As ever, politicians are grossly behind the times:

The private equity industry’s massive appetite for
debt is potentially destabilising the economy, according to a
parliamentary report that urges the Government to consider major
changes to the way the sector and its wealthy executives are taxed.

The
Treasury Select Committee warned that the massive growth of the
industry came hand-in-hand with an exponential increase in debt, which
was creating risks for Britain’s wider economic system. It pressed the
Bank of England to probe the potential consequences.

So, what in fact could be done about it? You could change the tax laws, so that interest is no longer an allowable expense. That would be entirely cretinous. You could change the tax laws on carried interest and capital gains, which while not cretinous wouldn’t actually do much to solve what is perceived to be the basic problem.

For the problem, such as it is, is not debt per se: it’s the price of debt. The wave of private equity highly leveraged takeovers has been driven by the shrinking of the risk premium upon borrowed money. The premium paid on BBB loans over AAA credit risks has shrunk dramatically over the past decade or so.

The way to slow down this wave of takeovers, if indeed that’s what you want to do, is to get that premium up again. So how are politicians going to do this?

Well, in something that won’t come as all that much of a surprise to the initiates, but will of course be terribly disappointing to those who think that politicians should indeed manage the markets: it’s already happened. The risk premium has widened massively in the past few weeks.  The leveraged takeover of Chrysler in the US and another one here (sorry, it’s Monday morning, can’t remember the name) have not been able to float off the bonds necessary to make them work. The underwriters (ie the banks) are stuck with the paper: the next people coming along trying to do something similar will be paying much higher prices. That risk premium has already risen.

And the politicians are issuing their interim report.

No, markets are not perfect, yes they do overshoot, yes, there are and can be problems in them. But they do seem to correct such faster than any other alternative method of arranging matters.