Thursday, 13 September 2007

Daily Mail, and others, don't understand free markets?

Daily Mail headline today expresses astonishment that the Bank of England says that "We Can't Control Mortgage Rates!".

Which bit of a free market economy does the Mail not understand? Do they really think that the huge range of mortgage deals, carefully tabulated on their own finance pages, are all individually controlled by the Bank of England? That the Bank of England says to, say, Bristol and West that their 5yr, 0.5% discount tracker deal, with £2k cashback and a £100 M&S voucher is fine; but that they'd prefer that the Woolwich shaved a couple of basis points off their 1yr-fixed, first-time-buyer- only offer?

The article at one point reminds us of the problem of sub-prime defaults in the US and says that "as a result, High Street lenders here are lookng to make more money from borrowers".

So, if it wasn't for the situation in the US, UK banks would be happy making less money from borrowers? That's just silly. Any bank will always try to make as much money as possible from their customers, but they are restrained by the fact that they operate in a competitive market. This is obvious stuff, everyone knows this really, don't they? They know that prices are controlled not by the State, but by competition from other companies?

But, you know, I think that while everyone sort of knows this, lots of people don't really believe it. They think that companies are generally out to get them, and if something is expensive that is nothing to do with the price the market will stand, but because the company is ripping them off.

I had a conversation with my brother (a scientist) recently about his car insurance, and he was utterly convinced that all insurance companies operate in a cartel, and that there is no competition for his business. He really believed this to be the case. Maybe it is, but it seems it would be a very, very complex cartel to manage. It seems to me much more likely that the market for car insurance in the UK is highly competitive, and if you are unmarried, drive a Lotus which you sometimes take to track days, and park it on the street in Bloomsbury, your premium is probably going to be quite high however competitive the market is.


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