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This innovation allowed large infrastructure to be established which was no longer tied to a particular individual’s wealth, and could carry on for generations. But then he also seems to partially agree with opponents in that debate about a “tension” between the otherwise successful model of the corporation and societal risk created by corporations that are “too big to fail”. He referred in particular to the banking sector.

I would like to refine this debate by pointing out that there are no societal risks from large companies like Walmart or large railway companies. Should they go bust, someone will always come by and pick up the ruins if there is any value left in them. Consumers don’t lose anything either, since they aren’t buying the services any longer. A few jobs are lost but that’s the natural part of creative destruction (what I call creative replacement in BFN – see online notes).

On the other hand, and here is the key, there is a big difference between banks and typical service providers like Walmart. A few weeks ago I discovered that banks had unlimited liability till the early 20th century when I suspect the Keynesians, the likely ‘do-gooders’, allowed them to avail the limited liability provisions applicable to ordinary corporations.

Till then they were constrained in growing “excessively” large or taking unnecessary risks because owners were directly and entirely responsible for consequences of bad decisions. Today, the owners (ordinary shareholders) may lose but ordinary customers lose a lot, too, while those who took the bad decisions (CEOs, etc.) get even fatter salaries.

It appears to be absolutely necessary to revert banking to the unlimited liability model of the past, when it worked without creating the risks it does today. It is NOT possible to prudentially regulate banking beyond a point. The owners must take unlimited liability for the bad decisiosn.

It that is done, there will no longer remain any tension between the successful institution of corporations and banks that are too big to fail.