Is there really a "banking crisis"?

Okay, a bit of a foolish title. Northern Crock, Bear Stearns, damn nearly Société Générale. There is certainly a problem but a crisis?

I'll admit that I am not trying to refinance my mortgage just now but I got my RBS Final Dividend cheque through the post a few minutes ago. This was a bit unexpected as I was expecting shares but there we go - I probably forgot to post some form or other. It was more of a surprise when I looked at the value - just under a fifth of what they want from me (but are not going to get) in the rights issue. Remember that that is diluting the share capital by 11/18^ths, albeit discounted - and that there is also an interim share dividend (about 1/3 of the total).

So, all in all, this emergency £12 billion cash injection is on the order of 3 years customer dividend. Lots of money, indeed, but, hardly, considering how many companies don't pay a divi, the crisis some are making it out to be.

"Black Swan"

I picked up a copy of Nassim Taleb's 'Black Swan' at the airport on Friday. Interesting book with some basic and difficult to argue with premises:

• The 'normal' or 'Gaussian' probability distribution curve is only ever, at best, an approximation to reality.
• Although there are some aspects of reality for which it is a reasonably good approximation (human height and weight are both examples mentioned), there are many things out there for which it is a terrible approximation.
• Where it is a terrible approximation, it is normally underestimating the probabilities of "tail" events - unlikely disasters or triumphs.
• Where a terrible probability approximation is used to mechanistically calculate for outcomes with high impacts, 'bad things' ™ may happen.

Although the example he regularly uses for a variable which has a long and significant tail is human earnings or wealth, where he considers that some version of a power law distribution is in force, his money has been made from using this understanding to predict high risk events in the financial markets.

How can you make money from this? By taking it from others through insurance or hedging. If you know (or can place a damn good guess of) the real likelihood and impact of one of his 'Black Swan' events, and everybody else grossly underestimates them, you are not going to need to spend as much as you would if their actuaries were up to speed (this doesn't apply to high-ish probability events where the actuaries just look up the number of events and the assessed costs). You can then take the upside of the event happening or not and transfer the risk of the downside to somebody who understands it less well.

Overall - I would recommend this book for anybody interested in the financial markets and how people manage to get paid quite so much for doing quite so badly. I would note, as a mild warning, that it will be a bit too mathematical for many - although he does try to flag this and allow you to skip those bits. Personally, I will try his "Fooled by Randomness" when I see a copy although I would recommend Tim Harford's "Logic of Life" for an even more sideways look at 'homo economicus'.

Adam Smith Institute - Common Errors (Pt 1)

Via el Diablo, I came across the Adam Smith Institute's series, by Dr Madsen Pirie on "Common Errors".

Each piece will look at a common error people make about free markets and the free societiy (sic), and explain why they are mistaken. We hope readers of this blog will be able to make use of these arguments themselves, and in doing so convince others of the overwhleming case for liberty - Ed.

The ASI don't tag their blog posts (bad, bad, people), so it can be time consuming finding stuff. So here are the current links and a few comments.

1. "Only the guilty have anything to fear from surveillance or police searches."

I would turn this around and say that only the perfect have nothing to fear - and, since the Fall, only Jesus Christ (or, if you are Catholic, Jesus and Mary) have been free of sin. For example, take a married person having an affair. It is very common and not illegal. Immoral, under some codes (but what if you are a Muslim or a traditionalist Mormon, where polygamy and / or concubines form part of the accepted moral framework). (Or just visiting a brothel - okay, that level of organisation in the sex trade is illegal in the UK but not everywhere - just why is this the only form of centralisation our statist masters are against?)

No, love, I'm just blogging. No, I'm not having an affair. It's just an example. When would I have time? Would you put that cleaver down and we can just talk about this? Please? Err ...

A wee while ago, I was involved with a case where a couple of (drunk and foolish) employees decided that they should get to know each other rather better and the deserted office was a good place to do so. They forgot about the CCTV. The security guard thought it was quite interesting and then tried some income re-distribution with menaces using the tape he had copied.

So, yes, many people do have something to hide (even if it is only the surprise birthday present you bought him / her a couple of weeks ago and have hidden at the back of your underwear drawer.) And most people have things they will quite happily admit to, or be unconcerned that are known by, friends and family, but not by total strangers - and other things they are desperate to hide form the family but are prepared to admin to total or relative strangers (doctors and nurses, for example.)

2. "When the state gives us rights, we have responsibilities to it in return."

The English common law tradition recognizes that people can do whatever the law does not specifically forbid, but in the continental Napoleonic Code tradition, people can only do what the law specifically allows. This leads people falsely to suppose that the state is giving them these rights, when it would be more accurate to say that the state is recognizing those rights. Our responsibility to behave fairly and decently is something we owe to other people, not to government.

I agree entirely with the above but I also disagree with the main thrust of this - I believe we have some, albeit very limited, responsibilities to the state. One is participation in the democratic process (even if it is just going in and writing "none of the above" on your ballot paper) and another is paying your taxes (avoidance is fine - poliscum and bureaucretins write the rules, if you wish to take advantage of their incompetence, rock on). Struggling to think of another, though.

3. "The industrial revolution brought poverty and misery for the masses."

Absolutely, it just bought the poverty and misery of the labouring classes to the attention of the merchant classes who had been, previously, able to completely ignore it as something that happened out in the country. Why did people flock to the appalling conditions in the new cities?

Because there was paying work there. Same argument applies to child labour in the third world - if you close the factory (or stop buying from it which, frankly, is then your intent rather than your action) because it offends your morals, where do you think the kids go? In a nice clean uniform to school 5 days a week and back to a loving and comfortable home in the evening? Nope. Another factory, begging on the streets or worse. Not so much "the law of unintended consequences" but simply failing to make the effort to think things through.

4. "Rich people should not be able to buy better healthcare and education"

The traditional whine of small children and socialists, "It's not fair". Although, admittedly, with the current British education system, the chances of either of those groups getting the apostrophe in the right place is slim.

It also allows the state to divert the money it would have spent on meeting their needs toward those less able to provide for themselves, and to give them access to better services.

The quote is a minimal justification but I hark back to the quote taken from Error 2. We should only allow the state to forbid things that are shown to have harm without corresponding benefit. But then I am not an interfering statist.

5. "Prices of essential goods should be controlled so that the poor can afford them."

See here.

6. "Nuclear power is uniquely dangerous and should be banned."

I used to spend large amounts of my time well within 100 metres of a live fission reactor. I still have one head and four limbs. My children appear to be reasonably healthy.

However, radioactive waste, not just from reactors but from other technical uses (especially within medicine) and from natural sources (including radioactive material separated from things we actually want or need in refining etc), needs appropriate, safe disposal. That doesn't make it "uniquely dangerous". See one of the ASI's other contributors here and here.

And, yes, if we can manage it, fusion is the future.

A damn good and thought provoking series. Long may it continue.

More interfering poliscum.

Would you not just leave well alone?

Scottish banknotes should be legally protected in England to stop them being rejected, it has been claimed.

Alistair Carmichael, the Liberal Democrats' Scottish affairs spokesman, said it was time for a change.

The status of Scottish notes as "Bills of Exchange" is absolutely fine. People generally take them off me, without no problems in the last 5 years (and that one was brand new). They clearly recognise you as horribly shifty and fundamentally untrustworthy - i.e. a politician. Which shows how good a judge of character most people are!

Poliscum

What is it about politicians that they find the concept of "property rights" so difficult to get hold of? Tim blogged about the effects of the tragedy of the commons on the "Common Fisheries Policy" and now Wee Alex has apparently said (of the Lewis chess set):

he found it unacceptable that the pieces were scattered around the UK.

That would be, Alex, because they are owned by different organisations or people - who can freely choose where and how they are kept. I can understand why the people of Lewis would quite like them back but you are hardly going to be spending your own dosh getting them back, are you?

PS - What game of chess do you play with 93 pieces? Not the one I learned, that's for sure.

Pollymath

From here:

Bonuses that hit an epic £14m last year may drop this year,

I think you may be out by a small thousand-fold. An excellent achievement, even by your standards (although Bishop Ussher still, for me, holds the record at over 800 thousand-fold.)

but not because managers or CEOs are doing their job less well. Sub-prime mortgage lending in the US is hardly their fault. This will show that the "performance-related" bonus culture is nonsense.

Err, nonsense. It could be either because companies have less profit (possibly) because of the general market conditions, therefore (quite rightly) less in the bonus pool or because bonuses may be tightly linked to share price, therefore the general fall in the market does actually count as "doing their job less well" (their job being to increase the market value of the shares) even if it is "hardly their fault".

Update: Edited to correct my math - £14b is not 1000% of £14m, it is 100,000% - therefore her error is 99,900% rather than my initial 999%.

A Fatal Error?

From bluematter, a rather good economics blog, discussing Inheritance Tax (and everybody's favourite Vulcan):

Still at last count it only affected 10% of estates and raised about £3.2bn - that's just under 1% of the total tax take but more than enough to pay for the work of Department of Environment, Food and Rural Affairs.

Fine, as far as analysis of the tax system goes but why, on earth or in heaven, should it be assumed that paying "for the work of Department of Environment, Food and Rural Affairs" is anything other than gross stupidity?

I suppose it could be the effective taxation equivalent of "the size of Wales" to land area (see also wikipedantic)?

Update: I suppose, in the interests of fairness, I should point out that neither of the bluematter posts linked were the outpourings of the blog's main author, who is on holiday.

Not a free market

There are a wide range of problems with economic theory, not the least of which is Truman's wish for a "one-handed economist", but the one I would like to address here is this - simple economic theories, like the sort us non-economists may have picked up in passing, are difficult to apply to real world situations, because they involve many simplifications. Actually, complex economic theories are also difficult to apply to real world situations, both because they are complex and because there are so many, most managing to be mutually contradictory.

Yesterday, I blogged about yet another petty incursion of the managerialism of the British political class; the Fawcett society being part of that class, though thankfully not yet part of the ruling or governing ones. (Chris, of Stumbling and Mumbling, did this better and in far more detail here.) That seemed to cause a minor degree of uproar, mostly here and here - with people suggesting that sex distinction should be abolished from sport, as opposed to abolishing pay discrimination due to sex.

So let's pick on another aspect where professional tennis fails to meet basic (ie simplistic) economic principles - the law of supply and demand. This is a reasonably realistic rule which says that, for a given demand for a specific good, you (the supplier) can get a better price if the good is scarce than if it is common and for a given supply of a good, you can get a better price if, and I know this seems so simple, demand is high rather than low. To paraphrase, if people want something badly and there isn't much of it to go round, it is dearer than if people don't want it and there is lots of it. In all good basic economics answers, you have your supply curve and your demand curve and they intersect at the magic free (and efficient) market price. This is clearly, in many cases utter tosh - as it requires free and efficient markets. As an aside, I don't think that supply / demand graphs can be strictly considered have standard deviation but consider by how many σ from the norm Ms Hilton must be :) We can all think of non-free markets (and a non-free market is, IMHO, by definition non-efficient) - the EU's Common Agriculture Policy being a particularly mendacious example, and we also have the supposedly-prudish-but-possibly-more-sinister US ban on internet gambling). Non-efficient markets are also common - export restrictions, whether through government action or lack of transport to market; monopoly middlemen (where some see Walmart and Tesco looming); and supply restrictions (the planning process for house-building in the UK.)

So, is the market for Wimbledon, and for its tickets, a free and efficient one?

No. Firstly, the market for tennis tournaments is, like most sport, neither free nor efficient - the International Tennis Federation, the Association of Tennis Professionals and the Women's Tennis Association, together with their partners, the television companies, advertisers and sponsors, all have a (legitimate) interest in making this a controlled market. The supply, of tennis talent, of TV time, of advertisers, is limited - and a cartel has been established to share out the financial benefits. This is clearly not "fair" but then nothing much is - whether this is to the public good, as opposed to a free market, I have no idea.

Is the (simpler) market for tickets free and efficient? No, again. Taking Wimbledon, any market where the initial sale value of the item from the producer - especially where the cost of distribution is a mere stamp - is £87 and the end-customer price is between £2000 and £3000, is clearly failing. Without wishing to downplay the work of the All England Club's "official hospitality agent"s - the official prices are £2850 (men's) and £1800 (ladies), ex VAT but inc booze & strawberries - there is clearly a market failure here. I assume (because the price difference between Sportsworld and Keith Prowse is a fiver or less) that these prices are set and they will clearly form a ceiling to the after-market prices, until the official sources sell out and then you get an extreme form of the supply scarcity effect kicking in. Also, please note, that (as I mentioned below) the market in the tickets is controlled and purchasers from touts (and possibly even from some of the established ticket resellers) may find themselves excluded from the event.

The real world is always more complex than real economic theory allows. Real economic theory is more complex than any explanation of it allows. Combine these two and you are sure to get strange results when you assume that reality will follow simple economic explanations. But note the hindsight and soundbite effects - when something does happen, it is easy for the media to find an economist to explain exactly why. If, however, they had been able to predict it in advance ...

I am sure some of you economists out there will wish to pick holes or to blatantly disagree. Feel free.

S-E

Versus Market Forces: Triumph or Failure?

I had never heard of the Fawcett Society before today. This is not necessarily a bad thing - they have, almost certainly, never heard of me. (And, as my first thought on seeing the name was this rather than this - NSFL -, they probably never want to :)

They want el Gordo to "end the gender pay gap". Tim has had much to say about the realities of any actual gap and the proper analysis of the many statistics misused by the "pay women more" lobby. (He particularly recommends this article at the Adam Smith Institute.) Now, never mind the absurdity of trying to persuade the Great Clunking Fist of anything not sanctioned by the "Inner Thoughts" section of the fun police, especially as this would be likely to impact the public sector wage bill in a rather dramatic fashion, is their stress on Wimbledon justified? Let's not argue about the men being best of 5 sets and the ladies best of 3 (and there is sexism right there - why not "gentlemen" and "ladies" or "men" and "women"?) Let's look at the market prices.

Now the face values of the finals tickets seem to be the same for both finals - £27 to £62, apparently, (although this page shows a relatively mild 8.75% mark up for the men's final day tickets) - so let's try "Google is your friend" to find a real market price:

Tout Agency	Men's Final	Men's Semi	Ladies' Final	Ladies' Semi
ticketstowimbledon	£2,250	£2,250	£1,025	£675
viagogo	£2,859	£2,716	£1,836	£1,249
	179%	174%	100%	67%

That seems to suggest that paying the guys 75 to 80% more than the dolls (now that is an interesting statement to analyse from the sexism p.o.v.) in prize money would be justifiable under free market conditions - and either the second place lad (or the losing semi-finalists - I am not clear on this) a whopping 2 1/2 times more than the comparable lass. I do appreciate that the hospitality ticket market for a major sporting event isn't a perfectly free market (as the All England Club try hard to prevent this) so my numbers will not be perfect but can we at least consider them as potentially representative.

Now, I am actually not bothered how much money some, already extremely rich, sports men and women make (especially as the prize money is probably small beer compared to their earnings from sponsorship, advertising and endorsements) - but I am bothered when pressure groups and politicians use this sort of flawed comparison to whine about or meddle with things that directly effect the lives of real people.

S-E