Tag: finance

Why are bank accounts so complicated?

A BBC report today says that some popular current account packages are having their fees increased substantially.

The change in Santander fees – announced in September – will see customers paying £60 a year, instead of the previous fee of £24. The charge for its 123 credit card rises from £24 a year to £36.
Last year the Santander account proved very popular, with more than 27,000 people switching to it in a single month. But experts said that – even after the changes -it still offered relatively generous interest payments of up to 3% a year, and cashback of up to 3% on some household bills. “Don’t jump ship until you’ve done the maths,” said Hannah Maundrell, editor in chief of advice site Money.co.uk. “To put it simply, you need to look at how much you’re earning in interest and cashback. If it’s less than the new £60 a year fee you need to take it as a wake-up call to seriously consider your options.”

Why should people need to do complicated calculations to figure out whether their bank is scamming them? Obviously, this is a rhetorical question. I know, sort of, that banks see current customers as locked in, so they are motivated to provide a minimum of interest and service to them, while trying to dislodge a few customers from other banks with some flashy (but inexpensive) offer.

Barclays has said it will double its cash rewards programme for those who take out an account this month. Marks and Spencer is already offering incentives worth up to £220 to anyone who switches.

The article cites experts arguing about whether the banks have been forced to charge more because of increased costs, or whether they are padding their profits. But even have to raise the question shows how pathological banking has become. It’s the consumer

Every few years I find myself in my bank, needing to spend half an hour talking with a customer-service drone about why the Super Privilege Advantage account doesn’t pay interest anymore, but if I switch to the brand new Club Lloyds (really) Account I’ll get interest (varying amounts depending on my balance, increasing up to £5000, and then cutting out after that.

By the theory of the competitive market, you might think that someone would see an interest in providing simple financial services, to people who have better things to do than discuss their half a percent interest with a bored bank employee for half an hour every year or two.

Greece and the lessons of Versailles

After commenting on the fake “assistance” that the Euro countries have bestowed on Greece for the past five years — stabilising Greece just far enough to get international banks clear of the falling debris, and then pushing it off the cliff — it occurred to me that this ties in usefully with the discussion that has been bubbling up — from Thomas Piketty among others — of how chief scold Germany had its debts written off after both world wars. Or, rather, it defaulted on its WWI debts as preparation for initiating WWII; the world then decided to cancel most of its debts after WWII — including debts to Greece — at the London conference of 1953. It would be hard to say that Germany in 1953 was more deserving of international assistance or forgiveness than Greece today. In part, this reflects the predilection for strong villains: Germany was seen as inherently strong, if currently weakened; Greece is viewed with contempt, for its weak and corrupt political system. Having reduced much of Europe to rubble and murdered millions is just one of those misadventures that befall those with big plans. At least you knew, if you bailed out Germany, the money wouldn’t just be wasted…

German default

Following up on the previous post, it occurred to me that I don’t know any German counterpart to the English verb “default”, as in, “default on a loan”. After some searching, I’ve come to the conclusion that there isn’t one. In German there can be a default — “Ausfall” — or the  loan can passively fail — “ausfallen”, literally the loan can “malfunction”, or “be cancelled”. But the debtor cannot as the active subject of the sentence do the defaulting.

The annuity puzzle

Stanford biodemographer Shripad Tuljapurkar has written a very thoughtful post about the “annuity puzzle”: Why do people generally not choose to purchase annuities that would seem to protect them from a major risk: Being feeble and impoverished 30 or 40 years after retirement? His explanation, which is surely right as far as it goes, is that the shunning of annuities is a rational response to the compensating default risk from the insurance company. You have to live quite a long time to make your nut on an annuity. The “risk” — the probability of living that long — is low, and (he argues, persuasively) one could reasonably conclude that it is outweighed by the likelihood of a financial crash in the interim.

From a behavioural economics perspective, this matches closely one of the standard explanations for discounting: Future returns are drastically uncertain, so we develop the habit of preferring immediate gratification. So this falls in the category of attempts to explain seemingly irrational economic behaviour by showing that it is in fact rational when you take into account limited information or costs of acquiring or analysing information. Of course, any economic theory inevitably struggles to deal with questions of insurance and annuities, where the risk involves the life of the economic agent. The celebrated analysis of this problem by Jack Benny is still relevant.

But while this is a cogent argument for why people shouldn’t buy annuities, I’m skeptical of it as an explanation for why they don’t buy annuities. First, the annuity puzzle is a phenomenon of average people, not savvy investors. I doubt that most people think much about the risk of established financial companies defaulting. One prominent study (based on surveys conducted in 2004) found that 59% of Americans would trade half of their Social Security annuity for an actuarially fair lump sum payment. I’m pretty sure that they are not thinking that they can find a safer investment, with less risk of default, than Social Security. Continue reading “The annuity puzzle”

Wall Street idealism

A Yale senior in computer science, Steph Rhee, describes an encounter with a Wall Street tycoon at a cozy Yalie networking event:

When I said that I was studying computer science because I want to be a software engineer and hope to start my own company one day, he said, “Why waste so many years learning how to code? Why not just pay someone else to build your idea?!”

What is hilarious is the imperiously aristocratic style of the grand financier, appalled at the notion of anyone getting their hands dirty in trade, in this case, being so crass as to actually develop the skills to make anything yourself, as opposed to taking advantage of your superior status to float your IDEAS into the room, and expect the peons to praise their brilliance and knuckle down to the real work.

I am reminded of Harlan Ellison’s celebrated reply to fans who would ask him “Where do you get your ideas from?”

“There’s this ‘idea service’ in Schenectady and every week like clockwork they send me a fresh six-pack of ideas for 25 bucks.” Every time I say that at a college lecture there’s always some schmuck who comes up to me and wants the address of the service.

 

Long-running non-dom com

UK residents who can claim that their real long-term home is somewhere else — perhaps in their family suite in Monaco, or they plan to be buried in the Cayman Islands — are termed “non-domiciled”, and spared the indignity of paying UK tax on their worldwide income. This includes people who were born and lived their whole lives in this country, if their father was foreign (or himself non-domiciled). This last is particularly galling to the ordinary taxpayer.

Now Labour has vowed to do away with the whole farce, leaving the Tories spluttering about the cost to the economy of driving away wealthy job-creators. What’s fascinating is to see Conservatives suddenly arguing that foreigners are making useful contributions to Britain, even if they are benefit cheats tax avoiders. Sure, some wealthy foreigners are probably making a positive contribution to the UK economy, while others are primarily competing with local people for scarce housing. In that they are a lot like non-wealthy foreigners, if we replace “housing” with “jobs”: some make a net positive economic contribution, some don’t.

But no one is suggesting that we really need to make sure that we retain any loopholes that allow impecunious immigrants to claim benefits in ways that seem contrary to any intended purpose or basic civic morality, because otherwise they might leave.

The biggest genetics-investment opportunity ever!

I was just looking at this paper from 2012, that purports to discover the heritability of economic and political preferences by slightly shady statistical analysis of GWAS data. And then it hit me: We could market

An investment plan tailored to YOUR genotype

Okay, we’ll have to work on the catchphrase. Feel free to send your seed money. (The genotype-based diet is running like gangbusters.) Excuse me while I go off for a moment to write the patent application.

Impact!

Snitches get stitches, French financial edition

Several newspapers, including Le Monde, have been collaborating to publish information about tax avoidance and money-laundering at HSBC, gleaned from files leaked from the bank’s Swiss dependency several years ago. Now Pierre Bergé, president of Le Monde’s supervisory board and one of the paper’s owners, has

attacked the paper on RTL radio, accusing it of “informing” on the business people, politicians, criminals and celebrities named in the HSBC files.

“Is it the role of a newspaper to throw the names of people out there? … I don’t want to compare it to times past but all the same, informing is informing.”

First they came for the hedge-fund managers…

“The important thing is to get the money in”

That’s what Lin Homer, head of HM Revenues and Customs (the UK tax authority) said in 2012 about agreements not to prosecute wealthy Britons who had been concealing their money in Swiss bank accounts, and so also protect them from having their identities publicly revealed, in exchange for them kindly consenting to pay the taxes that they were legally obliged to pay. We wouldn’t want to embarrass anyone! And then I recall this woman (a mother with two children) who was sentenced to prison for five months for receiving an item of clothing from a friend who had stolen it.* As Bob Dylan sang, “Steal a little and they throw you in jail/Steal a lot and they make you king.”

Shocked by the criminal activity at HSBC in Geneva, which was revealed to the French tax authorities by an enterprising tech support guy, the Swiss police have been unusually active in seeking to ensure that such lawlessness is stopped — by seeking to extradite and prosecute the guy who revealed the information. Informed of HSBC’s crimes in 2010, the UK government sought ingeniously to decapitate the bank, by appointing its CEO Stephen Green to the House of Lords and making him Minister of State for Trade.

In order to further ensure that appropriate standards of legal and ethical behaviour were put into effect at HSBC, the head of tax at HMRC, Dave Hartnett, started working for HSBC as a consultant two years later.

* This sentence was later overturned on appeal. But she certainly wasn’t allowed anonymity, and no one said “The important thing is to get the trousers back”.

The REF Research Rating Agency

Among the many inefficiencies imposed by the hexennial ritual of centralised research evaluation in the UK is the requirement that some of the nation’s most esteemed academics (thankfully, I am not one of these) need to dial their research productivity down to nearly zero while they spend their waking hours — and some when they might otherwise be sleeping — reading and ranking hundreds of papers, and attending interminable meetings. And then, after the results are complete, the specialised skills they have developed during this sisyphean herculean task are of no use to anyone, other than helping their individual departments get a leg up on the next REF, of course. Wouldn’t it be great — and very British — to enable the researchers who have devoted so much time and effort to monetise the skills they have acquired for personal gain?

This is why I am proposing the creation of a public-private consortium (privately owned, but initially funded by the British taxpayers), to be called the REF Research Rating Agency (REFRRA). The idea is simple: One of the major outcomes of the REF is to induce British universities to hire leading researchers away from other British universities shortly before the REF census date, expecting that their 4* papers will pay their salaries for the next six years. They also hire researchers from outside the UK on 20% contracts to pop by occasionally and credit their  research output to their generous UK host. By these means, the University of Birmingham has had itself crowned the king of UK philosophy.

The problem is the amount of guesswork that goes into these hiring decisions. That is why we need the REFRRA, employing experienced former REF examiners, to provide researchers in the UK and worldwide with Audited REF Score Evaluations (ARSE). For a modest fee, academics can purchase a documented ARSE to list on their CV. This will ultimately lead, it is hoped to a complete automation of the appointments process, whereby academics can simply go to a web site of a university they would hope to work for, put in their ARSE and a few demographic details, and receive an immediate job offer or rejection, based on the calculation of whether their hiring would be a financial net gain or loss for the university.

When I told a colleague about this idea, she said that no one could trust ratings where the ones being rated are the agency’s paying customers. Too much conflict of interest. On further reflection we had a good laugh at her naïveté.