Bank Xecutives

The Americans are now questioning whether the bail out money for the banks will end up in the hands of the people who created the problem-ie the executives and fund managers. This is a fair question. There is an easy solution though. Just make the directors of the banks and financial institution sign a guarantee before they get the bail out. Then put a provision in the legislation stating that any losses are recoverable from the directors first and the bail out fund second. Essentially make the executives insure their own companies. If you get the benefit you should take the risk and corporate executives have got away with too much for too long.

Truth and Belief

The current woes on the financial markets are making me think about the people who run merchant banks. Do they really think they are doing a good job or is it all just bullshit? Either way you have to worry.

Securities are based on trust. Effectively a security is a promise to repay money with interest. When you buy one of them you have to trust that the person you bought it from will pay the money back. The problem is that if they don't there is very little you can do. You can sue them but that will just make money for the lawyers. At least in Australia, the regulators are totally useless so your on your own.

The boards of financial institutions have effectively been paying themselves huge salaries to take these risks with other people's money. Compulsory superannuation means that we are all forced to give our money to these people. If they don't know what they're doing why are we doing this? If they do know what they're doing why have they lost so much money?

Competition v Cooperation

Competition and cooperation are two opposites which exist everywhere. We live in a system which values competition. Our whole economy is based on it; businesses compete for the consumer's business and cut their prices in order to get that business. This is the mechanism which stops prices from rising due to the greed of the seller.

The problem with competition is that it is resource intensive. It requires at least 2 businesses with the same or similar product. It then requires the consumer to go to both sellers, negotiate and finally buy from one of them. The consumer expends a lot of effort. Both sellers expend a lot of effort and one of them does not get the sale and so wastes his effort. Unless there is a significant profit in selling the item it's not worth it. As a result, competition does not work well for small items-which are the vast majority of the transactions occurring every day.

A cooperative system would solve this problem. It would be much more efficient.

market failure

Market failure has been in the news again this week. It reminds me of the failure of communism. The American's decided they had won the cold war when the Soviet system collapsed-until their system started to collapse.

The reason for market failure is the vulnerability of markets themselves and the blinkered view that de-regulating markets will produce a self-regulating system. Nothing could be further from the truth. Firstly, there is no such thing as a free market. All markets are based on property rights which set the framework for the market. The market will behave differently depending on what rights are recognised. A good example is carbon trading. It works by restricting the right to pollute and therefore creating a market for carbon credits. Without the "distortion" of restricting rights in the first place, the market would not exist.

It's easy to see that there is no such thing as a free market. All markets are the product of their environment. When those in charge of the markets forget this they are doomed to fail.