Wednesday, April 22, 2009

Slightly more coherent critique of the BRR

The Internet Archive has decided to join (some of) the complaints against the Google book settlement.  Despite its background pattern being unsafe for small children and epileptics, this site manages to provide a point of contact (and embeds the complaint via srcrib).  Take care though, should you click through, to note that the actual argument in the post is totally falacious. 

From the Archive's letter to Judge Dennis Chin who is presiding over the Author's Guild settlement:

"The Archive's text archive would greatly benefit from the same limitation of potential copyright liability that the proposed settlement provides Google. Without such a limitation, the Archive would be unable to provide some of these same services due to the uncertain legal issues surrounding orphan books.

"The Archive is one of many Internet content providers that have an interest in opposing the proposed Settlement Agreement because it effectively limits the liability for the identified uses of orphan works of one party alone, Google Inc., and provides for a Books Rights Registry ("BRR"), the interests of which are represented solely by identified rightsholders, to negotiate their exploitation. All other persons, including Internet content providers such as the Archive, would not be able to use orphan works broadly without being exposed to claims to infringement.

To me this is the only point that potentially stands up in these critiques.  An ideal version of this settlement would be identical for Google, but offer the possibility of the same settlement on the same terms for anyone else who wants to go through the effort of scanning stuff.  In some sense, this is a bit unfair, because at the time the start-up costs involved in getting these books out there was not simply the cost of scanning and providing a infrastructure for searching and downloading, but also involved the willingness to take on the large legal risks -- the Internet Archive in asking for the same settlement is asking to be spared this legal cost.  Given that I think this legal cost is partially bullshit anyhow, even if it is a real cost, I would be willing to support extending the terms to other people who want to go into this business.  Doing so makes the non-exclusivity of Google's arrangement even more apparent, and encourages them to provide the best product in order to compete with the philanthropy of the Internet Archive (I'm presuming they will basically give this stuff away, meaning that they can charge 38% less than Google -- they will still have to pay the BRR). 

The head of the Internet Archive makes a few good points:

Kahle and the Internet Archive have been competing against Google for years, receiving a million dollars in funding from the Sloan foundation in 2006 to carry on its open-source efforts in an attempt to create a free platform that would render Google's profit-based model irrelevant.

"Google is so good at the media being their PR machine, that you would not know there was an alternative out there," Kahle said. "We have brand name institutions going open and foundations like the Sloan are funding (us). It shows that the Open Content Alliance is viable, that there is support for public interest. We don't have to privatize the library system."
When it comes to displaying his scans, however, Kahle is Amazon's man all the way: he's a big proponent of the Kindle and he made his money in the first place by writing search software for Amazon.

Kahle's point is not that Google is doing anything unethical or potentially damaging to the current publishing world, only that the Archive ought to be able to do the same thing: namely, scan out-of-print books and give them away without legal liability.

It would be wonderful to promise to let others compete with Google like this.  Of course, changing the settlement in this way definitely takes away any incentive to challenge the lawyer-ly mafia that now rules America, "Okay, let's do it, but you get sued first.  No, you get sued first.  No, it was your idea, you have to take the first suit.  No, really, please, you simply must be sued first".  The incentive it provides is for everybody to ride on everybody else's coat-tails, legally speaking. 

Frankly, if I were Google I would not be super-worried about this competition from the Internet Archive.  These guys are a bunch of fucking amateurs.  More power to them, and I support their proposed modification, but I think Google will de-map them in the long-run.  I mean, they give away plenty of mp3's on the site now, and you don;t see Apple and iTunes shitting themselves with fear quite yet.

Like many, this debate has become strangely twisted by rhetorical or ideological considerations, as a glance further down that fictioncircus site will show.  These comments reveal a complete and total lack of comprehension of what is going on:

I want to know what deal the Internet Archive will offer to rightsholders in order to compete with Google. Kahle wants everything to be free, does this mean that he will strip away even Google's meager profit-sharing deal to authors if he can?

Why can't we turn this into a two-year-long U.S. rights auction where anybody can try to outbid Google for these copyrighted works?

I think Kahle is "a good man," but his plan is essentially the same thing as solving the world's poverty problem by printing more money and then giving it away. For a few hours, everybody will be able to run out and buy food. Everything will be free!

But then the world's economy will collapse completely.

Who would write fiction without getting paid for it? Who would publicize fiction or edit it for free? Will all fiction soon only be slash fiction, fan fiction, and scripts for movies? Will this settlement mean that as soon as a book falls out of print, Google can scan it, and then they own it forever 'till the writer dies?

First, Khale is not "stripping away" any rights from the authors, he is simply asking to be able to compete with Google by giving away their 38% of the settlement. 

Second, why the fuck should we wait another two years for (mostly dead) authors to get a clue so that we can read these books.  They can always sell their work on their own, through the Internet archive or through some other publisher later.  A rights auction would be a fine idea in some ideal theoretical world, but in actual fact is such a complicated, friction-filled undertaking that it would result in Google and everyone else just throwing in the towel right off the bat, and we would never see these books.  Gridlock publishing. 

Third, the vast majority of people who write fiction (and non-fiction) do it for their health and are unlikely in any case to receive much monetary compensation.  I am in fact writing non-fiction, as well as editing it (sometimes) and publishing it for free on a daily basis.  This settlement will make it much much more likely that authors can get some money out of their books because there will now be someone with a distribution platform, and an incentive to monetize even the most obscure texts. 

Finally, the settlement (if you go nuts and actually read the FAQ explaining it before ranting) explicitly states that it only applies to books written prior to 2009.  So, no, Google will not be able to scan a book when it falls out of print.  They will not own the exclusive rights to anything, and in fact, they would probably help this poor bastard a lot given that his book is unlikely to get into print in the first place.  I'm tired of hearing from people who are unwilling to actually think through what's going on here, and just resort to the same knee-jerk "Google is evil and exploiting the poor authors" when they would undoubtedly jerk the opposite knee if you phrased the question in terms of the movies or music they are pirating.

Tuesday, April 21, 2009

Incentives matter

I had a minor epiphany yesterday, which is to say that what I epiphanized was entirely obvious.  We still cling to a belief that somehow this crisis will "teach people a lesson" or something like that -- we still believe that the question is one of moral and ethical failures.  And if we continue to believe this, we continue to be unable to solve the problems of mechanism that led to this crisis.  We continue to imagine that somehow, the same people running the same banks will magically feel chastized and begin behaving in a more upright manner.  This is the very definition of insanity -- repeating an action and expecting a different outcome. 

So no one should be at all surprised to discover that the banks are gaming their earnings:

"Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won't be pretty."

-Steven Roth, professor of management at the Tuck School of Business at Dartmouth College, on Bank of America's earnings fraud

We been discussing how many of the recent profits were not "real" — i.e., based on one time sleights of hands — losing a losing month, AIG flow throughs, bailout monies, etc.

Thus, it is gratifying to see on the front page of the NYT Business section, Andrew Ross Sorkin's article with the provocative but accurate title, Bank Profits Appear Out of Thin Air.

The quote above comes via this same article. It refers to Bank of America's fraudulent earnings scheme of booking a $2.2 billion gain that falsely increases value of the  Merrill Lynch's assets recently acquired. BofA decided to give themselves a phony profit bump by raising the value of Merrill assets to prices significantly higher than Merrill kept them.

The banksters who have emptied the US Treasury of its money continue the same games of accounting sleight of hand, finacial engineering, and other tricks of the trade that helped caudse the mewltdown in the first place.

... to discover that they are gaming the bailout:

The Treasury Department's most ambitious plans to rescue troubled banks — partnerships between the government and private investors, backed by the Federal Reserve — are inherently vulnerable to fraud and should not be started without stronger safeguards, a top government investigator warned in a report to be released Tuesday.

The report also warned that the Treasury's $700 billion Troubled Asset Relief Program has evolved into a $3 trillion effort of "unprecedented scope, scale and complexity" and comes with too little oversight and too little information about what companies are doing with the taxpayer money they are getting.

... and to discover that in general, nothing has changed about the behavior of the principal actors, because the same actors are sitting in the same places with the same incentives.  In fact, the truth is that the incentives to roll the dice have increased dramatically for these guys.  With government assitance they have much less to lose and much more to gain.

Thus, the most dangerous sentiment out there is stuff like this WSJ op-ed:

What's to be done? We must work to establish a "fiduciary society," where manager/agents entrusted with managing other people's money are required -- by federal statute -- to place front and center the interests of the owners they are duty-bound to serve. The focus needs to be on long-term investment (rather than short-term speculation), appropriate due diligence in security selection, and ensuring that corporations are run in the interest of their owners. Manager/agents need to act in a way that reflects their ethical responsibilities to society. Making that happen will be no easy task.

Bogle is good guy, a smart guy, and the head of a very respectable and ethical organization ... and the most dangerous fucking man in America (unless this is Obama, who maybe represents the most perfect incarnation of this problem).  It's wonderful to think that people should be more ethical.  I fully agree.  They should.  However, at this point I think it is delusional to expect this little piece of monkey code to hold our society and economy together.  Monkeys respond to incentives.  This is the deepest and most valid thing that economics can teach us.  Money is not the only incentive, but it is a damn strong one.  Expecting some sort of exaggerated ethical and fiduciary duty to generate the counter-incentive necessary to overcome this is completely insane. 

I'm not saying that we shouldn't consider using the monkey ethical hack as part of our new system.  I'm just saying that somebody has already hacked the hack, so we need to develop some more clever version of it.  I would love for everyone to walk away from this crisis with a lesson I feel like I have learned, a lesson JP morgan summed up so well:

Asked: "Is not commercial credit based primarily upon money or property?"
"No sir," replied Morgan. "The first thing is character."
"Before money or property?"
"Before money or anything else. Money cannot buy it...Because a man I do not trust could not get money from me on all the bonds in Christendom."

While it's lovely to think that one should only go into business with people one trusts, that is not a solution to this crisis unless that trust is backed up by a mechanism, the very simplest version of which has a failure of trust resulting in a loss of capital.

Monday, April 20, 2009

Unless I'm missing something key ...

... this is just more useless hyperventilation over the Google book settlement.  First some relevant (fair use of course) snippets:

In the fall of 2005, the Authors Guild, which then had about 8000 members, and five publishers sued Google for copyright infringement. Google argued that its scanning, indexing, and snippet-providing was a fair and non-infringing use because it promoted wider public access to books and because Google would take out of the Book Search corpus any digitized books whose rights holders objected to their inclusion. Many copyright professionals expected the Authors Guild v. Google case to be the most important fair use case of the 21st century.


Approval of this settlement would establish a new collecting society, the Book Rights Registry (BRR), initially funded by Google with $34.5 million. The BRR will be responsible for allocating $45 million in settlement funds that Google is providing to compensate copyright owners for past uses of their books.

More important is Google's commitment to pay the BRR 63 per cent of the revenues it makes from Book Search that are subject to sharing provisions. The revenue streams will come from ads appearing next to displays of in-copyright books in response to user queries and from individual purchases of and institutional subscriptions to some or all of the books in the corpus. Google and the BRR may also develop new business models over time that will be subject to similar sharing.

One of the main jobs of the BRR will be to distribute the settlement revenues. The money will go, less BRR's costs, to authors and publishers who have registered their copyright claims with BRR. Although the settlement agreement extends only to books published prior to January 5, 2009, BRR is expected to attract authors and publishers of later-published books to participate in the revenue sharing arrangement that Google has negotiated with BRR.

By now, readers may be a bit puzzled. How can Google be getting a license to make millions of in-copyright books available through Book Search just by settling a lawsuit brought by a small fraction of authors and publishers?

and finally, a rather deceptive tidbit (I'll come to this in a moment)

If asked, the authors of orphan books in major research libraries might well prefer for their books to be available under Creative Commons licenses or put in the public domain so that fellow researchers could have greater access to them. The BRR will have an institutional bias against encouraging this or considering what terms of access most authors of books in the corpus would want.
There seem to be a few arguments against the settlement.
  1. Scanning these books for snippet display and search purposes should have been a question of fair use. I would actually agree with this, and this of course was Google's stated original intention.  But then the cold dead hand of the Author's Guild muscled its way in, and there was the predictable legal bamboozleing.   What the article misses is that the fair use trial was only part of, and really a small part of, the question -- one public good is being able to search and cite information, and another is actually providing a way for us to read all of these orphaned works and for their authors to receive some sort of compensation.  Just solving the fair use problem would not have created a market for these books. 
  2. The suit was settled as a class action lawsuit.  I don't really see the beef with this one either.  The whole point is to make these books available.  If you don't settle the whole class at once, then Google cannot make any of these works available, even on snippet or citation basis, because they face the constant threat of death by a thousand suits.  In addition, let's not get carried away with just how coercive the creation of a class is here.  They don't mention it in the op-ed, but authors and publishers can actually still opt out of the settlement until May 5, and even if they don't, the license granted to Google is non-exclusive.  So individual author's (or copyright holders) are really retaining substantial control over their works, and yet we still overcome the gridlock of negotiating with too many owners.  This is why I called the last quote deceptive; authors of orphaned works and reaserch libraries (as well as authors of explicitly claimed works) are free to offer the material under any license they want, including CC, or under no license whatsoever -- they can give it away on their website or print it on T-shirts or tatoo it on their ass if they so fancy, all perfectly legally (in most states).  Note the construction of the sentence quoted -- they don't say that author's can't offer their work for free, which would be a bald-faced lie, they say "if asked" and "might well" and then go on with the non-sequitir of how the BRR will have an "instituional bias" against this sort of arrangment.  Given that both Google and the authors controlling the BRR are for profit entities, I'm sure they will indeed have a bias against giving away their warez, however, the fact that any entreprising author can go into business giving away his own warez makes for still competition, even for a monopoly.
  3. Google will have a de facto monopoly on orphaned works.  This is probably true in a practical sense.  Someone else would have to go out and scan the same books and go through the same legal rigamarole to reproduce the database that Google has already built and try to monetize it.  I reckon it unlikely any company will make this investment.  But it's certainly possible, and eminently legal.  No on is stopping them from doing it.  Just like no one is stopping another company from indexing websites and creating a new search engine.  Yeah, I agree, it's an uphill battle almost doomed to failure, but that's only because Google is already providing a very good product.  Do you want to force them to give away paid search now too?  If internet search is a public service why is anyone going to put any effort into improving it? 
I am as suspicious as anyone of the knee-jerk defense of copyright and patent law that sneaks around under cover of "protecing innovation".  Often "protecting innovation" means protecting the comfy lifestyle of the great grandson of the guy that innovated.  This serves no public good.  But I don't really see that happening here.  Google stuck it's neck way way out on this one.  It spent a ton on scanning and took a shit-load of legal risk and it did something I am enormously happy about on a personal level.  My life will be improved by being able to access these books (if you don't beleive me, check out my rapidly expanding virtual library, much of which is difficult to find in print).  I want to encourage people to take on issues like this.  I don't want to see our society slip into a risk averse coma where we all think like lawyers.  The only way to preserve this innovation is to preserve some incentive for it (certainly the innovation is better here than in financial services).  And the incentive for large scale projects like this one almost has to be monetary.  With making music or wirting books, perhaps we can rely on the more social incentives like getting laid or being the life of the cocktail party (ie. getting laid 15 year later) respectively.  But not with scanning thousands of books or web pages.  If we want these projects to happen we have to allow someone to profit from them, at least insofar as the legitamate competition lets them.  If you take away that incentive, it seems pretty clear that nothing will happen.  Repeatedly.  Here, Google competes with other people who want to scan books as well as authors who have already been scanned.  What more do you want? 

Sunday, April 19, 2009

Minksy Meltdown

On Thursday, I was at the Hyman P. Minsky conference.  Like most conferences it had its ups and downs, which I won't bore you with.  It did however have one moment unusual for such a gathering of policy makers and academics -- the panel titled Assessment of Fed/Treasury Response To Crisis was remarkably blunt, especially given the several Fed presidents and assorted other government functionaries in attendance.  Unusual because these guys basically ripped the Fed/Treasury (remember when these weren't the same thing?) a new asshole. 

William Black (author of The Best Way to Rob a Bank is to Own One) spoke first about how government interventions similar to the current one create a perfect context for the white-collar crime know to criminologist as "control fraud".  I had actually read something by Black before, so I had an idea what he might say; the surprise was that everyone else on the panel agreed.  That doesn't mean everyone else at the conference, and in fact, some woman who arrived halfway through asked me after the presentation whether I though this was what most economists think, which had me chuckling.  I informed her that these guys were pretty far to the fringe, despite being correct (or perhaps because of it -- it is interesting to note that none of the panelists were economists, who seem to cultivate a willful ignorance of the incentive structure of actual institutions).  But it was gratifying not only to see five panelists saying essentially the same thing, but to see Dennis Lockhart, president of the Atlanta Fed, taking notes.

At the same time, I get frustrated by things like this.  Of course we just suffered the bursting of a giant corrupt Ponzi scheme.  You have to be blind not to understand this by now.

But that is not very interesting. 

Panics, bubbles, and Ponzi schemes have been around in various guises since people started handling money.  It is impossible that this is our last one.  The feeling that we have witnessed some rare and historic event is due entirely to quantitative considerations, and very short memories.

It's not even very interesting to try to understand the direct mechanisms that led to this bubble.  They too involve the same ingredients as ever.  Human greed being a constant, only a certain level of complexity, opacity, and surplus capital is required to catalyze a crowd.  Some day Google will formulate an information theoretic version of this law, but until then we can have faith that monkeys with the right incentives will always form crowds and fuel bubbles.

No, I no longer find either the moral outrage of the first revelation, or the structuralist dynamics of the second that fruitful*.  What I find more interesting these days is something deeper and more ... philosophical ... almost.  There will always be scammers and schemers and fine sounding charlatans, and despite the immorality of it all they will always find a way to take our money.  But why is it that we give it to them?  Why is it that after abundant evidence, we still fall prey to the same scams?  And I don't mean simply financial pyramid schemes.  I'm really talking about something much deeper here. 

It is the same question that makes fascism so interesting.  You can say that Hitler enslaved or simply fooled the Germans, or you can say that it was a predictable outcome of the economic circumstances of WWI and the Great Depression.  But none of these explanations are convincing.  Somehow we have to explain why, as Spinoza put it, people fight for their slavery as if it were their freedom.  Why do we again and again follow the same destructive incentives. 

Essentially, we have to explain power, the force that makes all of these mechanisms possible, the condition of possibility of enslavement, as it were.  I don't think we've gone very far towards this, towards understanding why so many people submit so often to such awful conditions.  Power operates alike in the strictest totalitarianism and the most open democracy.  It is not explained by the threat of physical violence or the promise of untold riches.  We know almost nothing about it.

* This is actually an exaggeration; thinking about the phase transitions that occur when a crowd is catalyzed is still a useful idea I think.

Thursday, April 16, 2009

Anybody else want to join

WSJ: "The Guys on the Corner" meet on Sunday afternoons to work out with a trainer in a liquor-store parking lot.

Wednesday, April 15, 2009

¡Viva Fidel, Carajo!

"The flood of the revolution evaporates and leaves behind only the slime of a new bureaucracy. The chains of tormented mankind are made out of red tape." -- Kafka

Tuesday, April 14, 2009

Wolf it down

Martin Wolf has prepared another typically thoughtful column, this one in response to Simon Johnson's incendiary Atlantic article.  Wolf is a characteristically a bit more balanced and a bit less rhetorical:

Yet do these weaknesses make the US into Russia? No. In many emerging economies corruption is egregious and overt. In the US, influence comes as much from a system of beliefs as from lobbying (although the latter was not absent). What was good for Wall Street was deemed good for the world. The result was a bipartisan programme of ill-designed deregulation for the US and, given its influence, the world.

Moreover, the belief that Wall Street needs to be preserved largely as it is now is mainly a consequence of fear. The view that large and complex financial institutions are too big to fail may be wrong. But it is easy to understand why intelligent policymakers shrink from testing it. At the same time, politicians fear a public backlash against large infusions of public capital. So, like Japan, the US is caught between the elite's fear of bankruptcy and the public's loathing of bail-outs. This is a more complex phenomenon than the "quiet coup" Prof Johnson describes.

This is certainly true.  The US as emerging market hypothesis is overly simplistic, even if it does capture something important, and is especially useful as a tool to pierce the delusional egotism of America.  But for all the problems we have, I don't think that it is yet a foregone conclusion that there is no way to tame the financial beast.  What remains to be seen is if we can generate the political mechanism for real reform.  This will only become apparent as the cloud of panic lifts and we see the real economy stabilize to some extent.  For the moment, I remain pretty cynical on this point, but I'm hoping to be proven wrong.

Double Housing Default Swap Dot Com

Felix Salmon points to some underwater activists that remind me of my favorite afro-futurists.

Thornburg Borrowers Unite is a new blog for people with mortgages from now-bankrupt Thornburg. Those mortgages are for sale, at a discount: why can't the homeowners themselves buy them back? "If Thornburg can be persuaded to give its borrowers right of first refusal," goes the argument, "it costs taxpayers nothing, and it prevents third parties from profiting from our losses and the demise of Thornburg."

This suggests an improvement on the idea.  If you buy my toxic mortgage and I buy your toxic mortgage, and we agree to go out and set the accompanying paperwork on fire on the front lawn, neither of us has to go through the hassle of moving.  Plus, given that the legal fees associated with foreclosure are built into the price of toxic securities, we can do even better than simply forgiving each other's loan -- we can get paid like lawyers for the priveledge.

Who knew that the US could turn into Atlantis?

Monday, April 13, 2009

Roach clip

Stephen, that is:

The problem with the apologists is that they failed to appreciate the deeper meaning of these imbalances. The U.S. current account deficit didn't emerge out of thin air. It was the outgrowth of an unprecedented shortfall of domestic saving. Saving itself was depressed by the illusions of an asset- dependent U.S. economy and especially by the willingness of consumers to live well beyond their means by extracting equity from over-valued homes.

In short, America's external imbalance was joined at the hip to the toxic interplay between asset and credit bubbles. Moreover, denial was global in scope. Export-led economies were delighted to draw support from bubble-dependent American consumers. And now, that house of cards has collapsed.

Repeating Mistakes

Unwittingly, the Depression Foil might well end up recreating this madness. With the risk of a depression viewed as completely unacceptable to the global body politic, the full force of the policy arsenal is being aimed at jump-starting aggregate demand -- irrespective of the consequences such results might imply for a new build-up of global imbalances.

Once again, the U.S. is leading the charge. The Fed wants to get credit flowing again to still overextended American consumers, especially in mortgage markets. The Congress wants to stop the bleeding in the housing market -- irrespective of the persistent imbalance between supply and demand. And the White House wants consumers to start spending again -- to avoid the perceived pitfalls of the "paradox of thrift" brought about by too much saving.

Put it together and it all smacks of a dangerous sense of déjà vu: promoting a false recovery by kick-starting overextended, saving-short American consumers to borrow once again by leveraging their major asset.


Pope to Faithful:

I'm crushing your head!

Thursday, April 9, 2009

Property rights

Interfluidity has hit the nail on the head once again -- contracts are not bilateral agreements.

Commenting on Nassim Taleb's provocative agenda for fixing the world, Felix Salmon notes that

Looking at the rest of the list, how on earth do you stop the financial sector from... creating complex products? Derivatives are, at heart, bilateral contracts: how can you ban two consenting adults from entering in to such a contract?

The only bilateral contract is a gentleman's agreement. Binding contracts involve an implicit third party, the state which (through its courts system) stands ready to enforce the terms of private arrangements. The state is not, and cannot be totally neutral in its role as contract enforcer: Communication between contracting parties is always imperfect; the universe presents an infinite array of unforeseeable possibilities; even very clear contractual terms can be illegal, repugnant, or contrary to the public interest. The state makes affirmative decisions about how it will (or will not) enforce the terms of contracts.

This has something to do with derivatives, but even more to do with one of Taleb's broader concerns: debt. At present, the state enforces debt contracts by permitting lenders to force nonperforming borrowers into bankruptcy. That is not a natural or obvious arrangement. Bankruptcy evolved as an improvement over automatic liquidations or men with big necks and brass knuckles.

In fact, there are no natural or obvious arrangements.  There is a social choice about what types of property rights we are going to have.  Up until now, the way this choice has been made has dramatically favored debt rather than equity financing, and has led to the instability we are experiencing.  This is by "design" in the sense that a tree which only germinates during a forest fire would by "design" tend to become more flammable. 

We should consider coining the term Big State to go along with Big Oil, Big Pharma, and Big etc ...  Big State's business model is called emergency; it finds itself strengthened every time there is a crisis a shock or a war.  This is the logic of Big State, and is no more of an accident than the corruption which makes it possible.

Wednesday, April 8, 2009

Number 41

Most people's intellectual life, such as it is, consists of picking up bits of scrap metal they have happened upon in their journey through the junkyard of opinion, and using these as armor to guard the nugget of prejudice that defined their trajectory.

Some day it will be a crime to change your mind.

A tax by any other name ...

... would still smell like shit.

SAN FRANCISCO -- Officials are weighing a proposal to generate as much as $56 million in new revenue by selling, rather than giving away, the city's limited number of taxi permits known as medallions.

Mayor Gavin Newsom is promoting the move as a financial necessity with the city facing a projected $129 million budget shortfall for public transportation. But the proposal has divided the local taxicab industry.

The government almost always follows the same playbook.
  1. Induce artificial scarcity. Claim this is justified because it somehow "protects us from ourselves".
  2. Stand in front of newly created phantom tollbooth bottleneck.
  3. Profit!!
Somehow, we calmly accept this as the necessary situation with cabbies, doctors and lawyers, and in fact, we see the price of the mafia protection these professions enjoy as a sign of their health; it might cost a fortune to go to med school, but that's just because you'll make so much money afterwards, right?  Or this:

"Auctioning medallions would dramatically improve the availability of taxicabs in San Francisco because the better the industry becomes, the more a medallion is worth," Mr. Newsom said in a statement.

I guess if "the industry becomes better" means "SF cab meters set up to actually extract blood from passengers during trip", then, yeah, sure, a steep new license fee would dramatically improve the industry.

I also love how this whole thing is set up to make the victim of the mafia feel like he's doing well; once he's paid his dues, he's thrilled to have the mafia "protect" him.

Drivers who stick with the industry are guaranteed a steady income once they rise to the top of a waiting list for their medallions.

That system "represents the American dream," said Jamshid Khajvandi, an immigrant from Iran who has been driving a San Francisco taxi for 29 years. After getting his medallion, he said, his income increased about $1,700 a month from leasing it out part-time, offering him sufficient income stability to raise three sons.

If we want welfare for this guy, we should just have freaking welfare for this guy.  Fine.  But isn't it sorta stupid to include it in the price of cabs?

Much too cool to ignore

This is an algorithmic demonstration of the non-partisan corruption at the heart of our political system.  If you zoom in on the picture, you will discover that financial firms constitute the exact center of political payola.  Our current system for the production and distribution of credit is perhaps the most centralized form of human social organization of all time, when you take into account both its political and real economic dimensions.

It is important to note that we do not impose the partisan separation or the placement of party outliers apparent in the image. Rather, the algorithm places Red Senators in Blue Territory and Blue Senators in Red Territory because they receive significant sums from industries who typically fund the opposing party. For example, consider Senator Olympia J Snowe (R-ME) who is typically characterized as a moderate Republican.  Since she receives money from more industries that typically fund Democrats than Republicans, she is placed in Blue Territory by the algorithm.

Evolutionary Economics

If I had to sum up where economics has gone wrong, I think the simplest explanation would be that it mistakenly modeled itself on physics instead of biology.  Incorporating a more evolutionary perspective into economics would improve both economics and evolutionary biology; capitalism is an animal behavioral pattern which we have collected extensive quantitative data on. 

Of course, I'm hardly the only one thinking this, as a quick glance at Galbraith's Predator State book Taleb's FT editorial illustrates:

Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the "Nobel" in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

Tuesday, April 7, 2009

Google Book settlement

Normally I am deeply long the slashdot paranoia trade, but lately I've been frustrated by the dependably knee-jerk response to the Google book settlement. There's an unholy alliance of publishers (brought to you by the same Author's Guild who think blind people shouldn't be able to read) and Google monopoly scaremongers (yes, they are taking over the world, unless Dick Cheney gets there first). Now, I'm the first one to get vexed about monopolies, especially ones granted by our dubious judicial system. However, I find comments like this misguided:

Any competitor that wants to get the same legal immunity Google is getting will have to take the same steps Google did: start scanning books without the publishers' and authors' permission, get sued by authors and publishers as a class, and then negotiate a settlement. The problem is that they'll have no guarantee that the authors and publishers will play along. The authors and publishers may like the cozy cartel they've created, and so they may have no particular interest in organizing themselves into a class for the benefit of the new entrant. Moreover, because Google has established the precedent that "search rights" are something that need to be paid for, it's going to be that much harder for competitors to make the (correct, in my view) argument that indexing books is fair use.

Well, so, yeah. In a perfect world, we would reform a lot of intellectual property law, and indexing books would be as fair use as indexing websites. But notice that it wasn't really clear that indexing websites was fair use when it got started either. So the argument made here would apply equally to Google's web search. Google stuck it's neck out. The new book search settlement doesn't grant Google any more exlusivity over scanning books for commercial purposes than it gives them over scanning websites. It's true that the settlement does establish the precedent that search rights for books need to be paid for, which I do agree is silly, and which is different from the way it has panned out on the web. This is simply because there's no web author's guild funded by big publishers that has the resources and threatened business model that would have led to lawsuits. But it does not prevent anyone from competing with Google on a level playing field, and, indeed, with substantially less uncertainty than Google faced when they started -- there is already at least a precedent, even if you would still have to negotiate a settlement.

So I think the settlement is great. It doesn't seem like much of a critique to me to say that in practice nobody could duplicate this result due to a confluence of circumstances. The same could be said for Google search in general. It's absolutely true, but it misses the forest for the trees. The problem is that the index wouldn't exist at all if this settlement was not reached. I think book search will be incredibly valuable to me on a personal level, and I'm glad it's going to exist. I know that somehow I am going to pay for that value. The way to pay the least for that value is to allow for competition between those interested in providing it. This is exactly what the settlement does at the level of the index provider.

Don't blame Google for a bad settlement. They are extracting value from new a service they are providing in full competition. Blame the cold dead hand of the publishers who are attempting to extract value from the already existing production of missing authors. These are two totally different types of monopoly -- one that encourages novel future production and one that tries to fence off an exisintg plot and extract the maximum rent for it.

Those were the days ...

Who does the proofreading at the BBC?

Segway introduced its personal transporter in 2002 and has sold more than 2,000 in the UK.

They are capable of speeds up to 12mph and cost £4,795.

The personal scooters came to international prominence when US President George W Bush fell off one while on holiday in 2003.

Monday, April 6, 2009

Koo's Coup

The blogosphere is unquestionably a bit of an echo chamber, but a new meme does appear to be bouncing around -- the balance sheet recession.  Basically, the idea Koo outlines in that quite accessible presentation is that modern economies have a long duration cycle defined by firms swinging from profit maximization to debt minimization.  Now I see other people picking up this ball and running with it.

Martin Wolf was the first place I saw it.
Keiichirio Kobayashi is one of several Japanese officials to break radio silence, all asserting that the US is not doing enough about it's banks.
Roger Altman has an FT editorial today.
And Paul Krugman has even gotten in on the act.

Policy punting

Macro Man has a nice link to a tinfoil hat research site, an embarrassing chart, and a whole set of policy prescriptions that I mostly agree with.

  • Change the regulation and/or incentive structure of the ratings agencies.
  • Migrate the CDS market to exchanges with position limits and heavy margining.
  • Grant loans and mortgages held on balance sheet more favourable tax treatment than those sold off to a secruity factory.
  • Re-institute some sort of Glass-Steagall split between commerical and investment banking.
  • Create tax incentives for investment banks to function as partnerships rather than as publicly listed companies.
  • Scrap the dollar if you want, but get ready to pay.

Macro Man was right

China's Martingale currency strategy is misguided:

In some sense, it makes financial sense for China to take its financial lumps sooner rater than later. Buying dollars to keep the dollar from falling (against the RMB) allows China to avoid taking losses now, but that implies that China is effectively taking on the risk of a much larger loss in the future. So far, though, China's leaders have always preferred to risk a bigger loss in the future than take a certain loss today – and to defer shifting the basis of China's growth away from exports rather than to force adjustment immediately. Unless those preferences change, China doesn't have much leverage.

In this context I would vote for an extension of Clasewitz's famous formula -- if war is politics by other means, then reserve accumulation is war by other means.  How else are you supposed to challenge American geopolitical dominance besides smuggling this suitcase nuke into the heart of finance?

Friday, April 3, 2009

Quick Maths

So let's start with these simple facts concerning the amount Americans spend on their pets:

Total U.S. Pet Industry Expenditures (billions)

2009                 $45.4 Est.

2008                 $43.2

2007                 $41.2
2006                 $38.5 
2005                 $36.3
2004                 $34.4
2003                 $32.4
2002                 $29.5
2001                 $28.5
1998                 $23
1996                 $21
1994                 $17  

Estimated 2009 Sales within the U.S. Market

For 2009, it estimated that $45.4 billion will be spent on our pets in the U.S.

Food                                                      $17.4 billion 
Supplies/OTC Medicine                           $10.2 billion
Vet Care                                                 $12.2 billion
Live animal purchases                             $2.2 billion
Pet Services: grooming & boarding           $3.4 billion 

Now, take a look at these facts about Argentina, conveiently collected by the CIA:

GDP (official exchange rate): $338.7 billion (2008 est.)

Population: 40,913,584 (July 2009 est.)

Age structure: 0-14 years: 25.6% (male 5,369,477/female 5,122,260)
                     15-64 years: 63.5% (male 12,961,725/female 13,029,265)
                     65 years and over: 10.8% (male 1,819,057/female 2,611,800) (2009 est.)

So, by my quick calculations, the GDP attributable to Argentinian women between the ages of 15 and 64 is approximately $107 billion.  It's probably a bit higher given the maintenance.  Furthermore, according to wikipedia, the population of the Buenos Aires metropolitan area is approximately 13 million, or around 32% of the total.  This means that, roughly speaking, we could maintain the entire porteña population for approximately what it costs us to keep our pets.  This is, of course, not meant to imply a comparison in kind, and merely represents some quick back of the envelope statistics.


I can't even figure out who is the virus and who is the host in this one:

Scammers are using Symantec's name as part of a ploy to lure those panicked by the Conficker worm into buying fake antivirus. Meanwhile, vendors such as IBM are stating the number of infections may be higher than they thought.

Those of you who think that Conficker is a CIA plot that has been outsourced to the Chinese should be ashamed of yourselves.  It's clearly the Canadians who are behind this.


Martin Wolf earns his bananas once again:

The conclusion is straightforward: the ability to navigate through the crisis, using either fiscal or monetary measures effectively and at modest overall cost, depends in both of these cases on the credibility of the authorities' commitment to long-term monetary stability. Neither huge fiscal deficits nor massive monetary expansions are themselves an unmanageable threat, provided the regime itself remains credible. This is crucial even for a country as indispensable to the global economy as the US. For the UK, it is close to a matter of economic life and death.

On a technical level, the breathless Republican hysterics over the deficit are a sham.  Wolf points out in this piece that the UK has been much deeper in debt in the past (of course, care is required here, they used to own the world too) and that there are plenty of other countries deeper in debt in the present.  The US is in an even stronger position as we haven't even come close to the government debt to GDP levels or deficit levels of the 80's yet.  So let's not get carried away with how we can't afford the bailout.

Unfortunately, we really can't afford the bailout from a political perspective.  Confidence in the government is all but used up at this point, and that is the much bigger danger.  This is the lasting legacy of Bush.  His cold dead hand stretches beyond the grave to preemptively prevent any rescue.  Hence my "prediction" -- George W. Bush will bankrupt the United States in 2013.

Toxic Default Swap Dot Com

This is spectacular.  I knew we weren't the only ones to have this sort of idea.

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury's $1,000bn (£680bn) plan to revive the financial system.

Your underwater, I'm underwater, but for a 7% upfront fee we can swap toxic sludge and stick the Treasury with the problem.  Brilliant.

By the way, this is the perfect counter-argument to those who are saying that the Geithner plan subsidy makes no difference.  If the subsidy was fine, then this horse trading should also strike you as fine. 

My new economic prediction is for another couple of years of this smoke and mirrors bullshit, rising unemployment, falling asset values, bigger stimuli, mild deflation, Japanimation -- and then a collapse of the dollar into hyperinflation 3-5 years down the road when both foreigners and Americans cease trust the US government at all. 

Thursday, April 2, 2009

Morality and Mechanism

I had a weird reaction to this Dani Rodrik comment, and I just figured out why.  At first I thought it was the simple bristling that comes along with someone criticizing something you are in agreement with; I read that Simon Johnson piece, and I liked it.  So when I read:

Simon Johnson tells a simple and compelling story: the U.S. has been afflicted by a version of the crony capitalism that has been the scourge of so many emerging markets, except that Wall Street has bought its influence and power not by bribery but by shaping the ideology of our times


As with any story built around clear villains easy solutions, there is something in this account that is quite unsatisfying.  For one thing, I think it puts the blame too narrowly on the bankers. Yes, there can be little doubt that banks badly misjudged the risks they were taking on.  But they were aided in all this by the broader economics and policymaking community--not because the latter thought the policies in question were good for bankers, but because they thought these would be good for the economy.  Simon himself says as much.  So why pick on the bankers? Surely the blame must be spread much more widely.


Simon's account is based on a very simple, and I believe misguided, theory of politics and economics.  It is an odd marriage of populist and technocratic visions.  Countries fail because political elites always end up in bed with economic elites.  The solution, apparently, is to let the technocrats (read the IMF) run your affairs.

I was a bit miffed.  First, umm ... our country did in fact fail largely because the political elites ended up in bed with the economic elites.  There's blame to go around beyond that, and it's certainly not enough to just stop there, without asking why the political system collapsed into the economic system, but there's really no need to spend much time attacking this explanation as incorrect -- it was the proximate cause of the problem.  So Johnson may have oversimplified his diagnosis for the magazine, but I don't see how you can say he was wrong, or even misleading, and I further don't see how Rodrik waving his hands and saying "it's more complicated" helps us think about the problem anymore clearly.  Yeah, sure, in some sense we are all always at fault for everything.  This is not, however, a very useful observation from a policy perspective.  There is always a mechanism by which we are all at fault, a mechanism by which "the broader economic and policymaking community" is also to blame. And this mechanism is the only thing that matters.  Ever.  Morality is an execrable cover up we use when we don't know why someone did something.  It merely serves to obscure the functioning of the machine.  But of course, it's not that hard to ask yourself what mechanism was involved in the broader failure that Rodrik seems so concerned we acknowledge, and, drum-roll please, it was the political elites being in bed with the economic elites.  So, yeah, it's more complicated, it's more abstract, it's about the centralization of power and the remarkable ability of suit wearing monkeys to line up and goosestep towards a brave no paradise of home equity withdrawals ... but it's mostly about the resonance of the political elites being in bed with economic elites. 

Second, the flippant charge that Johnson just wants us to put him and the other technocrats in charge makes sense (and I just leveled essentially the same charge at Galbraith) but I don't think it actually reflects what Johnson said in the Atlantic.  Johnson made a diagnosis, and prescribed a general treatment, which does, it is true, involve the government stepping in.  I would hardly say that this involves the economy being run by technocrats.  Nor would I say that this is Johnson's overall perspective in general; having read his blog a bit for the last few months, I would say that he is as aware as anyone I've encountered that every proposed government solution provides the opportunity for another lever of power that can subsequently (or contemporaneously, as his tunnelling and looting work makes clear) be abused.  Johnson, in short, seems to believe in real free markets, which would of course be the kiss of death for both the political and economic elite, as well as their demonic union.

In preparation for expressing my miffedness in accordance with my characteristic verbal opulence -- ie. before I posted a comment -- I actually read some of the comments and Rodrik's response to a previous critique related to my own (sadly lacking the aforesaid opulence, but cleverly sycophantic in tone, a skill unpracticed by your humble blogger)

The conundrum in which the practitioners of "modern political economy" find themselves is the following: either you say that policy is determined by the interests of the politically powerful (here, banks), in which case you are left with no way out (banks will remain powerful and veto any meaningful reform). Or, you accept some autonomous role for the intellectuals and policy makers to make a difference, in which case, you can hardly attribute all the blame for the mess on the special interests.

Failure to account for the fact that both forces are at play simultaneously results in the kind of attitudes I was objecting to: holier-than-thou moralism about the insidious effect of the banks (as if economists weren't equally complicit); preference for technocratic solutions (as if the IMF wasn't equally under the influence of Wall Street and the U.S. Treasury); and over-confidence on the technocratic policy recommendations of the moment (as if we had not been equally confident on the previous set of policies that brought us here).

This, I think, is a valid point.  It's almost a rephrasing of what I was saying above though.  You never understand these cases of corruption if you stick with an "us versus them" attitude and lament the exploitation of the poor masses by the elites.  The elites always need a mechanism to enforce this corruption, and the populace always has to go along with it.  Once you realize that people have always had to cooperate in their own exploitation, the conundrum Rodrik sees here dissolves.  Of course the intellectuals and policy makers have an autonomous impact and of course all the blame (in some deeper sense) cannot lie with special interests.  How could it?  How could Bush involve us in Iraq or Guantanamo without our cooperation as a  nation, without some mechanism for pushing forward with what many of us loudly proclaimed was a clearly dangerous and corrupt war.  How could Hitler have marched the Germans off to their grand orgy of collective suicidal homicide without a mechanism for centralizing power?  You can't say that the elites were responsible, you can't claim that the population was simply deceived, and you can't claim that they were any more foolish or more evil than any other group of people.  No, I think we all get the government we deserve, and we all deserve the government we let accrete around us. 

However,  just because blame is a diffuse and complex concept doesn't mean that there isn't a precise and useful way to state what the cause of the problem was.  And Johnson pinpointed what the cause of the problem is, in some important proximate sense that leads to specific recommendations for action.  And so this then bring me finally back to my original epiphany.  What bothered me was the original use of the phrase "morality tale". 

Because I agree with Rodrik that morality tales are useless.  Economists have regularly, and often correctly in my opinion, critiqued those demanding blood from the bankers, the return to old time values, and the liquidation of stocks, labor, etc ...  as moralistic solutions to what is fundamentally a technical problem.  The preeminent question is not one of fairness in the short term, but of minimizing the suffering that comes with a depression.  Retribution be damned, if the only way to keep people in China from starving is to give Ken Lewis gold plated teeth, then by all means, let's get smelting.  The question is never ever ever one of morality.  It's always a question of mechanism. 

Clearly, the concept of morality is part of monkey mechanism in all kinds of ways.  Accordingly, many who have been accused of spinning a morality tale -- like the Austrian economist and their hangover theories, or Buiter's dogged hammering on the question of moral hazard -- have been falsely accused.  Monkey mechanism can often involve "immoral" free-riding behavior that looks only at the short term, and sabotages our mechanisms of cooperation in the long term (this latter is maybe even the proper definition of immoral).  Conversely, monkey mechanism for getting through a crisis in the short term can involve a rhetorical appeal to monkey morality that dresses up a technical fix in morally acceptable terms.  So it's not that morality is irrelevant, but just that invoking it almost always serves to obscure the actually operating machines.  Getting at the mechanism is the only thing that counts.

Anyhow, my deep seated belief that morality tales are useless, coupled with my agreement that the proximate cause of the crisis were corrupt political and economic elites, caused a short-circuit when I read the first line of the Rodrik thing.  I have tracked down the frisson now, and aren't you glad you could participate?

Incidentally, I simply don't agree at all the Johnson proposed a morality tale on this definition.  He isolated a mechanism, and even proposed a mechanistic solution to the problem -- in fact, the very one I myself generally favor. 

DECENTRALIZATION.  Nothing in today's world is as dangerously centralized as the US government's credit system.  These guys make the pharaohs look like anarchists.


Wednesday, April 1, 2009

Banana Republicanism

This ad runs as a half-page spread every morning in the Wall Street Journal print edition. It never ceases to amuse. Not only did these guys literally invent the idea of a deliberately biased media outlet, but then they actually brought into being MSNBC as a reaction to their over-reaction-ary politics, a rather ingenious feat of self-fulfilling marketing. On top of that I love the graphic -- fucking double-america on acid, motherfucker! yeah! who would jesus shoot!?

Piquant Pequot

Byron Wien is nobody's fool.

The thought of the government running the major lending institutions, making them susceptible to political influence, seems like a nightmare to me.

My nightmare is the thought of the major lending institutions running the government, but at this point, it's unclear there's any difference between these.

The letter is hardly a revelation, but it's worth a quick read if your following the market.

Dear Sweet Baby Jesus

Has everybody gone crazy? Perhaps mama Merkel can use the G-20 as a way to give us a detailed description of the nether reaches of her colon, which she most certainly has a fine, unimpeded view of:

In last week's FT interview with Angela Merkel, the German chancellor said that: "The German economy is very reliant on exports, and this is not something you can change in two years." Moreover, "It is not something we even want to change." To paraphrase: "The rest of the world needs to find a way of absorbing our excess supply, but sustainably, please." Yet what happens if that cannot be achieved for the excess potential supply of all surplus countries together? In 2007, the three countries ran current account surpluses of $835bn (€629bn, £585bn). Logically, counterpart deficit countries must spend that much more than their incomes. Yet today deficit countries have run out of willing and creditworthy private borrowers.

There's so many different ways to go about tackling the problems that have lead to this crisis, but all of them involve admitting that there are problems. Unfortunately, every democracy is broken in the same fundamental way, with only minor and relatively cosmetic differences, so there is actually no possible way to adequately reform the financial system because it would involve reforming the entire corrupt edifice of democracy. So meanwhile, we should expect another patch-up job, which will last until people simply stop trusting their government completely, and first the US and then everybody else sinks into default and paper money becomes meaningless

The world economy cannot be safely balanced by encouraging a relatively small number of countries to spend themselves into bankruptcy.

Luckily, I think that the adrenaline rush of staring at a global depression might be enough for them to patch things up for at least several years, which gives us all a chance to seek fertile soil and sources of fresh water.

UPDATE: Gillian Tett says similar things in today's FT.