Weekend reflections

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.

47 thoughts on “Weekend reflections

  1. 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.

  2. “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?

  3. @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.

  4. 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!

  5. 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.

  6. 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.

  7. 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.

  8. 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?

  9. 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.

  10. 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’.

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

  12. @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).

  13. 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.

  14. 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.

  15. 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

  16. 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?

  17. 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?

  18. 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.

  19. 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.

  20. 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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