Yet we know exactly who the participants are, the types of firms, and their practices.
Step 1 to better regulation of creative rent seeking is to stop treating it like it's nebulous.
Actually, the hedge fund and private equity fund people hate that term because it implies something nefarious is happening. In reality, the new post-2008 crisis bank regulations in both Europe and USA to ensure stability causes a new phenomenon to emerge: Non-banks lending money to companies that banks are not allowed to lend to.
Every economist and financial regulator knows this became a side-effect of the more stringent financial regulations. So the "too big to fail" banks will still lend millions to big companies like Microsoft and Apple, but the $50m companies are too small and too risky to bother with.
Look how these "shadow" lending transactions keep emerging...
- a billion dollar pension fund is woefully short of its obligations to pensioners and needs a higher yield on its money. Buying safe US T-bills that yield 1% interest is not enough. They need to look at alternative asset classes that gets them in that ~8% range.
- a medium-size company needs $50 million loan to expand its business and is willing to pay a higher interest rate than 1% T-Bills. (That makes sense since the company doesn't have the same credit worthiness as the US Government.)
- If the pension fund (needing to put their money to work) and the company (needing a loan) can match up with each other, they can help each other's goals. But the pension fund isn't in the business of analyzing credit risk or providing loans directly. Likewise, the owner of the company doesn't have the time to fly all over the country and meet with 100 different pension fund officers.
That's where middlemen like private equity come in. They're the ones with the staff of credit analysts. The "back office" of the private equity fund that analyzes a company's credit worthiness does much of the same work that the credit analysts at JP Morgan, Bank of America, Wells Fargo, etc did. They become the "shadow bank". Of course, they also charge management fees and a % of the profits for their "financial intermediary" services.
The middle market's underlying need for credit never disappeared. The new bank regulations just inevitably shifted the loan transactions to a different set of players.
But shadow banking can and should be scrutinized, and potentially regulated, if there are systemic risks that will lead to the taxpayer being on the hook once again. If it's just isolated private actors losing money it doesn't matter.
so the taxpayer is on the line (at least, as much as they were in 2008)
So instead of banks lending directly to the risky mid-size businesses, they are lending to trustworthy middle men?
> To fund all this loan-making, the shadow banks have turned to insurance companies, pension funds, university endowments and wealthy investors, offering them a chance to buy into a diversified pool of loans that offer returns ranging from 6 percent to 13 percent, depending on the level of risk they are willing to assume.
If some hedge funds and "wealthy investors" want to take on risky investments that are "unregulated" I'm all for it. Would you agree the risks for systemic collapse come in when it's straddled onto say insurance companies or pension funds?
If everyone is making riskier bets for a significant, then those who do right may be outcompetes for long enough that they go by the wayside while the risk-takers dominate.
Then when the “black swan” comes the risk averse are already gone. Oh and the system is full of TBTF entities.
The line would be fairly arbitrary but I don't see why that would make it particularly hard to implement?
Rent-seeking happens when a person or business uses their position or resources to get some additional benefit from the government. The most common occurrence is when a company or industry lobbies the government to receive special subsidies, grants, and tariff protection. The term "rent" in economics means receiving a payment that is over the costs involved in the production of the item or keeping the item in service. These actions do not produce any benefit for the community-at-large but only redistribute taxpayer's resources.[0]
>Rent-seeking is an attempt to obtain economic rent (i.e., the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth.
The important bit in rent-seeking is "rather than creating new wealth."
Here is Wikipedia's:
"Rent-seeking is a concept in public choice theory as well as in economics, that involves seeking to increase one's share of existing wealth without creating new wealth. Rent-seeking results in reduced economic efficiency through misallocation of resources, reduced wealth-creation, lost government revenue, heightened income inequality, and potential national decline."