SOME THOUGHTS ON DECREASING THE FEDERAL BUDGET

There is the thought expressed by many that decreasing the Federal buget will decrease Federal borrowing and free up money for the private sector. But nobody is forced to buy government bonds, notes or bills (government securites). They do it of their own accord because Federal government vehicles are thought to be safe. So it really doesn't follow that the people that buy government securities will switch to buying less-safe private sector securites (stocks, bonds, etc.). More likely, it seems to me, that the people or companies that buy government securites will continue to buy them. If the securites become more rare, this continued demand will just bid up the price of the government securities. For example, with corporations, the only reason they will buy Federal government securities is that they don't know of any other place to invest the money profitably so want to park the money in some safe place depending on developments. The wealthy buy government securites because they are safe and not susceptible to state and local taxes. There are various reasons that foreign countries (like China) buy U.S. government securities, but certainly one component is safety. As far as balance of payments shortcomings are concerned, the foreign countries could buy private assets in the U.S. such as stock and property and some of this is done. But buying government securities do not conflict with buying private securities.

INVESTORS ACCOUNTABILITY

Also see: http://stopcontinentaldrift.blogspot.com/2010/06/corporations-are-political-entities.html

Corporations are political institutions. One of the big rules in favor of investors is that the owners (i.e. the stock holders) got a law passed that they are not held accountable for the malfeasance or losses of their company. Think about the value of that.

The above is not true about all types of owners. For example, general partners ARE held accountable although limited partners are not.

Stock holders and limited partners can lose their investment*, but they are not held accountable for malfeasance or losses of their company. Whew, what a relief!

Officers, however, can be held accountable for malfeasance in their companies. Think Enron.

*If you buy on the margin, you can lose more than your investment, of course, but we don't do that, do we.

CORPORATIONS ARE POLITICAL ENTITIES

There has been a good deal of discussion lately about Federal govenrment bailouts of industries. The AIG bailout may be the largest, but it is hardly unique. Some of us may recall that in 1979, Jimmy Carter bailed out Chrysler which actually paid off the loan early. Also a duty was put on Japanese imported automobiles which raised their cost by about $2,000 to make the U.S. automakers more competitive but hurt American consumers.

There was also a railroad bailout, in 1959 of the Great Northern Northern RR. In a recent article in the WSJ (06-10-2010), the headline reads Bernanke Expects "AIG To Repay Aid." And in a hearing, the CEO of AIG Robert Benmosche "...said taxpayers are 'going to get your money back plus a profit.'" So eventually this may turn out all right.

I think that there is a great misunderstanding about what corporations are. They are political organizations that are supposed to play by the rules set out by the government. Of course, they develop a life of their own and do their best to get around the rules all they can. One of the biggest political aspects of corporations are that stock holders are not liable for losses sustained by a corporation. We like to fantasize that there is some macho aspect to corporations that they are tough guys who live or fall by their own merits. Actually they are political organizations that go to the government whenever they are in trouble and continually try to skew the laws in their favor.

More common are indirect bailouts, such a tariffs. Just within the last decade, tariffs were put on imported steel and Canadian lumber to bail out the American steel and lumber companies. And of course, an infamous one is the tariff put on imported sugar cane ethanol, mainly from Brazil, to make such importation uneconomic so that the American corn ethanol agribusiness is profitable but again at a cost to the consumer.