An interesting study done in Warwick University reveals that minimum payment requirements presented to customers by the credit card companies (as dictated by law) in an effort to increase payment amounts and decrease consumer debt levels, may actually be doing the opposite. According to the study, people who would have otherwise paid a higher amount on their credit card bill, faced with the minimum payment amount, which is usually a very low amount, pay significantly less towards their balance therefore increasing their indebtedness.
Talk about unintended consequences. They should really conduct some economic focus groups and do rigorous simulations before they pass any law intended "to provide incentives for an improved behavior." Of course, a good chunk of all legislations would fall under that category.
Additional Resources:
Wednesday, December 24, 2008
Minimum Payment - Time to Abolish This Great Idea?
Tuesday, December 23, 2008
Wall Street's Dead? Not Quite and Not Likely
It seems that a belief in the death of Wall Street has become a new paradigm. Anyone stating that Wall Street as we know it is dead and it will take many years, if ever, for it to return to it's glory days instantly becomes a credible expert. In the article I linked to at the bottom, The Economist states:
"The biggest fear on Wall Street is that finance, which accounted for a staggering 40% of corporate profits at the height of the credit bubble, faces decades of relative decline. The survivors will get the spoils, but the booty looks unappealing."Is it just me, or is this typical depression-minded rhetoric that is common during severe economic downturns? I bet there was similar language in the papers when bond market imploded in the '80s.
In any case, the bubble has burst and financial sector will not constitute 40% of the overall corporate profits in the U.S. any time soon, but I doubt it will take more than five years for their profits to swell again.
Additional Resources:
Monday, December 22, 2008
Oil Price Volatility: Speculation or Not? Just Don't Ask Politicians
Currently oil producers blame financial speculators for the oil price volatility while oil consumers state that free markets are really the ones determining the oil price. Call me crazy, but I'm pretty sure I've heard exactly same statements made about six months ago except it was the other way around: Western powers were launching investigations into market speculations while OPEC was saying that it's really the supply and demand that are forcing the price to go high.
How can you stand there and say that speculation has no role in the current market if the price of oil can fluctuate in the 10%+ range within a DAY? Even when there are no inventory reports or supply cuts announcements being made!
On the other hand, Saudi oil minister is saying that we should really get up to a price of $75 per barrel in order for the "marginal producers" to be able to make future investments to maintain future oil supplies. Are you kidding me? When we were at the current price levels of mid-30s per barrel four years ago, I don't remember oil producers making much fuss about the oil price not being high enough for them to make money for future investments. Someone got addicted to oil profits real quick over the past few years and wants to keep the party going. I highly doubt anyone can produce a detailed business plan justifying the need for $75/barrel price in order to sustain future production.
The only issue that I see with the current oil price market is this: volatility. Oil prices simply need to level off and stabilize in order to allow for oil companies and oil producing countries to make reasonable forecasts for capital expenditures. Otherwise, they will be too conservative in their spending and supply will go down too much.
Of course, if you consider the long-term importance of alternative energy sources then $75/barrel may actually be a good thing. Hopefully, President-elect will plow the promised $150 bil into alternative energy regardless of the oil price.
Additional Resources:
