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Weekend reflections

July 25th, 2009

It’s time again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.

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  1. Ikonoclast
    July 25th, 2009 at 08:03 | #1

    Simplifying the Price Signals

    I’d like to put in a plug for simplifying the price signals in our society. If you have shopped around for anything from a mortgage to just groceries and petrol you will realise what I mean. There is a plethora of “fees”, “charges”, “deals”, “specials”, “three-for-the-price of two”, coloured spots”, “discount cards”, “award points”, “prizes” etcetera.

    Given the clear cartel-like behaviour of banks, supermarkets and the oil industry, we can be sure that this is not so much competition as the pretence of competition. I am doubtful that managing inventories takes as much price juggling as goes on presently. I think we would generally agree that clearer price signals would assist the economy. In so far as consumers can make rational spending decisions (a partial capability at best) these decisions are confounded by bewildering price signals which often prevent the consumer from properly comparing products by price. A good example is that of mortgage loans for private dwellings. The loan has an interest price which is often tinkered with itself in the form of introductory offers or “honeymoon” rates. Then various loan servicing fees are superadded such as establishment fees, repayment fees, exit fees and so on.

    I would advocate that three basic principles be applied and fleshed out in appropriate legislation. These principles would apply to all retail consumer products and services. Business to business dealings would not be in the ambit of this legislation. These basic principles would be;
    1. One price for one product.
    2. All prices, awards and inducements to be in legal tender.
    3. The spirit and practice of pricing must be that of basic simplicity without misleading, confusing or discriminative intent or effect.

    In other words, a mortgage offer from a bank would carry one price. This price (almost certainly) would be a variable interest price. No other fees or charges of any kind could be levied, not even an early exit fee. Regulation of home loan interest rates would be implemented by requiring government guaranteed banks (similar to JQ’s suggestions) to accept a Reserve Bank decreed “fair retail lending range” linked to the current cash rate. Lenders that did not qualify for a government guarantee or did not wish to seek it could lend at any rate they wish provided it met the “one price, no extra fees” provisions of the Act. Fair retail lending ranges would also be applied to other forms of loans in a like manner. Personal loans and credit card loans would be rolled together by legislation and all considered as personal loans subject to the fair retail lending range for that product. Notwithstanding the general freedom of non-guaranteed lenders to set rates outside the lending range they would still obviously be required to be licensed banks or societies, to meet all other prudential requirements and to observe a further clause which expressly nominated and barred ruinous and usurious rates.

    In the supermarket, the “one price for one product” principle would apply to all items. Therefore offers of the style “buy 2 get one free” would not be permitted. In addition all emotive and vague words like “special”, “deal”, “sale”, “fire sale”, “stock take sale” etc. would not be permitted. Point of sale advertising would consist of price, brand name and objective product information only. The same principles would apply to media advertising. Awards systems would not be permitted nor would any systems be permitted which allowed a docket or “points” for one product (say groceries) to attract a discount for another product (say petrol).

    In this manner the three consumer oriented principles would be observed.
    1. One price for one product.
    2. All prices to be in legal tender.
    3. The spirit and practice of pricing must be that of basic simplicity without misleading, confusing or discriminative intent or effect.

    Award schemes would be proscribed under this legislation. They violate all three principles. With award schemes there is not one price for one product. There are different prices for different customers at the same point of sale at the same point in time. There are also different components to the price which equate to a main charge (in legal tender) and a “fee” in the form of a docket or reward points etc. It is interesting to note that dockets and award points are not legal tender yet they are being made to stand in the place of legal tender or are being used to make the practical capacity to submit legal tender for a nominated price deal conditional on their use. This subverts both the currency and the clarity of price signals. Perhaps even more seriously, it aids and abets the development of horizontal and vertically integrated monopolies by applying a form of semi-covert manipulation to consumer behaviour.

  2. melaleuca
    July 25th, 2009 at 09:53 | #2

    “Given the clear cartel-like behaviour of banks, supermarkets and the oil industry,”

    Sweeping generalistaion presented without evidence. Fail.

  3. Michael of Summer Hill
    July 25th, 2009 at 09:58 | #3

    Crikey John, after reading Rudd’s ‘Pain on the road to recovery’ the PM concludes by saying ‘If we succeed’. What a stuff up, all hell is going to break loose.

  4. Chris Warren
    July 25th, 2009 at 10:55 | #4

    mel….

    There was more in #1 than “sweeping generalisations”.

    Didn’t you notice.

    There is a serious problem with price signals, and if capitalism goes into crisis or a period of austerity, such issues will need to be broached.

    When workers get paid, they only get hard currency. It is Capital that tries to earn first its own productivity (whatever this is) plus earnings on credit creation.

    It’s a pity you are so closed minded.

    Why do you need evidence for a proposition that “All prices be in legal tender”, when today’s globe is suffering from fake pricing due to obscene credit and debt phenonema.

    The evidence of what happens when you do not have proper price signals is all pervasive – you are drowning in it.

  5. Ikonoclast
    July 25th, 2009 at 11:07 | #5

    “At the “Cracking Cartels” convention held in November 2004, Graeme Samuel, chairman of the Australian Competition and Consumer Commission (ACCC), described cartels as ‘a cancer on our economy’ and ‘insidious and damaging behaviour’. It is now generally accepted that cartels in Australia cost businesses, taxpayers and consumers billions of dollars in higher prices. Cartels also have the effect of constraining innovation through their support of inefficient production processes.” – Bartier Perry Solicitors “Hard Core Cartel Crime”, March 2005.

    Also, have a look at the Melbourne Law School Cartel Project.

    Check this ABC story, http://www.abc.net.au/news/stories/2009/04/08/2538903.htm

    “”It’s important to remember that the banking industry in Australia is an oligopoly and it’s really fair to call it a cartel and it’s no surprise that the banks that are in the cartel would go about undertaking price coordination and cartel behaviour,” Mr Rogers said.

    “From my following of the public behaviour and the public statements of various banks over the last few weeks there has been a clear effort in the normal way the banks go about these things, which is talking in public about what they are thinking about in order to coordinate an increase in margins on home loans and no doubt on other loan products as well and that’s what’s going on.”

    Also, “MELBOURNE -(Dow Jones)- The Australian Competition and Consumer Commission warned Thursday that it will view serious cartel conduct as criminal, which would consequently expose guilty company executives to terms in jail of up to 10 years.

    Speaking at a business lunch in Sydney, ACCC Chairman Graeme Samuel said that while cartel activity has been outlawed for more than 30 years, additional sanctions of criminal conviction and jail will take effect from July 24.

    He said that under the new law, serious offenders would be jailed and, in addition, potentially face a fine and be banned from being a company director or company manager for life.

    Furthermore, a business could be subject to fines of up to A$10 million, or three times gain, or 10% of group turnover – whichever was the highest.

    “In the case of serious cartel activity, no matter how fat your check book, nor to what lengths a corporation will go to defend the position of its executives, there is no amount of money that will remove the risk of you going to jail,” Samuel said.

    -By Lyndal McFarland, Dow Jones”

    This ABC story ;
    http://www.abc.net.au/news/stories/2009/07/13/2624433.htm

    TO SUM UP

    I think we can say from this evidence that there is widespread evidence of widely held views in the public, the media, government, ACCC and legal and academic circles that the behaviour of banks, supermarkets and the oil industry in this country is often cartel-like. These views are the result of wide experience of all these groups and are not just popularly held but also taken seriously by hard-nosed academics, legal experts and regulatory bodies.

    That is why, “Amendments to the Trade Practices Act, effective on 1 January 2007, significantly increased the level of penalties that may apply for cartel conduct. Courts may impose either a fine of A$10 million, a penalty of three times the gain from the conduct contravening the cartel provisions, or, where that amount cannot be calculated, up to 10 per cent of the turnover of the corporate group of which the contravening party is a member for the year when the offence occurred. In addition, individuals found guilty of cartel behaviour may be barred from holding office as directors or managers in public corporations, and companies are prohibited from indemnifying individuals for penalties imposed upon them.” – Global Competition Review.

    “The biggest price-fixing case in recent times was the Visy/Amcor case. Amcor and Visy conducted a price-fixing cartel relating to the sale of cardboard boxes between 2000 and 2004. The Federal Court found that Visy had committed 69 contraventions of the Trade Practices Act and fined the Visy Group of Companies $36 million. Amcor had earlier obtained immunity from liability for its role in the cartel under the Australian Competition and Consumer Commission’s leniency policy. The case highlighted the absence of criminal sanctions for cartel conduct in Australia and resulted in the Australian Competition and Consumer Commission waging a public campaign promoting the imposition of jail terms for executives who engage in cartel activities.” – Mondaq.com

    Need I go on? Evidence now presented. HD level for a short blog.

  6. Michael of Summer Hill
    July 25th, 2009 at 13:25 | #6

    John, the federal opposition says it will pass the emissions trading scheme on condition their list of demands is accepted. But who in their bucking wright mind would give free permits and fully compensate any dirty, filthy, and inefficient industry. Copenhagen is not about implementing grandfathering clauses, it is about cleaning up the environment.

  7. Alice
    July 25th, 2009 at 13:42 | #7

    @melaleuca
    Come on Mel…..as for the supermarkets…I am not a discouraged worker, I am a discouraged shopper.

    They (Coles and Woolies) dont get bulk of my business any more (as few and only hard essentials as possible out of complete and utter contempt and moral indignation…and does anyone have a new recipe for washing powder…honey they shrunk the boxes!)
    May not be a cartel (officially) they act and price like one and thats soley due to insufficient competition and mega merger power.

  8. Alice
    July 25th, 2009 at 13:45 | #8

    Ikono – you are fine in your assessment. Its Mel living in denial land.

  9. Donald Oats
    July 25th, 2009 at 15:39 | #9

    If price discovery for groceries is simplified in the manner you wish, Ikonoclast, then more males might do the grocery shopping for the family, instead of leaving (nearly always) to the better half to do. Seriously though, it would be great if the Gordian knot of specials and store cards and cut-out deals, and so on, could be cut through in one blow. I suspect though that the response to such a change would be that the product manufacturers create ever larger ranges of (nearly identical) products, be it toothpaste or whatever, in an attempt to gain market share. It is bad enough now with the fake choices we are presented with in a supermarket.

  10. hrvoje
    July 25th, 2009 at 19:27 | #10

    found this gem from Buffet, from 2003

    http://money.cnn.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm?ref=www.creditwritedowns.com

    in the short to medium run it does not apply to Australia though, as for us, we can keep on digging more holes, bigger and deeper. And when we run out in year 4500 or so, or maybe a little earlier, we can fill them out with nuclear waste. As the saying goes, it’s a big country, and there is a whole lot of nothing out there. Assuming of course that we’re still inhabitable continent. Why worry about our current account deficit. Lucky country indeed.

  11. pablo
    July 25th, 2009 at 19:49 | #11

    Good post Ikonoclast. Interesting in that I took my concern about supermarket inducements to the NSW Fair Trading Dept on Friday July 24. My particular beef was the use by Coles of the ’3 for the price of 2′ tag on specials with no mention on the sticker of unit pricing, just a line at the bottom on what you were saving. As I saw it you would have to be fairly knowledgeable about the usual unit price and/or addicted to the idea of ‘saving’ or the product offered (in one case lammingtons) to be on anything like ‘equal’ terms with the seller. Judging by the number of punters attracted to these stands they work in favour of the seller. One line manager I queried did admit to finding this ruse as a confusing nuisance. But the potential embarrassment of a shopper locked into a checkout queue as the only way of finding out the cost of their ‘bargain’ shows how weighted this tactic is in favour of the retailer.
    The good folk at Fair Trading were a bit perplexed but did ascertain that the ACCC is to enquire into this practice later this year. They promised to keep me informed. We wait with interest.

  12. Alice
    July 25th, 2009 at 19:58 | #12

    pablo – been there done that – purchased a “5 for special” only last week. Bought five. It turned out one of the five despite being situated smack back above the five for special deal sign had small words on the packet “gluten free.” Well blow me down – did I argue my case at checkout when my credit didnt come through – threw a tantrum at the refund counter – made everyone run around including me – took me an extra twenty minutes to get them to understand what I was on about (their con man false advertising).

    I got my discount. Any happier? NO!!! They just annoy me but I wonder how many people get caught by that sneaky little trick.

  13. pablo
    July 25th, 2009 at 21:33 | #13

    Lovely account Alice. Let me deduce…you’re not the average supermarket punter. Checkout tantrums over specials must be rare, but I think I’d like to go shopping with you.

  14. melanie
    July 25th, 2009 at 22:04 | #14

    I read Ben McNeil’s book – The Clean Industrial Revolution – that JQ recommended a few weeks back. It’s a good book. The main thing I got from it was that business knows there is going to be a carbon price and they’re working on emission reduction. Moreover, early movers will ultimately face fewer adjustment costs than ostriches.I worried about the micro focus. Do we know enough about aggregate effects? For example, the case of electric cars that run off coal-fired power vs hybrids. I hear a lot of claims about which production chain emits more CO2 and would like to see some hard evidence. At present, while there is no carbon price, firms are moving to reduce their own emissions, but they could be causing increased emissions elsewhere.

  15. philip travers
    July 25th, 2009 at 22:05 | #15

    If Ikonoclast got his way,then we Australians wouldn’t know if the Capitalist classes had given up lying and confusing us, for the sake of our innate arithmetic skills,or some other scenario unrecognised by me at this time.As time flies,like big blowies sometimes,the most amusing story this week was the young people with counterfeit money shopping in remote shops, in Queensland and the Northern Territory.Now I know my own behaviour sometimes with a crook New Zealand twenty cent piece look a like,guilty as a kiwi shoe polish tin for keeping change in.But to park the money in a very small town shop somewhere really misses the point of counterfeiting…I would say.They might of just said,like carrying a shotgun,”I have counterfeit money here.Give me what I want and I will just leave!” Whatever happened to Bonny and Clyde and Minnie that had a heart as big as a Whale!?

  16. SeanG
    July 26th, 2009 at 02:06 | #16

    Australia’s retail banking market is uncompetitive and offers a poor service to customers. There is the correct argument that the lack of competition meant that the supply of loans and use of securitisation was comparatively less than in the US, UK and Europe. However, the lack of competition means that at the consumer level, the volume of products and services offered by Australian banks are considerably smaller than that in more healthily competitive sectors.

    This does not mean that Australia needs a public bank. I disagree with the idea of a government-owned retail bank because it distorts the market and increases institutional risk for all the other banks. The reasons behind this are obvious.

    Firstly, a public bank will not increase overall aggregate savings rate in the economy meaning that, for instance, the same savings pool will have to spread over an additional institution weakening other banks.

    The reduction in deposits in these banks means that there is a balance-sheet mismatch between assets and liabilities and between the capacity to meet the cash movements. This would require Australian banks to enter into wholesale markets far more than they have in the past.

    Secondly, it can be argued that prudent individuals will move to the public bank resulting in the other banks to offer higher interest rates for savers to keep existing customers. I like the idea of savers getting more money but these banks will have to balance incomings and outgoings by increasing interest rates on lending and other fees. This means that the cost of capital will rise for companies and large corporates unless they bypass banks and go directly into the wholesale markets themselves.

    Thirdly, public banks are susceptible to political interference. This can be seen with the underwriting criteria that Fannie and Freddie in the US which was manipulated by politicians. Before elections, a government desperate for the economy to grow more can, and will, exert pressure to loosen credit criteria for new borrowers. A very dangerous move. Politicians have different motives and these can be contradictory to good banking practices.

    Fourthly, the cost of establishing a public bank is massive in this modern era and people do not consider this. You need the physical infrastructure – branches and offices. You need the technological infrastructure – computers and network systems. You need the human infrastructure – banking and risk management experts. Rome was not built in a day, and neither are banks built in a day. The cost is huge because you need branches across the country, you need backup sites, you need state-based and nation-based headquarters, you require processing and mailing centers etc etc.

    Getting in experts require a public bank to outbid the current big 4. How much is the government prepared to pay? The public bank must have experts in the following products – mortgages, savings, credit cards, commercial banking, market risk, credit risk, liquidity risk, security – physical and technological, audit, operations. I can go on for a while. Where are we to suddenly get this?

    Finally, people like to take multiple products from banks. There is an incentive to cross-sell existing products to existing customers. So a bank will offer a business client not only the basic lending and savings, but also insurance protection, FX and interest rate protection, and this list can also go on. How does a public bank offer these if they do not have the incentive other than to act as a public utility?

    I want to talk about the positives of this – yes there is a massive positive aspect of a public bank.

    This is a credit-induced recession. The credit crisis saw the sharp contraction of credit flows which then hit consumer demand and economic growth. I have long argued that the key to reviving the economy is not propping up consumer demand because that is a symptom rather than the core issue which is credit.

    A public bank can be used during a credit-induced recession to keep the economy afloat by maintaining a steady or growing supply of captal and credit to the market. This is an incredibly powerful tool that can be used to provide assurance that the economy will not collapse and should be emphasised rather than just talking about the competitive issues of the current system.

  17. July 26th, 2009 at 08:13 | #17

    Kevin Rudd is against neoliberalism and extreme capitalism (whatever that is.) Yet isn’t fiscal conservatism just another version of neoliberalism? And spending during a recession then cutting spending during a recovery just hands power back to the extreme capitalist doesn’t it? These issues are on my blog too.

  18. SeanG
    July 26th, 2009 at 08:33 | #18

    Fiscal conservatism has been apart of political debate by both the left and the right before neoliberalism was even invented as a political term.

  19. Ernestine Gross
    July 26th, 2009 at 09:58 | #19

    SeanG, if you don’t mind, I prefer to make up my own mind on where I want to bank and if it happens to be a public bank, then I’d say it would be none of your business. At present and thanks to the naive market economics of privatisation of ‘everything’, there is no choice.

    On a technical matter, it is new to me that one can solve a problem by the same means by which it was created. In this specific case it concerns the attempt solving the effect of the latest of a series a private enterprise credit bubbles by means of repeating the term ‘competition’ many times. How many more empirical observatyions do you require to take note of crucial differences in the theoretical conditions of models of economies with financial markets and those without, keeping everything else constant, including ‘competition’.

    Further, some of your arguments are merely wishful thinking. For example, you believe that a public bank would have to pay more to attract managers (‘experts’) from the existing bank. While there is evidence that some people are motivated only by money, there is also evidence that not all people are motivated by money and there is evidence of a negative relationship between the size of monetary payments and productive work. There are bank managers who left the system because they could not stand it onethical grounds. Some of these people are still young enough to put in a few years – long enough to educate and assit the new generation.

    I may not agree with all aspects of JQ’s banking proposal but I do agree on a public bank.

    I also agree with Ikonoclast on price signals. Interesting, isn’t it, whenever someone takes ‘market economics’ seriously then the proponents of a version of ‘capitalism’ object.

  20. Chris Warren
    July 26th, 2009 at 10:22 | #20

    Sean

    This is just a political view that has a direct and better alternative.

    Having only capitalist banks distorts the market – the reasons are obvious;

    Firstly capitalist banks will increase bad debts destroying the system in the long run through a widening mismatch between assets and liabilities.

    Secondly capitalist banks cannot offer higher rates to savers due to the need to sequester profits. Public banks will serve a larger demographic, and could make funds available to investors at lower rates – providing a benefit which can flow through to final consumption prices.

    Thirdly – capitalist banks are susceptible to cartels, unfair trade practices, interference from shareholders and introduce massive duplication wastage. Public banks will provide more funds to more people at lower costs leading to greater economic efficiency and less risk of systemic failure and of imposition of bailout costs.

    4thly: The cost of establishing a capitalist bank is massive and people do not consider these – need infrastructure, Naples was not built in a day, the cost is huge and has to draw funds from other capitalists – you need back ups – you need headquarters – processing and mailing centers – offshore slave labour – huge costs just for competition and advertising – compensation for mislead customers. How can a capitalist bank provide all these and cut staff at the same time.

    Public banks can provide more affordable home loans as there is no capitalist profit impost. A public bank does not have to maximise profits so will not chase reckless bets, or lend to Ponzi schemes, or play with high-return sounding financial instruments that cannot be adequately priced – except in sorry hindsight when they fail.

    Public banks offer greater services, for a greater number, at lower cost, and provide greater long term security for normal commerce and employment.

  21. hrvoje
    July 26th, 2009 at 10:43 | #21

    @Chris Warren
    Very impressive argument Chris. No wonder existing banks would not want a competition from a public bank. They would stand to loose big, and no wonder they would do anything in their power to make sure the idea does not take off. As the saying goes, it’s nothing personal it’s just business. Same applies in the current battle on the health insurance front in US between Obama and private health insurance industry. Private health insurance industry stands too loose big if he pulls it off.

  22. Alice
    July 26th, 2009 at 11:36 | #22

    Agree with Ernestine @19 and JQ on need for a public bank.

  23. Michael of Summer Hill
    July 26th, 2009 at 12:15 | #23

    John, after reading Steve Murphy’s article “Balance of power’ I thought about what he said about crazy uncle objecting to the leader actually leading. Then the next question was who might be prodding the redneck from the west to stoke the fires within the Liberal Party and by coincidence Rio Tinto is pushing for nuclear power.

  24. melaleuca
    July 26th, 2009 at 13:51 | #24

    Alice says:

    “Ikono – you are fine in your assessment. Its Mel living in denial land.”

    Since I asked for evidence in support of a generalisation without expressing any opinion whatsoever it is clear that your comprehension skills are markedly inferior.

  25. Jill Rush
    July 26th, 2009 at 13:51 | #25

    Prior to the Commonwealth bank being privatised it provided a level of competition to the private banks which has long gone. The only reason for its sale seems to be that it raised a lot of money. It’s profits have continued because it brought a large customer base with it and has remained competitive with other commercial banks. Those banks are more interested in money than the benefits to the wider community which is why jobs are being sent offshore.

    With this discussion on banks it is of interest to compare it with private health cover as it appears that Medibank Private has been privatised very quietly. It can only be a matter of time before the premiums of all medical insurance goes up steeply and more money will move from the public to the private sector. This is definitely a case of privatising the profits and socialising the losses.

  26. July 26th, 2009 at 15:23 | #26

    Ikonoclast: “3. The spirit and practice of pricing must be that of basic simplicity without misleading, confusing or discriminative intent or effect.”

    A phrase that would make a lawyer drool. The pursuit of simplicity will give rise to a lot of litigation about the precise meaning of your chosen adjectives (whatever they ended up being). And what’s with outlawing the mere drawing of a shopper’s attention to a reduced price? Don’t you think that’s a touch authoritarian?

    SeanG, you make some good points about the downsides of a public bank, but I wonder if your preferred role for it is really suited to a banking entity rather than another means of increasing credit. (Leaving aside the wisdom of doing so anyway – AFAIK, a broad summary of the GFC is too much credit -> too much risk -> too little credit. But that’s another topic that isn’t worth getting into right now.)

    Chris Warren: “Firstly capitalist banks will increase bad debts”

    What’s so preordained about it? What’s your evidence for its universality? Why are you convinced it’s a problem that won’t fix itself?

    “capitalist banks cannot offer higher rates to savers due to the need to sequester profits.”

    For a public bank (PB) to give Aussies better savings accounts means having to lend at greater risk to match the greater return, precisely opposite to one of your reform’s intended aims. Unless you propose running the bank at a loss, in which case it’s regressive redistribution – the better off you are, the more likely you are to use bank services, including loans, so you benefit more from the PB.

    “capitalist banks are susceptible to cartels, unfair trade practices, interference from shareholders and introduce massive duplication wastage.”

    a) cartels are not good, we need some light regulation to help end them earlier than they otherwise would, but it’s not really reason to establish a PB.
    b) “interference from shareholders”?? Oh no, the owners are behaving legally and peacefully with their property! Whatever will we do?
    c) “wastage” in multiple private companies providing the same thing is an issue, if you’re set on maximising the efficiency of the species’ conversion of energy into productive output in a Borg-like fashion – ie regardless of the costs – but in the human world is worth tolerating for all the benefits of having many independent actors in a market instead.

    “How can a capitalist bank provide all these and cut staff at the same time.”

    Given your previous comments, I’m not really surprised you are baffled by this seeming mystery. And who cares what it costs to set up a private bank? It’s their money.

    “A public bank does not have to maximise profits so will not [make risky or bad decisions]”

    I’ve already shown how a PB will indeed have to pursue a risky strategy if it’s to be anything more than inefficient and regressive middle-and-above-class welfare. But you also seem to be under the illusion that a PB will somehow magically be able to make better decisions about risk than a private one. As others have pointed out, there is a given pool of finance professionals, the majority of whom are guilty of participating in the current FUBAR. You can claim that regulations about the conservatism of investments will help, but AAA-rated securities have burnt many, including local councils who already had regulations of that nature. In addition, reassurances from PB enthusiasts that a stable, conservative, slow-growing but not-crashing-either bank can simultaneously enlarge its demographic (ie lend to people who otherwise would not have received loans – that is, people at greater risk of defaulting) ring very hollow. It also leads me back to the first point – almost by definition, a public bank has a greater risk of bad debt accumulation than a private one.

    Lastly, unless zoning, environmental and conservation laws change a great deal, more mortgages at cheaper rates would just mean an acceleration in the fall of housing affordability and no real benefit to anyone except downsizers who already have a nice big house.

  27. Ernestine Gross
    July 26th, 2009 at 16:09 | #27

    “You can claim that regulations about the conservatism of investments will help, but AAA-rated securities have burnt many, including local councils who already had regulations of that nature. ”

    And who issued the AAA rating, Jarrah?

  28. Alice
    July 26th, 2009 at 16:23 | #28

    @melaleuca
    And your comprehension is also a bit below par Mel to ask for evidence of cartel behaviour in supermarkets and oil companies in Australia…. Iif it isnt in the technical definition of cartel behaviour according to you Mel its only because they have been caught in the act yet…how about just plain uncompetitive (and thus inefficient) old highly concentrated oligopolies with monopoly pricing power who practice price discrimination and deliberately mislead consumers who dont have access to perfect information? Either way the consumers and suppliers gets ripped off, evidence of cartel or none. Id call your request a total hair split – we wouldnt have had an attempted grocery watch set up or unit shelf pricing set up if there werent concerns over competitive practices in grocery.

  29. Alice
    July 26th, 2009 at 16:24 | #29

    should read havent been causght in the act yet

  30. melaleuca
    July 26th, 2009 at 16:40 | #30

    Alice says:

    “how about just plain uncompetitive (and thus inefficient) …”

    You now say Coles and Woolies supermarkets are uncompetitive but above you said: “They (Coles and Woolies) dont get bulk of my business any more … ”

    Hands up those who can spot the cavernous logical error. Not too bright, are we, Alice.

    ps. I unfortunately live in a country town with 2 IGA’s and no Coles or Woolies. The local council and ratepayers’ organisation are firmly opposed to the presence of Coles and Woolies and accordingly I’m paying a premium of probably 15-20% on my grocery bill!

  31. Chris Warren
    July 26th, 2009 at 16:46 | #31

    Jarrah

    I don’t think I wanted to imply that increased bad debts are “preordained”.

    Is this really what you read? More like a structural tendency within capitalist logic.

    The tendency, for capitalists, is to go for maximum returns irrespective of other considerations. Capital will flow to occupations which report the greatest returns – irrespective of risk or possible future bad debts.

    So it is preordained to the extent it is a structural tendency based on capitalists maximum profit seeking in the relatively short term.

    Under capitalism, capitalism can easily become universal – it just requires a Thatcher or two, or a Keating, and all else is soon obliterated.

    Better savings greater returns do not imply greater risks or losses. If a capo bank gives savers 5% and shareholders 3%, by lending at 8% (after costs) then with no other changes, a Public Bank can give savers 6% by lending at 7% or thereabouts. As this will have greater stability I assume funds will be available at 6% or even the 5% as before.

    The efficiency gains are plain for all to see, and capitalist profit acts like a tax in partial equilibrium analysis. So we all win if we can get rid of it.

    Anyway, why not let a public bank develop and let lenders and borrowers choose.

    Cartels are one of the srongest reasons for public enterprise provided the public enterprise seeks only natural profits and does not seek additional capitalist profits.

    Slaveowners also behaved legally and peacefully with their property. Noone said interference wasn’t legal. Damaging yes, illegal – no. Setting up a public bank is not illegal and is just as peaceful.

    INdependent actors would have less duplication. However once their is a cartel, the independence does not apply and then the duplication is wasteful.

    A public bank will not be able to assess risk any better than others, but will not have to chase maximum returns. Its behaviour, admidst the same risks, will be better for all.

    The greater demographics can arise at the same level of risk of defaulting because lending interest rates are lower (less onerous).

    A non-capitalisat bank has substantially less risk of bad debt accumulatoin thsan a capitalist one.

    The difference is between a non-cpaitalist bank and a capitalist bank. Whether each is ‘public’ or ‘private’ is irrelevant. In our culture private is usually taken as capitalist.

    You last point make no real contribution to understanding these themes.

  32. Michael of Summer Hill
    July 26th, 2009 at 17:07 | #32

    John, today it has been reported that some 650,000 Australians cannot afford dental treatment and are on a 27 month long waiting list. And if it wasn’t for Healthy Smiles for Life and the good work done by 220 dentists volunteering their services free of charge around the country the list would have been greater. If anyone needs a reality check it is Labor.

  33. July 26th, 2009 at 17:45 | #33

    Good to know the old girl is on ther job – http://www.abc.net.au/news/stories/2009/07/26/2636616.htm

  34. SeanG
    July 26th, 2009 at 18:39 | #34

    Chris #20,

    Public banks have been brought down because of bad debts and asset-liability mismatches in the past. There is no evidence to suggest that public banks do not make poor lending decisions or that the criteria for lending does not result in bad debts developing. Our bad experiences with state-based public banks are an example of poor governance leading to poor lending decisions ratcheting up bad debts.

    I agree that a public bank will provide lower interest rates to borrowers and higher interest rates to savers. It can squeeze out private providers that way. So far, so good but it will result in a permanent yearly loss that will be funded by tax payers, it will distort the capital markets and it has not concept of risk-return i.e. higher interest rates for higher risk clients. The downside risk is the unsustainable increase in credit flows without the corresponding fee income to pay for the deposits and daily expenditure resulting in larger yearly deficits and greater systemic risk.

    Your third point is half true – that private banks can lead to cartels as shown with the Big 4 but you second point about public banks and systemic risk is not accurate. Lower lending rates will increase the volume of loans into the system increasing systemic risk and forcing the other banks to sharply sell off assets to compete turning the Big 4 into ‘originate-to-distribute’ thereby increasing systemic risk. Do not forget that the larger the level of lending the greater the institutional risk is.

    The cost of establishing a bank is large which is the risk that investors take. They are willing participants. The cost of establishing a public bank to directly compete against the Big 4 is similarly huge or larger because you start from scratch and the investors is the publics money – not every taxpayer is a willing participant.

    With your final comment:

    “Public banks can provide more affordable home loans as there is no capitalist profit impost. A public bank does not have to maximise profits so will not chase reckless bets, or lend to Ponzi schemes, or play with high-return sounding financial instruments that cannot be adequately priced – except in sorry hindsight when they fail.

    Public banks offer greater services, for a greater number, at lower cost, and provide greater long term security for normal commerce and employment.”

    A bank is an intermediary that measure the risk against the return of individuals. You want the bank to become a means to giving money over very cheaply. There is not concept of risk-management or return to get to a break-even point. Lower the cost and increase the loans is very dangerous and increases indebtedness in society at large, it also means that there will be a cultural change to taking on more and more debt which the crisis has shown us is bound to fail.

    With you plan which is effectively that you want to give away – and it is giving away – money, you give no thought to bad debts, lending criteria, the capital markets. What if there are billions of write-offs? Who is left to pay off bad lending decisions? The taxpayers. So all taxpayers have to hold the bill to pay for a decision dreamed up and supported by a few individuals that will lead to massive amounts of unsecured lending. A very dangerous proposition.

  35. SeanG
    July 26th, 2009 at 18:43 | #35

    Chris #31,

    I only glanced at your post but are you suggesting that two people with polar opposite credit ratings should get the same interest rate for a loan?

  36. Ernestine Gross
    July 26th, 2009 at 19:46 | #36

    SeanG, histories of “public banks” are not a necessarily a predictor of a future “people bank”. You may have heard that companies (now corporations) have a “constitution” (previously memorandum of assocation) in addition to general laws and regulations. Thus, until you see at least a proposal of the constitution of a people bank (and possibly other regulatory changes system wide), your comments are, if I may put it bluntly, talk in the wind.

  37. Ernestine Gross
    July 26th, 2009 at 19:53 | #37

    SeanG, I admire the strength of your beliefs with a possibly equally strong sense of disbelief.

    You are still talking about ‘credit ratings’ as if such ratings are not a crucial element in the financial fiasco, which, incidentally, is much more ‘expensive’ than the establishment of a hopefully non-profit organisation with a limited range of financial securities as ‘assets’.

  38. Alice
    July 26th, 2009 at 19:57 | #38

    The credit ratings were put together by executives with experience in book publishing (mostly fiction as far as I can gather).

  39. Alice
    July 26th, 2009 at 19:59 | #39

    @Michael of Summer Hill
    “if anyone needs a reality check it is labor”
    Never thought Id hear you say it (but perhaps they need less of a reality check than the Coalition – Ill take it as far as saying they both need a big reality check but the coalition to a greater degree).

  40. Chris Warren
    July 26th, 2009 at 20:41 | #40

    Sean

    Past so-called public banks have been brought down, but I note they generally acted like capitalist banks. I do not think that public banks would have been bought down if they received the same trillion dollar feather beds we see today.

    Anyway a public bank should not replicate past forms, and would have to represent competitive neutrality with capitalist banks. If competition policy forces a public bank to act like a capitalist bank then there is no point and a public bank will fail quicker than a private capitalist bank. But the capitalist bank will follow a decade or so later.

    There will be zero financial loss – zero. This loss is the capitalist loss given that a supposed high interest rate opportunity is given up for a lower interest rate. This is not a real loss. No bank need make a loss ever.

    INterest rates vs risk is a complex issue irrespective of the political economy. Higher interest rates for higher risk seems odd unless there is also higher returns. UNfortunately capitalist financiers just look at the first two, and pass off their obligations ‘pass-the-parcel’ fashion, in new, poorly backed, instruments.

    A real public bank is unlikely to loan to risky enterprises, as there is no need to feed or impress hungary capitalist shareholders (and will therefore survive longer).

    UNless the returns cover the risk, then no interest rate should attract investment no matter how high they may be.

    Larger lending at lower interest rates keeps the risk of borrower insolvency constant. However if more lending expands demand then purchasing prices will escalate and then, larger lending will coexist with larger risk. However setting larger deposit requirements, or other queueing devices, can regulate demand.

    We should not be concerned about some supposed taxpayer not being a willing participant as i note that this supposed willingness is never a factor when it comes to massive defence expenditures or billion dollar bailouts and subsidies of current capitalist enterprises.

    Removing the capitalist impost is like removing a tax. It increases efficiency and wealth. It reduces risk as lower interest rates come closer to real GDP growth. It risks huge increases in demand for money, so this needs to taken into account through queueing devices. Low interest does not necessarily mean improvident lending practice. This is not “a very dangerous proposition”.

    Two people with similar asset base and revenues should have equal opportunities to borrow based on these. You should never charge those with less means a higher interest rate – this is bizarre but appears to be only option under capitalism.

    Those with lower credit ratings should be qualifies to borrow less at the same interest rates. This is why we need a non-capitalist bank. The capitalist logic to charge higher interest rates destroys everything.

  41. Michael of Summer Hill
    July 26th, 2009 at 21:18 | #41

    Dear Alice, the good thing about blogging is that conservatives cannot stiffle and censor each and every site. I’m more in tune with the left than the wrong side of Labor. Thumbs up Rees and may God bless you for giving preferential treatment to aussie made goods for it does not breach the WTO guidelines until some foreign country makes a complaint.

  42. SeanG
    July 27th, 2009 at 03:22 | #42

    Ernestine,

    Individuals have credit ratings you are thinking of Moodys and Fitch; these are completely different. Banks can monitor exactly what you spend your money on and they monitor if you fail and how much of a hole is left over. Everyone has a credit rating. It is about risk and that is why if you are a riskier client you are hit with higher rates to mitigate the risk of collapse

  43. SeanG
    July 27th, 2009 at 03:47 | #43

    Chris,

    I don’t think you quite get the concept of loss because you are arguing that there will be no loss – that there will be no defaults, no bankruptcies, no maturity mismatches between assets and liabilities. You are assuming unrealistic assumptions.

    The higher interest rates charged for higher risk IS THE RETURN. The return is higher to compensate the provider for capital against the higher risk of default.

    You say that they are unlikely to fund risky ventures. All ventures carry some form of risk. You have already stated that “a Public Bank can give savers 6% by lending at 7% or thereabouts.” Which means interest rates are charged with no consideration of risk. Have you thought of the impact this will have on the capital markets? You are guaranteeing returns of 6% which means that people and corporates have less incentive to invest elsewhere, even other banks which do not have a guarantee over the safety of the deposits.

    How will this affect the real economy? Every advanced economy in the world has deep capital markets. You are reversing this with your proposal.

    ProfQ likes the claim that the government is the ultimate risk manager. This is wrong. It is the taxpayer. For this proposal to work the taxpayers must be willing to pay to cover the cost of default. Do you think that is fair?

  44. Ernestine Gross
    July 27th, 2009 at 08:37 | #44

    SeanG @42. You are mistaken. I don’t confuse credit rating agencies such as Standard and Poor (or Moody) with consumer credit rating agencies. Both cause problems. Further, there are many millions of individuals who don’t have credit ratings.

    You are also wrong about ‘deep markets’. What happened in 2008 at the proverbial centre of the ‘deep market universe’ – Wall Street?

    Further, you seem to know only the ‘reduced form equation’ results of second or third level Finance literature (ie what some accounting departments teach under the heading of finance) but not the underlying theoretical assumptions under which the ‘risk-return’ relationship you talk about is true in the logic of mathematics. But, let me not prejudge you. Let me ask you, what are the practical implications of conditions such as “price expectations are in a closed cone” and “every investor is strictly risk averse” and “continuous time trading”?

    Further, I am asking you to tell me how a higher interest rate is making it easier for “Joe Sixpack” to avoid foreclosure on a home loan in a market without quantity constraints on lending that are conditional on actual and reasonably expected cash incomes?

  45. Chris Warren
    July 27th, 2009 at 09:34 | #45

    Sean

    There is no reason for a non-capitalist bank to make a loss or end up bankraupt.

    Losses and gains occur outside banks.

    High interest is not the return. The return is whatever value that was produced by investment. Interest only represents a monetarised share of the return.

    Capitalists substitute high interest for high returns and then wonder where all the inflation, unemployment and mountains of debt came from. A non-capitalist bank would seek a share in future production due to its loans, and this will always ensure an ongoing sustainable match between assets and liabilities.

    It is a moral hazard to allow capitalists compensation for defaults. I would have hoped even the slowest of learners would have realised this by now. Capitalist lenders need to be exposed to market signals.

    In general the world is not as risky as our capitalists like to pretend (just so they can supposedly save us). Most risk is introduced through capitalist lust, speculation and profit-seeking job losses and wage cuts. Natural disasters are the main risks but these are not driven by speculation.

    A non-capitalist bank can cope with normal risk better by eliminating capitalist risk from the system generally.

    Capital markets will always exist if people save. If capital markets fund production which then in fact improves GDP growth the real returns will attract funds from savers.

    If there is no incentive for more real growth, then the economy has reached utopia.

    How will this effect the real economy. The rich will be poorer, the poor will be richer, and the whole will be sustainable with steady continual growth at human dimensions.

    The best of all possible worlds.

  46. Chris Warren
    July 27th, 2009 at 09:51 | #46

    If JQ thinks that the government should be the ultimate risk manager then I assume the is only under capitalist duress. Since the 2nd World War workers essentially have been forced to look to governments to protect society from capitalists and their conflicts.

    A government function should be as selective risk coverer “of last resort”.

    In the end, wiht no capitalist mystification and problems arising, the government should withdraw completely, and producer communities should provide resources to deal with natural disasters.

  47. Michael of Summer Hill
    July 27th, 2009 at 12:04 | #47

    John, it seems the PM is out of touch with practically everyone on the issue of giving preferential treatment to aussie made goods and will be rolled over at the next Labor conference. Thumbs up Rees for I love aussie mandarins.

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