Tuesday, October 20, 2009

What if?

Here's a question for you:

How many Harry Potter books would've sold if they had sold at full retail price? If they had always sold at retail price, and everyone knew they sold at retail price, and that's just the way it was?

My guess?

Just about as many as actually did sell.

People would've bought them and enjoyed them and never given the price a second thought.

Here's another question for you: What if Walmart had never existed?

My guess?

We wouldn't miss it a bit. We'd have the same quality of life we have now.

A third really outrageous question:

What if people had to save up to buy something, and when they had enough money, they had to walk to the nearest local store and buy it at full retail? What would our lives be like?

My guess?

We'd all have less stuff, we'd be careful to buy quality, and we'd treasure it more.

What if.....

33 comments:

RDC said...

Just as many Harry Potter books might have sold, but then something that was purchased with the difference between the full and discounted price would probably not have been.

While I certainly am against the abuse of credit that occurs in this country, I am fully in favor of competition, including on price.

If everyone charged list price they would value each item more because each one would be so expensive (lists prices would also be substantially higher because manufacturers would retain far more pricing power then they do today) that the hours of labor necessary to obtain anything would be substantially more.

Duncan McGeary said...

What if?

Competition was based on best quality for the best price, based on best idea, best material, best presentation, best knowledge and location and service?

What if it wasn't based on cheap foreign labor and materials cost-cutting?

RDC said...

Is it really??

Or is it a matter that salaries in the US are at a artificial level compared to the rest of the world and if we want to mantain our standard of living and maintain our salaries compared to the rest of the world we really need to be that much more productive.

What you call cheap foreign labor is basically a pretty high salary compared to average incomes around the world. Lets see I think the average per capita income for China these days is around $4990 compared to $37,500 in the US. Now in the days when third world countries were lacking in infrastructure, education, etc. it was pretty easy to compete and maintain the higher wage in the US. Today you have plants in some of the emerging nations that are as modern or more modern then ones in the US and with a work force as productive. In that situation US wages either go down, the productivity of the work force goes up, or the work moves. Artifically trying to maintain it only encourages inefficiency and creates more of a problem later on. Setting price controls just makes the problem worse.

What you are referring to as cheap foreign labor and materials cost cutting is not valid because that same foreign labor and those same plants are also producing the brand name top line goods that show up in the expensive stores.

I suspect that many of the items in your store are produced using that same labor in those same factories.

RDC said...

Actually to the following statement

Competition was based on best quality for the best price, based on best idea, best material, best presentation, best knowledge and location and service?

You also add cost efficient operations and supply chain. There are substnatial savings with shortening the supply chain. Each step has its own, often unecessary costs.

Leitmotiv said...

Actually, our wages have not adjusted for inflation since the 1970's. That means the corporations aren't paying us anymore than we've made since 1970. We make less money now than we ever have, and we are one of the most overworked countries. Average work week is between 50 and 60 hours. We also have to employ both parents to make ends meet, when before just the father would suffice.

So yeah, RDC our wages are artificial. Artificially depressed! And you think we need to be more productive? Are you kidding me? 50 to 60 hours a week ain't good enough for ya? I don't think I have much more hours to spare in the week! Remember, I still need to eat, sleep, and take a bath!

Broofa said...

I'm with Dunc' on this one. Although I believe cheap labor and cost-cutting are a symptom, not the cause. The real problem is that consumers simply don't value the same quality in products that they used to.

Perhaps the most outrageous example of this are the Swiffer™ products - dusters, mops, vacuum cleaners... none of which are made to last, nor expected to. And so you see these P.O.S. products littering curbs every trash day. It's horrifying what they are doing to our landfill, nevermind our sensibilities about quality.

Contrast that to the products our parents and, more aptly, our grandparents used, and you see an entirely value system. Vacuum cleaners were expected to last, literally, a lifetime. Go to Goodwill and you can find perfectly good vacuum cleaners made 50 years ago. But very few made 10 years ago.

So, I say, "What if... consumers quit tolerating these crappy, disposable products, and quit buying into the marketing hype machines that tell them to replace everything in their home simply because a new, more sparkly version is available?" (I'm looking at you Gillete Fusion Power Gamer razor. For chrissake, any man that's so pussyfied he needs a $22, 5-bladed, oscillating motor razor (complete with Enhanced Indicator Lubricating Strip!) should just be taken out back and buried in a shallow grave.)

RDC said...

Leitmotiv,

And how do you think the rest of the world is. What you are seeing is people in the US having to compete with people outside of the US for jobs and income. Guess what most people get paid far less. The result manufacturing job have left. The salaries for the ones that remain are lower.

You want to earn more you better be in a position with some competitive advantage, because if you do not have a special skill or knowledge the level of competition from the rest of the world is going to continue to increase.

Service jobs that require physical presence here have some degree of protection, but most of them are pretty low paying to begin with.

You may not like the current situation, but there are a lot of people in the world that would be perfectly happy to do what you do for considerably less then what you get paid to do it.

Actually all of the quintiles, adjusted for inflation are significantly above 1970 levels. They are relatively flat when adjusted for inflation to 1995 levels.

Alex said...

Yes, but RDC, do you REALLY want the US and other first world countries to compete with third world countries? Do you want those things that occur in third world countries to occur in the US and other first world countries:

*child labor
*no workplace safety resulting in numerous casualties and fatalaties
*wages kept artificially low due prohibitions (both legislative and non-legislative) on unions achieving decent wages (OK, this happens to an extent in the US and some other countries)
*people working a full-time job still not able to provide enough for their family due to the ridiculously low wages (again, this already happens to an extent)
*the harrassment, discrimination and bullying of employees that goes on unchecked.
*the lack of democratic institutions and respect for human rights

I'm sorry, but by forcing the US and other first world countires to compete with third world countries, all you do in entrench the above in third world countries and drag conditions in the US and first world countries down to these abhorent levels. The objective should be to drag 3rd world conditions up to 1st world levels, not drag 1st world levels down to the 3rd world levels.

It should also be pointed out that those people who use the excuse of "competition" to suppress wages in the US and other first world countries also defend the excessive salaries executives get. Why shouldn't executive salaries be suppressed for the sake of competition? Oh, and don't use the excuse of "needing to attract the best talent", because the global financial crisis shows just how stupid and ignorant this so-called talent is.

RDC said...

Hate to tell you it is not a matter of me wanting anything. However, it is the world in which we live. The only way to stop it would be to go back to very high tariffs and that would bring about the drop even more rapidly.

The US had substantial benefits after world war two because all of the other industrial powers were pretty much destroyed. The US was able to take the lions share of manufacturing while the other countries (Europe and Japan) were rebuilding. That carried us through the end of the 50's.
During the 60's and 70's there was not sufficient infrastructure in the third world, plus the cold war prevented real competition between large segments. Then in the 80's you had the collapse of the Soviet Union and China becoming commucapital (keeping the communistic party in charge but becoming capitalistic in a number of ways) as such that really started the competitive period. India puts its focus on education, China on manufacturing, other third world countries followed suite. The end result has been a steady out flow of jobs. It has been somewhat countered by the US remaining the main location for R&D. However, competition is rising there as well and you are starting to see technologies being used outside of the US that are not present outside of a lab in the US. So to reverse it the US has to be successful in competing, not just exist. That means R&D (How many of the research scientists in our labs are now from India or China?), finance (not much chance of that with the current situation), or some other area that can be leveraged to improve the US competitive position.

We do have some (the dollar as a reserve currency, natural resources, farm output),but the deficits and other actions are rapidly erroding those as well.

(The Australian dollar has been a great investment over the past 6 months.)

blackdog said...

"What you are referring to as cheap foreign labor and materials cost cutting is not valid because that same foreign labor and those same plants are also producing the brand name top line goods that show up in the expensive stores."

How true. And people pay a hefty premium for the "prestige" label ... thereby fattening profits for the manufacturer -- or I should say the owner of the label, who doesn't really manufacture anything anymore.

FYI American workers already are the most productive in the world, measured by GDP divided by labor hours.

I remember when "globalization" was cranking up how the "experts" assured us it was going to make us all better off in the long run. What a load of bullshit. Working Americans are still waiting for the long run to arrive. Meanwhile the plutes have made a bundle in the short run.

And after shipping almost all of our manufacturing jobs overseas we're wondering why our economy is in ruins.

blackdog said...

Alex: That's exactly what he wants -- a return to the good old days of William McKinley, before the lousy Progressives "ruined" the country.

RDC said...

Globalization really would not have a fundamental impact. What you had was a point where other countries could build industrial capacity weither we liked it or not. You might of had some minor shifts in timing and you certainly would have had trade wars and kept prices high enough for a longer period of time to reduce the low cost rampant consumerism, but the competition for manufacturing, and now for R&D and pretty soon for financial markets and the reserve currency would still be here and coming like it or not.

As far as productivity depend upon how you measure it. In terms of what individual workers can produce in a factory, the margin is not high enough to offset the lower wages that the rest of the world earns and that pressure will only increase over time.

Go visit some factories in Europe some time. They are much more automated then those in the US. Their labor regulations have resulted in factories being designed to use far less labor then their US counterparts.

We are in the middle with less automated factories and high wage costs.

blackdog said...

"Go visit some factories in Europe some time. They are much more automated then those in the US. Their labor regulations have resulted in factories being designed to use far less labor then their US counterparts. We are in the middle with less automated factories and high wage costs."

Maybe we should change our labor regulations to emulate theirs, then.

High-quality products at reasonable prices made by workers earning a living wage are not impossible. For example, this summer I bought a new pair of Birkenstocks -- made in Germany, excellent quality, probably will last 20 years. Price: $100 retail.

Also this summer I bought a new pair of Brooks Addiction walking shoes -- made in China, probably will last about three years. Price: $100 retail. Obviously someone is benefiting here and it is not the consumer.

I can't help thinking that executive pay is a factor too. Top executives in the US, as you know, are paid far more than their counterparts in Germany, France, England, Japan, etc. Maybe if American CEOs didn't feel they had a god-given right to receive eight-figure or nine-figure incomes we would be better able to pay American workers a living wage and make products that were high-quality and competitive in price.

blackdog said...

"(I'm looking at you Gillete Fusion Power Gamer razor. For chrissake, any man that's so pussyfied he needs a $22, 5-bladed, oscillating motor razor (complete with Enhanced Indicator Lubricating Strip!) should just be taken out back and buried in a shallow grave.)"

LOL! But such gimmickry has always been part of the razor game ever since King Gillette introduced the safety razor in 1895. Then along came twin-blade razors, triple-blade razors, four-blade razors, and now five-blade motorized razors. Maybe next we'll see a six-blade, laser-guided razor that also can be used to grind coffee and as a sex toy.

blackdog said...

"The objective should be to drag 3rd world conditions up to 1st world levels, not drag 1st world levels down to the 3rd world levels."

That's what Ross Perot was saying back in 1992. The pundits said he was crazy.

That was back when we were still being told that globalization would be good for everybody. Now the line is, "Whether you like it or not, you're gonna get it -- so bend over and take it."

RDC said...

Ok lets just legislate everybody in the world to be wealthy.

Since that won't work we are stuck with basic economics. If you take all of the wealth in the world and distribute it evenly the resulting level is substantially below the median level in the US.

The conditions which resulted in a lot of that wealth being attracted to and remaining in the US no longer apply. Unless new conditions are set up to replace them (pretty difficult) the margin between the US standard of living and the rest of the world will continue to erode. Now the good news is that erosion will, in general, not mean a loss of the current standard of living as much as it will mean that it will tend not to improve as it has in the past. New benefits will take longer to implement throughout the population. In general the erosion will be slow enough that most won't really notice it. Think of the frog in a pan of water which is slowly heating.

On the other hand in the emerging countries their rate of change will increase, the rate at which conveniences will become accessable throughout the population will increase. They are still quite a ways behind in that reguard, but they will accelerate and we will languish.

Now I expect someone will talk about all of the green jobs which will be created. To that I will comment on guess who leads in solar cell production (hint: not the US), guess where most windmill components are manufactured (not the US) and guess who controls access to most of the worlds supply of rare earths (needed for battery production for electric cars) (also not the US)? Now the US together with Europe still leads in Nuclear power plant engineering and technology. Though not by as much as we used to.

RDC said...

Let me followup with a little more information. In the year 2000 the average wealth (think net worth) in the US was around $144,000, the Global average (depending upon method of calculation used) was 33,893 to 43,628. Now even more interesting is that a net worth of $2160 puts one in the upper half of the world wealth distribution, $61,000 in the top 10% and $500,000 in the top 1%.

If you are interested in reading more on this subject the above items came from an interesting paper at http://www.iariw.org/papers/2006/davies.pdf

Alex said...

It's interesting that you mention that the Australian dollar had been a good investment over the last six months. Do you know why?

1. The country did not go into recession
2. There is a high level of consumer confidence and spending, resulting in relatively high interest rates - they were uin fact just increased last month at a time when many countries are still reducing them.
3. There was not a number of large companies, particularly financial companies, that went broke

Now why did these things happen or not happen:

1. Because the financial sector is heavily regulated by the government
2. Because the government has continually engaged in large spending.

in other words THE GOVERNMENT HEAVILY INTERVENES IN THE ECONOMY. Now I know that for some people, government intervention equates to Communism. But the reality is that government intervention in the economy is the best way to ensure that the economy works in the best interests of the entire population, not just the rich few. And really, isn't this what the economy should be doing, and the government intervening in the economy to do - work in the best interests of EVERYONE? This isn't "communism" - the government doesn't own all enterprise - it's just the government intervening in the economy when needed to ensure everyone benfits, not just the few.

And yes, that means protection. See, let's go back to a time when most developed countries had very protectionist regimes - the 50s and 60s. Was their high unemployment? No, in fact, in many countries there were great periods of close to full employment. Standard's of living were high, despite the fact that people had to pay "high" prices for imported goods. The only thing that ended up causing a problem (despite what some economists claim) was the conflict in the middle east and the resposne of the Arab countries with oil. As a result of the crisis this caused the monetarists and their policies came to the fore, resulting in the problems we have today.

Another example of how protectionism can work is South Korea. After WW2 they were definately a develping country. In order to develop they engaged in heavy protectionism and government assistance to dinsutry. The result is the developed country we see today.

So Protectionism and other government intervention (the EU has much more geovernment intervention in the economy than the US)isn't the big evil economists with their own agenda tell us. It can and should be used to ensure to ensure decent working conditions and living standards in all countries. Shoulfd there be universal protectionsim and government intervention? Of course not, it all depends on the individual country and their needs.

Remember, it shouldn't be free trade, it should be FAIR TRADE.

RDC said...

Actually the primary reason is because Australia is largely a commodity based economy.

They did go into recession.

They just happened to come out first when China started stockpiling commodities after the collapse and continue to benefit from relatively strong demand.

The Australian economy is considerably less retail dirven then the US economy. The debt load is substantially less on the consumer side.

The real major reason is because the Aussie tanked when there was the flight to safety after the collapse of Lehman and just now is getting back to the same level that it was at prior to the Lehman collapse. Currently around 93 and was as low as 60 at the peak of the crisis. It was at parity prior to the collapse.

Also keep in mind that the Australian Central Bank maintained a 3% interest rate (down from 7%) when most of the rest of the developed countries went to zero. Now their banking system is less regulated then the UK and the EU and those areas participated very nicely in the overall recenssion and problems in the banking sector.

Also just for your information Australia did experience a housing bubble and a corresponding drop in price, for example Perth has dropped over 10% in the last 12 months.


Now upon what evidence do you make your claims that there economy "1. Because the financial sector is heavily regulated by the government
2. Because the government has continually engaged in large spending. "

Because overall their banking system is not regulated very much differently then ours and has less regulation then the banks in the UK and Europe (which as I mentioned about failed as dramatically as ours). They do have some differences in the level of reserves for foreign banks, but in general the regulations are not that dramatically different.

As far as your second claim about Government spending they did put in place a 9.9 billion spending plan in November of last year and will run a deficit for 2009, which for Australia is rather unusual since the last time they ran a deficit was in 2002.

But that is pretty much all of the intrusion that they did.

So lets see the detail on the continuing spending and the other aspects of how much intrusion the government is taking into their economy.

I also

RDC said...

In the 50's and 60's the rest of the world were happily buying US exports. It took well into the 50's for Europe and Asia to recover from the destruction of their infrastructure in WWII. China was closed off, Russia and Eastern Europe was locked in a cold war with the US, the third world had limited infrastructure and little education. Europe and Japan got their infrastructure and industry going in the 60's and by the 70's were starting to compete effectively (when was the last tiem a TV set was built in the US). In the late 70's and 80's India started focusing on training and graduating engineers, China started opening up and adopted the commucapitalistic approach. In the 90's China really started to pick up steam and the other third world countries (primarily Asia) started following the infrastructure and education model and became somewhat competitive.

None of this competition existed in 50's and 60's. Even if the US had keep trade barriers in place the exports and the marklet share to the rest of the world would have dropped. THe rest of the world woud not have financed our debt, which on one hand might have been a good thing, but on the other it would have produced a day of reckoning much sooner, the US standard of living would have been considerably lower, with prices for just about everything by probably 50-100% higher compared to today.

The world does not stand still. When you are on top you just want to maintain status quo, the rest of the world wants to change it.

The percentage of wealth held by the US will drop and drop significantly over time. THe current government deficits will accelerate that process.

RDC said...

Since you brought up the government intervention in Australia lets look at a couple of items about their economy. Their GDP is around 1 trillion compared to the US 14 trillion their 9 billion stimulus package is considerably less compared to their GDP then the US approximately 800 billion is to ours, not even counting all of the expansion by the other bailout programs and the dramatic expanison of the feds balance sheet. Looks to me that they have done considerably less playing with their economy then our government has with ours.

By the way if China announces their GDP growth to be above 9% you expect the Aussie dollar to react nicely, less then 9% and it may retrench slightly, less then 150 basis points. The Aussie is very much tied to the expected commodity demand of the Chinese economy.

Alex said...

RDC - hate to tell, but I live in Australia and work in the finance sector. (FYI prior to collapse last year the $A was about 97 cents to the $US)

Australia did not go into Recession at all. A recession is a decline in GDP for two consecutive quarters. Australia had only one quarter of negative GDP growth.

The finance sector is much more heavily regulated here than it is in the US and most of the developed world. The Banks here constantly whinge about this - for example resitctions on what sort of fees they can charge- though the government is looking to put even tighter restrictions on their lending and the senate is currently exmaining this.This is why our financial sector did not go into the nosedives experienced in other countries. Heck, even both sides of politics here acknowledge that the level of regulation is what played a part in stopping us go into recession.

Housing bubble burst? Not where I live. Yes, house prices in Perth have gone down, but in the 2 largest cities which account for 40% of the population, Sydney and Melbourne, after house prices steadied or went slightly down for a few months, they have been gone back up this year, thereby eliminating the small decreases that happened.

Now for government spending. You mention the $9 billion in in November. That is only a small part of the spending. In the May budget for example, the government allocated $22 billion for infrastructure. There was a $78 billion budget turnaround between this year and last. Some of that is due to declining revenue, but almost all is due to an increase in government spending.Ever since the GFC started there has been sustained government spending which is what helped us avoid the recession.

And yes, our economy is partially dependant on China - but so is much of the world's economies, including the US. But it's not as dramatci as you think, otherwise Australia would have gone into recession here.

Alex said...

The fact was in the 50s and 60s, developed countries were heavily protectionist. These countries competed with one another in the same way that China and India now compete with them. Nothing has changed - those at the top are challenged by those below them. Countries want to trade with other countries on terms that are beneifical to them. If they can make things cheaper than another country, well it makes sense for them to try and export these goods to that country. That doesn't mean the other country can't do something about it. That was the case in the 50s and 60s, and it is the case now.

It's interesting when bringing up China that little is mentioned of the fact that there is heavy government involvement in their economy - the Chinese Communist party still controls the economy. The question is why shouldn't government intervene in the economy to ensure better living standards in the developed and developing world, when the Chinese Government (and other developed countries too) intervene in their economy to achieve their objective?

The countries that claim to be all for free trade only believe in free trade when it suits them. When it doesn't, they are protectionist. Free trade has become nthing more than a mantar for those people who want to scrwew others - though they only support free trade when it suits them.

RDC said...

Alex,

Nice to hear that you work in the finance industry there so we can move to a more technical discussion.


The biggest difference in Australia that protected it is in the nature of housing purchase transactions, just as the nature of how houses are purchased in Canada tended to protect its banking institutions. As well as the difference in individual debt load, thought people took on fairly significant home debt in recent years, compared to historic norms. It tracked similarly to New Zealand in that requard.

So if you work in the Australian finance market describe the nature of house purchase transactions in Australia. In particular the requirements for qualifications and the standard type contract and percentage of down payments expected. You might also describe a term which is foreign to most in the US called a one off payment. You might also describe the approach called a home savings account and how the Australian government provides a partial match on contributions for people trying to save up there down payment. Now there is a considerable differnece from the US where the government allows banks to do no down loans and then buys them. Now that is a form of government intrusion that really really benefited the US (as in being one of the major causes of the problem)

Interesting that the example about how tightly regulated they are is "The Banks here constantly whinge about this - for example resitctions on what sort of fees they can charge". I am sure that since you are in the finance sector you can come up with some field related description of the regulations such as what is the maximum leverage rate for institutions. What are the ownership restrictions (Australia rukles for ownership are more liberal then those in the US). Fee structures are not what caused the problem in the US and EU markets. It was basically 3 things. The first was issuing no money down loans. The second was no retention of risk by the originating institution. The third was the selling of credit default swaps which allowed banks to purchase them as cheap insurance so they were able to keep the CDO's at full price on their books. Happens to be the reason why AIG was bailed out since they wrote many of them and if they went down and the CDS's defaulted then all of the banks that purchased them would go down as well.

The answer the following question , what if any are the australian equivalent of Freddie and Fannie? If they exist are they government institutions or are they private. If they do not exist then what percentage of initiated mortgages are held by the institution and what percentage are sold.

By the way since you work in that industry what percentage of Australian banks are owned by New Zealand institutions?

Last time I looked 97 is pretty close to parity and the price has almost returned to that pre-collapse level so thank you for confirming.

By the way your timing is a bit off on Korea it did not move forward as an industrial economy until the early 70's. A slight problem called the Korean War intruded. So it did not start progressing after world war two. It significantly lagged Japans economic growth.

RDC said...

I stand corrected on the recession the economy shrank by .06% in the last quarter of 08 and grew by .04% in the first of 09 so it did avoid the technical definition of a recession. The reason why was largely the size of the Chinese purchases of commodities and the stock piling that was taking place there.

I was looking at the size at the end of the March quarter and comparing it to the end of the third quarter of 08. It was smaller, however, because it did not shrink in both it did fail to meet the technical definition.

Now where in Australia are you located? Most of the people I work with are in Sydney.

RDC said...

Not sure if you have respond to the question but I will answer some of them in this post.

My understanding, from your posts, is that Australia did not suffer from a major downturn because 1. The government is far more intrusive and 2. the people kept spending. Mine is that Australia's economy rebounded quickly because 1. it is largely an commodity export based economy which benefits greatly from China's economic growth (and most recently from China's massive stimulus plan, much of which went into stockpiling the very commodites Australia exports) and 2. Australia's economy overall is pretty fiscally conservative. That is to say that the government tends to not run deficits. The consumer and business debt load is pretty low (especially compared to US levels).

First I would like to address the issue of government intrusion and in doing so wil answer some of the question I put into an earlier message. My understanding is that the current Australian banking systems foundation was put into place with the 1945. A system larger based, like the US on fairly quantative measures. There was substantial loosening of the Australian banking regulations after the Campbell inquiry in 1979. Primarily the entry of foreign banks into the country. This was accelerated in 1992 with the allowing of foreign owned bank operations in the country. Banking is Autralia is largely 4 major banks (with a number of smaller players). Now if we look at the regulations themselves. They are not dramatically different from the US regulation. The key differences is that they are more fiscally conservative. There are tighter requirements on capital reserves and the walls that exist between different types of financial institutions are still intact (similar to want was required in the US Glass-Stiegal Act which was done away with here in the late 90's). As you mentioned earlier there are some limits on fees. The limits of fees reinforce the fiscal conservatism of the banking sector. It results in prett high requirements for down payments. Pretty detailed checking of credit worthyness and ability to repay. It is my understanding that 20 percent down is pretty much standard and for consultants asking for low doc loans the expected amount is 40% down. While fixed rate loans are available the standard, most loans originated are variable with limits the credit risk to the financial institution over the life time of the loan. All which are sound banking principals. There is securitization and resale of mortgages on the secondary market (I have made a substantial amount of money in that area), but the loans those packages contain are fundamentally sound. Even though banking regulations are fiscally conservative by US standards they have adopted the principals coming out of Basil II and are further tightening capital reserve requirements and risk provisions.

RDC said...

Continued

Now compare that to the US. The government intrusion in the US banking over the past 20 years has been to encourage lending and to especially encourage lending to those that were high credit risks. This carried over to the government sponsored organizations such as Freddie Mac and Fannie Mae. The movement into subprime loans, which are decryed today, was not only acceptable to Government regulators, it was encouraged and praised by both parties as ecouraging the expansion of home ownership. Any comments by regulators or conerns raised were blocked by Congress. Standards dropped drmatically in the resale of mortgages, which in turn combined with the commercial sector becoming active in the securitization process, resulted in origination standards becoming non-existent (no doc, 100% financing, option arms becoming the new normal so to speak). If you could breathe you could get a loan. You actually had cases of regional banks that applied sound banking standards and stopped making loans in that environment get pressured by regulators to make loans. Even today after the reality of the risk of not following sound banking standards is in plain view the Government is still intruding and you now have the FHA basically lowering lending standards and continuing the no money down (anything required wither paid by the seller or added to the mortgage balance) and worse then that the government is giving tax credits. Certainly that is intrusion into the market place. As a result FHA is currently on very shaky economic ground with a high failure rate of even newly originated loans and will probably require a government bailout. Whereas Freddie and Fannie have already been bailed out and will continue to require additional government infusions.

Goverment intrusion can take many forms. What you are calling intrusion in the banking system in Australia, is in my opinion, enforcement of what are sound banking principals (which were also the foundation of the US banking system until Glass-Stiegel was changed in the late 90's and the government started becoming an advocate for lowered lending standards). Those principals are primarily sound capital reserves, separation of different line of financial business (banking, insurance, brokerage, etc), loan origination standards (one must not forget the role of depositor preference rules contained within the Banking Act of 1959). The intrusion of the government in the US was to break down those principals and ecourage banks not to act like banks. While you have the entire debate here about financial regulation, all that is needed is to return to Glass-Stiegel, return capital reserves back to a reasonable level (keep leverage down in the 10-12 range instead of the 20-30 range) and maintain loan orgination standards to ones that minimize loss (down payments, ability to repay, etc.)

A banker coming from the US to Australia would not find the system fundamentally different, nor the Goverment more intrusive. The regulatory expectations are well published and stable.

Now unlike past recoveries the US will not lead the world out of this one. It will instead lag. The reason is not the financial sector. The reason is very simple - DEBT. The levels of debt, individual and government, are at record, unsustainable high levels. THe reason why consumers have stopped spending, is because they finally cannot afford to continue. The last 10 years the consumer has used their home values as a piggy bank. Now that the piggy bank is drained and will not be accessable for the foreseeable future, the consumer is, in gneral, stuck with a high debt load. The recession in the US is a deliveraging event. It is similar in that reguard to the Japanese economy in 1990. Unfortunately, the government intrusion is taking the same form and that of the Japanese and will probably have similar results.

your turn

RDC said...

One correction on my posts from last night. Should have been -.6 and +.4 instead of negative -.06 and +.04

RDC said...

One other comment.

If I follow your logic it appears to be that things were good in the 50 and 60's with policies were more protectionist and that the current competition used protectionism to build their manufacturing base.

Now lets follow that logic and look at the circumstances. During that time frame the US was basically the manufacturing center for the world. It economy was heavily dependent upon exports (since that time it has shifted to services and retail). Now lets say the US had retained or for that matter increased trade barriers, because of other countries protecting their developing industries would that have really resulted in anything different. Clearly that would not have prevented those countries from building industries to meet their internal need. They would have successfully been able to export to other non-US countries. So the only thing that it would have accomplished is to deny access for those countries to the US market. That would have still resulted in the loss of US exports in those categories, and probably others as those countries retaliated in turn on other categories. Prices in the US would have been significantly higher. Job losses would have still occured as industry shifted from pretty much internally focused. Cost of imports for commodities would have still been there so new cash out flow and trade imbalance would have still occured. The rates would have changes but can you really say that the resulting situation would have been fundamentally better.

The emerging countries would have still progressed, they would still have improved their infrastructure and educational systems, they would have still narrowed the gap.

Alex said...

In Australia the Reserve Bank (the equivalent of the Federal Reserve) is government owned, not privately owned. This is significant in that it works to achieve government policy, not it's owners objectives.

You then have APRA (the Australin Prudential Regulation Authority)which oversees and regulates banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. At the height of the GFC the Government, through APRA, guaranteed all the deposits of authorised deposit taking institutions - which was significant as it helped provide financial stability at a time when financial instituions throughout the world were going under.

We also have ASIC (the Australian Securities and Investment Commission) the corporate, markets and financial services regulator.

In terms of houses, generally if you are an owner-occupier you are required to have about 5% of the house/property price as deposit. This is down from the 10% that used to be rule of thumb 20 years ago.

Most significantly, a loan is attached to the person who takes it out in Australia, not the property like in the US. This legislation is significant as it means that people are much more cautious taking out a loan as they can't simply board up the house and leave as the loan and the debt attached to it follows them. As a result, there was much greater responsible borrowing in Australia than the US.

And yes, there has been heavy government intervention in the housing market - the savings account where the government will match your contributions (to an extent) if it is for a house. There is also the first home buyers grant of $7,000 (which was doubled during the height of the GFC) as well as state home buyers grants. Of course, getting rid of stamp duty would have been better, but that's the way it is.

As you previously indicated, in November last year the goverment gave a $750 bonus to all people with children. In May this year they also gave a $900 payment to all people who earned less than $80,000, with lower amounts for people who earnt more. As much as economists are loathe to admit government sopending is a good thing, most economists did admit that this fiscal spending played a significant part in ensuring the country did not go into recession.

Now all of the above proves my points - the reason why Australia did not go into recession was because;

1. The financial sector wa heavily regulated
2. Becuase of heavy gvernment spending and intervention in the economy as a whole.

RDC said...

The Federal Reserve in US is also a Government institution. It also operates to carry out the Governments mission and not the banks owners. Not much difference there. In the US it is a dual mission of inflation control and GDP growth.

Now the corresponding equivalent of the APRA (the Australin Prudential Regulation Authority) is the FDIC (for banks), the OTS (for savings and loans), NCUA (for credit unions) which, guess what, carry on the same role as the ARPA and they also increased the level of guarenteed deposits and provided stability.

Keep in mind that in the US they also guarenteed money markets accounts during the current period of instability.


In addition to the National institutions, here in the US you also have a layer at the state level depending upon how the institution was chartered.

So not much difference in the structure of oversite other then we have three institutions for different types, whereas Australia has one.

So I see that your regulators all loosened up loan standard at the same time that the US was doing. Yet not to the same level. Australia remained more fiscally conservative in it loan standards. Though I suspect that they have also tightened back up (as I mentioned before current bank loan offerings seem to be back in the 20% range, at least at those with which I have a business interest).

Now clearly the fact that Australia does not have non-recourse loans is a clear difference. Again that is far more fiscally conservative then in the US. However, it is important to note that the laws pertaining to loans and if the buyer is liable for any amount after foreclosure, varies from state to state. As a practice even if a state is not non-recourse banks seldom go after the person because of the costs to sue and collect, as well as the increased legal costs of the more complicated process that judicial foreclosure dictates.

I suspect that difference is more a practice of cultural nad tradional practices then government intrusion. If I recall that practice is also more consistent with NZ, the UK, and even Canada.

As far as the government intervention you don't have the government actually buying mortgages from the banks as we have have with the GSOs (Government Sponsored Organizations) Freddie Mac and Fannie Mae, nor has your Reserve Bank been buying up trillions in bank mortgages of off the secondary market.

While we don't have the government match in the savings accounts (I seem to recall that the match is 17% of the first X dollars contributed (I don't recall the dollar level off hand). Which actually encourages people to save and create a down payment. We have the FHA which basically allows people that cannot afford a house buy them for 3.5% down and where it allows people to have the seller pay that or in some ways bury the cost in the mortgages (seller raises price 3.5% and the n pays the down) allowing the buyer to basically get in for no money down. A far less fiscally conservative approach.

We also have had government programs for $8,000 on home purchases during this most recent crisis. Many states and even cities have also had their own programs.

So far for each ARPA we can raise you an FDIC and an NCUA.

So for your comment that it proves your points you have yet to present anything that is dramatically different in regulation than the US.

Australi was greatly helped by the fact that it is more fiscally conservative in practice which probably helped matters more thean regulation level.

It still comes down to the Chinese buying of commodities which jump started Q1.

RDC said...

As I mentioed earlier the Australian government stimulus spending as a percentage of budget, GDP or on a per capita basis is substantally smaller the in the European Countries, the US and China. As a percentage of GDP it is maybe 1/100 of the total US stimulus efforts (including TARP, the stimulus Bill, the Feds exapnsion of its balance sheet).

So it is not the result of increased Government spending.

Comes down to lower debt levels and the rapid recovery of commodities. If China had not put its very massive stimulus in place and accelerated its commodity purchases Australia's Q1 and for that matter up to and including the current period would not have looked nearly as nice. The rate at which mining and production operations were starting to shut down in Australia late last year was pretty dramatic and it reversed course very quickly as commodity demand rebounded.

Some items that one might find interesting to research and find

% of Australian GDP related to

1. Manufacturing
2. Retail
3. Commodities

On a different subject % of products purchased in Australia that are domestically produced vs imported.



I am sure you can find the numbers of commodity exports by quarter.

RDC said...

I actually found something interesting concerning the Q1 positive growth in GDP. Now if you recall Q1 grew by .4 after Q4 dropped by .6. That growth in Q1 is why Australia missed the technical definition. Now from a Forbes article I find that aggregate spending dropped 1% inspite of the Government stimulus (which was responsible for .3% of GDP growth) The real kick in GDP growth was the increased trade surplus due to dramatically dropped imports, while commodity exports remained high. That added 1.6% points to GDP so if companies and people had kept imports high and not increased the trade surplus then Q1 would have been negative 1.2% instead of positive .4% and it would have met the definition of recession.

The advantages of having an commodity based economy instead of a consumption based one, and of having a trade surplus, instead of a trade deficit.

"Yet behind the surprise, the underlying picture of the Australian economy is not that brilliant.

The first quarter growth was contributed by the biggest trade surplus in 48 years, which helped offset declines in business and housing investment. The huge trade surplus resulted from a sharper-than-expected decline in imports. The lowered import figure, which added 1.6 percentage points to GDP, reflected that Australian companies had slashed their investment.

Thanks to lower mortgage costs and pocket money distributed by Australian government, household spending in the first quarter added 0.3 percentage points to GDP. Aggregate spending in the domestic economy, however, fell 1.0 % in the quarter."