Economics Re: The Fire Sale....

[Phild]

This topic has been split from 'The Fire Sale"
Background Posts:
Clio: http://greece.greekreporter.com/2015/08 ... -airports/
and the carpetbaggers...
http://www.ekathimerini.com/200591/arti ... -in-greece

Kilkis: I think it is a bit unfair to lump the airport deal and the property deals together
Clio: Both about pillaging, licensed or otherwise? About exploitation of the crisis, about Greece being up for grabs?
Carolina


Phild:
I have to agree with Clio on this one (or at least what I think she intends by her comments).

My personal take in it is this:

If you are buying a property to live in or work in, for now or the future - that's a reasonable matter.

If you are buying a property solely to make money out of it, you are a speculator. A speculator's position in the market chain is to buy something cheap and sell it for as much money as possible (perhaps waiting a while in-between). They add no value to anything, and inevitably cause the price of whatever they are buying to increase (in the case of many property markets, to the extent that ordinary people can no longer afford to buy).

In my view this is immoral.

Of course, this applies to all speculation, trading (just why is coffee so expensive when the coffee farmers are paid a pittance for producing it), and derivative markets (how can you possibly buy and sell a crop that hasn't been planted yet?). All of these things should be illegal.

[mouche]

Mouche, why not just edit a post rather than repost it with the addition of a single sentence. You can do hat any time you wish: it's not the same as deleting a post (which you can only do if nothing has been added after your post). Just click the pencil icon, make any changes and additions and submit again.

Yes, I'm aware of that but had problem with my internet connection all day yesterday so wasn't aware of the fact that I had a doubleposting till just now!

[Kilkis]

The derivatives market largely grew up in relation to the agricultural sector in the USA and as such served a useful purpose, Phil. Grain, for example, is all harvested within a very short space of time but the market for grain lasts all year. Consumers of grain, e.g. flour mills, need a guaranteed all year round supply. If all the grain was sold in that short time period it would fetch a low price as supply would vastly outstrip demand. The farmer needs the income from his grain harvest immediately, however, to buy new seed etc. He cannot afford to store the grain and sell it gradually through the year to get a better price. Speculators fill that gap. Typically the speculator will negotiate simultaneously with farmers and with buyers. He will then enter into futures contracts with both the farmer and the buyer. While technically he is trading something he doesn't have he does have contracts to acquire. Today, with a global market and grain being harvested in different time frames in different geographical locations, this function isn't quite as important as it was but it still fulfils a need.

It doesn't always work to the disadvantage of the farmer. A farmer friend of mine claims he makes more money trading his crop on the futures market than he makes from the actual crop. It also serves the purpose of guaranteeing he doesn't make a loss. He knows what it costs to produce his crop. He has a pretty good idea how much crop he will produce barring catastrophe. If he can sell enough of his crop on the futures market to cover his total costs then he knows he won't make a loss. He can then wait and sell the rest at market price when he knows exactly how much he has got or he can sell more of it on the futures market if the price looks good. This beneficial speculation works in many markets. Oil/gas are other examples where energy generators can lock in prices using futures contracts if they think the price is likely to rise. As with all forms of speculation they don't always get it right and stand the risk of losing.

I don't know if you get/will get a pension, Phil but if you do I'm willing to bet that a significant percentage of that pension fund is invested in property so indirectly you are also speculating in the way that you would ban. Also not all property speculation is bad. A significant amount of UK commercial build is done by speculators. A property investment fund will build an office block or an industrial unit with the intention of renting out the space to a company that cannot afford to build such a space themselves. The investment company receives the rent and also benefits from any increase in value of the property. They also carry the risk of not filling the space and/or any decrease in value. The companies that rent the space benefit from being able to set up in business/expand without incurring the capital cost of building. Depending on the terms of the lease they can also walk away at low cost if they downsize. When I worked at BSI about half their testing labs, i.e. core business that they believed was completely stable, was located in an owned building and the other half, i.e. new capabilities, was in rented industrial units.

The same is true in the housing market. While much is made of people being unable to buy because of high prices many people actually want to rent. While I'm a great believer in owning your own house I have found it preferable to rent for periods in my life. Every rented house is owned by a speculator. If you ban such speculation there would be no private rental sector at all. In the UK potential demand for housing has always outstripped supply. The reason that prices didn't spiral out of control for many years was that real demand was much less than potential demand because it was constrained by lending criteria. As long as nobody could borrow more than about three times their earnings, house prices could never increase much faster than wages. It's not a perfect correlation but it is a pretty weighty anchor. House prices spiralled out of control because banks relaxed the lending criteria up to as high as ten times earnings and with no real checks. I would say that many more speculators were attracted into the housing market because of this out of control rise rather than causing it. Undoubtedly they then contribute to the problem but I don't think they are the underlying cause. London is an exception since it attracts a huge amount of dirty money from abroad.

Unfortunately the futures market can be and is misused to skim the market. Investment banks in America were banned from getting involved in this sort of trading but have often found ways round it manipulating the price of things like Aluminium and oil for example. Every time they are caught doing this they simply wind down one scam and start the next one. Completely naked selling on the futures market should be banned but is difficult to police.

Warwick

[Phild]

Firstly, I must apologize for my previous post, which was off-topic and I'm not going to expand on it here.

See you over at the Post-Capitalism forum, Warwick!

I will say this, though:

How much of an indictment of a broken market system is the fact that your friend makes more money from futures of his crop than from the crop itself? If he can do it, then so can other people - and so they do - and, as we know, that 'extra' money which speculators make comes from consumers like you and me, and statistically, from a lot of people on low incomes; and so the rich get richer.

[Kilkis]

All he is doing is using the futures market to get the best price for his crop. Wouldn't you do the same if you were a farmer, Phil? I think people are too concentrated on price and not enough on food supply security. While nobody wants to pay more than they need to, I think our obsession with getting everything cheaply means we are walking blindly into a very major food security problem.

Warwick

[Phild]

All he is doing is using the futures market to get the best price for his crop. Wouldn't you do the same if you were a farmer, Phil?

Well, no, I don't think I would. I've never been one to 'maximise my profits'. As far as I'm concerned, enough money is enough.

I think people are too concentrated on price and not enough on food supply security. While nobody wants to pay more than they need to, I think our obsession with getting everything cheaply means we are walking blindly into a very major food security problem.

I agree with you on food supply security - but I think we would probably differ on the methods required to maintain it. Mine would be rather 'leftward' leaning.

[Kilkis]

Firstly I don't understand the logic. If a coffee grower gets a low price for his coffee it is the evil middle men who are screwing him but if a farmer tries to get a better price for his crop he is screwing us? Either it is a good thing for a grower to get the best possible price for his crop or it is a bad thing. It can't be both.

Have you ever walked into a shop that was having a sale and told the assistant that you intend to buy an item but you want to pay the full price for it, Phil? Anybody seeking to buy something will tend to buy it wherever it is cheapest. To what lengths somebody will go to get that cheaper price will vary from person to person but I don't think there are many people in the world who would demand to pay more than is being asked.

Have you ever sold anything like your house or your car, Phil. If four people offered four different prices which one would you take, all other factors being the same? Would you take the lowest price because it was "enough"? Most people would take the highest price offered and I don't think anybody would regard them as evil for doing so.

Trading has existed since mankind came down from the trees and arguably before that. Trading has always been based on each side getting the best value they can. Farming is a very high risk business. You never know in any one year if your total crop will fail for a multitude of reasons and you will have no income at all. You have to get the best possible price in each year or you will certainly go bankrupt.

Warwick

[Phild]

I didn't really want to turn this into a dialogue here, Warwick - firstly, because it's off-topic, and secondly, because it's probably boring the pants off everyone else.

However, I'm sure that anyone who doesn't want to read it will have stopped by now, so I will continue.

Firstly I don't understand the logic. If a coffee grower gets a low price for his coffee it is the evil middle men who are screwing him but if a farmer tries to get a better price for his crop he is screwing us? Either it is a good thing for a grower to get the best possible price for his crop or it is a bad thing. It can't be both.

A farmer isn't a middle-man - he's a producer, and he should be paid a fair amount for his crop - he shouldn't need to resort to the futures markets to make money on his crop. If he actually needs to go to the futures market to get a fair price, then there is something wrong with the system (and that 'something' is that the futures market exists, so that non-producers can plunder the gap between production and consumption).

A middle-man (note, I'm not including storage facilities and distributors in this category, as they add value to a product by a) storing it when a producer doesn't have storage space, and b) distribute the product to the consumers when the producer doesn't have the means to do so) is a person who buys a product and does nothing but sell it on for a profit, He is not adding any value to the product, and is just skimming off profit. He is the evil man in this equation.

Have you ever walked into a shop that was having a sale and told the assistant that you intend to buy an item but you want to pay the full price for it, Phil? Anybody seeking to buy something will tend to buy it wherever it is cheapest. To what lengths somebody will go to get that cheaper price will vary from person to person but I don't think there are many people in the world who would demand to pay more than is being asked.

A shop which is having a sale is still making money on their stock, just not as much money as usual. Some may be selling off stock as low as cost price to free up storage space for new stock, which may be more saleable - But no shop sells for a loss unless they really think that the items are no longer saleable. This is why I wouldn't go into a shop and offer to pay the full price - the shop is still making a profit, just not as much as it normally does.

Have you ever sold anything like your house or your car, Phil. If four people offered four different prices which one would you take, all other factors being the same? Would you take the lowest price because it was "enough"? Most people would take the highest price offered and I don't think anybody would regard them as evil for doing so.

Actually, I have often sold for lower prices on many items that I could have asked more for. I often give things away. The last property and car I sold, I sold for the first offer I was given. I have, indeed, sold items to people who offered less, just because I liked them.

Trading has existed since mankind came down from the trees and arguably before that. Trading has always been based on each side getting the best value they can.

Well, there is 'value' and 'price' - the two are not necessarily the same. I would argue that 'value' is a term which encompasses a utility to both buyer and seller - 'price' is a figure dreamt up by a seller, which is not necessarily agreed on by all parties.

Farming is a very high risk business. You never know in any one year if your total crop will fail for a multitude of reasons and you will have no income at all. You have to get the best possible price in each year or you will certainly go bankrupt.

Are you telling me that your farming friend doesn't 'hedge' by buying insurance??? (i.e. betting that his crop will fail) If so, he has been severely remiss, given that he bets on the futures market to maximise his crop profits. I would be aghast!


On personal note, I have always followed the advice of those who are wiser than I am. One of the maxims I follow is "Question everything!"

One of the questions I have asked myself is "Do I really need any more money than I use to get through the day?", and the answer is 'No'.

The reason that the answer is 'No', is because I don't need big houses, fast cars and jewellery on ever surface - but it's also because if everybody said 'Yes' to this question, then the world would be on an unsustainable trip up its own backside - into a world where a few rich (usually sociopathic) people own everything, and essentially, everyone. Where the poor are getting poorer by the moment, and are unable to scrape up enough money for what we would assume are basic human rights - water, food, sanitation - and certainly not medicines.

Can you imagine a world like that?

...oh!

...hang on a minute...!

[Clio]

Actually, I have often sold for lower prices on many items that I could have asked more for. I often give things away. The last property and car I sold, I sold for the first offer I was given. I have, indeed, sold items to people who offered less, just because I liked them.

Oh Phil, I didn't think there were any like you in Crete. Are you spoken for?

[Kilkis]

...One of the questions I have asked myself is "Do I really need any more money than I use to get through the day?", and the answer is 'No'.

The reason that the answer is 'No', is because I don't need big houses, fast cars and jewellery on ever surface - but it's also because if everybody said 'Yes' to this question, then the world would be on an unsustainable trip up its own backside - into a world where a few rich (usually sociopathic) people own everything, and essentially, everyone. Where the poor are getting poorer by the moment, and are unable to scrape up enough money for what we would assume are basic human rights - water, food, sanitation - and certainly not medicines....

We are not as far apart as you think, Phil. I agree with your sufficient unto the day sentiment entirely. I have never chosen a job based on the money it would pay but on the satisfaction I believed I would get from doing it. In the last job I had I was rarely paid my full salary and went very long periods with no pay at all. The only jewellery that I own is my father's watch and my wedding ring. I have never borrowed money except for mortgages which were all paid off in ten years or less. I have never bought anything, other than a house, unless I had the money to pay for it. Every single functioning item I have disposed of in the last ten years or so I have given away including a car, a TV, a bike etc. No the car wasn't a wreck. It is still going strong five years later and is now on its third owner after me, all also free transfers.

Having said that I also recognise that markets work if they are true markets and are allowed to work. They are probably the best method of ensuring that when two people are engaged in a trade both get the best they can out of transactions. I see absolutely no problem with anybody seeking to get the best price they can when selling something or paying the lowest price when buying something. The problem is not this type of normal activity but corrupted versions of it perpetrated through financialisation. I would support totally this proposal: http://positivemoney.org/our-proposals/ While it is a UK organisation its message is worldwide including for Greece. It was very instrumental, with others, in getting the Bank of England to admit that 97% of money in circulation in the UK was conjured up out of thin air by the private banks and issued as debt. I am sure the figure is similar here. No central bank has ever openly admitted that before.

Morphine can be used to relieve pain or it can be misused to kill someone. Things like the futures market can provide a useful process to smooth out peaks and troughs in market pricing or it can be misused to distort markets to benefit a kleptocratic minority. We don't blame the morphine, we prosecute the people who misuse it. The same should be true of things like futures markets.

Warwick

[SteveH]

Can I say that I'm not happy with the world (For us as a species) as it is progressing.

When I sober up, I'll make more sense.

I'm reassured, that I'm not quite as alone as I thought I was.

[Phild]

Oh Phil, I didn't think there were any like you in Crete. Are you spoken for?

Indeed I am. I'm sure there are more like me around here somewhere...

We are not as far apart as you think, Phil

See?

We are not as far apart as you think, Phil

Warwick, I didn't think we were. Most intelligent people I've known throughout my life are not what I'd call 'money-grabbers'. I've just been responding to your questions about my personal approach to money matters, not assuming that you were any different to the general trend of intelligent people.

Having said that I also recognise that markets work if they are true markets and are allowed to work.

Yes - it is rather surprising that markets work as well as they do, given that there is so little overt regulation - but the key statement here is "if they are true markets and are allowed to work". What is a 'true' market? Who has set the rules to decide what a true market is? Who sets the rules about how they work? What happens if these rules are broken?

My objection to most economic ideals - particularly the free market ones - is that they don't recognise that 1%-2% of the population are, in fact, what psychologists would call sociopaths (some sources put this figure even higher). These people are going to operate outside of the general norms of society, and abuse whatever informal systems of control are put in place. They are going to 'win' (i.e. make money) at all costs. This is why I believe that markets need formal regulation.

Without proper regulation, the sociopaths will continue to break and bend the informal rules, and most of the formal rules, accrue more cash than they can conceivably use in several lifetimes, and generally make life worse for everyone else. (It's not that they are doing the latter part on purpose, it's just that they don't care about people, so don't actively think about any harm they are doing to the general population. Nor, of course, do they care about the environment.)

So, my general thesis, Ladies and Gentlemen, is that the true distortions to the markets and society are due to the under-control of sociopaths.

You might like to reflect on the fact that sociopaths are drawn to unregulated and under-regulated career paths, because they can get away with more before they are reined-in. Let's see... What's still unregulated?

Hmmm... Politics. maybe?

Can I say that I'm not happy with the world (For us as a species) as it is progressing.

You can - and I'm sure that a lot of people agree with you. I am one of them.

[Kilkis]

You are right to be worried, Steve.

1 We are living in a world wide economic system that only functions as long as there is growth. That has been demonstrated again and again over the last century or so and certainly very graphically in the last half century.
2 The Earth is a finite resource so indefinite growth is impossible.

We cannot change Item 2. We can only change Item 1. The sooner we start the easier it will be.

I would use my morphine analogy again, Phil, and say regulate the sociopaths not the markets. All the activities carried out by the large investment banks in recent years are probably down to sociopathic tendencies. The large investment banks carry out psychometric testing to discover if somebody has sociopathic tendencies. They do this not to root them out but to deliberately employ them precisely because they generate bigger profits. The BoE could impose rules on the banking sector that anybody above a certain level in a bank or anybody in specific position within the bank must undergo independent psychometric testing and cannot be employed in those positions if they exhibit sociopathic tendencies. You could probably extend that to publicly quoted companies and many jobs in the public sector.

A market has to have a large number of people offering something for sale and everybody, who would potentially buy that item, must have easy access to the variety of "prices" offered. In this case "price" might reflect more than just the monetary value. If you satisfy those conditions the market will function close to optimal with no interference. The more you depart from these conditions the functioning becomes increasingly less optimal with a monopoly being the ultimate deviation. At some point on that path you need to introduce regulation and the regulation needs to increase the more you deviate. The corollary is also true. Interfering in markets that are functioning correctly invariably reduces their optimal performance.

Buying meat is a good example. There are hundreds of shops selling meat in the Chania area. Virtually all of them put the price of the meat on the display. Both my conditions for a free market are satisfied. I buy my pork chops from the local supermarket. The quality of the pork is very good the price is typical and it is a few minutes walk from my house. I buy beef steaks from a particular stall in the indoor market. His price is slightly higher than my local supermarket and it is much less convenient but I have found that overall the quality of his beef steak is better. Some friends prefer to use a particular butchers in Platanias because he has a much wider choice. Others buy from the large supermarkets like AB because it is more convenient to do it with the rest of the shopping. Some buy from John in Vamos because he has some selections that aren't easily available in local shops. All of us are happy with our choices. All of us have maximised our utility and the market has achieved that completely automatically with no interference. Do you think it is possible to devise a system that would achieve that outcome with greater efficiency than the free market has achieved it?

Warwick

[Phild]

You are right to be worried, Steve.

1 We are living in a world wide economic system that only functions as long as there is growth. That has been demonstrated again and again over the last century or so and certainly very graphically in the last half century.
2 The Earth is a finite resource so indefinite growth is impossible.

We cannot change Item 2. We can only change Item 1. The sooner we start the easier it will be.

I couldn't agree more - the 2nd law of thermodynamics applies to economics as much as to physics.

I would use my morphine analogy again, Phil, and say regulate the sociopaths not the markets.

I'd be uncomfortable with not regulating at the point of the market, largely due to the fact that sociopaths are often very clever people, and I'm sure that many are able to fool the existing tests, and will adapt to new ones. If you can pick up sociopathic behaviour on the market itself, however, you can then regulate it.

You don't have to do anything to the market, per se - merely remove the sociopathic element from it, and fix anything they may already have broken.

A market has to have a large number of people offering something for sale and everybody, who would potentially buy that item, must have easy access to the variety of "prices" offered. In this case "price" might reflect more than just the monetary value. If you satisfy those conditions the market will function close to optimal with no interference. The more you depart from these conditions the functioning becomes increasingly less optimal with a monopoly being the ultimate deviation. At some point on that path you need to introduce regulation and the regulation needs to increase the more you deviate.

This is one of my other criticisms of the free market experience. Regulation must root out monopolies or near-monopolies - and any product or service which can only be supplied on a monopolistic basis, e.g. water, energy, sewerage, etc - must be supplied by the state with the proceeds from taxes, in order to produce the 'fairest' price to the consumer.

Buying meat is a good example
....
All of us have maximised our utility and the market has achieved that completely automatically with no interference. Do you think it is possible to devise a system that would achieve that outcome with greater efficiency than the free market has achieved it?

Not in an ideal world, assuming that we have removed the sociopaths and tendencies towards monopolies. But, sadly, this isn't an ideal world, is it?

I don't know if you are advocating the free market for everything, Warwick.
I hope that you're not - otherwise I would continue in this way:

Let's extend this argument a little further and use Morphine to illustrate my 3rd criticism of the free market.

"A terminal cancer sufferer in India cannot afford Morphine."

What do we do?

[Kilkis]

I am sorry but I am obviously not making myself clear. I am advocating free markets where the conditions for a free market exist. I am NOT advocating free markets where those conditions don't exist, e.g. monopolies and oligopolies.

I am also advocating no interference where free market conditions exist or at worst the very minimum of interference. There is plenty of evidence to show that interfering in free markets generally makes them work less efficiently. Your examples of where sociopaths distort the markets to their own advantage are typically not free markets. In many cases they are supposedly strongly regulated but in reality the regulator is on the side of the sociopath. Market regulation fails as well. We are dealing with human nature.

We need to get away from "isms" and ideology and be more pragmatic. Water for example is a natural monopoly and so cannot be allowed to operate as though it is a free market. Thus it should be removed from private ownership. Simply returning it to traditional public ownership would also probably not work, based on previous experience, because politicians would interfere on political grounds not what is best for the consumer, i.e. clean safe water at the lowest possible price and a conservation programme to ensure security of supply. I would suggest some sort of independent company run on a not for profit basis but with a normal company management structure a bit like the Research Associations that were set up after the war to help industry compete. The government would set the overall goals for the company but would not be allowed to interfere in the day to day running. Management would then set the budget and the pricing to achieve those goals. I would also suggest that it ought to be a single company for the whole UK with individual water boards as divisions of that company. That way a UK wide pricing structure could be set which would average out the differences achievable in each board. Similarly for other natural monopolies.

Warwick