I saw William Greider on Book TV today and it reminded me of an article he wrote in Rolling Stone just before the Savings and Loan bubble burst in the early 1980s. I was teaching college finance at the time and consulting with a troubled credit union, a "canary in the mineshaft" of the coming S&L troubles.
Greider nailed the problem so well, I became one of the few business professors in the country, I suspect, requiring students to read Rolling Stone.
The dilemma is this: There is no clear line between corporate debt and equity, rather a gradual continuum of risks vs. costs, with instruments like convertible bonds and preferred stock in the "fuzzy middle". In a sense, business managers don’t care whether their assets are financed by debt or equity investments EXCEPT for one thing.
Interest payments on debt are tax deductible to the corporation. Dividends are not. So there is a tax incentive to "leverage" the company with higher and higher levels of debt.
Greider picked this up in the 1980s, and suggested that business managers would begin to do more and more stupid things in order to get that tax deductibility, which boosts apparent earnings and their own bonuses. The downside was that the stockholders were taking on higher and higher risks, risking a heavy fall if they got too big and too leveraged.
Fast forward to 2008. Companies, thanks to this tax incentive, have become far too big and far too leveraged. So big and so leveraged that their crash has put us all in peril.
If you want to really make the world safer from "economic terrorists," get rid of the tax deductibility of interest. Get them back to selling stock in their own companies, not exotic debt instruments.