Don’t bail out F&P

Almost unsurprisingly F&P is struggling in the current environment. Given that we are experiencing a global recession there was always going to be a huge fall off in demand for appliance products (something that hasn’t really happened in New Zealand yet interestingly).

Stuff has already put up a few articles on the event (* and *) and Bruce Sheppard has suggested a bail out. Let me just say that I am completely against a bail out.

Now, if F&P is still in a position where it will be profitable in the medium term, but drastic conditions in the credit market prevent F&P gaining any finance, I could accept the government loaning money to F&P temporarily at a high rate of interest. Bailing out F&P should not be an option – after all, what is growth promoting about forcing all of society to cover businesses mistakes?

As far as I can tell they are in trouble as their debt was denominated in foreign currency and the value of the NZ dollar collapsed. Now excuse me if I’m wrong – but isn’t this just hedging on their part. A few months ago they were complaining that the dollar was too strong and was reducing the profitability of their manufacturing. Now that the dollar is weak (improving the return on what they make) they have lost out on their debt. By denominating their debt in foreign currency they were hedging their losses stemming from a high dollar – why should we be bailing them out when the tide turns?

Update Kiwiblog and Anti-Dismal more explicitly discuss the moral hazard problem.

Average vs Marginal: The most common mistake in economics

Something I have noticed over time is that there is always a mass of confusion surrounding average vs marginal costs (or benefits) in economics.

Although there is some confusion with fixed vs variable costs as well (an issue that I believe is closely related) the issue of average vs marginal costs appears ohh so often.

Greg Mankiw mentions a case from the paper recently here.  I remember a case where it was important that was blogged about here.

Now, the difference is important as it is “marginal” costs and benefits that determine decisions (implicitly) not average costs and benefits.  However, if people are often confused between the two is it not possible that many people do make decisions based on the average?  There are a lot of interesting questions implicit here – something we should discuss over the next week 😉 – eg do people choose marginal when describing average?  does this confusion serve some “evolutionary” purpose?

Quote 14: Milton Friedman on policy prescriptions

This was from Greg Mankiw’s blog:

The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is “politically feasible” and then to recommend it.

If you ever get annoyed with the fact that much of what economists say is politically infeasible this is the quote that explains how we feel. When giving policy we see ourselves as describing the process “removed” from the institution of government – in many ways economists have an idealistic view of government as a body that actually functions in the interest of society.

The fact that a policy isn’t “politically feasible” doesn’t stop it being optimal in the face of more natural constraints.

Kiva: Individual microlending

When looking at Questionable Content (it is a webcomic – I’m addicted to watching the guy develop his drawing style!) I saw a link for a site named Kiva. To explain what this is I will leave it up to the Kiva about page.

Kiva is the world’s first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs in the developing world.

It is so incredibly cool – it lets you loan money to individual entreprenuers in developing countries. Instead of giving money to a charity as a black hole you are giving money directly to someone who you believe will make good use of it – furthermore, you are pretty likely to get you money back!

This is a great way to incentivise capital transfers and charity – seriously cool.

Is anyone keen to join a TVHE Kiva group – I’m sure I can rope at least the other authors into it 😉

What is up with petrol prices?

The cost of a barrel of oil is down to $35US and the exchange rate is loitering around $1NZ=$0.52US. Why is fuel at $1.63? A rough and ready look at the numbers suggests approximately $1.40 to me – although with a big error band (Note: less than 20c though).

The rumours I’ve heard are:

  1. Refiners are increasing margins (how?)
  2. Tacit collusion between retailers (then why do margins appear to be average in the MED data?)
  3. Premium based on exchange rate and oil price uncertainty which is elevated (but is it any worse than a few months ago?)
  4. Retailers have put themselves in at fixed oil/exchange rate contracts that are at worse rates than current spot prices (when did they start doing this?)

So, does anyone have any knowledge or suggestions that they would like to share with me :)

Update:  Paul Walker at Anti-Dismal discusses the role of consumer search in the adjustment of petrol prices.