from the hip

A Norwegian agent of the National Security Authority was sentenced in Norway a few days ago for downloading and storing child pornography. He actually did this at work! Aftenposten writes:

The man, who did not have an Internet connection at home, used two years before his arrest in March 2006, sitting in a former NATO bunker in Kolsås and filling 99 CDs with child pornography, involving the abuse of minors as young as four to five years of age.

.. The NSM worker had the highest security clearance at the time, with access to top secret material when arrested.

The NSM’s own control system picked up the abnormal network traffic on their service server, and notified police.

The secret agent actually had compiled a collection of 600 films and 1750 images of hard-core child porn while on the job.

I guess secret agents aren’t all like James Bond after all?!? Sad, sad.

I am shocked by the lack of efficiency and the fees charged by American banks! Having lived mostly in Europe, and now residing in the US, I am completely unable to understand American banks.

Checking is costly

I have stopped using checks years ago. But in the US they are still used! Even though debit and credit cards are accepted everywhere, people still use checks. But checks are much more costly for banks than electronic cards. They also take more time to write and control whenever they are used. So the costs as well as the transaction costs are higher. But still there are tens of millions of checks written every day!

This is wild. But I have started to notice why. The first thing is that banks in the US are extremely bad when it comes to electronic payments and transfers, both in terms of efficiency and in terms of the costs (or the fees they impose on users). So the incentives for discontinuing the use of checks for consumers are small.

This is a sad state of affairs. Both the banks, the customers and the US economy lose out on this. Loss of efficiency in the end translates into higher costs for users and hurts the competiveness of American businesses.

Electronic transfer efficiency

I am used to a transfer from one of my own accounts to another of my accounts taking no time at all. Here in the US it takes a day. Transfer to somebody else’s account with the same bank, I am used to taking 1-2 hours. Here it is one to two days. Transfers to other banks I am used to taking 1-4 hours. Here it is 3-5 business days.

But electronic wiring and computers are just as fast in the US as in Europe. So the explanation for this is not technical. It’s simply the banks keeping the money for a while to profit from the float (the accumulated interest of all funds being in “limbo” on the way from one account to another). But this kind of greediness slows down business and imposes business costs on others! And it makes customers angry all the time.

Fees

The cost for an electronic payment is microscopic. Yet in the US the charges for some transfers are dollars instead of cents! How is it possible? I pay 3 bucks to use an ATM to take out money from an account in Europe. Bank of America, which charges this fee, has a cost on this transaction which is unlikely to be higher than 5 cents. How come they are allowed to charge this outrageous amount?

According to CNN money American consumers actually paid more than $36 billion in various fees in 2006! They write that a

.. government study on bank fees released Monday revealed that consumers are ill-informed about the fees they are paying on their checking and savings accounts.

The report, published by the Government Accountability Office, found that some fees assessed by at banks, thrifts and credit unions have steadily increased in recent years – in some cases by double digits.

Overdraft fees, for example, rose 11% between 2000 and 2007, according to the study. Other charges however, like monthly maintenance fees, have declined in recent years.

Regulation

Philosophically, I am a liberalist. I want the market to take care of things. But when markets fail, they need to be regulated. I will write more about the American banking industry later. But to my mind this is an industry in dire need of regulation. It’s really shocking to see that this is possible in the country that really is in the forefront technologically as far as Internet, computers and software is concerned.

It is truly remarkable, isn’t it, that the country with Microsoft, Intel, Dell, Facebook and Google is at the same time at the level of a third world country when it comes to the quality of its banking system?

The price fall in the US continues and accelerates. According to The Independent:

The price of the average home was 11 per cent lower than a year ago, the S&P Case-Shiller index showed yesterday, as repossessed homes flood the market – and economists predict that the price adjustment may belittle more than half over.

…. “It does not look like early 2008 is marking any turnaround in the housing market,,” said David Blitzer, S&P index committee chairman. “Home prices continue to fall, decelerate and reach record lows across the nation. No markets seem to be immune from the housing crisis.”

Other indexes point in the same direction. But actually all these indexes most likely underestimate the problems in the housing market for the moment. The reason for this is that a large number of sellers are holding back. So at the same time the market has slowed down (New York Times):

Sales of new U.S. single-family homes fell to the slowest pace in 13 years

On the other hand, real interest rates are now negative. And the Fed is pumping liquidity into the market. So it’s easy to think that the housing market will pick up relatively soon.

However, I don’t think that’s the case. Given the huge structural imbalance in the housing market and the time it will take to achieve balance, on one hand, and the need the Fed has to also look at factors in the much bigger recession picture on the other hand, they can’t and shouldn’t maintain negative real interest rates for an extended period of time. And smart buyers, I think, know this.

Because the bigger picture is a federal budget out of control, a foreign trade deficit that is monumental, a continued weakening of the dollar as a result of low interest rates, low productivity (see NYT, Feb. 7) growth in the economy (see also OECD), cautious lending by the banks (reacting to the current uncertain situation), and the danger of a substantial imported inflation.

Then add to all this that a negative real interest rate most likely is exactly the opposite of what the American economy needs over the slightly longer term, as cheap capital will lead to decline in productivity.

Taken together, these factors should imply that a negative interest rate – which just is plain stupid but may momentarily be necessary – will and should only be maintained until the financial institutions are over the worst.

More to come!