Written by Davian Views

 

[Continued from Part 2 here and Part 1 here]

 

Why taxpayers’ money should be used to bail out incompetent banks is a question barely asked, and yet to be answered. This is a particularly corrosive move that damages competent lenders by rewarding the incompetent, thereby encouraging even more incompetence in the future. It is the same as social security that pays people more money to be out of work than they would earn if they got a job. The final proof was the rescue of Northern Rock in September 2007, reinforcing the delusion that when you put your money in a bank, as a depositor, it is something other than lending your money to a business.

Low Finance/Crouponomics

The difference between speculating on the turn of a card and speculating on the turn of events has always puzzled me. With a pack of cards there are a known number of possibilities, whereas with events in the wider world, there are an infinite number of possibilities. 

Speculating on events, such as buying shares in a company, is referred to as investing, a prudent and sensible thing to do. Speculating on the outcome of a game of chance is referred to as gambling, a reckless and stupid thing to do.

For my sins I spent over nineteen years of my working life as a croupier, dealing and watching games of chance in casinos, my interest being in finance rather than sports, unlike most of my peers. Over time I formed the view that gamblers and investors seem to behave in much the same way.

Economics is full of jargon and tends to be borderless and therefore more difficult to understand, but the principles can be easily understood in metaphor using the microcosm of table games.

Roulette is a simple game of chance. Zero to thirty-six gives a total of thirty-seven numbers. If you bet on a number the odds you are paid are worth 2.7% less than the risk you take. This difference between risk and reward pays enough to cover the expenses of running the game and a profit for the house, as well as making the game attractive to players.

Not content to leave well alone, there were two attempts to improve Roulette. Firstly the Americans  added another zero and doubled the percentage from 2.7 to 5.4 percent. This had the effect of making the game less attractive to the player, which is why it is less popular in America than in Europe. The second were the British who decided in the 1960s that the zero should be blocked making the game unviable for the house. However, this idea was abandoned and legislation, introduced as 1969 Gaming Act, did produce an industry standard that was the catalyst for British Casinos to become world leaders in a few years.

The previous paragraph illustrates the importance of balance within any system of exchange. Take too much or too little and the system will collapse. A parallel can be drawn between the roulette table and the banking system, which is also a system of exchange.

In order for the banking system to function, the percentage that it takes must not be too large or the game will not be attractive to the players. This is most obvious in the spread between the cost of borrowing and saving. The bigger the spread, the greater the drag in the system, reducing the returns for the players. 

Credit ratings are one of the greatest drags: by increasing the spread whole sections of borrowers are certain to have less chance of benefiting from the system. A parallel would be that a roulette player with a poor credit rating would be paid 30:1 instead of 35:1, his chances of making a profit reduced and the appeal of the game destroyed.

Savers also suffer in the banking system in the same way, when the spread is too big. E.g. a current account may pay 0.1% when you are in credit, but your overdraft costs 10.9%. That is a Roulette table with four zeros!

Side by side with the banking system is the tax system, which goes around taking money from the winners, deducting a chunky portion for itself and giving the loose change to players who have lost. This is on a good day – on a bad day they make more chips and everyone loses a portion of their chips value!

The other effect of making playing the game less profitable is to provide a price advantage to the “Black Market“  ensuring that one market grows at the expense of the other.

The current position, where banks and government are trying to recoup their losses from their remaining customers, increases the drag on the system beyond its limits. If the economy were a passenger aircraft it would now be in a flat spin.

The current credit system is no longer cost effective, and new models of saving and lending need to be developed. In simple terms, if there is a mountain of debt in front of you, don’t try and climb over it, just walk around it.

 

~   The End   ~

 

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