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I’d like to share a quote on banking industry regulation:

“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker for any sum, whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty, which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respect a violation of natural liberty.  But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.” (emphasis added)

We all know that the banking industry is unique relative to other industries and needs unique regulation…this is not news.  But, did I mention that the aforementioned paragraph was written by one Adam Smith in An Inquiry into the Nature and Causes of the Wealth of Nations all the way back in 1776?!? (see book 2, ch. 2)

Adam Smith believed that the role of government was to protect and maintain a system of private property (i.e. protect against invasion and provide an administration of justice) and to provide public goods.  There are very few circumstances in which he supported government intrusion in the market mechanism.  One of those circumstances is in the banking industry where the free market of capitalism may “endanger the security of the whole society.”  This is amazing stuff considering the lack of industrialization and the general lack of economic knowledge at that time (e.g. the labor theory of value and the lack of knowledge of what determined a price, the general view of precious metals as wealth, exports as “good,” imports as “bad,” etc.).

Fool me once: The lack of banking regulations and the Great Depression.  We learned our lesson and instituted regulations in the form of the Glass-Steagall Act of 1933.

Fool me twice: The relaxing of S&L regulations during 1979-1982 and the subsequent S&L crisis in the late 1980’s and early 1990’s.

Fool me – you can’t get fooled again: The relaxing of banking regulations in the late 1990’s repealing many Glass-Steagall elements (e.g. Gramm-Leach-Bliley Financial Services Modernization Act of 1999) and the situation we’re going through now.

Not to say that these are the only causes, but my oh my, there’s a lot of fooling going on here!  I think, in general, we have learned from Adam Smith, but we’re also working with a Congress that very much loves embracing free market principles involving lobbying dollars AND THEN sitting down to vote.  We recognize that it would be idiotic to let our judges do that but barely make a peep when our policymakers do it everyday.  Let me guess why: When elected to Congress you are forced to get a shot that miraculously makes it so that you no longer like money?

I was reading an article last week about the SEC temporary ban on short-sales and came across the following quote:

Short-selling can contribute to efficiency while adding liquidity to the markets. But a recent wave of the maneuvers — profiting by selling unowned shares of companies in the anticipation their prices will drop — has been blamed in part for the demise of venerable investment firm Lehman Brothers and other big financial companies.

There appears to me to be a growing trend towards a lack of acceptance of personal responsibility (which I’m witnessing more and more over time in the classroom, by the way).  While I know they aren’t blaming the collapse of Lehman Brothers entirely on short-sales, let’s get it straight.  The executives, managers, and decision-makers at Lehman Brothers are responsible for the demise of Lehman Brothers.  Yes, short-selling may have marginally accelerated the inevitable collapse in stock price.  Yes, Alan Greenspan may have aided this mess with almost three years of historically aggressive expansionary monetary policy.  That being said, the people at Lehman Brothers freely made their bad decisions.  Lehman Brothers is responsible for the demise of Lehman Brothers.  Let us not forget that.

I can’t seem to get my comment on Geoff’s XM-Sirius post below to go through, so I’ll just post it:

I would still disagree with the DOJ when they say “there is not likely to be significant competition…through the car manufacturer channel for many years.”  As mentioned, the exclusive contract is competition.  Even though they aren’t negotiating new contracts now, the competitively agreed upon prices and rebates are still in effect through 2012.  That doesn’t end competition, it extends it.  In addition, if there was no merger in the future and both companies were still in business when 2012 rolled around, they would again compete for the exclusive contracts.

I think the DOJ made the right decision.  However, I would have said that even though some aspect of competition for auto manufacturers between the two companies would end due to the merger, in general the relevant market is much broader than just satellite radio (which is the most important factor).

Also, why would the DOJ make it seem like it matters that there’s no evidence that competition between XM and Sirius affect’s customer’s choices of which car to buy?  Even if no customer would ever choose one car over another on the basis of its satellite radio, XM and Sirius would still compete for the customers each auto manufacturer “controls” (term used loosely).  This is similar to competition for grocery store shelf-space (either exclusively or non-exclusively) to acquire the consumers each respective store “controls.”  Our resident Mr. Shelf Space, can tell me whether he agrees or disagrees.

Just as the April 1 trial date was approaching in the lawsuit by seven elite-level poker players against WPT Enterprises, it has been extended four months to August 5.  The case involves antitrust claims of exclusive dealing and price-fixing as well as the non-antitrust issue of contractual interference with respect to the releases players must sign before competing in a WPT tournament.  I have an article in the March issue of Two Plus Two Internet Magazine targeted towards providing everyday individuals who follow the WPT a basic understanding of the antitrust claims and my opinion on what they’re likely all about.

In the “small world” coincidence department, I happened to play at the same table as WPT CEO Steve “Other Guy” Lipscomb back in December (if the name Berman means anything to you, you’ll understand what “Other Guy” means).  When he mentioned he was the CEO of the WPT, no one believed him.  Personally, I refused to believe him for a solid half-hour until I decided to ask him what was going on with the player lawsuit against the WPT.  When he instantaneously dodged the question, I was pretty confident he wasn’t lying…………Oh, and looking up his name and picture on the Internet when I got home also helped.

Anyway, it will be interesting to see if the antitrust elements are settled or go to trial, or if they were really just thrown in the case as some attempt at leverage for what appears to be the players’ main complaint about the alleged overly broad releases.

Amateurism Is What We Do!

Paul Gift —  30 January 2008

Yesterday, the NCAA settled a horizontal price fixing class action case initiated by former basketball and football players (here, here, and here).  It’s nice to see the student-athletes get something, but I wish they would have received more.  The suit deals with the difference between the NCAA’s grant-in-aid (GIA) cap and the full cost of attendance (whether they were secretly trying to include the opportunity cost of attendance in their damages, I do not know).  The settlement provides $10 million over three years to cover former student-athletes’ “bona fide educational expenses” over the GIA cap and $218 million through 2012-2013 to “use the available funds for such aid to student-athletes with demonstrated financial and/or academic needs, and to include such assistance in their reports to the NCAA describing their uses of these funds.  Consistent with current practice, those reports will not be disclosed outside the NCAA.”  It will be interesting to see what exactly the latter means.

In my opinion, the NCAA has been one of the most blatant cartels in recent history, and I tend to be pretty free-market.  Colluding to lower an input’s wage is just as anti-competitive as colluding to raise the price of outputs like vitamins or lysine.  When you here NCAA President Miles Brand speak about it, you get the same “Amateurism is what we do” quote (quoting from memory) over and over again.  I bet those vitamin and lysine guys wish they could have had a catch-phrase like that to help keep the law off their backs.

The collusion was so bad that student-athletes weren’t, at a minimum, having their full expenses covered.  It made the lame Reggie Bush story headline news (and I went to UCLA).  And then there’s this part of the settlement:

“Conditioned upon final approval of this Settlement, the NCAA Division I Board of Directors has approved adoption of a rule permitting, but not requiring, Division I member schools to provide year round, comprehensive health insurance to student-athletes.”

I’ll leave that one to the reader.  In summary, I’m happy today but I wish I could be happier.

In France, it has been ruled that Amazon can no longer offer free shipping on book purchases. Don’t you just love it when competition policy protects certain competitors instead of actual competition? The protected competitors here are “vulnerable small bookshops.” Last I checked, the essence of competition is that “vulnerable” or inefficient competitors are supposed to be likely to go out of business. That’s the whole idea of promoting efficiency, innovation, economic growth, and enhanced welfare. The reason they’re vulnerable in the first place is that consumers in the market reveal that they more highly value the product characteristic bundle of other alternatives.

Personally, I have a love/hate relationship with this policy. I hate the “backwards” economics it promotes, but I love the fact that I get to make fun of it on TOTM. Death to free shipping, free samples, free coffee, loss-leaders, and, while we’re at it, Wal-mart rolled-back prices too!

See here.

Prediction Markets & XM/Sirius

Paul Gift —  28 November 2007

I had never heard of Intrade before.  Maybe I live in a hole.

Let’s see here:  I’d love to short the bid for Dec. 07 if it wasn’t at zero.  No way I’d touch the 10 ask.  I think there’s over a 90% chance this goes into next year.  The bid/ask spread is so big for Mar. 08 and Jun. 08 (40/60 and 60/80, respectively) as to make them unattractive too.  However, if my hand were forced, I’d short the bid of 40 for Mar. 08.  I guess another way of framing that is to say I’m more likely to believe there’s at least a 60% chance this extends past Mar. 08 as opposed to the other “break even” alternatives of a 60% chance it doesn’t, a 40% chance it extends past Jun. 08, or an 80% chance it doesn’t.  This is all assuming a “buy and hold” strategy.

My actual strategy is…………………no purchase…………………..secret answer C.

ET Radio Merger Countdown

Paul Gift —  20 November 2007

The countdown is on for the XM-Sirius merger decision! (I wouldn’t be optimistic that the “end of the year” decision target will stand.)  Former FCC Chairman Reed Hundt and Representative Rich Boucher (D-Va) have recently come out in favor of the merger.  As everyone knows, it’s all about market definition, baby!  I’m not a gambling man, but I’d love to know what the Vegas odds would be for approval.

Hello everyone!  I’m glad and excited to be a new part of Truth on the Market.  I’d like to thank Josh for inviting me.  Unfortunately, I’ll be very busy through the end of the year so I probably won’t get to post with great frequency, but I look forward to posting more in the future.

I want to note that I’m an economist, not a lawyer.  I worked in litigation consulting for a few years so I have a basic familiarity with antitrust law, but I don’t and won’t pretend to be an expert when it comes to matters of law.  My opinions will come from my economic perspective.

I got a random e-mail the other day from someone at a website called  It occurred after my addition to TOTM, so I wonder if that had something to do with it.  Anyway, the e-mail made me laugh so I figured I’d share it with everyone in my first post.  The e-mail references the following document:  The author recommends that, to enhance competition, the European Union (EU) require that the Windows operating system not be “bundled” with computers.  In general, bundling is when a company sells two or more goods together for one price.  It can take different forms: pure, mixed, technical.

So, why did I laugh?  First, in my mind, bundling is something that a manufacturer may choose to do with its own products (e.g. bundling shampoo and conditioner, left shoes and right shoes, etc.).  Personally, I wouldn’t say that nails come bundled with the house, tires come bundled with the car, or Intel processors come bundled with the computer.  I would describe them as inputs purchased in a competitive (or reasonably competitive) input market.

Second, the idea that “Microsoft has over 90% market share so we need to allow consumers to choose so we can break into Microsoft’s dominance” is funny to me.  Do you know what else we need to do?????  We need to outlaw the “bundling” of Intel processors in computers so that consumer choice will bust up Intel’s monopoly power!  We have got to outlaw the “bundling” of iPod connectivity and stereo controls with automobiles!  It’s imperative that we outlaw the “bundling” of those darn nails with houses!  I know, I know……there’s not a dominant nail supplier so there’s no need for the latter.  Well, suppose there was, and one nail company had over 90% market share.  Would welfare be improved with a regulation “unbundling” nails from houses, giving consumers a choice?  No!  There’s already competition and choice in the market at the builder level.  On top of that, the end-consumer can still choose to purchase from alternative builders (or alternative auto makers or OEMs in the other examples) or not at all.  Nail companies compete to supply home builders.  Tire companies compete to supply automobile manufacturers.  Intel, AMD, and other processor companies compete to supply processors to OEMs.  If the end-consumers’ preferences are strong enough towards one brand or another, competition and consumer choice between home builders, auto makers, and OEMs will tend to induce them to adjust.  If consumers strongly prefer an alternative, cheaper operating system, do you not think OEMs, competing in an aggressive marketplace, trying to earn profits, will listen?

It’s not scientific, but here’s some anecdotal evidence.  I went to Dell’s website and, within a few clicks, found  They offer Windows-free computers installed instead with Ubuntu Linux or FreeDOS.  The short video in the lower right-hand corner mentions that Dell chose to offer Ubuntu because of the large number of consumer requests on their suggestion box webpage.  So, markets really do tend to adjust to changes in consumer preferences?  Interesting.

Anyway, I just wanted to share that story.  It’s good to be here.  Goodnight, God bless, and Ubuntu…….