Does competition really exist?

Lars Syll’s post says that state intervention interferes with the market and as a result competition does not necessarily eliminate bad bosses (quoting banks as an example – without state intervention after the 2008 crisis, many banks would not exist and their bosses would no longer be employed).

But surely this is the same as saying that competition does not really exist.  State intervention has rigged the system!

But what of the argument that competition eventually eliminates bad bosses? True, it does sometimes; the relatively egalitarian John Lewis Partnership has done better than department stores such as…

Source: Does competition really eliminate bad bosses? | LARS P. SYLL

I was one of the only economists who predicted the financial crash of 2008 – in 2017 we need to make urgent changes The Independent

Economics is driven by ideology – it is ideology, not science, which drives them to assert that bank bailouts are tolerable but policies that protect the poor aren’t. Unsurprisingly, these flawed theories and models are a great comfort to financial elites – which is why so many economists are hired and funded by big banks, corporations and the wealthy

As someone who correctly predicted the financial crisis (first in 2003 and later in a 2006 book) I support Andy Haldane’s assertion that the economics profession is “to some degree in crisis”.

Source: I was one of the only economists who predicted the financial crash of 2008 – in 2017 we need to make urgent changes | The Independent

The bonus puzzle | LARS P. SYLL

Sometimes I come across something that makes me wonder.  This is one of those somethings.  Perhaps bankers bonuses exist because they can get them, not because they help make banks more profitable?

Diane Coyle has an excellent article in the FT about an apparent puzzle. Why do executives get incentive bonuses (extra pay on meeting some target), but most workers do not? Her article is based ar…

Source: The bonus puzzle | LARS P. SYLL

The fiction of forecasting

I realise that this article was written by an accountant (Richard Creepicture of Richard Cree is editor-in-chief of economia, which is the magazine for Chartered Accountants) and can therefore be rubbished by all practising economists, but I do like his suggestion that economic forecasts are about as useful as a 5-year weather forecast.

Here are some highlights

About Mark Carney:

A week ago, on what some in the media insisted on labelling “Super Thursday”, (because how can a day feel important without a hashtag-friendly label?) the Bank of England governor, Mark Carney, released a huge quantity of economic data. From the slew of numbers and insights he offered up, one headline jumped out. Contrary to his advice the last time he gave such “forward guidance”, way back in July when the economics clearly looked completely different and when he announced interest rates were on the verge of being hiked up, rates would now not be going up until 2017.


This week, as better than expected numbers on unemployment suggest the economy may be on the verge of over-heating, it now seems plausible that Carney’s next forward guidance may move that 2017 date forward again.

About George Osborne:

Meanwhile, across town in Westminster the chancellor, George Osborne, is planning his next mini-Budget (how long ago it seems since he pledged to scrap these in favour of a return to an annual Budget). At the heart of his Autumn Statement will be a set of economic forecasts from the Office for Budget Responsibility (OBR). Or rather, a set of revised forecasts. And they will be wrong, or more accurately they will only be a best guess of what might happen. Apologies to the doubtless very clever economists at the OBR if they’ve landed a couple, but most OBR forecasts have had to be revised. In fact, the recent record of most of those who make a living from reading the economic runes hasn’t been great. Only a handful of economists predicted the economic crash (and many of those are from the Cassandra school of economics, rather like the former business secretary Vince Cable, who was once accused of predicting “nine out of the last three recessions”). Today you can find an economist prepared to collect together a bunch of financial and economic indicators that point to either the start of the next recession, the beginning of a golden recovery or anything in between. Can someone please just admit we haven’t really got a clue, that the models, if they were ever fit for purpose are broken?

If you want to read the whole article go to The fiction of forecasting

Macroeconomics — totally messed-up

Until a few years ago, economists of all persuasions confidently proclaimed that the Great Depression would never recur. In a way, they were right. After the financial crisis of 2008 erupted, we got the Great Recession instead. Governments managed to limit the damage by pumping huge amounts of money into the global economy and slashing interest rates to near zero. But, having cut off the downward slide of 2008-2009, they ran out of intellectual and political ammunition.

For more click on the link below

macroeconomics totally messed up

It was the cartoon that really got me!

Cartoon - I want to be an economist

It’s not just me

It can be difficult deciding what to write next.  Everything seems to have been said already.

And then along comes the weekend newspaper.  The Times Saturday June 27 and Philip Aldrick.  If you have a subscription you can read his article We ought to be scared: too much debt is being combined with too much blind faith.

In simple terms what he was saying was that some important economic indicators are heading the same way they went before the big crash – the  2008 disaster brought about by banks lending too much to people who could not pay them back.

So – money is cheap thanks to Quantitative Easing and very low (or zero) interest rates.

Probably as a result, lots of borrowing has been going on – according to the article $57 trillion in 7 years – which is massively more than the economic growth in the same period.

So debt is now 286% of GDP.  Is this worrying?  Well it was less than that – 269% of GDP – before the crisis.

And where is the money being lent?  “Emerging markets” seems to be the answer – Latin America, the Middle East and Africa are all running deficits borrowing from Western economies.

As I see it, the problem is simply our debt-ridden system.  Because of low interest rates in the Western economies, bankers need to find someone else to lend money to who will pay high rates of interest.  Germany is financing Greek debt at higher interest rates than it can get elsewhere in the EU, but even this is not enough to produce returns for the financial sectors in the West.

As a result money is lent at higher risks to countries which offer a much higher rate of return.  This means money in junk bonds and frontier bonds.  Or put another way in risky companies and risky countries.

Some risky investments will go bad and the question is whether the financial gurus have got it right this time and balanced the risk with the return or whether, as happened before 2008, they went for return at all costs and ended up offloading the risk onto governments who did not dare to let the banking system (and therefore the banks) collapse and so underwrote the debts in massive bailouts.

My answer is simple.  If commercial debt is outlawed, then bankers and other financiers cannot do this to us again.

This is not an easy fix, because we have been brought up on the present system and imagining a different world is difficult.  And bringing in a ban on commercial debt will require considerable planning and ruthless implementation (because any loophole will be exploited because the financial sector is all about exploiting situations – such as different interest rates in different countries – to make a profit).

Is this a crazy idea?  Possibly, but we have tried for years to bring the banking sector under control in the UK and we keep on ending up with scandals – PPI and other misselling scandals, LIBOR and foreign exchange rate fixing, helping launder drug and terrorist money…

So let’s try something new!