11 February 2009

Free markets work

Continuing the theme of my recent posts. This from Troy Schwensen at The Global Speculator:

Australia’s Prime Minister, Kevin Rudd, has recently delivered an address to the nation providing details on his second stimulus package. Within this briefing, there was a number of sniping remarks about the so called “failure of free markets”. This apparent failure has forced the government to step in and clean up the mess. ... It seems free markets cannot be trusted to spend money wisely, so it is up to the government to spend our money for us. I want to make a couple of points.

Firstly, free markets work fine. The global problems we have experienced in the credit markets were caused by easy monetary policy. Many argue the cause was a lack of financial sector regulation. The more pertinent question to ask is why does the financial sector need so much regulation in the first place? Why is it that free markets work well in other industries but fail so dismally when it comes to the financial sector? The answer is quite simple. The financial markets are anything but free! We have a government entity called a central bank that essentially sets the price of money. It decides the level of interest rates under the flawed belief that the market is incapable of performing this function on its own. ...

The second point I want to make is governments are incapable of investing money smarter than individuals and companies. By deficit spending, they are drawing funds away from the capital markets and effectively competing with businesses for money. Over the longer term, this will put upward pressure on interest rates exacerbating our economic problems. What Australians should be doing right now is saving and paying down debt. At some point this will inevitably have to happen anyway. By lowering interest rates to historically low levels, the message central banks are sending is don’t save, borrow and spend. Governments are releasing stimulus packages encouraging us to spend and “save the economy”. You cannot save an economy via consumption. All you are doing is prolonging the agony. Individuals and organizations need to clean up their balance sheets and save.

7 comments:

Anonymous said...

I had a really good laugh when Rudd said "let the free market rip". That was a classic. The free market will eventually deal with today's system very harshly and current policy will only make the final outcome worse. Looks like at best we are set for a zombie economy if we have to carry all the dead wood.

We all know that the populist argument will be that they did not spend enough and need to do more.

Lone Ranger

me said...

This is great stuff

Anonymous said...

Ah topics more interesting to me than deflation/inflation.

Free markets are good: an unregulated banking sector bad. Here's a quote from a UK Daily Telegraph article.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4590532/Sir-James-Crosby-quits-Financial-Services-Authority-over-HBOS-whistleblower-claims.html
...

"He said: "He clearly acknowledged that this was the right analysis. He said something like 'I see your point but the fact is that everyone else in the industry is doing it, so we have to do it.'" "

Bankers will get caught up in booms as they will lose out to the competition and most likely get taken over. Strong regulation of banks is a must. The question is how much did cheap rates fuel the boom. Quite a bit but completely responsible - I don't think so.

As to deficit spending, in a country like Australia which has done a lot of reform and being responsible with it's budgets I think we can afford to do it. If your in the US's position, with a poor economy and a lot of debt, that's a whole different ball game.

Silverthorn

Bron said...

Silverthorn, I was discussing the "everyone else in the industry is doing it, so we have to do it" dynamic with the Mint's CEO recently and he was also of the view that unfortunately he could see the pressures a CEO of a listed company would be under to produce silimar sales/returns as their competitors, lest their share price suffer.

Question is would the regulators be co-opted into the "system" or indeed would Government relax regulation if it was producing a booming economy and happy workers. In other words, can you really create a system that will protect against human nature, against temptation for easy money?

Anonymous said...

Bron I think in Australia, the banks and governments give the impression at least, that regulation worked fairly well. Our banks have taken a lot of hits and needed some support from government due to worries of a run but compared to the US, UK and Europe not too bad.

The free market mentality in the US, as applied to the banking sector,led them down a slippery slope but they got a big push from cheap money. Recessions seem to have become politically unacceptable.

Your point is well made though, the regulators failed and as you say were co-opted. In the Madoff case I think someone from the SEC married into the family? This is one of the other factors to go with the cheap money. SIV's and the like seem to be a means to get around regulation.

Can it be done better? Couldn't have been much worse from what we read about the US, UK and I presume elsewhere.

Perhaps Costello can get a job advising regulatory bodies.

Silverthorn

Mo said...

Dear Bron;
I searched your gold chat blog. I tried to find a link to send you an email to ask you a question but found no other way to contact you , but to send this comment. I want to ask about the usual discount over the spot price, that a miner will sell his gold for to a refinery! please email me at mroushdy@gmail.com Thank you very much. Best Regards

- Mohamed Roushdy

Bron said...

Mohamed,

Miners don't sell their gold at a discount in my view. Miners, or indeed anyone delivering impure gold, pays a refining fee to get that gold turned into 400oz bars. Those bars are then sold at the spot (bid) price.

If the refiner does not offer a good spot price, the miner can easily take delivery of the 400oz bars and sell them to someone else.

You may consider the refining fee to be a "discount" to the spot price but I think refining and selling the gold are two different processes.

As to what might be a usual refining fee (or discount), well this depends on volume. If you are Newmont, well you play off the refiners with the fact that you have thousands of ounces of refining work and thus you get a much lower refining fee compared to a junior.