Category: Market failure

Forex rigging claims could prove to be bigger scandal than Libor, says Carney

The Guardian:

Mark Carney has been forced to admit that allegations of rigging in foreign exchange markets could prove be a bigger scandal than the manipulation of Libor as he sought to rebuff criticism that the Bank of England had been slow to react.

The committee’s Andrea Leadsom repeated several times a question to Paul Fisher, the Bank’s executive director for markets over why Threadneedle Street did not once deign to follow up the committee’s queries in the wake of the Libor scandal over whether other prices may have been rigged.

She quoted from minutes from 2006 meetings between the Bank and its chief dealers subgroup, which noted “evidence of attempts to move the market” at certain times and said that should have set bells ringing. “It goes back to this complacency that all will be fine,” Leadsom said to Fisher.

But Fisher said: “Those minutes did not convey to me that markets were being rigged.”

On the question of being spurred into further investigations, Fisher said: “It isn’t our job to go out hunting for rigging of markets.”

If it isn’t the the Bank of England’s executive director for markets job to go hunting for rigged markets, who, exactly, is responsible?  And given such a supine regulatory approach, how can one have faith in any of the global benchmarks for e.g. commodities trading?

When and why did we stop worrying about monopoly power?

Paul Krugman in the New York Times:

Comcast’s chief executive says not to worry: “It will not reduce competition in any relevant market because our companies do not overlap or compete with each other. In fact, we do not operate in any of the same ZIP codes.” This is, however, transparently disingenuous. The big concern about making Comcast even bigger isn’t reduced competition for customers in local markets — for one thing, there’s hardly any effective competition at that level anyway. It is that Comcast would have even more power than it already does to dictate terms to the providers of content for its digital pipes — and that its ability to drive tough deals upstream would make it even harder for potential downstream rivals to challenge its local monopolies.

One puzzle about recent U.S. experience has been the disconnect between profits and investment. Profits are at a record high as a share of G.D.P., yet corporations aren’t reinvesting their returns in their businesses. Instead, they’re buying back shares, or accumulating huge piles of cash. This is exactly what you’d expect to see if a lot of those record profits represent monopoly rents.

It’s time, in other words, to go back to worrying about monopoly power, which we should have been doing all along. And the first step on the road back from our grand detour on this issue is obvious: Say no to Comcast.

Hopefully the Monopolies Commission is aware of this useful indicator.

Energy firms paid £4bn more for power than market rate, claims Labour

The Guardian:

In a new analysis of official figures, the Labour party, which has pledged to freeze prices for 20 months if it wins the general election in 2015, said the big six energy suppliers appear either to be inflating their prices to make extra profits for their own power plants, or striking very expensive deals to the detriment of consumers.

 It would appear we’ve learned nothing from Enron’s transfer pricing policies.  Why doesn’t Ofgem, the energy regulator, require the energy companies to produce audited company accounts which expose this practise.  Is it incompetence or corruption?

Improving personal finance skills

From Harvard Business School, a paper on improving financial decision making:

Financial literacy and cognitive capabilities are convincingly linked to the quality of financial decision-making, influencing savings, stock-picking, and avoidance of outright financial mistakes. Yet, there is little evidence that education intended to improve financial decision-making is successful. Using plausibly exogenous variation in exposure to state-mandated personal finance and mathematics training in high school, affecting millions of students, this paper answers the question “Can good financial behaviour be taught in high school?” It can, though not via personal finance courses, which we find have no effect on financial outcomes. Instead, we find additional training in mathematics leads to greater financial market participation, more investment income, and better credit management, including less bankruptcy and fewer foreclosures.

It does make you wonder about the quality of information the market discloses, when the best thing you can do is teach people basic maths skills.

UK energy companies

As Tax Research UK argues, one basic step to helping us understand what is going on with the UK energy market is for the regulator to require companies to produce audited data fit for regulatory purposes that they put on public record.

Where is the performance data for private hospitals?

The Guardian:

More than half the private hospitals in the UK are foreign-owned, with average pre-tax returns in 2012 of 24%, although some of the parent companies have been so loaded with debt or rent obligations that they make minimal trading profits, and even losses – risking a Southern Cross-style collapse that could have a big impact on some parts of the NHS. One of the four largest for-profit groups, Ramsay, relies primarily on NHS patient income, while BMI and Spire each get 20% or more of their revenue from treating NHS patients. A rapid increase in their NHS business – private hospitals are now treating almost one in five of all NHS knee and hip replacement cases – has kept all three groups afloat during the recession.

Exactly how they get this business is a bit of a mystery. Private hospitals have successfully resisted publishing information which would allow them to be compared with NHS hospitals. The Choose and Book website, which provides performance data for every NHS hospital, includes private hospitals but provides no performance data for them. NHS patients who choose private hospitals are acting on private advice from their GPs. Not surprisingly, perhaps, it turns out these patients tend to be drawn from the same social class as private patients. Given that their treatment is paid for out of public funds the lack of openness involved seems indefensible.

If NHS patients are to continue being treated at private hospitals this gross imbalance of transparency must end. NHS hospitals treat everyone – including the dangerously ill, accident victims, the old and frail, people with multiple illnesses – on steadily shrinking budgets. Some of them – again unsurprisingly – present “serious concerns”. Private hospitals take only low-risk patients, do a limited range of elective surgery and make a lot of money. They should present no concerns whatever. Yet as the CQC reports show, they can sometimes be dangerous places.

My emphasis.   Why this market failure?

What, really, is wrong with ad tracking?

Fascinating article in The Atlantic about a report by Professor Ryan Calo at the University of Washington on the potential harms of digital-ad targeting.

So where does that trouble lie? What are those actual harms? Calo outlines three distinct types of damages. The first are economic: market failures, not unlike others that the government has decided merit corrective regulatory measures in the past, such as the regulation of cigarette ads. But in the case of digital marketing, Calo says, the inefficiencies aren’t going to be such clear cases. Rather, the failures will come in the form of consumers being systematically charged more than they would have been had less information about that particular consumer.

It seems obvious that an asymmetry of knowledge – they know more than you do – might affect the hidden hand of the free market.

Making markets

The Guardian:

The IfG found mistakes in the setting up and management of outsourcing in areas such as care for older people, schools, probation and employment services.

Flaws meant some contractors were “gaming” the system, responding in “undesirable ways to the reward structures” including by parking people with complex needs and creaming off payments for the easiest cases.

The government also struggles to force out poorly run companies, “partly as a result of a lack of confidence” that it can manage the switch to a new provider. The report comes after a number of companies have faced intense criticism over the way they have handled highly lucrative government contracts.

As a general rule I think Governments are better focused on making markets (i.e. setting rules) rather than participating in them.  It astounds me there isn’t more research and discussion about tendering and so on.  This report requires real action.