Finally, mainstream bankers and economists admit the market has beaten them.
No, we’re not talking about multitrillion dollar banking bailouts. And we’re not talking about the unending European debt crisis.
So what is it that has Australian banking and economic minds stumped? It is…wait for it…$2.
That’s right, $2. Not $2 billion, or $2 trillion, just a lazy old $2.
It’s no wonder the global economy is in such a mess.
Central bankers run the world (even last weekend’s Australian Financial Review admitted it). They directly and indirectly control multitrillion dollar economies.
They pull levers and push buttons. They try to fine tune and run the economy. And yet they can’t solve a simple $2 puzzle. Well, luckily for them, we can help out. But we don’t think they’ll like the answer. Read on for details…
The mainstream press still serves a purpose. They help bring our attention to things we would normally ignore.
For instance, yesterday afternoon an email dropped into your editor’s inbox. It was the release of a discussion paper from the Reserve Bank of Australia (RBA). The title was, RDP 2012-03, ‘ATM Fees, Pricing and Consumer Behaviour: An Analysis of ATM Network Reform in Australia’.
What a yawn. So we ignored it.
It was only when we read Peter Martin’s article in today’s Age that we realised we’d missed a gem of mainstream economic puzzlement.
Peter Martin writes:
‘Australians have banking economists stumped.
‘They thought they knew what we would do when in 2009 the Reserve Bank outlawed largely hidden payments between financial institutions that were usually passed on to us as account-keeping fees whenever we used a so-called “foreign” teller machine owned by another bank.
‘They thought we would do nothing…
‘But the size of the charge, typically two dollars, didn’t change. All of the economic models — including the Reserve Bank’s own model — suggested we would use ATMs pretty much as we had before. The incentives were much as they had been.
‘Instead withdrawals from foreign machines dived from around half of all ATM withdrawals to just 40 per cent. Among senior citizens the proportion fell to less than 10 per cent. The group the Reserve Bank had thought would be the least able to shop around turned out to be the keenest to drive across entire suburbs to avoid the two-dollar charge.’
But here’s the best part of Mr Martin’s article:
‘A Reserve Bank study released yesterday says it’s behaviour that “cannot be accounted for by the model of ATM fees presented in this or any other existing paper.”‘
In short, the RBA’s fancy pants economists and fancy Dan models, couldn’t work out that when consumers know about a fee in advance that they would try to avoid the fee (rather than not knowing about or remembering the fee until it appears on their statement).
Is it a mind-blowing revelation? Or is it flamingly obvious? The latter of course…
When you know in advance that something will cost you more, most people will decide whether to accept the higher cost or try to avoid it.
We’ve explained this before in Money Morning, using the example of buying a can of Coke. Your editor can either walk across the road to the local milk bar to pay $3.40 for a can of Coke, or we can walk five times the distance to the IGA to pay about $1.50.
If we can spare the time and effort, we’ll walk the extra distance. If it’s raining or we don’t have the spare time then we’ll pay the higher price.
ATM users make the same choices. Is it worth spending $1 on petrol to save $2 on ATM fees…or walking an extra 10 minutes rather than paying $2? The answer depends on who you are and the circumstances.
Importantly, it’s something you can’t put into economic models or mathematical equations.
But here’s the thing (a point we wished Mr Martin had made), if the supposed finest minds in Australian economics and their fancy Dan models can’t figure out the impact of a $2 charge to consumers, how on earth can they figure out the impact of trillion dollar bailouts, interest rate movements, and money printing?
The answer is they can’t figure it out.
That’s why everything central bankers have done over the past four years has resulted in unintended consequences or ineffectual policy decisions.
The reality which the central planners don’t want to admit is that human action is often unpredictable and illogical. That’s why central planning doesn’t work.
Given the same choices some people act in different ways to others. That’s the beauty of the human race. It’s why humans are so successful…and it’s why mainstream economists are so terrible at forecasting.
The fact is no-one, however smart, can accurately predict consumer behaviour. So it’s foolish for central bankers and central planners to even try to steer an economy in a certain direction.
The only real way to run an economy is by not running it. By leaving it to the free market. By allowing individuals to keep the reward of their labour (wages) and letting them spend, save or invest it as they see fit.
The result is a free market influenced and guided by the natural actions of millions of individuals. Instead, what we have is a perverse market guided by the unnatural actions of banks, crony capitalists (or fascists, they’re much the same), vested interests, central bankers and governments.
It’s this kind of perverse market that’s ruining and suppressing entrepreneurial instincts in the West. So that the West is fast following the example of China’s crony capitalist bubble economy — a subject our old buddy, Greg Canavan has written about here.
Central planners can’t direct huge economies as they see fit…not without creating a lot of problems. The fact that the RBA couldn’t predict consumer reaction to a $2 fee, tells you it’s dangerous to give them the power to set the price of money.
Bottom line, the more central banks interfere and try to fix things, the worse things will get, and the longer it will take for the world economy to recover.
Cheers,
Kris
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