Cartels, rational behaviour and punishment strategies

Well, it turns out that a group of firms in an oligopolistic industry have been working together to maximise profits and rig the market.

http://www.theguardian.com/business/2015/may/20/banks-hit-by-record-57bn-fine-for-rigging-forex-markets

To paraphrase Capt Renault in the film Casablanca, “I am shocked, shocked, to find that collusion is going on in this oligopolistic market.”  Now the banks involved find themselves facing fines as a result of their activities.  The real question is, what will be the effect of these fines?  Consider some basic statistics.  According to reliable sources in 2013 $5.3 trillion per day was traded on the forex markets.  Presumably their collusion over a period between 2007 and 2013, six years, increased the bank’s profits on each day’s billions of dollars worth of trade.  Those additional profits across the six year period probably added up to a very significant amount, although we will never be sure how much.  The fines, which seem to total around $6.3 billion, start to look pretty insignificant when compared with the rewards that the banks netted across the six years thanks to their collusion.  Stock market investors agree with this analysis as the share prices of a number of the banks involved rose on the announcement of the fine.  Food for thought indeed.

As economists we tend to assume that people are rational and respond to incentives.  From this perspective you can argue that this bit of market rigging looks like a one way bet.  If you get caught the fines involved are smaller than the extra profits you make, so it is sensible to form a cartel, and if you don’t get caught then you get to keep all of the extra profit.  You can’t lose.  Perhaps we should be vigilant for more of this kind of behaviour in the future.

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Confidence and the economic cycle

Behavioural economists, who believe that economic actors are driven as much by hunch or emotion as by pure rationality, are starting to influence more and more economic thought.  One area where their influence is increasingly being felt is in theories relating to the business cycle, where confidence is clearly important in determining behaviour.  The problem is, how can we measure confidence?  This article from The Daily Telegraph, which explains the Skyscraper Index, is an interesting insight into this problem.

http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/11614093/Dont-worry-the-office-building-boom-doesnt-herald-another-recession.html

The real question prompted by the article is not whether the Skyscraper Index is a useful predictor of recessions, but how we can come up with a good series of leading indicators of confidence and how they can be used to predict the future path of the economic cycle.

The consequences of quantitative easing

In this fascinating article in The Independent Satiyajit Das considers whether quantitative easing (QE) has succeed in its objectives and whether the unintended consequences are so serious that it should not be used.

http://www.independent.co.uk/news/business/comment/satyajit-das-low-rates-have-caused-the-crisis–they-are-not-the-solution-to-it-10259752.html

His analysis of the ways in which QE actually affects the economy, in contrast to the ways in which economic theory suggests it should affect the economy, are essential reading.  In particular we should all be aware of his reference to the possible variation in the velocity of circulation of money, made famous by the quantity theory of inflation and the equation MV=PT.  All in all, anyone who is revising QE, as all Economics A level students should, would do well to read the article.

Poor productivity – is there a solution?

In a recent speech Mark Carney, Governor of the Bank of England, commented upon the UK’s poor levels of productivity and suggested that in the medium term this is the biggest barrier to faster UK GDP growth.  He also found time to add that delivering better productivity is not the Bank of England’s job, although oddly he did not say who is responsible for doing so.  An article in today’s Daily Telegraph does try to point the finger a little more precisely at the causes of poor productivity growth.

http://www.telegraph.co.uk/finance/economics/11604098/Britains-shameful-productivity-deficit-must-be-tackled-head-on.html

However, the solution to the UK’s productivity puzzle is still not clear from this analysis.  Exactly what is different about the UK in comparison to other nations which is pulling us back in the productivity league tables?

So, how rich are we?

The question of comparison is one which is always with us in the UK.  We are constantly comparing ourselves with other nations and the yardstick we often use is GDP.  In some senses the GDP figure gives us cause for optimism.  However, when you look a little closer, the picture becomes a bit less clear.  Roger Bootle’s excellent article in today’s Daily Telegraph is well worth reading for all economists as it is thought provoking, which after the recent election campaign is the best thing any economist can be.

http://www.telegraph.co.uk/finance/economics/11596205/The-UK-needs-to-learn-to-be-more-modest-about-just-how-rich-we-really-are.html