Protecting customers from the banks

What can governments do to help consumers protect their interests when dealing with financial institutions? (Or any other industry)   I suggest increasing competition and requiring firms to publish more information would be more effective than regulation.

I figure governments pass legislation to restrict competition.  This allows firms in the protected industry to collect  profits they wouldn’t otherwise get.  When the firms protected by the legislation get out of hand and blatantly exploit their customers governments introduce regulations to limit the offensive behavior. This is to protect consumers.

Generally the way to restrict competition in the financial industry is via licensing.  Therefore the way to increase competition is to loosen licensing requirements so that more firms can get into the industry.  More competition should reduce the opportunities for exploitive behavior.

The other way to protect the interests of consumers is to require firms to publish plenty of information about their business so their customers have the knowledge with which to protect themselves.  In banking this should include detailed information about their loan portfolios.

Shouldn’t  depositors have the right to know to whom their money has been loaned?   If a depositor has this information then he or she can evaluate the safety of the deposit.  If there are concerns about where a firm is lending one’s money then one can take the deposit someplace else.

This post was written after reading in The Guardian a concern that financial reform in Britain will not lead to more competition.  You can see the article here.

Two views of food supply

My daily observations in this small corner of the planet tell me this article which predicts “increasing food prices, leading to political instability, spreading hunger and, unless governments act, a catastrophic breakdown in food” is 100 per cent bull excrement.

I hope this is  right.

However, I have long worried that the North American food factory could easily break down in which case my daily observations would change quickly.

We tend to forget or ignore things which for us are not an immediate problem.  Agriculture and food are so important we should probably be paying a lot of attention to what is happening on the farm.  It is much too important to leave to those in the industry.

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Austerity and more austerity

This week’s The Economist has an article on austerity which has turned out to be worse that some people expected.

I see this article as a part of the debate/conflict over austerity vs stimulus. I also think the economic crisis is a result of our depleting the topsoil and using up the most easily accessible energy and mineral resources.  As the easiest resources are used the costs of additional resources increases and this has to force painful adjustments in the economy.

If this analysis is correct then it is likely a great deal more austerity will be forced upon us regardless of what we do.  Austerity has had a greater negative impact on our economy than a lot of people expected and more and more observers are saying  the economic crisis will continue for some time.

The austerity – stimulus debate will probably continue so long as people believe a return to economic growth is just around the corner.

Limiting our thinking to just these two choices presents  us with  a dilemma.  Stimulus will continue to use up resources and bring forward the timing of a major economic collapse.  Austerity on the other hand is forcing suffering on many people.

Which side a person takes probably depends upon how one is affected by inflation as stimulus generally causes inflation and austerity generally leads to deflation .

Those people who have savings in the financial system are likely to lose some of their purchasing power from inflation and therefore want austerity.  Those people who are borrowers, including governments, are likely to benefit from inflation.  Governments tend to prefer inflation as it reduces their debt load (at the expense of bond holders) but they also have to convince people to continue to loan to them.

The essay “LETS go market: Dealing with the economic crisis”  on this weblog attempts to show how we might deal with the current economic crisis.  Even
so just thinking about the problem leaves me feeling down because I think the outcome will be a few people doing very well and a lot of people experiencing a lot of suffering.


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The economics of nature

I rather like to following quote, the first sentence in an editorial titled “The economics of nature”  on the website of The Hindu and dated October 22, 2012.

The strongest message to emerge from the global conference of the Convention on Biological Diversity in Hyderabad is that countries allowing their natural capital to be rapidly depleted and destroyed in pursuit of short-term goals are dangerously risking their future.

But the statement should include more than just biological diversity.  It should include all resources including energy and agricultural resources.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

God’s penny

This article about the Vatican bank in this week’s The Economist reminded me of the story of God’s penny.

A priest  was out walking in the wilderness when he came face to face with God.  He was quite flabbergasted and the only he think of was the theory that God had a different time scale in which a second to God was a thousand years to us.  When the priest asked he was told that this was true.

He then thought about the repairs his church needed and asked if the same was true for money.  It was.  One of God’s pennies was worth a million dollars.

He asked God to donate a penny for church repairs.

“Yes.” replied God.  “But I don’t have one with me.  I’ll have to go and get one.  Just wait a minute.”

Inequality through the ages

Another explanation for the economic crisis which is frequently being heard is income inequality.  Here’s a link to an interview with 2001 Nobel economist Joseph Stiglitz who has just released a book on this theory.

The idea is that with inequality people at the bottom don’t have enough money to spend to keep the economy rolling while people at the top just don’t spend enough.

Another view is that people at the top  should be allowed to get rich because they use their money to invest in new projects and this will keep things going.

Take your pick.

However, inequality is not new.  Through the ages it has been a part of most if not all large civilizations.  Previously the elites used force to expropriate the economic surplus.  Now they use legislation that restricts competition to get their riches.

Probably the most equal of societies have been the small so-called primitive aboriginal groups.

The sharing of wealth between elites and the rest of us has been a relatively recent phenomena.  It is probably a function of the supply and demand for people and the increasing productivity which started with, or just before. the industrial revolution and has continued until just recently.

If and as the economic decline continues there will probably be even more inequality.

The economic crisis and the Nobel economics prize

Maybe today’s awarding of the Nobel prize in economics adds to my previous post about the economists not dealing with the serious issues.

Match making is a fascinating subject and I frequently ask couples how they met.  I can also accept that match making can go beyond male-female relationships.  I figure economics should be mostly about the relationships involved in the exchange of goods and services.  It appears their work focuses on the initiation of relationships.

However, I fail to see how the work of these two economists is going to help solve the current economic crisis which should be the main interest of most economists.  Probably we need to focus on the types of relationships rather than how people find each other.

Here is a quote from one of many articles reporting on the prize.

“This is very much what economics is about,” said Tore Ellingsen, a Nobel committee member and a professor at the Stockholm School of Economics. “How to allocate scarce resources as well as possible, to economize.”

Why did economists fail us in this crisis?

A number of writers have recently pointed out that economists have failed the people of the world in the current economic crisis in that they failed to predict it and appear unable to offer viable solutions.

Most of these critics, including this one, don’t appreciate the seriousness of the situation and are not themselves radical enough.  Criticizing austerity and promoting stimulus is hardly an economic intellectual revolution as this writer suggests.  Nor is forecasting necessarily the most important part of economics.

As I see it the problem with economics is that the role of economists is not to solve economic problems but to provide theological or moral legitimacy to our economic activity.    Their role is to tell us our economic activity is creating wealth even thought we are really using up scarce resources and destroying the world we value so much.

It could be that most of us are to blame for this economic weakness.  Most of us don’t want to hear that there will be no more economic growth because the implications are extremely painful.

To deal with the crisis the first thing is to recognize that economic growth has come to an end in part because we have used up the most easily accessible resources.  I would also suggest that economics is mostly about the human relationships involved in exchanging goods and services.

If economists are  going to help us cope with current problems they need to study how to cope with negative growth and the type of relationships this will involve.


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Patents and smart phones

Here’s a rather long article on patent wars in the software industry especially with regard to smart phones.

The purpose of patent and copyright legislation is to restrict competition and allow some people to make excessive profits.  In this case it appears some of those profits are going to lawyers.

If we didn’t have patent legislation the smart phones would be even smarter and would be less expensive.  Probably a lot of lower-income people would benefit greatly.

I have a theory that genius is 90 per cent plagiarism.  Therefore anyone can be a 90 per cent genius which isn’t bad – except those who don’t listen (or who get caught by patents).

Innovation, growth and marginal cost

Mainstream economic wisdom says innovation is one of the things that will return the world economy to growth.  Therefore governments should adopt policies to encourage knowledge development and innovation.

As I meditate on this I think that in a previous reincarnation I must have been a charter member of the skeptics society.

Lets consider the effect of innovation on marginal cost.  Price is determined by supply and demand and  is set at the marginal cost of producing an item.   Marginal cost is the cost of the last item produced and will be the price at which any item will be sold.  If price is above marginal cost, then another producer will enter the business and more items will be produced.  If the price is below marginal cost, some producers will leave the business until the price rises.

The traditional view is that innovation reduces marginal cost and encourages growth.  For the most part this has probably been true.  What’s the point of innovation that doesn’t reduce costs?  Keep in mind that to contribute to growth new products have to be useful and people have to buy them.

However, there is no law that says innovation has to reduce costs and it may be that we are now using innovations that are more expensive.  I’m thinking of oil, gas and mineral extractions where new and expensive techniques have made possible the recovery of difficult deposits.

In these cases the marginal cost is rising and the innovations are used only when the price rises enough to pay for the innovation.  Rather than encouraging growth these innovations are slowing the rate of negative growth.

Another complication in all this is that spending more money on energy is reducing the resources for other items.  This means a whole raft of adjustments throughout the economy.

Innovation has been important to our standard of living and no doubt innovators will make further changes to our quality of life.  It is not clear that innovation will return us to economic growth and save us from an economic crisis.

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