The Evils of Rent-Seeking

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Ormurinn
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The Evils of Rent-Seeking

Postby Ormurinn » Sat Jun 29, 2013 11:02 am UTC

http://www.guardian.co.uk/money/2013/ju ... ation-rent

(I know this isn't, strictly-speaking, a case of economic rent in conventional terms)

Basically, the U.K Govt's policies of keeping interest rates at rock-bottom, jacking up house prices with help-to-buy, coupled with already historically high prices due to the boom engineered by labour, are enabling a class of property owners and renters to bleed ordinary people dry without producing anything of value.

We need a land value tax.
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Re: The Evils of Rent-Seeking

Postby elasto » Sat Jun 29, 2013 11:35 am UTC

Yeah.

On the one hand, buy-to-let is great for social mobility. My last landlord started out as a tv repair man, rented out some rooms and used the money to buy a second house, rented that out and by the time I rented from him he owned about six or seven. It's been a way for virtually anyone to go from rags-to-riches. My landlord before that worked as an IT contractor and actually funded his buy-to-let houses on his credit cards (lol)

However, overall, it's something that successive governments have got badly wrong. For purely selfish electoral reasons (if people feel like they're getting richer with their property rising in value - they're more likely to vote for the incumbents) they have propped up and encouraged a housing boom. But, actually, society would be far better served by a stable and affordable housing market.

That basically means instead of propping up house prices, allowing them to stay flat or even fall by propping up the house building industry. And, if housebuilders won't build, directly fund a massive new raft of council houses. It also means big capital investment in existing and new infrastructure like new roads, new water systems... well, basically whole new towns and cities. Another reason why they don't like it of course: Capital investment on that scale takes a generation to pay itself back - a lifetime in this world of five-year election cycles.

It's also a legitimate gripe that immigration has worsened the housing situation, but that's not the fault of the immigrants, it's the fault of successive government housing policies.

Basically, yeah, I don't know what the answer is but I know the UK has got this one badly wrong.

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Re: The Evils of Rent-Seeking

Postby Tyndmyr » Sat Jun 29, 2013 3:46 pm UTC

Ormurinn wrote:http://www.guardian.co.uk/money/2013/jun/28/new-class-landlords-profiting-generation-rent

(I know this isn't, strictly-speaking, a case of economic rent in conventional terms)

Basically, the U.K Govt's policies of keeping interest rates at rock-bottom, jacking up house prices with help-to-buy, coupled with already historically high prices due to the boom engineered by labour, are enabling a class of property owners and renters to bleed ordinary people dry without producing anything of value.

We need a land value tax.


It's a common problem with market manipulation...you can hurt property owners, etc by manipulating a market, but you can also set up unreasonably good situations for people who mostly just are lucky. This particular situation looks worse than most...probably because there's a number of different incentives at play, and the result of the whole is, at least in this regard, a stronger effect than anyone was out to produce. Emergent behavior is a problem in sufficiently complex systems, and neither government nor economy are simple, so unintended effects become more of an issue as you increase complexity.

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Re: The Evils of Rent-Seeking

Postby Silknor » Sat Jun 29, 2013 4:34 pm UTC

Ormurinn wrote:http://www.guardian.co.uk/money/2013/jun/28/new-class-landlords-profiting-generation-rent

(I know this isn't, strictly-speaking, a case of economic rent in conventional terms)

Basically, the U.K Govt's policies of keeping interest rates at rock-bottom, jacking up house prices with help-to-buy, coupled with already historically high prices due to the boom engineered by labour, are enabling a class of property owners and renters to bleed ordinary people dry without producing anything of value.


I'd dispute the claim that nothing of value is being produced.

Here are quotes from two people mentioned in the article:

There is such a shortage of property, it couldn't be better. Some of the tenants are telling me they have given up entirely on the idea of home ownership. Gordon Brown said we are 3m properties short in this country and he was right.


The affordability is there for first-time buyers – the properties we buy are something first-time buyers could afford, at around £80,000-85,000. The problem is the availability of finance for private buyers.


It seems there's a number of areas where value is added here:
1. The rent-to-renters improve the home by adding more bedrooms. If you have a bunch of single, childless people who need a space to live, a 3-bedroom with lots of common areas has some value. But convert it into a 5-bedroom, and each person may find the space less appealing (less common area included with the rent), but the overall value goes way up because the number of renters increased by 60%.
2. It's a lot simpler for some landlords to deal with 1 renter than 5. The rent-to-renters absorb the extra transaction, and possibly legal, costs for the landlord. If this is an area where there are economies of scale or where experience helps, then it's very plausible that rent-to-renters can perform this service more cheaply than each landlord on their own (and if they can perform it more cheaply per ultimate tenant, they're adding value by reducing the number of resources (time and money) needed.
3. Both of these, by increasing the number of rooms available for rent, help alleviate the problem of first-time buyers not being able to obtain sufficient credit.
4. It decreases search-costs for tenants. At any given time, most of the people you know probably have housing (especially if you're moving to a new city!). Which means if you want to rent and share a single-family home instead of an apartment, you need to find strangers and all agree on a place. That's a lot more difficult than finding a place you like and leaving it to someone else to both convert it into a more useful state and find people to fill the other rooms.

It's certainly possible that the lack of sufficient housing is caused in part by government policies (it happens all the time in high-demand areas in the U.S. where local regulations prohibit the density needed to accommodate all the people who want to live there, thus blocking construction and driving up prices). It's even possible that the difficulty first-time buyers face getting credit is due in part to regulation (so that even though interest rates are low, banks just won't lend to many people at any rate). I'm not familiar enough with the U.K. to say.

But it doesn't sound like rent-seeking (barring the extent to which it's a pun!). Rent seeking traditionally refers to the gains you get from government granted privileges. For example, occupational licensing beyond what is necessary can restrict competition and thus push up wages for the licensed group. Or a tariff might boost the profitability of a domestic manufacturer. This seems more like people deploying scarce resources in more efficient ways, perhaps in reaction to government policies that made housing scarcer. I may be off though as I don't know much about the U.K., if the rent-to-renters organize to push for policies that would make their business more lucrative, that would definitely be rent-seeking.

By the way, I'm not saying this is an ideal outcome. There probably are better options. But I don't think the characterization that they are "bleed[ing] ordinary people dry without producing anything of value" is an accurate one.

elasto wrote:For purely selfish electoral reasons (if people feel like they're getting richer with their property rising in value - they're more likely to vote for the incumbents) they have propped up and encouraged a housing boom.


Shouldn't a housing boom mean increased construction though? It sounds like a lot of the problem is that there simply aren't enough dwellings to fulfill demand, and so people are resorting to less orthodox solutions. Higher prices should lead to increased construction unless they're some limit (and there very well may be, since I'm not sure what policies you're referring to when you say the government propped up housing prices. If they did that by limiting new construction it has very different consequences than if they did it by say, providing generous tax breaks or subsidies to encourage homeownership. Both can happen of course, in the U.S. we both have a large number of vacant homes and a lack of affordable housing in some places because so many of those homes aren't where people most want to be).
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Re: The Evils of Rent-Seeking

Postby Derek » Sat Jun 29, 2013 4:57 pm UTC

Yeah, this is not what rent seeking means. It's completely unrelated.

This looks like a pretty straightforward case of insufficient supply. The best thing to do about this is just to leave the market alone, so that the high prices can drive supply increases. If there are barriers to new construction, or more efficient use of existing construction, those should be removed. Attempts to control rent have always been disastrous, and made the problem even worse.

Another issue here is government policies that have made home ownership artificially cheap, encouraging a housing boom. Home ownership is a great thing, and is almost always a better idea than renting if you can afford it, but it doesn't need assistance from government programs, it can stand on it's own merits. And like all things, you can have too much of it, which is what government subsidies tend to do.

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Re: The Evils of Rent-Seeking

Postby Vash » Sun Jun 30, 2013 12:11 am UTC

You don't have property taxes? My family are landlords in a relatively high-priced area of the US, and we pay property taxes. In fact, without renting, we probably would not have the income to own these properties. Anyway, I'm obviously biased, but I don't think that renting is evil. It provides access to housing to people who otherwise might get a worse deal on it or simply be unable to buy. That said, from a moral standpoint, an economy favorable to ownership might be good (assuming that it wouldn't tank the economy in other ways, which would be immoral in itself).

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Re: The Evils of Rent-Seeking

Postby elasto » Sun Jun 30, 2013 2:24 am UTC

Derek wrote:The best thing to do about this is just to leave the market alone, so that the high prices can drive supply increases.

One of the problems is that lots of people are buying up land and just keeping it because land is going up so quickly in value. It's basically a commodity bubble. But it feeds into the spiral of increasing house prices, which then increases land value.

That's one reason for the OP suggesting a land tax - to force people to actually make use of land and build on it (or sell it on to someone who will). Sure, like all commodity bubbles it will eventually self-correct (ie. crash), but if the bubble can be popped sooner rather than later it's better for everyone's sake - even for those currently holding it.

Yes, we do have a property tax, but if landlords are fitting 6 people into a 2 bedroom house and so on, it's hard to actually pitch a property tax which will dissuade that behaviour. And, as Silknor says, perhaps you wouldn't want to: There are people happy(ish) to rent half a room, so why shouldn't people meet that need.

As I say, imo the best way to intervene is just to commission a load of new council houses. Flood the market and force the prices down. The bonus would be it would get a temporary boost to the economy as well, something all our flat-lining countries could do with.

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Re: The Evils of Rent-Seeking

Postby Iulus Cofield » Sun Jun 30, 2013 2:48 am UTC

The worst part about real estate bubbles is that speculators generally get mortgages on their investment properties and then can't afford to sell them off at the post-crash prices, which then artificially locks prices at the peak of the bubble for years afterwards.

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Re: The Evils of Rent-Seeking

Postby Silknor » Sun Jun 30, 2013 1:40 pm UTC

Vash wrote:You don't have property taxes?


I don't know if the U.K. has property taxes, but property taxes and land value taxes are actually different, though I rarely hear talk of land value taxes outside of economics circles. A land value tax is levied on just the value of the land itself, while the base for a property tax also includes the value of the building and improvements. As I understand it, land value taxes are generally considered to be more efficient and less distortionary, than property taxes (and many others).
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Re: The Evils of Rent-Seeking

Postby elasto » Sun Jun 30, 2013 2:07 pm UTC

We have a stamp duty tax, but that only applies when a property changes hands. It's between about 1-3% for 'ordinary housing', 5-7% for mansions, up to a maximum of 15% for major corporate transactions.

We have council tax, paid to the local authorities, which is loosely based on a property's value, but it's only $200 a month or so and pays for everything from rubbish collection to local policing, fire service, libraries etc.

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Re: The Evils of Rent-Seeking

Postby Ormurinn » Sun Jun 30, 2013 3:59 pm UTC

Derek wrote:Yeah, this is not what rent seeking means. It's completely unrelated.

This looks like a pretty straightforward case of insufficient supply. The best thing to do about this is just to leave the market alone, so that the high prices can drive supply increases. If there are barriers to new construction, or more efficient use of existing construction, those should be removed. Attempts to control rent have always been disastrous, and made the problem even worse.

Another issue here is government policies that have made home ownership artificially cheap, encouraging a housing boom. Home ownership is a great thing, and is almost always a better idea than renting if you can afford it, but it doesn't need assistance from government programs, it can stand on it's own merits. And like all things, you can have too much of it, which is what government subsidies tend to do.


There can't be any supply increases because of limits on construction due to greenbelting.

The latter part of your post is the opposite of what's happened in the U.K - home ownership has been rendered artificially expensive, not artificially cheap, the market has been propped up. That's what's led to the market distortion that's put so much power and wealth in the hands of rentiers.
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Re: The Evils of Rent-Seeking

Postby Derek » Sun Jun 30, 2013 5:41 pm UTC

Ormurinn wrote:The latter part of your post is the opposite of what's happened in the U.K - home ownership has been rendered artificially expensive, not artificially cheap, the market has been propped up. That's what's led to the market distortion that's put so much power and wealth in the hands of rentiers.

I think we're saying the same thing, in different ways. There are government policies intending to make it easier to buy houses, right? Things like low interest rates, tax breaks, etc. These policies increase the demand for housing, which raises the price.

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Re: The Evils of Rent-Seeking

Postby elasto » Mon Jul 01, 2013 12:58 am UTC

Derek wrote:
Ormurinn wrote:The latter part of your post is the opposite of what's happened in the U.K - home ownership has been rendered artificially expensive, not artificially cheap, the market has been propped up. That's what's led to the market distortion that's put so much power and wealth in the hands of rentiers.

I think we're saying the same thing, in different ways. There are government policies intending to make it easier to buy houses, right? Things like low interest rates, tax breaks, etc. These policies increase the demand for housing, which raises the price.

Demand for housing is pretty inelastic. If people can't afford to buy they still need to consume a house via renting. Yes, there is some elasticity in that they can apparently rent only half a room, but that's a pretty recent phenomenon.

Low interest rates were more about trying to keep capital flowing to business during this recession. And there are no tax breaks for buying a house that I'm aware of. There's this 'help to buy' scheme for first time buyers, but that's only been in the last couple of years.

No, as stated, one of the big interventions successive governments have made is refusing to allow building on green belt land. This has made houses in the South artificially expensive. I've driven from Bristol to London and it's virtually all fields. Yeah. It's nice to look at but it's not really what our country needs.

I'm not suggesting the whole thing need be concreted over, but there's such a high demand for housing in the South that turning over, say a fifth of it to new towns would benefit everyone. Yes, there's a water shortage issue also, so we might have to rely on more reprocessing than we currently do, which will add a premium, but the drop in house prices could counter that.

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Re: The Evils of Rent-Seeking

Postby CorruptUser » Mon Jul 01, 2013 3:07 am UTC

elasto wrote:Demand for housing is pretty inelastic. If people can't afford to buy they still need to consume a house via renting. Yes, there is some elasticity in that they can apparently rent only half a room, but that's a pretty recent phenomenon.


It's more elastic than that; 3 people will divvy up a 1000 sq ft apartment if need be, but if the price drops everyone will 'demand' their own 1000 sq ft apartment. Think of it this way, assuming you rent, if the price of an apartment in your city were to fall by half, and your lease is up and you must find a new place, would you get a similar apartment or rent a somewhat larger apartment?

With regards to housing, people were buying the most expensive houses they could get because they assumed that the price would keep rising faster than inflation, and if the housing price rose faster than the mortgage rate, it's irrelevant how much the mortgage was because the house was worth even more. Obviously that didn't happen.

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Re: The Evils of Rent-Seeking

Postby Tyndmyr » Mon Jul 01, 2013 4:54 am UTC

Vash wrote:You don't have property taxes? My family are landlords in a relatively high-priced area of the US, and we pay property taxes. In fact, without renting, we probably would not have the income to own these properties. Anyway, I'm obviously biased, but I don't think that renting is evil. It provides access to housing to people who otherwise might get a worse deal on it or simply be unable to buy. That said, from a moral standpoint, an economy favorable to ownership might be good (assuming that it wouldn't tank the economy in other ways, which would be immoral in itself).


Renting /= Rent Seeking.

The concept of "rent seeking" is that of figuring out how to game the system to appropriate the wealth of others, rather than creating wealth. Renting is often a perfectly legitimate economic activity...I'm certainly glad that I can rent a truck when I need to move instead of mucking about with buying and selling one. The issue here is more that the laws involved are distorting the market.

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Re: The Evils of Rent-Seeking

Postby Adacore » Wed Jul 03, 2013 5:45 am UTC

elasto wrote:We have council tax, paid to the local authorities, which is loosely based on a property's value, but it's only $200 a month or so and pays for everything from rubbish collection to local policing, fire service, libraries etc.

It's important to note that council tax is paid by the resident, not by the owner, so does nothing to directly discourage people in the buy-to-let market. I guess having higher taxes would mean people would be prepared to pay less rent, but with such limited supply, I'm not sure the market has the level of elasticity required to make that work.

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Re: The Evils of Rent-Seeking

Postby elasto » Wed Jul 03, 2013 6:17 am UTC

Adacore wrote:It's important to note that council tax is paid by the resident, not by the owner, so does nothing to directly discourage people in the buy-to-let market.

Yes and no. Empty houses still have to pay a council tax (though it is usually discounted) so that comes out of the owner's pocket.

And I'm not sure it makes much difference either way: If the owner were required to pay all year round they'd simply pass the cost on in higher rent. The bottom-line cost to the renter probably works out the same either way.

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Re: The Evils of Rent-Seeking

Postby Iulus Cofield » Wed Jul 03, 2013 7:20 am UTC

Hold the phone, you have to pay $200 per month just for being alive in the UK? And this is a mostly flat tax on top of sales and income taxes? Are there, like, crazy big exemptions for people working for minimum wage?

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Re: The Evils of Rent-Seeking

Postby elasto » Wed Jul 03, 2013 8:41 am UTC

Iulus Cofield wrote:Hold the phone, you have to pay $200 per month just for being alive in the UK? And this is a mostly flat tax on top of sales and income taxes? Are there, like, crazy big exemptions for people working for minimum wage?

- It's per household (single occupiers get a discount)
- It's based (loosely) on the value of the property, so it could vary from $100 to $300+ per month (so pensioners with very expensive fully paid-up houses but little income are hit unfairly hard here in some people's opinions)
- And, yes, it tapers down to zero for those on low incomes

As I say, it pays for local services like rubbish collection, libraries, fire service, police, home-carers (eg. people coming to cook a meal and help wash people who can't do such for themselves) etc. - all of which is partly funded centrally and partly locally, so far as I understand.

Each local council sets their own rates, and in recent years they have been given financial incentives by central government to keep rate rises below inflation.

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Re: The Evils of Rent-Seeking

Postby Adacore » Wed Jul 03, 2013 11:20 pm UTC

Council tax replaced poll tax, which was basically a flat tax for just being alive, and was the main reason so many people hated Thatcher. Council tax isn't much better than poll tax, really, but it is definitely better.

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Re: The Evils of Rent-Seeking

Postby sigsfried » Fri Jul 19, 2013 11:51 am UTC

The Poll Tax was not the main reason people hated Thatcher. She was already hated in many areas before the introduction of it.

Also while local tax rates are somewhat set by the Local authority they do not have unlimited powers to set the value.

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Re: The Evils of Rent-Seeking

Postby sardia » Sun Jul 21, 2013 4:43 pm UTC

http://www.nytimes.com/2013/07/21/busin ... f=business
I think this is a better example of rent seeking. Goldman Sachs ( a bank) was granted an exemption to own aluminum (a commodity). So they decided to buy a warehouse company that holds aluminum for others. Goldman earns 1% of the rent per day for storage of the metal. For some unknown reason, there's been massive delays in getting the metal out into the market place. Whole trains are used to deliver the metal into the warehouses, but only trucks are used to ship the metal out. When the NYTimes tracked the trucks, they mostly went between the warehouses, shipping metal back and forth. This delay has caused aluminum prices to soar, since most of it is sitting in a warehouse unused. Btw, these warehouses only work a single shift, despite the huge demand for aluminum, strange no? Why haven't the regulators done anything about this? The regulators are made up of banks and trading firms, aka Goldman Sachs and Co. In addition, the regulators also receive a cut of the profits from the warehouses.

The article has some other things, like how Goldman publicly announced similar plans to get into copper warehousing, conflicts of interest, and insider legal commodity trading. All really aggravating stuff that really pisses me off when people talk about a free market. =(

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Re: The Evils of Rent-Seeking

Postby Tyndmyr » Sun Jul 21, 2013 5:52 pm UTC

sardia wrote:http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?pagewanted=1&_r=1&ref=business
I think this is a better example of rent seeking. Goldman Sachs ( a bank) was granted an exemption to own aluminum (a commodity)....All really aggravating stuff that really pisses me off when people talk about a free market. =(


The entire system is set up to exploit pricing regulations, and you blame this on the free market?

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Re: The Evils of Rent-Seeking

Postby sardia » Sun Jul 21, 2013 7:31 pm UTC

Tyndmyr wrote:
sardia wrote:http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?pagewanted=1&_r=1&ref=business
I think this is a better example of rent seeking. Goldman Sachs ( a bank) was granted an exemption to own aluminum (a commodity)....All really aggravating stuff that really pisses me off when people talk about a free market. =(


The entire system is set up to exploit pricing regulations, and you blame this on the free market?

The financial industry lobbied for exemptions to get into the commercial trading sector under the flag and banner of free market deregulation. My beef with this is that free market people espouse such principles, except when it comes time to write the rules. Instead, we get this 'exploitation of pricing regulations' as you describe it. In this particular case, it came during the mass deregulation during and after the Regan era where it was popular to deregulate things in the expectation that it'll improve the economy. That belief is still popular and widespread today. This isn't a critique of the free market so much as a criticism of people who wrap themselves up in the banner of the free market so they can rent-seek.

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Re: The Evils of Rent-Seeking

Postby Hegelian Murder » Sun Jul 21, 2013 8:57 pm UTC

Some of you might find the Novara Media podcast about the Housing Crisis to be quite useful in giving a more full picture of the situation in the UK.*

I think the important thing to point out is that the housing prices here, especially the rent prices, are artificially inflated. By this, I mean that we are maintaining the value of property far higher than it should be, and we have been doing so for quite some time. Many people would also say that it is a fallacy that there is a housing shortage which is driving demand. I'm neutral on this - it's quite clear that some of the more densely populated areas are struggling with property shortfalls, but in other areas this is definitely not the case. In the podcast I mentioned above, the presenters talk about some of the housing developments in London, particularly noting that instead of affordable housing for low income families, many of the developments are "luxury" housing, which is inappropriate to our current economic need.

There are several attached issues. One is the historical issue that, thanks again to Thatcher, the proliferation of rental houses in general is due to the privatisation of council houses. Instead of families living in a council home at highly subsidised prices, families are living in rented homes, being given housing benefit, and paying this to private persons (ie, landlords). The second issue is that the inflated rental prices make it difficult, if not impossible, to actually save to buy. I'm in this situation myself - I earn about as much as the average three-person family on my own, but my rent accounts for just under half of my income after tax (and that doesn't include bills, council tax, and so on). I don't, I point out, live in a particularly extravagant house. It is a somewhat depressing situation in which to be.

* Link to follow in edit, after I have passed "definitely not a spambot" status

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Re: The Evils of Rent-Seeking

Postby Tyndmyr » Mon Jul 22, 2013 12:28 am UTC

sardia wrote:
Tyndmyr wrote:
sardia wrote:http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?pagewanted=1&_r=1&ref=business
I think this is a better example of rent seeking. Goldman Sachs ( a bank) was granted an exemption to own aluminum (a commodity)....All really aggravating stuff that really pisses me off when people talk about a free market. =(


The entire system is set up to exploit pricing regulations, and you blame this on the free market?

The financial industry lobbied for exemptions to get into the commercial trading sector under the flag and banner of free market deregulation. My beef with this is that free market people espouse such principles, except when it comes time to write the rules. Instead, we get this 'exploitation of pricing regulations' as you describe it. In this particular case, it came during the mass deregulation during and after the Regan era where it was popular to deregulate things in the expectation that it'll improve the economy. That belief is still popular and widespread today. This isn't a critique of the free market so much as a criticism of people who wrap themselves up in the banner of the free market so they can rent-seek.


Your issue here is that your supposed opponent, ie "free market people", is not monolithic or unified. Hell, that's not even that well defined of a label. So, your supposed hypocrisy is merely an artifact of different people having different opinions and poor labeling.

Incidentally, this same thing happens pretty frequently when you see arguments that begin with "liberals says" or "conservatives say".

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Re: The Evils of Rent-Seeking

Postby Derek » Mon Jul 22, 2013 7:06 am UTC

Tyndmyr wrote:
sardia wrote:http://www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminum-but-to-banks-pure-gold.html?pagewanted=1&_r=1&ref=business
I think this is a better example of rent seeking. Goldman Sachs ( a bank) was granted an exemption to own aluminum (a commodity)....All really aggravating stuff that really pisses me off when people talk about a free market. =(


The entire system is set up to exploit pricing regulations, and you blame this on the free market?

That really wasn't a very good article. They didn't explain what the loophole is that allows them to do that, or why it wasn't possible before. I understand that apparently Goldman-Sachs couldn't enter this industry before, but that doesn't explain why this business model wasn't viable before dregulation. And why is there a queue for aluminum at all? Keeping excessive inventory is almost always a poor business move, so what is different here?

I found this line in the article particular naive:
All of this could come to an end if the Federal Reserve Board declines to extend the exemptions that allowed Goldman and Morgan Stanley to make major investments in nonfinancial businesses

It sounds like Goldman Sachs found a loophole in whatever regulations exist that lets them make easy money. But the fact that they are a bank appears to have nothing to do with it, besides the NYT believing that banks are evil. If Goldman-Sachs is forced out of the business, this won't come to an end, someone else will just copy their model instead.

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Re: The Evils of Rent-Seeking

Postby Dark567 » Mon Jul 22, 2013 2:45 pm UTC

http://mobile.slate.com/blogs/moneybox/ ... _work.html. Goldman is not hoarding commodities to gouge prices and even if they were what the NYT claims they are doing wouldnt be the way to do that. Slate and the financial times have debunked this.
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Re: The Evils of Rent-Seeking

Postby ILMTitan » Mon Jul 22, 2013 5:28 pm UTC

That article doesn't debunk. It is just as confused as the rest of us.
But Kocieniewski's basic facts—banks buy warehouses, delays skyrocket, bank profits soar—all seem to check out.

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Re: The Evils of Rent-Seeking

Postby Tyndmyr » Mon Jul 22, 2013 7:57 pm UTC

Derek wrote:
Tyndmyr wrote:The entire system is set up to exploit pricing regulations, and you blame this on the free market?

That really wasn't a very good article. They didn't explain what the loophole is that allows them to do that, or why it wasn't possible before. I understand that apparently Goldman-Sachs couldn't enter this industry before, but that doesn't explain why this business model wasn't viable before dregulation. And why is there a queue for aluminum at all? Keeping excessive inventory is almost always a poor business move, so what is different here?


You're right, it really didn't explain the loophole at all...but it seems to infer that rent can be charged for material that has been ordered to be sent out but not delivered. This would present an incentive to delay deliveries, but that would seem to be blatantly undesirable to those paying them to store materials there. And yes, this would seem to be fairly irrelevant as to who is exploiting this...it would work just as well for anyone else.

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Re: The Evils of Rent-Seeking

Postby Dark567 » Mon Jul 22, 2013 8:15 pm UTC

ILMTitan wrote:That article doesn't debunk. It is just as confused as the rest of us.
But Kocieniewski's basic facts—banks buy warehouses, delays skyrocket, bank profits soar—all seem to check out.
That's just the first in a series of a few on Goldman's aluminum storage.

What is happening is that commodities are currently in contango, which is when the future contract prices is greater than both the current spot price and the expected spot price on the date of the future's maturity. This happens because people want to buy aluminum today, for use at some future time, but don't want to have to store it. For example, if you happen to have a warehouse where you can get the costs of storage cheap enough, you can simply sell futures contracts at the higher future prices, say $100/lb and buy aluminum at the same time much cheaper, say $75/lb. When the future matures, you deliver the aluminum. As long as your storage costs were less than $25, you profited.

This isn't rent seeking, this is arbitrage.
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Re: The Evils of Rent-Seeking

Postby Starlight » Tue Jul 23, 2013 8:07 pm UTC

Dark567 wrote:This isn't rent seeking, this is arbitrage.

Arbitrage in time instead of space? That's pretty awesome.

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Re: The Evils of Rent-Seeking

Postby Tyndmyr » Tue Jul 23, 2013 8:50 pm UTC

Starlight wrote:
Dark567 wrote:This isn't rent seeking, this is arbitrage.

Arbitrage in time instead of space? That's pretty awesome.


Well, that's what futures do...arbitrage has actually spread into quite a lot of sectors, and it's generally a good thing overall. Looking over this a bit closer, I still see some unfortunate minor aspects, such as the mention of storage fees sending kickbacks to the market...for me, that's a concern in that it reduces motivations to fix problems with storage, but it is hardly the smoking gun the original article seemed to imply.

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Re: The Evils of Rent-Seeking

Postby Dark567 » Tue Jul 23, 2013 9:02 pm UTC

Starlight wrote:
Dark567 wrote:This isn't rent seeking, this is arbitrage.

Arbitrage in time instead of space? That's pretty awesome.

My understanding is that most modern arbitrage is actually time based rather than geographic.
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Re: The Evils of Rent-Seeking

Postby Silknor » Tue Jul 23, 2013 11:37 pm UTC

FT Alphaville has a much fuller (but complicated) explanation (free registration required) of what's going on. The gist seems to be along the lines that Dark567 points out, that a glut of aluminum drove prices down, creating a profitable opportunity for someone who could afford to store the metal, earn a little rent on it, and sell futures contracts as the price is expected to rise over time.

That's the non-shady side of things. The article points out a couple reasons why there might be some problems. But they're not based on causing intentional delays in order to earn more from renting the warehouse space, but on the ability to move aluminum in and out of public inventory, thus creating the appearance of shortages or gluts that don't actually exist, allowing them to profit on the resulting price changes.

Derek wrote:I understand that apparently Goldman-Sachs couldn't enter this industry before, but that doesn't explain why this business model wasn't viable before dregulation. And why is there a queue for aluminum at all? Keeping excessive inventory is almost always a poor business move, so what is different here?


According to the FT article, the reason it's banks doing this instead of someone else is just a matter of who can afford to tie up that much of their balance sheet holding aluminum for years while waiting for prices to adjust. Banks can sell financial products based on the underlying assets to raise money, and the Federal Reserve's recovery policies helped make it much easier for banks to borrow the money necessary to setup such a large operation. So anyone could've profited on it, but it would require a large up-front investment.

As for the queue, that seems to be a symptom of excess aluminum production, not an intentional strategy of providing bad customer service to charge more fees. Since demand for aluminum dropped so much in the global recession, there's simply a lot more of it that needs to be stored.

From an obviously biased source (emphasis added)
Per a Goldman executive: “The Times has grossly inflated the power of the warehouses in the aluminum market. Roughly 95 percent of metal sold every year doesn't pass through the warehouse system at all but goes straight from producers to consumers. Goldman's company, Metro, doesn't own or control the metal in its warehouses. That is up to its customers and subject to LME rules. So to the extent that metal flows inside the warehouse system (on and off warrant), that is a function of customer demand. As you might suspect, the vast majority of the build-up in inventories at warehouses is a result of the financial crisis and the subsequent lack of demand.

The warehouses absorbed excess production, but the macro picture is one of soft demand and excess supply, which is why aluminum prices have come down substantially over past years (roughly 40 percent lower since pre-crisis levels), another factor the Times fails to mention. As with other global commodity markets, prices are ultimately driven by supply and demand, and there's been significant overcapacity in the global aluminum market for years now. Thus, the need for storage and the role the warehouses have increasingly played. In many ways the Times is confusing a symptom for the cause.”
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Re: The Evils of Rent-Seeking

Postby Derek » Wed Jul 24, 2013 1:41 am UTC

So the queue is not for buying, it's for selling, and despite what profit margins Goldman-Sachs might be making on the storage, prices are much lower, not higher? This paints a more plausible picture for me. There is still the oddity of moving aluminum back and forth between warehouses, but I think I got that that was to circumvent some industry regulations about storing metal for too long (which would be a stupid regulation in the first place).


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