In the late 1970s and early 1980s, there was a “green” business term: “greenmailing.” Deriving its name from “green” (for money) and “mailing” (from blackmailing), it was a phenomenon that has had a long reach and has exacerbated our current financial problems. Before the advent of this practice, prudent companies kept a significant amount of cash or near cash equivalents on their books. This cash was theoretically available to help a company through a rough patch. However, in the economic malaise of the late 1970s, some sharp operators (Sir James Goldsmith comes to mind, so does Carl Icahn) noticed that many companies' stock could be bought for close to the price of the cash on hand (I am being a bit simplistic, but this reference is accurate enough to serve our purposes here). Such operators would buy up the stock and hold the companies hostage, threatening to liquidate them and make themselves a big profit. Boards of directors, too comfortable with their own lifestyles, started buying these people (called “Greenmailers”) off with their hordes of cash, hence the term greenmailing. In 1991, a movie called “Other People’s Money” fictionalized this process.
Old habits die hard, and hence, from the days of the Greenmailers until today, corporations have remembered it is not wise, at least from the perspective of greenmailing, to keep much cash around. Hence we entered the era of the leveraged business. In times like today, this hurts, and is one reason (but not the only reason) corporations are running to governments seeking bailouts (I am speaking of manufacturing and service companies, not banks and insurance companies).
I think I have a solution going forward that will allow corporations to keep a bit more of a cushion for bad times. My solution is this: encourage corporations to invest spare cash in sovereign funds of their home nationality. Give such investments a special category on the balance sheet as follows: allow corporations to withdraw these funds and their accrued interest tax free, as long as the withdrawn amounts are used for operating expenses or organic domestic growth. If they are used for mergers and acquisitions or to buy up their own stock, slap them with a large tax, say 25%, on the withdrawn amount. This will not prohibit international expansion or M&A, but it will make the anticipated returns on such activities meet a very high threshold if these funds are to be used. And, of course, all these other activities can go on as normal if they are funded outside this special category. Another restriction I would place on funds in this special category is that they cannot be used as security for loans, for if they could that would defeat part of the purpose.
Corporations, at least in the United States, are currently holding large profits overseas, for bringing those profits home subjects them to income taxes. In my proposal above, I would allow repatriated funds into the country tax-free if they were invested in these special funds such as I have described here.