Saturday, 26 February 2011

Geithner and other advocates of free markets don’t understand free markets.

Geithner says he does not want the U.S. financial sector reduced in size. Well, having spent his working life in this sector and with so many friends in this sector he wouldn’t would he?

But more seriously, his main reason for not wanting this sector reduced in size is that there are opportunities for the sector because of the rapidly expanding middle class in developing countries. There are two flaws in this argument.

First, whence the assumption that it will be AMERICAN banks rather than NATIVE banks that will provide developing countries with the financial services they need? Given that American banks are run by clots, idiots, and crooks, I’d probably prefer a native bank to an American one if I were a developing country citizen.

Second, the size of the financial sector in a properly functioning free market would be determined by the same factors as determine the size of any other sector: supply and demand for the products concerned. Supply and demand based, that is, on genuinely free market prices.

Now the price of credit or loans is one of the main elements here, and the price of credit (i.e. interest rates) are anything but FREE: the price is rigged by central banks, and is currently at record lows! My guess is that this artificially expands the size of the financial sector (though that depends on the elasticity of supply and demand for credit).

Geither clearly thinks “bigger is better”. The notion “optimum size” is perhaps too abstruse for him.

Britain’s CEOs are frustrated train drivers.

In similar vein in a letter to the Financial Times, a long list of Britain’s CEOs want Britain’s rail system improved because this will “create capacity” in the rail system. Plus it will “improve connections between airports” and “help commuter services”.

What are they going to tell us next? That investment in the plastics industry will result in more or better plastics products? Or perhaps they’ll tell us that building more blast furnaces will result in the production of more steel?!?*!!

The optimum size of….. Oh dear - there goes that “abstruse” word again. Anyway, the optimum size of the transport industry should be determined (as in the case of the financial sector) by supply and demand, that is, supply and demand at market prices. The only exception comes where someone can demonstrate that social or environmental factors should override market forces.

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