Tip of the Iceberg

Category rants
Jerry Carter wrote a fascinating analysis of whether regulation or market forces would prove more effective in dealing with Microsoft. I'm a raging liberal hippie, so I'm probably more in favor of government oversight than most others might be, but there is definitely a tradeoff with either option, and as with anything else, there should be periodic adjustment to keep things in balance.

Ultimately, I think a good guide is an analysis of the likelihood of exploitation, who gets the shaft if things go awry, how much clout those parties have to restore balance by their own actions, how long it may take for that balance to be restored, and how widespread the impact could be in the meantime.

For example: As recently as May of 1999, the average U.S. gas price was 93 cents per gallon. Which was the lowest it's been in a long time - for quite a while, it fluctuated within reasonable limits, seeming to average around $1.25. But since then, prices have essentially tripled. One of the most baffling things I've ever seen was a market analyst attempting to explain, during an interview with Jon Stewart on the Daily Show, how gas companies could still be posting record profits if they're not intentionally gouging us. Bizarrely, her argument was that an increase in supply chain costs (in this case, the price of oil) translates directly to an increase in profit. Which is, of course, complete crap: if no other factors change, the opposite is true. If I'm charging $1.25 for something, and my cost per unit rises from $.75 to $1.00, my margin decreases from $.50 to $.25 per unit... assuming I've been selling 100 units per day the whole time, my daily profit decreases from $50 to $25. But if the demand doubled in the same period, it wouldn't matter, because my margin is still positive, so my profit would flatline. If demand remained the same, however, I could increase my price to $1.50. My margin remains the same as before, so my profit remains the same, because the customer now absorbs the increase. Ergo, if the gas companies have increased their prices in a manner proportional to their cost, their profit only increases significantly if demand has increased significantly as well. If increase in demand has been gradual but increase in profit has been significant, the only explanation is that the price increase absorbed by the customer provides higher margins than the gas companies had when their costs were lower.

Another example: the global market is getting hit hard right now by this sub-prime lending debacle. If you haven't been following the news on this, essentially it's mortgage companies offering loans to consumers who ordinarily wouldn't qualify for a mortgage, but with an "adjustable rate". In other words, it starts out as something the buyer can afford (though often barely), and gradually increases over time to where they can't afford to pay anymore. This last bit wasn't specifically the intent: the increase in rate is (ironically) designed to minimize the lender's risk by increasing their margin. But because the explosion in prevalence of this type of predatory lending happened to coincide with a drastic decline in sales of houses, as the interest rates rose to levels buyers could no longer afford, many found themselves unable to sell in time and have had to foreclose. This occurred so rapidly that the banks to which the lenders sold the mortgages simply have to eat their losses... and the impacted buyers are now bankrupt. This may very well be exploitation at its worst: tempting consumers with a piece of "the American dream" that they thought they couldn't have - often because of poor financial decisions they've already made - and telling them it's a good investment because they're no longer throwing rent money down the drain, while incorporating a risk level so high that, when it goes bad, both parties suffer.

These are areas where I think increased regulation would be more effective than simply relying on market principles to keep things in check. There's no "open source" gasoline yet to threaten the current industry players' lock on the market, and the price impacts nearly everyone (I'm one of the fortunate exceptions, since on the whole I now have no commute, but so far my wife isn't so lucky... so in a way, I'm still impacted). And numerous voices are now warning that the sub-prime lending issue could trigger a global recession. I'd love to believe that laissez-faire can work in any situation, but the sad reality is that many individuals and organizations don't subscribe to Wil Wheaton's "don't be a dick" philosophy. If we proles can't keep them in line, somebody has to. First and foremost - in my opinion - it is the government's job to provide protection to its citizens... even if that means protecting us from the very people whose influence got them elected, which they're typically disinclined to do. See why Barack thinks special interests have disproportionate influence?