Mortgage interest rates, LIBOR and game theory

Saturday, March 03, 2012

by Penny Brooks

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This morning’s headline on BBC Breakfast was the news that yesterday RBS raised the interest rate on three of its mortgage products by a quarter of a percent to 4%. Three days ago the Halifax wrote to its mortgage holders saying that it intends to raise the cap on its Standard Variable Rate (SVR) to 3.75% above base rate, rather than the current 3%. As the Telegraph reports, although this doesn’t guarantee that Halifax would raise the rate itself, brokers”… believe otherwise and suggested that this would soon happen for a million Halifax borrowers” – and the BBC are now reporting an expectation that the Halifax will announce a rise in the SVR with effect from 1st May. For A level economists this story has several implications.

The first is clearly in macroeconomics, with the likely effect on consumer spending. We know well how squeezed consumers are, with rises in fuel and food prices, and the Bank of England has regularly expressed the importance of keeping base rates low in order to allow households to keep their heads above water. For mortgage holders with an interest-only mortgage, the RBS rate increase represents a 14% increase in their monthly mortgage payment – highlighted in this BBC video report.

The second concerns kinked demand curves and game theory. We have already seen RBS actually raising their rate and a likelihood that Halifax are about to do the same. Stuart Gregory from Lentune Mortgage Consultancy, who used to work for Halifax, told the Telegraph he expected to see a “chain of events” whereby other lenders also increased rates. “Once one does it, the others see it as an opportunity,” he said. This sounds like oligopoly behaviour to me. Mortgage lenders have all held their rates low for almost three years since Base Rate sunk to 0.5% in March 2009. This could be because, in close competition with each other, they have been stuck on the apex of a kinked demand curve, not feeling that the market would allow them either to raise rates and increase their returns – perhaps because competitors would not follow suit, and in any case their clients couldn’t afford the repayments - or to lower rates and try to gain larger market share – perhaps because they can’t afford the lower margins.

But something must have changed to cause RBS and Halifax to risk moving away from the established position, and guess that others will follow suit. There is certainly no signal from the Monetary Policy Committee or the Bank of England, who are more inclined at the moment to give the impression that 0.5% remains set in stone. The justification given by RBS is a rise in their borrowing costs. Partly due to rises in the LIBOR rate – as this graph shows, there may be some justification for this as there was a significant rise between November 2011 and the end of January 2012, although it has fallen back a little during February.


Source: thisismoney.co.uk

A second reason may be that savers are becoming more savvy in moving their funds between banks and accounts in order to seek the best possible rate, squeezing the margin between the rate that banks pay to savers and charge to borrowers – a new paradox of thrift. And a third was suggested by Paul Lewis on the BBC this morning; could it be that base rate, stuck so low for so long, is losing its power as a signal to other banks, who see official monetary policy as increasingly disconnected from the real world?

تحلیل تئوریک بازی از تحریم اقتصادی

A GAME THEORETICAL ANALYSIS OF ECONOMIC SANCTION

Khalifany Ash Shidiqi

Rimawan Pradiptyo

Abstract

 

Faculty of Economics and Business, Universitas Gadjah Mada, Indonesia

1

Economic sanction has been widely used and increasingly a popular tool in maintaining peace and political stability in the world. The use of economic sanction, as opposed to the use of military power, to punish target countries have been supported by the Charter of United Nations (UN). Tsebelis (1990) modelled economic sanctions using game theory and found that any attempt to increase the severity of the sanctions was counterintuitive, namely the policy reduced the likelihood of sender country(s) in enforcing economic sanction, however, it did not change the probability of the target country(s) in violating international agreement/law. This paper focuses on the refinement of the sanction game proposed by Tsebelis (1990) to analyse international relations. Recent findings from various studies on the effectiveness of economic sanction have been used to reconstruct the game. In contrast to Tsebelis’(1990) findings, any attempt to increase the severity of economic sanction may reduce the probability of the target country(s) in violating international agreement/law. A similar result was obtained in the case for which the sender country(s) applies any policy in preventing violation of international agreement/law by providing aids, assistances, and incentives to the target country.

Keywords: Economic Sanction, the Sanction/Inspection Games, Mixed Strategy Equilibrium. JEL Classification: C79, K42, F51

رفرنس: http://mpra.ub.uni-muenchen.de

 

 

نظریه بازی جنگ هسته ای:

Nuclear War Game Theory: Who Passes the Presidential Sanity Test?

Daniel Honan on February 20, 2012, 12:00 AM

"How can any missile crewman know that an order to twist his launch key in its slot and send a thermonuclear missile rocketing out of its silo—a nuke capable of killing millions of civilians—is lawful, legitimate, and comes from a sane president?" When Maj. Harold Hering asked this question it made his commanders so uncomfortable that it cost Hering his career. 

Major Hering wasn't asking this question in an historical vacuum. This happened at the height of the Cold War and the Watergate scandal. President Richard Nixon was not only losing his mandate to govern and lead, but also, some feared, Nixon was losing his grip on reality. The extent of the president's alcohol abuse may not have been public knowledge at the time, but there were plenty of signs of erratic behavior that raised eyebrows. For instance, Nixon reportedly told a group of Congressmen at a White House dinner party "I could leave this room and in 25 minutes 70 million people would be dead." Nixon may have been many things, but genocidal maniac was fortunately not one of them. And yet, Hering had challenged the very foundation of the nuclear "failsafe" system. 

As Ron Rosenbaum writes in the new book How The End Begins: The Road to a Nuclear World War III, while the president is "the ultimate authorizer of Armageddon," what if his mind "is deranged, disordered, even damagingly intoxicated? Should there be a breathalyzer lock on the nuclear football? A brain scan?" In other words, the most horrific decision in history "could be executed in less than fifteen minutes by one person with no time for second-guessing."

How do we safeguard against a President who is "off his meds" or otherwise mentally incapacitated? This is not a far-fetched question considering that a 2006 Duke University study found that mental illness has affected about half of all U.S. presidents, including Lincoln, John Adams and James Madison. U.S. presidential history, in fact, is filled with "secret surgeries and strokes." John Kennedy, Franklin Roosevelt and Woodrow Wilson all hid illnesses from the public, leading to the 25th Amendment that mandates, among other things, that presidential illnesses be disclosed. 

Of course, in today's media environment, it is almost impossible to imagine a president being able to hide an illness the way FDR did during World War II. Moreover, our culture has greatly evolved when it comes to discussing illness openly. "I'd prefer to live in a world where people can embrace that our [public figures] can be ill, and still be great leaders" says bioethicist and Big Think Delphi Fellow Dr. Jacob Appel. "Now that this information is open, I think it can be for the greater good." 

But how much information is really open? Are there actually sufficient medical background checks in place for presidential candidates? This became an issue in 2008, when the 71 year-old candidate John McCain allowed only select members of the media a three-hour "peek" at his medical records. 

On the other hand, our public vetting process must be some measure of comfort. "The presidency is the most intimate office we have," Time magazine columnist Joe Klein recently told Chris Matthews on MSNBC's Hardball. "They live in our kitchens. They live in our living rooms." We demand to get to know them.

Indeed, evaluating a candidate's mental competency has indeed become a staple of our politics in the nuclear age. Remember Lyndon Johnson's devastating attack on Barry Goldwater in 1964. While Johnson's infamous "Daisy" ad only hit the airwaves once, as it has been noted, "once was enough". The American public is extremely wary of "nuclear cowboys" who might risk "total extinction in the defense of liberty." This subject is no joking matter, as evidenced by Ronald Reagan's famous mic check gaffe that cost him 9 points in public opinion polls in 1984:

"My fellow Americans, I am pleased to tell you I just signed legislation which outlaws Russia forever. We begin bombing in five minutes." 

So if we were to administer a presidential sanity test, who would pass it? 

Let's pick on Ron Paul, for instance. While 90 percent of what he says might be defended by a reasonable person, what about the 10 percent that appears to be insane gibberish?

But what about JFK, who took LSD? 

And what about Ulysses S. Grant, who was drunk at his own inauguration? Would he have passed the test?

What about our military strategists that Rosenbaum references in his book? Their literature is a bizarre mix of "nuke porn" and nuclear war game theory, in which the "calculated irrationality" of men like Brig. Gen. Jack D. Ripper builds to an inevitable climax, or "wargasm." Are these "young Strangeloves" not demonstrably insane? Or, as Rosenbaum asks, are we all going crazy together? 

But it might not be up to us. 

What about an imposter? Rosenbaum writes: "We know that hacker attacks, many believed to have originated from China's military, have regularly targeted the Pentagon and our nuclear control system." Indeed, in a previous post on Chinese espionage, intelligence expert David Wise told Big Think how "a few key strokes on the computer" can function as a weapon of mass destruction.

I don't feel very failsafe now.