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Bankruptcy? What's that? Oh, that's right, you're talking about a Government-created market failure? What would happen in your situation, but without bankruptcy law? If I pay a premium to a fire fighter/insurer, which then fails to deliver on either the fire fighting or the insurance payout, then I own the fire fighter/insurer. And I don't just mean the current assets of the firm, and I don't just mean the current assets of the owners. I mean I own the future assets of the owners (i.e. their future income). I'm sure I'd cut a deal where, in order to give the owners an incentive to get out of the hole they're in, I'd let them keep a proportion of their future income. And in the absence of welfare, I'd imagine that they'd respond positively. Who are these owners of fire fighters/insurers anyway? Could it be the banks with perverse incentives arising from an implicit government promise to bail them out when trouble comes? Or could it be super funds that don't have to compete for investors due to current government compulsion? Or maybe it's everyday mums and dads with a false impression that the government is capable of prudential supervision, and with a love of capital gains given taxation distortions.
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