18 March 2012

Entrenching corruption

Matt Taibbi writes:
In a pure capitalist system, an institution as moronic and corrupt as Bank of America would be swiftly punished by the market - the executives would get to loot their own firms once, then they'd be looking for jobs again. But with the limitless government support of Too Big to Fail, these failing financial giants get to stay undead forever, continually looting the taxpayer, their depositors, their shareholders and anyone else they can get their hands on. Too crooked to fail, Matt Taibbi, 'Rolling Stone', 29 March
Yes, a pure capitalist system would be an improvement on the current model, in that it would respond to people's wishes, rather than the interests of monopolies or government. What we have in the west, more and more, is government that is reponsive not so much to the citizens whom it's supposed to represent, but to powerful institutions. These include large corporations, trade unions, or government agencies, including the military. They all have one over-riding goal: self-perpetuation, regardless of the interests of society or the environment. Unfortunately, there is little in the way of self-correction, especially when government gets involved. Indeed, the dynamic works in the other direction: corrupt favouritism entrenches itself along the lines that Mr Taibbi describes. Interests groups whose influence is out of all proportion to their contribution to society benefit from direct subsidy or regulatory manipulation to such an extent that they become wealthy enough to resist any change.

If this sounds far-fetched take a look not only at the Bank of America, but also at farmers and agribusiness in virtually every rich country. The insanity of agricultural support policies has been widely understood and quantified for several decades now. Its persistence is a savage indictment of our so-called capitalist model.

06 March 2012

Social Impact Bonds and Social Policy Bonds

Social Impact Bonds, about which I have blogged before, are a small step in the right direction. (I have had no input into their creation, though I have spoken to their lead developer.) Their best feature is that they target outcomes, rather than activities, inputs, or outputs. To my mind they suffer from the deficiency that they are not envisaged as being tradeable. This means they have to focus on narrow and short-term goals, for which the purchasers of the bonds can expect to hold them until redemption. This in turn means that the arrangements for each issue are more along the lines of contracts whose reporting requirements (monitoring progress toward the goal etc) seem quite burdensome in relation to the intended outcome.

Social Policy Bonds, being tradeable, can target broad, long-term goals, such as peace in the Middle East, or the avoidance of any sort of catastrophe, man-made or not. This is a huge advantage. Targeting outcomes, which both SIBs and Social Policy Bonds do, works better than the current, command-and-control system when we do not know in advance how best to achieve our social and environmental goals. If we target broad, long-term goals there is both: (1) less chance that targeted goals will achieved at the expense of goals that are not specifically targeted, and (2) more scope for investors to explore different ways of achieving these goals and follow and refine the best approaches. As well, reporting requirements will be a lesser proportion of the sums at stake.

Social Impact Bonds, though, are already being issued, while Social Policy Bonds, despite being in the public arena since 1989, have not. As well, I will readily concede that "Social Impact Bonds" is the better name. I was originally going to give my bonds the name "Social Objective Bonds" until one of my colleagues, more worldly than me, pointed out the meaning and widespread usage of the acronym.