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View Diary: The Most Important Economic Theorem You've Never Heard Of (174 comments)

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  •  US banks are the world's smallest (6+ / 0-)

    when we look at deposits as a % of the home country's GDP, FWIW.

    •  ironically, (8+ / 0-)

      industrial organization theory holds that in some industries in some conditions, natural competition would lead to natural monopolies in some cases, which poses the question of what to do in those cases.  Intervene to try to create competition?  Or intervene to regulate pricing?  

      "This world demands the qualities of youth: not a time of life but a state of mind[.]" -- Robert F. Kennedy

      by Loge on Fri Oct 14, 2011 at 08:12:45 AM PDT

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      •  My $0.02 (24+ / 0-)

        If something is a natural monopoly and it is essential, it should just be done by the Government.

        This includes many utilities, telecom, and a lot of transportation. Basic banking (checking and savings accounts) might also be candidates.

        •  I agree with this. (8+ / 0-)

          Though in some ways banking was so heavily regulated in the 30s-60s that it was a public-private partnership with the public firmly in charge.

          Anyways, the only thing worse than a public monopoly is a private monopoly.

          The two things Teabaggers hate most are: being called racists; and black people.

          "It takes balls to execute an innocent man." -- anonymous GOP focus group member on Rick Perry

          by Punditus Maximus on Fri Oct 14, 2011 at 08:57:31 AM PDT

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        •  Sure (4+ / 0-)
          Recommended by:
          ManhattanMan, kyril, alizard, drewfromct

          In competitive industries, we want the profit motive to incentivize incumbent firms to innovate in the shadow of potential competition or challenger firms to enter markets where there are supra-competitive rents prevailing.  What incentives do we want to encourage in natural monopolies?  Entry is largely impossible and in their absence, innovation is not incentivized.  

          in the case of banking, checking is something of a loss leader to get you in the bank and then when you need one, to go to them for a home loan or some such.  Increasingly, they make the money back on charge fees or overdraft fees (basically high interest loans).  interestingly, the VISA/Mastercard duoply comes close to the conditions where a natural monopoly might prevail -- they're a two sided market, which means there are huge economies of scale and network effects. Basically, if you wanted to set up your own swipe card network, you couldn't get into stores because you wouldn't have customers and you wouldn't have customers because you couldn't get into stores -- a debit card that only works in half of places wouldn't be that attractive.  Somehow Amex stays in business, but i don't quite understand it.  i don't think government could take over the function of check clearing / maintenance of accounts, but it could take over the interchange processing without turning America commie.

          Savings accounts aren't the bank provding a service to you.  You are providing a service to the bank, lending them money at low interest.  

          Interestingly, the FDIC, by guaranteeing deposits, subsidizes banks, though they pay for it thru insurance payments they make back on consumers elsewhere, so that means, we're subsidizing banks twice, and it means we don't have a strong incentive to care about their creditworthiness.  By the theory of second best above, i'd keep it, but it's food for thought, no?

          "This world demands the qualities of youth: not a time of life but a state of mind[.]" -- Robert F. Kennedy

          by Loge on Fri Oct 14, 2011 at 10:21:03 AM PDT

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        •  and healthcare n/t (3+ / 0-)
          Recommended by:
          Simplify, kyril, ManhattanMan
    •  deposits are no longer (6+ / 0-)

      the real measure, their revenue is.

      Loyalty to petrified opinion never yet broke a chain or freed a human soul in this world--and never will. Mark Twain

      by whoknu on Fri Oct 14, 2011 at 08:38:54 AM PDT

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    •  So what's your point? (7+ / 0-)

      Here are the top banks in the world.

      I can make several inferences from your statement but I rather you state what your point is.

      This I know for certain, when Lehman collapsed it had a huge negative impact on the whole system. I know that if J.P. Morgan collapsed it would make the Lehman event look like a bad hair day. So it would be logical to conclude that the percentage of deposits held relative to a countries population is not one of the most relevant numbers to worry about. After all, Lehman compared to BoA or J.P. Morgan in deposit accounts as a percentage of population was irrelevant.

      Now, Lehman as a place for overnight deposits was not such an irrelevant player. The proof is that after it collapsed on a weekend next Monday all the credit markets in the world were frozen. The real dangerous part of banks today is that the top 5 banks in the U.S. hold over 90% of the risk in $250 TRILLION in derivatives. That is about 16 times, not 16%, again 16 times the GDP of the USA or about 4 times the GDP of the whole World. The Lehman collapse reverberated through the markets through the effect it had on derivatives and because of the $Billions that thousands of companies and institutions didn't have access to the Monday morning after the collapse. Billions that had been parked as overnight deposits the Friday before. All those accounts where frozen. So perhaps more important than the number of accounts is who holds those account and what those accounts are used for.

      Again, what inference are we to make from your statement?

      "Capitalism has defeated communism. It is now well on its way to defeating democracy."
- David Korten

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      by basquebob on Fri Oct 14, 2011 at 10:50:44 AM PDT

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    •  human scale (0+ / 0-)

      Percentage doesn't tell the whole story.

      Government and laws are the agreement we all make to secure everyone's freedom.

      by Simplify on Fri Oct 14, 2011 at 01:37:32 PM PDT

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