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One of the reasons our smartphone service in the United States is improving so quickly is an FCC rule from 2003 that says consumers can bring their phone numbers with them when they change carriers. If it weren't so easy for consumers to change phone companies, carriers would have a vice clamp on your nipples and they would feel less pressure to compete aggressively. In this case, government meddling in the free market worked like a charm.

The banking industry is a lot like the phone industry before the 2003 FCC rule on phone number portability. For consumers, changing banks is a gigantic pain in the ass. I have my automatic bill payments linked to my existing accounts. I'd need to reorder checks and make sure the outstanding payments clear. I'd need to learn what services the new bank has, and order new credit cards, and get a new ATM card. It's all doable, but I'm not going to jump ship just because my bank is being a jerk about one thing or another. It's too much work. Let's call this situation a stickiopoly. Banks do compete, but not as aggressively as they would if consumers could switch at the drop of a hat.

So what would happen if banks had to adhere to a "bank consumer portability" law? Suppose you could switch banks as easily as giving your new bank your social security number and asking them to switch all of your credit cards, mortgages, and bank accounts automatically. And let's say the new bank also has the capability to switch all of your automatic payments (water bill, energy bill, car insurance, mortgage, etc.) at the same time with no effort on your part.

If switching banks were easy, a bank would magnify its risk any time it engaged in sketchy behavior such as LIBOR manipulation, ridiculous overdraft fees, or lending discrimination. Consumers could punish banks for being jerks. For example, I wouldn't want to be associated with a bank that was guilty of LIBOR manipulation. I'd figure the rest of the bank's management was rotten too and they're probably screwing me in some way I'm not yet aware of. If it were easy to change banks, I'd do it. But it's not easy, so I don't. (My LIBOR example assumes at least one bank wasn't in on the scam.)

And this brings me, very indirectly, to my point for today. On 7/14/12 I published a Dilbert comic that mocked banks. The original version of this comic used coarse language that reads funnier to me. But newspapers wouldn't have found that language acceptable. Today I submit for your consideration both the published version and the unacceptable version. Which do you prefer?

This one got published...

 
This was the original version...



 
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-1 Rank Up Rank Down
Jul 19, 2012
And every business is a stickiopoly at some level. I don't see how the mere existence of such a thing necessitates the initiation of force. I could actually see forced portability making monopolization easier, for example, as it would allow one mega bank to edge out the competition even faster. The only true solution is to remove government enforced barriers to entry.
 
 
-2 Rank Up Rank Down
Jul 19, 2012
In fact, in the complete absence of bankin regulation, there would be totalbanking competition, with each individual being a potential issuer of notes. The banking industry would exist in a state of perfect competition. Government enforced competition is always a complete joke.
 
 
Jul 19, 2012
Wow, regardless of your foolish downvotes, "free markets" does not equal "no rules.". In fact, private property and contract law creates all sorts of rules to be followed.
 
 
Jul 19, 2012
Every example of regulation expansion in response to crisis that you can point to during the classical period was actually a means to provide legitimacy to risky banking practices, while most of the effort went to removing any downside risk to bankers first rather than consumers. If a risky banking practice is bad, then banks should go out of business and avoid taking such risks without adequate reserves or capital on hand.

Now there are no lessons learned in the banking industry precisely because there is less downside risk. Instead of allowing banking failures and the market to reinforce strict and safe banking practices, we have spent the last 100 years creating a corporatist chimera that depends upon the political and military power of the US government. Central banking is a weapon, not a tool.
 
 
Jul 19, 2012
But that's just it, we don't need overconfidence in the banking system either. Under the original system, with bank runs and no bail outs or FDIC, there was greater due diligence and less risk taking. The government has essentially subsidized a risky business model while telling everyone it is safe for a hundred years. Why do you take it for granted that we need a debt laden economy in the first place? People will develop trust in the banking system as soon as they establish that they are trustworthy. The truth is that we don't need the debt as much as modern economists believe. Low inflation/high savings economies worked quite well during the industrial revolution.
 
 
Jul 18, 2012
-tkwelge

I understand your rebuttal, the banking failures in the 1800s did not have nearly the same calamities of the post-fed world, but it showed that fractional reserve banking plus an under-regulated market did little to instil confidence in the growing financial system.
In any market, there has to be trust. For ordinary products, a violation of that trust means that a producer goes out of business, but in banking, it often meant that people's savings were lost as well, which was an intollerable condition for an industry that is meant to produce trust itself.

Hence regulations were tightened to avoid future problems and restore the trust in banks. The fact that crashes continued just shows that letting the banks regulate themselves is a bad idea. Canada has OSFI - a much stricter regulating body - and one independant of the banks - even the central bank. And Canada has much much fewer bank failures.
 
 
Jul 18, 2012
Ya, and in addition - its also hard for customers whom have had problems at other banks - whom made ones own problems worse , to switch banks also [indeed much harder]. There is however at least two finance insititutions that I will stay away from at all costs now. One is wells fargo, and the other is capitol one [And there will be another added to that list if I cant settle with them as well - but we shall see] Cap one for jacking up interests rates and for jacking people out of their monies, and wells fargo for rediculous interest rates, that amount to loan sharking. The best solution we could implweiment at the moment, would be a boycott - and simply pressure government to not bail the little monsters out next time - let capitalism consume these org's into non-existance and let the market forces obliterate these rotten critters.
 
 
-3 Rank Up Rank Down
Jul 18, 2012
> However, forcing customers to use the OS provided browser (or microsoft software) is. At which point the EU went into the issue and forced microsoft to open up its OS. Or Intel doing a special deal for a special customer, like inserting a certain conditional jump and not telling anybody about it. Or granting iexplorer privileged access to Win8 APIs and denying it to non-microsoft browsers.

This is just a mess created by government. Without Intellectual Property, which is an abomination against the entire concept of property, their would have been many more competing OSs each with a small chunk of market share.
 
 
Jul 18, 2012
>The crashes of the the 1800s proved that in the banking industry, free competition is not practical, so regulation is necessary.

This is completely false. The 1800's never experienced any crashes on the level of the current recession or the great depression from 1840 to 1913. The period after the return to the gold standard in 1879 until 1892, when the world became afraid that the US would pay its bills in silver, was incredibly stable and prosperous. The period from 1840 to 1859 was also quite stable after the calamitous 30's when the 2nd central bank was closed. The 30's were mostly calamitous due to credit expansion in Mexico and new gold discoveries that flooded the banks with new specie. After that, the system was stable and prosperous until the civil war.

The banking system of the 1800's was also not full free banking, since branch banking was prohibited, leading to centralization and less diversification, and the entire system after the civil war was centered around "National Banks" in New York city. Here's some growth data:

US

1840 to 1859

1879 to 1891

1913 to 2010

Real GDP per capita 1.93% 2.80% 2.00%

The years listed top to bottom correspond to the percentages (annualized growth rates) going left to right in order.


Here's the 1840 to 1913 period as a whole:

US

1840 to 1913

Real GDP per capita 1.67%

So yes, the economy arguably grew more slowly before the progressive era, but it definitely experienced similar growth, with much more stable prices and no great depression style events. The population was also low skilled with little education and grew at more than twice the rate it does today, with much of the population living as subsistence farmers.

The two periods aren't directly comparable for a number of reasons, but it is fair to say that the experience with the banking industry in the US hardly "proves" that free banking doesn't work.

Besides we have more successful examples of true free banking to choose from, such as in Scotland and Sweden.
 
 
-4 Rank Up Rank Down
Jul 18, 2012
>"Free market" is about as efficient as "free road traffic". Take down the signs, abolish driving licences and all is well, eh?

NO, markets still have rules based resulting from natural bottom up cultural prohibitions against the initiation of force and property rights. If a private road owner owned the road, surely he/she would require some sort of licensing for road users, and would provide access to such a service at lower cost and higher efficiency than the government owned roadway system.
 
 
Jul 18, 2012
>The problem with "free" markets is that the players consider cheating, colluding, manipulation, lies and lobbying a legitimate means of getting market share or profits. Naturally you and I are immune to that, just like about 95% of all drivers are better than average. But this is the point where makets become non-efficient because efficient markets require that no participant has an information advantage and that no collusion takes place.

Free market collusion has none of the benefits of government supported collusion. Cartels always break down in the free market, and have always sought government support to continue existing.

There is no such thing as a perfectly efficient market. There is simply the absence of the initiation of force vs the implementation of the initiation of force. Efficiency is based on billions of subjective factors that are perceived by billions of people who's perceptions are always changing. Neoclassical economists are simply technocrats playing with sandcastles.
 
 
Jul 18, 2012
Rothbard tears apart adam smith in an article entitled, "The Adam Smith Myth."

And I really hate it when people declare that one example of government force succeeding as an argument that the government is somehow legitimate or necessary or even a net positive. It's kind of like when people defended Mussolini by arguing, "But now the trains run on time!" (Yes, I know its apocryphal but the analogy still stands).

Before portability, I don't remember anybody with a cell phone ever being chained to a company because they couldn't change their number. I think you are just exaggerating to make a point, Scott... It's kind of like when people declare that removing Glass Steagal was THE cause of the last crisis. People always tend to exaggerate whatever they think to be more important, and I suppose that is just a natural human failing we will have to live with.
 
 
Jul 17, 2012
EMU-

"It is worrisome to me that today's young people, brought up in our left-leaning public educational system, seem to know much, much more about Karl Marx' theories than they do about Adam Smith's. With the spectacular failures of Mr. Marx' theories and the spectacular successes of Mr. Smith's, this is even more problematic."

I am reading Wealth of Nations for the first time (I've never read Marx). It seems to me that Smith would have applauded the form of Capitalism espoused by the American Founding Fathers, but he would have been horrified by the 'capitalism' found in many places today.

For example, In the first book he talks about how the Government of the United Kingdom is far superior to that of the Dutch East India Company, because the UK government has protections for consumers and workers, which generally tends to a prosperous nation, while the governments of the East Indias has no such protections, and the resulting collusion to drive down wages and drive up prices has reduced the population to a level of poverty such that most had already died of starvation, in spite of the Indias having a climate much better suited to production.
 
 
Jul 17, 2012
EMU,

I like your reasoning.

If I can add to it, I'd say that unchecked monopolies are no different from the worst forms of communism, where the entirity of the production is controled by a group of oligarchs with no reason to benefit either employees or consumers, except to maintain an exploitable population.

So a government must use whatever means necessary to prevent these monopolies from forming. In most cases this is accomplished by forcibly restricting monopolistic activities, and by encouraging new competitors to continually enter the industry.

Where competition is not possible or practical (infrastructure or utilities), then government must either manage the industry as a social program, or regulate it for the protection of consumers. The crashes of the the 1800s proved that in the banking industry, free competition is not practical, so regulation is necessary.
 
 
-1 Rank Up Rank Down
Jul 17, 2012
Addendum: Why does e-n-t-i-t-i-e-s gets !$%*!$'ed up?
 
 
+2 Rank Up Rank Down
Jul 17, 2012
Phantom II:
"There are more than 8,400 FDIC-insured banks in the USA. There are 1812 with assets of $300 million or more. There are also overseas banks operating here. It is unrealistic to consider banking a monopoly."
Yet credit card interest rates and payment modes are totally ridiculous in the US compared to germany with its 6 or 7 banks. (treating savings and cooperative banks as two !$%*!$%*! Looking at the US from outside I can see plenty of things where most market participants agree informally and bank on people being used to it. Btw in germany we have a comparable situation with gas prices. (And the government is evaluating several ideas to force non-cooperation between gasoline stations.)

The problem with "free" markets is that the players consider cheating, colluding, manipulation, lies and lobbying a legitimate means of getting market share or profits. Naturally you and I are immune to that, just like about 95% of all drivers are better than average. But this is the point where makets become non-efficient because efficient markets require that no participant has an information advantage and that no collusion takes place. It's the job of a regulatory system to enforce that. I'd suggest you have a look at auction theory. This is quite fascinating because it's possible to measure the efficiency of, say, frequency auctions and these highly formalized market transactions are among the most efficient in the entire market society. (I also like XETRA's security auctions. Ebay could learn a thing or two from the german stock exchange.)

Regarding barriers to entry, by now, trivial patents and copyrights are designed to achieve this. I don't know what you mean by "not monopolistic" but efficient markets require a minimum number of non-cooperating suppliers and customers (eight in various lab experiments). Yet companies continually strive to get around this, be it shadow pools and otc securities (get around public exchanges), noncomparable feature lists for products and so on. An unregulated market would (and does, where it exists) result in a free for all that has one victor or a set where each victor has a mnonopoly, either on a region, product line or customer class. The british railway system is one example where one monopoly was split into several with absolutely no advantage to the customer. (I speak as a railway user regularly in germany and sometimes in the UK.)

"Another thing to look at is market share. Is it really tough to build a new O/S for a computer? Not really. Linus Torvalds built one all by himself. But if it catches on, it creates a barrier to entry for competing systems - think Windows. Is it unfair that Microsoft has the lion's share of the O/S market?"
It's not. However, forcing customers to use the OS provided browser (or microsoft software) is. At which point the EU went into the issue and forced microsoft to open up its OS. Or Intel doing a special deal for a special customer, like inserting a certain conditional jump and not telling anybody about it. Or granting iexplorer privileged access to Win8 APIs and denying it to non-microsoft browsers.

"With the spectacular failures of Mr. Marx' theories and the spectacular successes of Mr. Smith's, this is even more problematic."
There is no spectacular failure in his analysis of capitalism. In fact, seeing how my equity portfolio works out, I'm quite happy to have learned as much in "socialist" school. Other than that, I'm sure you can point out some of his failures about describing capitalism. As for "socialism" in general, read it up and then decide whether what we had in eastern europe qualifies. Wikipedia would be a good starting point. Regarding north korea, may I point you to http://www.amazon.com/dp/1935554344? It's a nice and refreshing treatise by one who does know more about them than most in the western world. It's not really scholastic (being based on letters to a diplomatic journal) but it still manages to answer a lot of puzzling questions, like the tame reaction of south koreans to north korean provocations. Or the lack of any meaningful subversive or revolutionary activity in the north. (In which it starkly differs from, say, east germany, where I grew up.)
 
 
+2 Rank Up Rank Down
Jul 17, 2012
I assume my earlier use of the word that also means 'female dog' was changed to exclamation-mark-dollar-sign-percent-asterisk-exclamation-mark for reasons of humour? If not, America is in even worse shape than I thought. 'Ve haf vays of makink you be polite!'
 
 
Jul 17, 2012
The "b"-word is gratuitous in this strip. Humor based on gratuitous remarks is dumbed down to the level of the lowest common denominator. Pandering to the predilections of the people may turn one into a Steve Jobs-like marketer and an Apple-style billionaire, but it's still pandering and intellectual gutterball humor.
 
 
Jul 17, 2012
Scott, do you see the irony here? We can't use the word !$%*! here either! Hahahaha
 
 
Jul 16, 2012
I like the clean version better. I admit that sometimes there's no literary substitute for a well placed 'colorful metaphor'. But in this case I don't think it adds to, or detracts from, the humor, so why not keep it clean.

On a related note, it takes a lot more comedic talent to be funny without having to rely on shocking the moral sensitivities of the audience. Comedians that pander for a laugh by being as vulgar as possible are at the bottom of the food chain.
 
 
 
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