit from the State instituted market advantage of "limited liability" bear the cost.
But, there is another possible solution that is more fundamental to the working of a free and unencumbered marketplace. This solution would involve observing and classifying the creditor-debt transaction into its natural categories: secured and unsecured debt.
Secured debt is debt incurred with the backing of collateral. The creditor agrees to allow the use of their Capital over a period of time in exchange for receiving both the Capital back in the future, along with a return or interest. The contract between the parties specifies amount, time period, and payment schedule and interest details.
It would also call for some value or property under ownership of the debtor to be posted as "collateral" or backing for the transaction. If the debtor defaults on the agreement, the creditor receives the property in exchange for the lost capital. If the value of the property exceeds the amount of default, the contract can specify whether and how the excess value be redistributed to the debtor. The two parties are free to agree on these terms as they see fit.
The court system has certain duties and responsibilities in the honor of secured contracts. The contract must not step outside the bounds of existing law. Any fraud or deception can be settled in the courtroom. Poor contract language and misunderstandings also can end up in court. But, with these considerations in mind, the bulk of secured contracts can exist without the intervention of government.
Unsecured debt shares the same credit-debtor relationship, but the debtor brings no collateral to the table. As long as the schedule of the contract is adhered to, there are no problems. It is when the debtor defaults that the can of worms is opened. Our court system and our law books are clogged with the debris of failed creditordebtor relationships. In fact, our present economic doldrums attest to this problem. Yet, it doesn't have to be the case.
Unsecured debt can and should be just that, unsecured debt. If we set the ground rule at the onset, we have simplified and freed an unwieldy and unworkable system. A contract between a creditor and a debtor that does not call for collateral payment in the case of debtor default is final; both creditor and debtor have finalized the contract and are free to move on. The courts would have no role in unsecured debt other than mentioned above for the secured debt contract.
What could be a common clause of the unsecured debt contract would be an "obtained assets" clause. Assets that were purchased in the course of the intended enterprise of the contract could be entitled to the creditor as compensation for the defaulted debt of the contract. In fact, entitlement could be part of a "future collateral" agreement within the contract. What is at stake is the ability of parties to be free to contract within the realm of the law. They will both seek a balance between that which protects themselves and that which provides return. Such is the nature of the market.
This arrangement grows out of the true nature of investment and capital. Capital has no use other than reentry into the production process. The use of Capital as "leverage" to extract or force interest and return is an outgrowth of the use of "collective" force. Capital by its nature has no power to coerce action from the parties beyond the enterprise and actions freely chosen.
A contract that extends the use of Capital to the non owner is an "agreement" to jointly share the results and products that will hopefully come to fruition. In order to lessen the risk to the creditor and increase the availability of funding, the debtor offers collateral as security and lowers his costs while raising his own return. The creditor gives up return in exchange for security.
A contract that extends credit to the debtor without collateral greatly raises the return to the owner of the Capital and raises the costs of the loan to the debtor. The creditor gives up security in the "interest" of higher return. The debtor, in a sense, becomes more of an "employee" of the creditor and less of an entrepreneur. This is the nature of Capital and Capitalism.
This is also the difference between investment and storage of Capital. The funds are "stored" in the collateral or they are "invested" in the debtor. There is little risk in storage and extreme risk in investing and the markets will substantiate this.
We have as civilized people decided "slavery" is wrong. There is no argument. A contract is not valid unless the parties are "free" people. One cannot "enslave" another through a contract. And, a contract cannot "induce" slavery. Therefore, a contract cannot induce future slavery or indentured servitude.
Incorporation? It becomes meaningless. Contracts ordered either as secured or unsecured overrule any State imposed sense of "Corporation". Contract itself provides or eliminates liability. One of the great impediments to a free market in our time, Incorporation, becomes an antiquated notion.
Insurance, of course, is possible within the contract market realm. But, it simply needs to be remembered that insurance falls under the same basic parameters, secured and unsecured. Value becomes self evident.
Bankruptcy? Meaningless. A loan, by its contracted definition, has security in the form of backing or it doesn't. The market determines the risk and reward. Creditors make their judgments, they have the power of Capital, and they live by their decisions. Debtors mold and determine their future credit, their access to Capital.
Credit Card Issues? No need for regulation. No need for litigation or restraint. The power lies in the parties who enter the contract and the terms they choose.
Creditors are free to subject their Capital to the highest risk for the greatest return or the lowest risk for the least return. Debtors can pay the highest rate in exchange for little or no collateral risk or the lowest rate in exchange for their acceptance of the full risk of the marketplace and possible forfeiture of collateral value to the creditor.
When the only advantage an actor has in the marketplace is their own individual ability and aptitude, not the backing of "collective" force to bestow benefit and insure success for the chosen or disadvantage and hinder progress for the others, it is then that they are free to act.
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The views expressed in this
article are those of Gene DeNardo only and do not represent
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Posted By: Jake, the Champion of the Constitution
Date: 2009-06-27 11:20:44
Gene -
One day you will have to start your own think tank :)
These thoughts above mesh well with the future of loans as I dreamed up once (and may already exist for all I know) - use of the internet to mesh borrowers with lenders with clear contractual terms - your principle of "secured" vs "unsecured" is a common sense insight. Over time, I think a 'standard' for contracts would quickly ensue.
People can also entrust their capital to be loaned out through groups (sort of like how our modern banks are supposed to work) or place it into a "money warehouse" that charges storage fees - which I believe you wrote about earlier
The group or mutual concept could have the same parameters. Individuals could choose whether they want the high risk unbacked group or a more secure environment.
I really think it gets back to allowing people to control their own money! The system is made complicated in order to hide who is using our money without full permission!
Posted By: Jahfre Fire Eater
Date: 2009-06-29 06:40:58
Hi Gene,
I'll say right up front that I think this went over my head. I'm not sure of the problem it is aimed at fixing and I couldn't follow actions and consequences well enough to deduce the problem. I'm just glad you're out there figuring all this out.
The one thing that I'm not clear on is important though, whether or not I undestand the rest. When you started you mentioned "fundamental to the working of a free and unencumbered marketplace." There there seemed to be a lot of clauses about this would have to happen and that would have to happen. I couldn't sort out the altruistic expectations from the government imposition of force to cause these things to happen. In any case, I wasn't sure that your plan had any relationship to a free and unencumbered market because of my confusion over the mandatory condidtions that followed.
Side thoughts: how long would it take to create and refine a basis for the "insurance" you mentioned. (Very appropriate use of quotes around insurance, BTW) Insurance is a specific business model that isn't really compatible with universal coverage. So, if everyone has it, it CAN'T be insurance, it can't be voluntary and it can't be viable in the long run. IN my limited understanding this sounded like a forced hedge rather than insurance.
Keep those thoughts coming...critiquing yours is way easier than writing my own. :-)
Thanks for the comments Jahfre. If the article went over your head, I need to do a better job.
The problem aimed at fixing is the State imposed chartering of "incorporation". The granting of the advantage of "limited liability" by the State.
Force, as you say is very critical.
First, there is no problem with "secured" debt. The creditor "owns" the security so any default by the debtor is repaid with the security and this is defined in the contract.
When the debt is unsecured, neither the creditor or the debtor know the future. This is the nature of risk. By voluntarily entering into an "unsecured" contract, by definition both parties have accepted this. They agree to "engage" in the enterprise, share the risk and the return as the contract states.
Contracts cannot infringe upon the laws we have in place against "indentured servitude" or "slavery". So, an unsecured contract cannot be "secured" with the performance of future labor, as that would fall under "indentured servitude". This would be debt labor.
This is the path of "least force". It takes the force of the "collective" [government] or the creditor to coerce a defaulting debtor to "pay" for non performance, thereby transfering the risk of the marketplace away from the Creditor and completely upon the debtor. It takes force to coerce taxpayers to pay for the non performance of AIG, etc.
Fraud and default are two different entities. The debtor who is non performing, unless he has deceived the creditor beforehand, has not committed fraud. No human can foretell future events and no human can claim responsibility for what the future holds. This is what determines risk and reward, and neither the creditor or the debtor can claim power over that fact. It requires force for this basic truth to be overruled.
As far as the insurance, your comment made me realize I need to edit that paragraph. I was simply referring to the possibility of insuring the contract for default and noting that the insurance contract also would be either secured or unsecured and should be viewed in that light [such as unsecured Credit Default Swaps].
Your really not saying anything (I think) except that contracts should reign, and parties need to accept the outcomes based on their terms, with the state only involved in settling contract disputes, not lending financial support to"critical" or "strategic" industries.
I agree 100% with the idea of eliminating the concept [or at least the effectiveness of the concept] of incorporation. It creates a 'virtual' entity on which to push all the liability and bad things the firm does.
Unsecured credit would undoubtedly become hard to get, and the terms might seem outrageous compared to current 'standards'; politically somewhat inconceivable.
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