The failures of modern crony capitalism are much discussed. Few solutions are agreed on, but if there is one thing you can say that is close to consensus it is that shareholder capitalism must find a way to be more inclusive. It is no good reminding anyone that most working UK adults hold equities via their pension, or that, in the US, 55% of adults own equities. Not everyone has a stake, and not all of those that do understand that they do.
So here is where we might be able to pull a silver lining from the economic carnage of Covid-19. Governments are desperately bailing out companies with grants and loans in the hope that this will buy them time to survive to the other side of the pandemic. But then there is this key bailout question: is giving the already overleveraged corporate sector loans to infinity a good idea?
Ask anyone who has just realised they are losing six months’ worth of turnover and odds are the answer will surely be no. Offer too much debt and the governments backing these companies may find that they don’t collect much back. Might we all then be better off if these loans were fast converted into equity – strengthening corporate balance sheets and leaving the government with a portfolio of equity stakes along the way?
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The idea of the state taking some equity is mainstream stuff. Larry Kudlow, the White House’s chief economic adviser, suggested in March that “if we provide assistance, we might take an equity position”. Indeed, funding for airlines such as Delta and United via America’s Coronavirus Aid, Relief, and Economic Security Act has included warrants (the US could end up holding 1% of Delta’s stock).
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Meanwhile, in the EU, the Directorate-General for Competition has suggested that governments should take stakes in companies with an eye to prevent them being taken over by foreign rivals. The German government may take a stake in Lufthansa. We are also all used to the idea of governments being forced into taking on shares in important companies or sectors – be it the UK’s takeover of Rolls-Royce in 1971; the Swedish bank nationalisations of the 1990s; or the huge financial bailouts in 2008 that left many Western governments with equity stakes in big banks.
But in circumstances such as today’s, why stop with just a few big firms ending up on government books? Why not take all the loans, convert them into equity, create a special purpose vehicle (or several, dividing up listed and private businesses, perhaps) and manage them for the public’s benefit. Or, for extra public support, manage them specifically for the benefit of public health services – always a winner in the UK and surely an increasingly political draw elsewhere.
There is some precedent of successful intervention here as well. Let’s ignore for the moment that the Bank of Japan is on track to own some $370bn of the country’s ETF market. This is intervention on a huge scale, but whether it will ever count as a success is not yet known. A more interesting example is Hong Kong in 1998. Then, as markets tanked during the Asian financial crisis, the government stepped in to calm the market and bought about 11% of the Hang Seng’s free float over a two-week period. Crisis averted. There is also how the US made loans to, and held stock in, thousands of distressed companies in 1932 via the Reconstruction Finance Corporation. Intervention, assuming it is both fast and big, isn’t always an obvious mistake.
The difference this time is that we aren’t just having to think about one part of the economy or even about listed companies only, but about entire economies. Given the calls for inclusive capitalism, we might also have to rethink the idea that governments should sell down these equity stakes as fast as possible, as happened in the above bailouts. Instead, we should think about the situation as if we are building very public sovereign wealth funds.
Obviously there are differences. Sovereign wealth funds are international investing vehicles created from excess cash. Today’s equivalent would be crisis-driven bailout machines for domestic corporations, all financed from a magic money tree. Yet the result is still useful: a diverse long-term fund of holdings representative of a domestic economy, in which all citizens have a stake – and know that.
Governments are trying to make sure that today’s bailouts come with strings attached: no dividend payouts, limits to share buybacks and bonuses, emissions targets and so on. But having shares and asking the public how they should use those shares’ voting rights would surely strengthen the bailouts’ conditions and make it clear that 2020 is no repeat of the “bailout for boardrooms” of 2008.
All good capitalists will respond that governments have no business being in markets. And they’re right. Of course we shouldn’t have to part-nationalise capitalism to save it. A world with no debt bubble, no pandemic, no lockdown and no intervention would have been better.
But, in this world, a structure that allows us to keep our companies going now, and creates something that might help people see the benefits of the profit motive and shareholder capitalism, might be a neat part of the solution.
Sure, the best time to create something that looks suspiciously like a SWF is when you have excess wealth. But the second-best time is when all other choices look worse.
• This article was first published in the Financial Times
