Limited liability and the nanny state

Ozplogger James Morrow has a piece in Wednesday’s Oz, saying

If a gambler sitting at the Crown Casino in Melbourne knew that the Government would cover his losses, no matter what, he’d have no incentive not to draw to an inside straight or hit on 17. Likewise, a board of directors, if they believe their business is politically “too big to fail” and could qualify for a government bailout, will surely be more inclined to take the sort of big risks that would in the long run cost a gambler his house and car and livelihood.

And though a casino is able to force a loser to pay his debts, in the corporate cowboy world of Adler and Williams, losses go unpaid while the gamblers walk around with huge personal fortunes.

I agree with the sentiment and with Morrow’s concerns about ‘moral hazard’, but I think he has aimed at the wrong target.

It’s not government bailouts that let Adler, Williams, Rich and others walk away from failed companies with their personal fortunes intact. Under the institution of limited liability, this is the rule, not the exception. Assuming the company is not preserved as a going concern, government bailouts of the kind we saw with HIH don’t give any additional help to the managers and shareholders, only the creditors (in this case, policyholders, and in other cases employees).

James writes for Reason and there are quite a few bloggers of a libertarian bent. I’d be interested to read their views on limited liability and, for that matter, personal bankruptcy.

Update As I hoped, this post has generated a lively comments thread. Come and have your say – I’m enjoying the bloggers’ privilege of asking a rhetorical question without revealing my own answer for a while.

PS I forgot to thank Gareth Parker, whose link I followed.