Wednesday, June 30, 2010

Volcker Rulz

So, anyone who can help me out with this one earns my undying loyalty.  I'm trying to figure out if this Volcker Rule thing will make any difference at all to the big banks.

Now, you remember the Volcker rule, right?  Tall Paul said that we shouldn't let the shadow banking system gamble with the house's money -- in other words if you are a bank with access to the Fed's discount window, effectively a state guaranteed bank (which we already know is broader category than a deposit taking institution), you would not be able to engage in proprietary trading.  Sounded pretty smart to me.  The devil is of course in the details.  How do you define proprietary trading and distinguish it from market making?  I didn't see this problem as insurmountable, just something requiring definition.  In fact, I imagined that if you pushed most of the stuff that the banks want to claim they are just "making markets in" onto exchanges, this would nigh unto solve itself.

But one of the things that seemed would be obviously off limits was explicitly sponsoring an in-house hedge fund.  I mean, if Goldman puts up their own LP capital alongside the LP capital of other investors, and then goes out and leverages this up and tries to make a fortune trading some reverse-credit-default-swap-strangle strategy that only a former string theorist could love ... well this would appear to be obviously against the rules.  After all, that's state guaranteed capital they're playing with.  Nobody believes that if this fund blows up and threatens to sink GS as a whole, the Fed would hesitate in coming to the rescue. 

The whole point of the Volcker rule was to eliminate these "heads I win, tails you lose" bets.  The banks screamed bloody murder of course, and when they first proposed it, I was convinced that there was no way they would ever enact any reform this strong.  That was before Congress decided they had to look tough on the banks though, and I was anyways naive in thinking that the banks would oppose the idea completely rather than just rewriting the details so that it appeared as if there was some reform despite business continuing as usual.  The back door solution makes everyone happy.  Banks keep trading and congress keeps its pockets lined, all the while being able to put on a populist face. 

And that's exactly what the banks did.  Instead of not being able to sponsor in-house funds at all, they now have to whittle down the equity they put up until it is only 3% ... of total ... capital, by ... 2022 ... at the ... latest?  Wait.  Does anyone else think that maybe this is "reform" designed exclusively for the midterm elections?  And anyway, just how much whittling is there to be done here.  I mean, how much of their capital was in these in-house funds to begin with?  Such numbers are a little vague, and hard to come by, but the estimates I've seen peg it at less than 10% of capital for most of the big banks, and maybe slightly more than that in the case of Goldman.  So reducing it to 3% does something I guess, but hardly seems like some revolutionary reform to me.

But then this brings up a whole nother question.  Why did Goldman sponsor these funds to begin with?  If these are such money making machines, why did they only put 10% of their capital into them?  When you start to think about this more, you see that the equity in these funds is really beside the point.  Sponsoring these funds is really Goldman selling the equivalent of subprime to the other LPs.  They don't even really want to put up their own money.  They only do this to convince the other LPs, who are endowments and wealthy families and pension funds and the like, that they have "skin in the game" so that they can raise funds.  These LPs are not typically the sharpest tools in the shed, because I can tell you from personal experience that it's really quite obvious that these things are the dog food of the fund world and you wouldn't want to go near something so riddled with conflicts of interest.  The real purpose of the fund is not to make money, but, as so often in finance, to take management fees on someone else's money. 

When Goldman sponsors one of these funds, it will own a chunk of, if not all of, the GP, who is charging 2% of the assets under management, and taking 20% of any profits.  From their perspective, the less capital they have to put up, the better; if the other LPs only want them to invest 3%, then in 1.5 years they have made back all of their initial investment in fees.  Now, even if the fund blows up and the LPs get zero, Goldman has come out ahead. 

But wait, there's more (if you're a vampire squid).  On top of the management and incentive fees, it's pretty obvious that Goldman's fund will trade through ... Goldman.  And given that most of the money in this in-house sponsored fund is in fact coming from outside Goldman, this prime brokerage type relationship is likely to be, ahem, under-negotiated.  To top that off, Goldman is famous for front-running it's clients trades and taking a little extra off the top, and trust me, they don't have an in-house fund where other LPs can invest in this part of the business (that's what GS stock is, essentially).  One would have thought that Volcker really meant curtailing this type of proprietary trading that masquerades as "market making" for "third party" clients.  This is not 3% or even 10% of Goldman's business -- it's more like 70%.

But wait, there's even more!  Because undoubtedly, this fund is going to want some leverage to generate the first couple years of really juicy returns that attract LPs like moths to flame.  Luckily, they have abundant access to leverage because they have a great relationship with their prime broker, who in turn has a great relationship with the Fed and Treasury!    We don't seem to have done anything about this problem, which falls outside the Volcker rule completely -- it's entirely possible that the bulk of the capital in the fund is actually debt, and not equity, and this rule doesn't say anything about how much you can lend to the fund.  Some of you may recall a little operation called Long Term Capital Management.  Goldman and other banks invested a little of their money in the name of "optics", stroked the egos of some Nobel prize winners, went out and convinced a bunch of other LPs to invest with these geniuses, and then fronted them 100-to-1 leverage.  When the fund blew up, they were forced to bail it out, and the Fed was in turn forced to bail them out (recall that the bubble supercycle was not coincidentally kicked into overdrive at about this time of the asian/russian crisis -- 1998).  When times are good this leverage is a normal banking spread business which contributes nicely to the bottom line.  And when times are bad ... well that's what the Fed is for.  This isn't proprietary trading, it's just too big to fail shadow banking, but it has the exact same effect, systemically speaking. 

So now, you tell me, is Goldman upset that they are forced to reduce their investment in this fund?  As long as they can continue to convince the other LPs to pony up, it seems to me that they should be very happy indeed.  In fact, it reminds me of a great joke I recently heard:

So there are these two beggars in Mexico with a bowl in front of each of them... one has a cross in front of his bowl, and the other a star of david.

Anyhow, people walk by and put money into the bowl with the cross.  The bowl begins to collect a lot of money... No one puts any money into the bowl with the star of david.

Finally, a nice man comes by and explains to the beggar that "Mexico is a Catholic country, no one is going to give money to a Jewish beggar."  He goes on to tell him that, "In fact, people are pretty religious here and they might even give more money to the guy sitting next to you just to prove a point and spite you, what do you think of that?"

One beggar turns to the other and says, "Morris, looks who is trying to teach marketing to the Goldberg brothers!"

Sunday, June 27, 2010

The Poetics of Space

I recently discovered Gaston Bachelard's The Poetics of Space.   Such an absolute delight to find a book filled with so many little twists of insight that curl up from the page and make you dream of the shapes of smoke.  It's really a gem and I highly recommend it.

There's not much point in my trying to summarize the argument; despite how lucid Bachelard's philosophy is (the book really makes you want to read the bulk of his work in the philosophy of science) there really isn't one.  Suffice it to say that it's about how we experience spaces in general, and particularly intimate places -- about how we connect with space, as it were.  If there is something like a thesis, it would be that humans don't experience the world "as it is" but as it intertwines with a whole set of daydreamed images that run alongside it.  This might give you a clue as to what philosophical school you could slot him into, if you're into that sort of thing -- he considers himself a phenomenologist, something which I side with the late great Leszek Kolakowski in not knowing what the hell it's supposed to mean exactly.  But don't write him off just because you think you're a hard core Heideggerean or something.  The book is light on theory and heavy on poetic examples.

In fact, Bachelard mostly just uses the term phenomenology in order to distinguish himself from a psychologist or psychoanalyst, and not to align himself with a philosophical school  The key difference lies in how you approach the life of an image.  Psychologists and psychoanalysts try to explain an image by relating it to another image, and from there, back to the psychology or life or childhood or even cultural history, of the imaginer.  In other words, they try to explain the cause of the image, and hence to reduce it to a mere effect of something supposedly more real and fundamental.  They center their view on humanity as the creator of images, deny the reality of the image itself, and explain away the flower in the fertilizer.

Bachelard doesn't really disagree that this is one way to look at things (he did start off as a physicist after all), but he goes on to take seriously the being of images in themselves.  Words and images are things too, and they have a life of their own.  Maybe, like the Jewish mystics imagine, the white spaces are just as important as the black letters, and we humans are just the bees that keep the flowers blooming (unless we're the fertilizer). 

This actually brings up one of the ideas that most resonated me in this book, albeit through the metaphysical backdoor.  And that is: read generously!  People (myself very often included) are terrible readers.  Yes, I mean rushed and ADD and made stupid by the internet, though this type of reading may have some place for us worker bees.  But more than that, I mean that we so often read and think with some angle in mind.  We come to a text with so many preconceptions that we have to fight through layers and layers of dismissal before we can even hear it.  We find it so difficult to change our minds, to listen to new arguments or new facts and decide that perhaps we see it differently now.  Fearful even of the possibility, we show up spoiling for a fight.  We immediately fill ourselves with feigned outrage and petty critique before we even try to understand why someone might make that argument and what it might mean, regardless of whether we agree or not.  When I am reading well, I open up every book hoping to find a brand new treasure, and listen to every argument with the idea that there is some new side I have not weighed in the balance.  Which is probably why I contradict myself so much.

Bachelard critiques a similar type of haste in our approach to poetry.  We breeze through the mounting construction of an image without ever really living it.  It's only when we go slowly enough to genuinely feel the image, to really experience it, that we actually bring it into being.  This requires us to read slowly and generously, bending our mind into the shape asked by another until we recreate the same magic that they felt in putting it on paper.  It also requires us, as philosophers, to read reality generously, so to speak.  We have to explore the reality of an image in all its obvious power to move us, rather than reducing it to confusion and mere metaphor.  We have to suspend our desire to get to the bottom of things and grant reality to everything with an effect, no matter how superficial an image may seem at first.

But what exactly is an image?  How does it come into being and propagate?  Bachelard doesn't try to come up with a full theory of this, though his introduction does sketch out some interesting ideas about the image as the cutting edge of being or the place where life and being overflow themselves. Almost paradoxically, he calls this absolute creation of novelty a kind of reverberation, because the image comes into being and is lived anew each time it is truly experienced.  You are following the bouncing ball if you realize that this creates strange questions about the meaning of concepts like "cause" and "identity". 

The real beauty of the book, however, is in the wealth of images Bachelard waxes rhapsodic about.  It's a grand tour of French poetry in little snippets, with a commentator who draws out all kinds of interesting currents that run beneath.  Which is to say that I think it's well worth reading even if you have no special interest in philosophy  He begins with the images of shelter and solitude that constitute the basis of the house -- a lone lamp in the distance protectively enveloping the dreamer within.  Then he moves on to houses that open to the world; we don't close ourselves up in huts but open our windows to the universe.  And once he has covered the house as whole he goes back to examine the images we associate with all the tiny parts in several chapters on drawers, wardrobes, nests, shells, and corners.  Then gradually, towards the end, he works his way back around to more metaphysical speculation by examining the Alice In Wonderland quality of our relationship to miniatures and the strange way they open into immensity -- an apple becomes a model of the solar system.  And finally, we end with a long chapter on the dialectics of inside and outside and the brilliant observation that anything that marries these two opposites, fusing diversity into unity, seems somehow pleasingly round, even if it is a tree.  In fact, maybe Being is Round.  It's sure sounds fun to say.  Maybe after a few drinks you can even feel it.

One day it will see God
And so, to be sure,
It develops its being in roundness
And holds out ripe arms to Him.

Tree that perhaps
Thinks innerly
Tree that dominates self
Slowly giving itself
The form that eliminates
Hazards of wind!

Friday, June 25, 2010

I don't believe in imaginary property

Okay.  That's an exaggeration.  But I certainly don't believe that companies should be allowed to choose to live off it in the lean times by extorting money from newer, smaller competition.  As Milton Friedman put it, not giving people the option to go back and decide to suck the the life out of their old patents is a "no-brainer".  Which is what makes something like Kodak's "strategy" distressing.

In commercial printing, Mr. Perez has high hopes for a fast digital printer introduced in the first quarter called Prosper Press, aimed at publishers and catalog makers. Mr. Perez says more than 100 companies have requested the Prosper Press but so far Kodak's only shipped four of them because of manufacturing complexities. The commercial printers cost $1.4 million to $4 million each.

He says Kodak so far is incapable of making more than "a few dozen" this year. "We're desperately trying to get the technology under control so we can expand," he says.

While he has worked to build these new businesses, patent payments have provided a cash cushion for the company. In 2008, he set a goal to generate between $250 million and $350 million on average each year in intellectual property licensing—mainly its digital imaging patents—through 2011. He later extended the target for that goal to 2012 but had disclosed little on his plans afterward.

In the past year, Kodak settled lawsuits with Samsung Electronics Co. and LG Electronics Inc. receiving lump sums of $550 million and $400 million respectively. In January, it filed lawsuits against Apple Inc. and Research in Motion Ltd. alleging their smart phones infringe Kodak's digital-imaging patents. Analysts say it may be difficult for Kodak to match its earlier success in the latest patent fights.

But Mr. Perez says he'll wean Kodak off the patent fights once the commercial and consumer printer businesses are profitable. "We'll find more value getting into business relationships that generate revenue working with some other partner rather than asking for cash," he says.

So your strategy for not having a strategy is to paper it over by legally shaking down smarter competitors till you (maybe) get back on your feet?  This is why we have patents?

Do we really think a system in which competition increasingly occurs in front of judges and behind closed congressional doors, instead of in the marketplace for products and ideas, is a system that will produce gains for everyone?  These games are zero-sum.  If we play more and more of them, that's exactly what we'll get.

Tuesday, June 22, 2010

Tarde just in time

I'm going to take another crack at this.  Every time I've tried to articulate my theory that the stock market is a machine for ever more closely approximating total randomness, I have fallen short of capturing what I mean by this. 

This time though, I've got a running start.  I'm in the middle of one of the recent Prickly Paradigm Press pamphlets -- Bruno Latour's introduction to the economic theories of Gabriel Tarde: The Science of Pasionate Interests.  I love these little pamphlets.  This one covers some late writings of the brilliant but long forgotten turn of century French sociologist.  Tarde got briefly famous for writing The Laws of Imitation, which turns out to be one the first versions of the theory of mimetics, and he went on to turn the "society as organism" metaphor inside out and the push it into new territory before he was unceremoniously run out of academic favor by Emile Durkheim.  100 years later Durkheim looks like a bond company stooge, and the upper hand, to my mind at least, is on the other foot ... intellectually speaking.  So while he's impossible to find in English, Tarde is worth tracking down if you read French, or even Spanish, and he sounds bizarrely modern to my ears.

Enough background though; vamos al grano.  Tarde's pamphlet contends that economics is not a real science.  Yeah, I know, yawn.  File under overpaid underworked Marxist professorial twit and move on.  But wait, what's interesting about Tarde is why he feels that economics falls short of being a science.  Unlike what you would expect, Tarde is upset that economics is not quantitative enough.  He doesn't complain about how it reduces all of human values to merely monetary calculations and thus fails to take into account the unmeasurable qualities of the human heart.  No, he wants to measure everything.  And in 1902 no less.  He thinks that all value is measurable, it's just not all (directly) measurable in money.  Money is really just a poor indirect proxy for value.  It's like trying to diagnose an illness exclusively by taking someone's temperature.  So to construct a decent theory of production and consumption we need more direct measures of the things that influence these, and cannot just settle for looking at the price and inferring everything else according to some pitiful black box type theory of how individuals operate.  We need to measure how individuals and institutions actually operate, you know, empirically, like we were, um, scientists.  He shoulda worked for Google.

The argument runs something like this.  Science is supposed to be quantitative and empirical investigation.  You take a system and you try to figure out how to measure something about it in a way that allows you to 1) predict the future values of this measurement and 2) have the measurement be useful for something you want to do.  Some scientist types might disagree with (2).  They may claim that true science shouldn't be concerned with practical and useful questions.  They may defend "pure" science.  What they have in mind though is really a political, rather than a philosophical objection.   There is no such thing as "pure" science, because there is no obvious measurement.  When you approach a new system, it's not at all clear what you should be looking at, what you should be measuring.  Maybe you should be measuring how fast the ball you dropped is going when it hits the ground.  Maybe you should be counting how much wind it produces.  Maybe you should care what shape it is.  Maybe you should ask how much heat you can get out of this ball dropping gig.  There's a  million things you can measure.  Some will be fruitful and multiply, and others will be dead ends.  Science progresses like that.  It invents new things to measure and new theories that these quantities would correspond to.  And it invents them, always, according to the two conditions I mentioned. 

If this sounds like a critique of science, you're right in a sense.  The idea that science is Objective and Universal strikes me as ludicrous.  Bunch'a apes running around with slide rules, congratulating themselves on not creating a black hole?  You call that Objective? This stuff is as contingent as it gets.  Which doesn't make it any less objective and real in a simpler sense of course.  Drop shit and it falls.  Regardless of your political position.  I'm not trying to suggest that science is wrong or completely arbitrary, just that it is partial and always fragmentary.  It is an animal behavior pattern.  What else would you expect?

Yes, I aware this could be a long discussion.

Anyhow, enough philosophy of science.  Tarde argues that economists chose the wrong thing to measure.  Or at least, they chose to place too exclusive a value on the one variable they decided to measure.  They did because they based their choice on faulty analogies with physics and chemistry.  Again, it's important to understand that he's not saying that human behavior is inherently less quantifiable than the behavior of balls and atoms.  His point is that physicists chose to measure simple thing about balls, like their mass and position because they could not get inside them to see how these machines actually worked. As these sciences have progressed and their tools for looking inside smaller and smaller balls improved, they discovered a completely different set of forces operating on the inside.  In other words they started off by measuring what they could get their hands on.

Economics, imitating physics, pretended it was on the outside of its object, even though we are all in fact right in the middle of the economy.  The system economics wants to study is so big that it's all around us.  You don't need a microscope to see exchanges of value taking place.  You don't need a particle accelerator to break the economy apart and see how it ticks.  We already have a particle accelerator for the social.  It's called the internet.  We live inside this explosion of data that measures the system at the micro level.  Why not use all this data to create a science of economics which would then be dramatically more empirical and quantifiable and less dogmatic?  Why settle for pretending that humans are nice tractable little black box utility maximizing agents when that doesn't convince anyone?

Tarde's point is that the real economy is filled with real people and that -- unlike what happens in a proton -- we know all kinda of things about what real people want and how they interact.  We can measure these things in clicks or surveys or traffic patterns or church attendance or whatever.  All we have to do is look around. 

Now that I'm so off topic that you quit reading ages ago, I feel like I should back up a bit and bring in the central thesis of  the other Tarde I have read.  It will give us a good analogy for thinking about this stuff. 

The basic idea of Monadology and Sociology is that everything is a society.  I'm still partial to Deleuze and Guattarri's formulation of this as, "politics precedes being", but whatever.  Everything is a society because everything is composed of interacting parts, all the way down to Leibniz's monads, which are less the tiniest subjects than just raw sparks of belief and desire (hence the two parts of the title).  Ignoring the indivisible unity of the monad question for the moment, this thinking makes sociology the queen of the sciences, a startling reversal of the usual way of looking at things.  If everything is a society, then sociology is the study of things.  And one of the images that Tarde goes back to repeatedly in that book is of a brain so large that we could walk around inside of it and observe the society of neurons, as it were, with the naked eye.  If we could do that, we could start to understand the brain as a society, and, running the analogy backwards, to understand society as a sort of brain, or at least a sort of organism. 

You can see how this fits perfectly with his ideas about economics.  Economics, or "psychological economics"  as Tarde later book is entitled, should be the study of the societal brain from the inside.  We walk through the organism we wish to study everyday.  We observe at first hand how the parts of it function.  We only lack the ability to integrate all of our observations into a coherent whole.  That quantitative integration is the science we want to build.

We can keep using the brain analogy to illustrate why just keeping track of money will be insufficient to study the economy.  If you studying a brain, it surely might be useful to know what parts are active at what time.  And you might measure this by blood flow and take pictures of it with an fMRI machine.  But you can't tell me that even the fanciest theory of of predicting the hue of a bunch of red, blue , and green pixels on a map of the brain is really going to fully explain how the system works.  You're going to need to measure all sorts of other things too.  "Activity" is fine, and so is money, but these are tremendously crude measures of the inner workings of value, or information processing.  The economy is like a brain is like a society is like an ecosystem-- and it's a jungle out there.   We lack the science that would enable us to understand systems like this, because the sciences we have all started very very far outside their objects, at a distance where the complexity was impossible to see.  What we need are new measures of all different kinda of things.  We need to measure more than just money, or activity.  We need to get in there and drop some mushrooms and do some electrophysiology.


We actually have a great data set that simultaneously measures all kinds of things about the economy, but economists have traditionally ignored it almost completely.  The market (a misnomer really, as what we have is a set of numbers rather than a unified anything, a fact which dark pools and algorithmic trading is making increasingly obvious) is connected to everything.  It measures everything.  It is indirect squared though.  No number in the market measures any one thing in particular.  All the wires are crossed and everything is jumbled together.  But each number measures a little bit of everything.  Taken together, these numbers are the best data repository we have so far.  It's all in there, somewhere.  Economics in the usual sense, but also psychology, culture, politics, technology, everything.  And it's all perfectly quantitative.  Little numbers, little meters, moving up and down all the time.

There's a book I haven't read, but which sounds interesting (though is reportedly awful, unfortunately) called Investing: The Last Liberal Art.  The idea being that investing is the last refuge of the renaissance man who needs to know a little bit about everything.  But maybe it should be titled "Investing: The First Social Science".  Investing is, after all, the art, or science, take your pick, of predicting these little numbers.  They, in turn, incorporate the whole world, though in a giant jumble (which incidentally is what makes the big casino so much fun)*

Incorporate and reflect it, and of course feed back into it as well.  Which is naturally where your real nasty randomness gets started.  If blowing the the system up to "life-size" proportions helps to measure it easily from the inside, it also means that we are, um, inside the system.  New meters will build are also part of the system, and act on the system, which is how is grows and incorporates ever new vistas of measurement. 

Consider, for example, the "Flash crash" we had a few weeks back.  For a second there, the little numbers went berserk.  P&G spent 7 seconds trading at a nickel.  The weather vane was caught in a hurricane of its own making.  Think how much richer our data set got though.  That was a beautiful way to incorporate the latency of servers, the new programming languages, the growing importance of our computational infrastructure.  It's in the record now.  As is the regulatory response that precisely measures our desire to control the range and time scale of change.  All in the form of numbers, if only we knew how to read them.  Someday we will improve at this.  Though by then the machine will have moved on.  It has to if it is going to continue to incorporate everything.  If has to if it is going to be the increasingly rich raw data for our science of human desire, if it is going to incorporate and perform wider and wilder variations, to support the proliferating diversity of value.  Like the universe, it has to get more and more random every day, just to keep up with us.

I don't know whether I did my original thought justice this time either.  In the hopes that it helps summarize, I leave you with a quote from Freeman Dyson's Infinite in All Directions.

As a working hypothesis to explain the riddle of our existence, I propose that our universe is the most interesting of all possible universes, and our fate as human beings is to make it so.

I Pangloss on acid.

* I'm not claiming to have a science of the markets.  I do, however, know about some swampland in Florida ...

Monday, June 21, 2010


Money is like a tree falling in a forest; if it doesn't make some noise, it might as well not exist. 

Naturally, I take this to be an almost metaphysical statement about how movement is actually more fundamental than the thing moving (if this sounds silly, think for a second about the surf).  But for the moment I'm just thinking of the more prosaic aspect of it -- there's no inflation, and paying down government debt is going to kill the economy unless someone else wants to invest those funds.  All of these debates at bottom boil down to people thinking of money as a thing --  a brick of gold, a herd of cattle, a docile wife or extra zeroes next to your name -- rather than as a process.  Money only becomes a thing when it moves, when it circulates through the economy.  This is why Krugman and others fear that our new found faith in austerity will mean that we cannot grow no matter how much money the Fed prints up, and if we aren't growing, then there can be, to mix my metaphors, no match to light the fire to the Fed's powder keg and cause inflation

So today you escape a lecture about Whitehead.  Because we've got plenty of time (at least by financial market standards) before this bomb goes off and the waves roll in over our little fiscal atoll.

Saturday, June 19, 2010

I feel sure they got this sign backwards

But it could be that I'm getting cynical in my old age as well.

Thursday, June 17, 2010

Not subtle

I'm not even in the mood to bother with the subtleties of this stuff right now (Argentina's playing in a few minutes) so let me just lay it out quick.

More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.

What exactly is the definition of "unprofitable" here?  Because I thought banks borrowed money from me at low rates and then lent it out at higher rates.  And given that a checking account ain't worth a warm pitcher of spit, in terms of the rate the banks pays to borrow from me, I would think that they could at least keep my name next to a number in some database and maintain a website and still manage to make a spread on lending the stuff out again. 

Now, if it really costs $300 a year to maintain a checking account, and the average account has $1,000, then this clearly isn't going to work.  About the only place to make a 30% interest rate loan is India, and that will be for $7 at a time.  However, I'm wildly skeptical of this figure.  Some quick estimates suggest that Fiserv (one of the largest outsourced processors of these accounts) charges around $50 per account, and that's going to be a package deal including debit processing, etc ...  (Incidentally, this suggests that the WSJ is once again essentially a corporate marketing vehicle and not a news organization, a shift which the informed investor can potentially profit from).  I'm having trouble finding the average checking account balance, but BOA does disclose the average interest spread, which was 4% last year.  So we might guess that a $1,000 checking account is about break even for a bank, which makes sense given that the article cites this as the pain point.  Even that seems a bit expensive to me, given that maintaining a checking account should cost about $0.05 more than maintaining a gmail account at this point, and somehow Google manages to give this away to 150 million people all over the world. 

But I feel sure that the median US checking account has a balance substantially in excess of  $1,000.  Which means that the bank isn't running this whole system at a loss, and that this is really question, once again, of financial extortion.  That is what you should hear every time you read something like, "banks must replace lost revenue by raising fees".  Sometimes, you don't get to replace lost revenue.  Especially if your whole goddamn industry should shrink.  Somewhere along the way people keep forgetting that the success of any financial reform can be judged by how much smaller we make finance.  There's really very little way to finesse this issue.  Finance is an intermediary that grew to enormous proportions.  At the peak it was close to 40% of all corporate profits in America.  This just can't continue.  We can argue about which part of the industry needs to shrink.  Maybe it's trading and derivatives and not checking account fees.  But some revenue has to get lost and NOT get replaced -- getting smaller is how shrinking happens.

Friday, June 11, 2010

Reflex Action

I don't know much of anything about Andy Kessler, but he's got an op ed in today's journal that perfectly illustrates why I find the part of the right wing I reckon I'm supposed to agree with so goddamn frustrating. 

He frames a debate over internet regulation by first talking about how AT&T's new monopoly over the iPhone and their recent move to charge by the GB is is going to stifle the growth of the mobile internet in the same way that AT&T's old monopoly over the telephone lines stifled their interest in adapting them to new purposes (like the internet).  He then goes on to complain that there's no competition in many markets for high-speed broadband -- cable is often the only game in town.  Finally, he writes about the FCC's recent decision to reclassify the internet from Title I (lightly regulated information services) to Title II (heavily regulated telecommunications services) in the wake of losing their net neutrality beef with Comcast in front of the Supreme Court. 

And so a month ago, on May 6, the FCC announced its intention to reclassify portions of broadband as a common carrier telecommunications service and start regulating like crazy—imposing net neutrality, setting rates and data speeds, and who knows what else.

At this point in the story, you might be confused.  He's bitching about monopolies with their lack of incentive for innovation and their extortionate pricing, but when the most obvious solution to the problem is presented -- they need some sort of regulation -- he tries to scare you about that too.  To make it worse, the scare tactic is factually inaccurate; the FCC does intend to reclassify broadband, but they explicitly and in no uncertain terms say that the do not intend to set rates, enforce data speeds, treat data as a common carrier situation where cable companies would be forced to sell wholesale access to their pipes, or, in fact, anyone knows what else.  He's simply full of shit here.  It's impossible to describe the FCC move as an intention to start "regulating like crazy".  If you don't believe me, read the damn thing yourself.

So, what exactly does Mr. Anti-Regulation think we should do about these progress crushing monopolies?  Well, he proposes we regulate them:

I think competition fixes all that. But according to a study a few years ago by, less than 1% of 30,000 cable markets had more than one provider in 2000 and 2005. Any guesses for 2010? In Paris and Tokyo, competition is vibrant, with eight to 10 competitors, speeds higher, and prices much lower than in the U.S. More competition here is the way to keep bandwidth charges reasonable.

Thinking a few more chess moves ahead, the FCC can use the threat of regulation to kick-start real competition in wireless data and cable broadband. How? Just threaten local cable companies with common carrier/telecommunications service regulations, unless they can prove that there are viable competitors, municipality by municipality. And not pokey phone-company DSL competition, but real broadband providers offering service at, say, 10 megabits per second.

To do this, the FCC would set common-carrier pricing for consumers of now-Title I designated cable-modem Internet service just below the debt-servicing level of the cable companies. Comcast has almost $30 billion in debt, Time Warner Cable $24 billion, and Cablevision $11 billion. With potential negative cash flow, see how fast cable companies will start lobbying for competitors.

Again, this is all tremendously sloppy and factually misleading -- it's not the number, but the size, of individual markets without competition that matters, there is, by hypothesis, no competition in these markets, so asking the cable companies to prove that there is asks them to come up with some scam; and they will not start "lobbying for competitors" if you set the price of cable broadband so that it falls just short of servicing existing debt.  Remember, they call them cable companies because 70% of their profits come from, um, cable.  If you say that they should be able to pay their interest bill out of internet profits, you are effectively subsidizing cable TV with higher broadband prices, which is hardly the progressive position he imagines himself supporting.

But the fact that this guy's head is so far up his ass that he needs a periscope to take aim at the crapper is not, ultimately, my point. I have a simpler and more conceptual concern.  Here's your typical WSJ guy praising the virtues of competition and the free market, and scaring you off about the big bad government coming in to regulate.  But the actual market does not necessarily police itself in all instances, and is demonstrably failing to police itself in the instance we're discussing.  Competition is wonderful, if it exists.  And when there's no competition, there is typically a reason why, so simply saying that it would be nice if it existed is not going to make it magically happen.  Of course, it's also clear that over-regulation can ruin competition.  It happens all the time, and I'm the biggest beater of this dead horse that you can imagine.   But it's pretty hard for over-regulation to ruin what you're already claiming doesn't exist.

My point is that competition and regulation are two sides of the same coin  If you are in favor of competition, you are in favor of regulation.  It's that simple.  I'm sick of people like this who abstractly pretend that competition is the opposite of regulation.

Competition is the only way we can stop talking about allocating scarce resources via regulation and network neutrality and start talking about how we are going to use a future bandwidth bounty of 100 megabits per second. Maybe video calls will finally come of age.

Without some regulation, you have no competition.  That's why you're writing the fucking op ed you moron! You want regulation.  In fact, by proposing we regulate the end price for broadband consumers, you propose more draconian and invasive regulation than the motherflippin' French.  The whole reason competition is vibrant in Paris and Tokyo is because they force the big pipe providers to sell wholesale data access to anyone who wants to resell it at the retail level.  In other words they have competition because they have regulation.

The only truly free market is the one where we go around hitting each other over the head with bones and dragging women back to our caves by the hair.  Every other market is a game.  We set up a game with certain rules to keep things interesting and to be able to keep playing the game.  The game has to be designed with strong enough rules that it doesn't immediately stop, and few enough that it's still interesting to play.  The rules have to apply to everyone and they have to be enforced.  And if the game of making up the rules of the game gets too prehistoric, then all the other games are ruined as well.  Designing games and meta games is not easy, but you can't just pretend that stable, satisfying ones will design themselves (at least on relevant human time scales).

The question is not whether we should regulate.  We have always-already regulated in some way, explicitly or implicitly.  The question is how we should regulate.  And the answer is usually "in inverse proportionality to the amount of competition".  I know that's not the only question in regulation (externalities and blah blah blah), but it's a pretty good start.  Design a fun game that people enjoy playing and that leads to even more fun and games.  After all, that's what existence is all about.

Thursday, June 10, 2010

Elves first. Jews line up behind.

Honestly, I never did trust that Santa fucker.

Monday, June 7, 2010

In the long run, even Keynes is dead

I remember writing a strategic piece for work at the beginning of this year.  To be provocative, I started off with the observation that, despite the apparent recovery in the economy and financial markets (at the time), we were in the midst of the second Great Depression.  And I think the first 6 months of this year have borne out that observation.  I don't mean because the stock market has tanked in the last few weeks, or even specifically because the Greeks are giving the Germans the finger.  These things are symptoms of an underlying disease called "debt", and it's precisely them same disease that caused GD 1.0, even if the exact symptoms may look quite different this time.

The essence of debt is trust.  And the essence of a depression is a collective loss of trust.  This is why a depression seems so "irrational".  How is it that we can't just make what we made yesterday?  We didn't run out of people, or fuel, or ideas.  What ingredient did we have in such abundance in 2007 or 1927 that is now suddenly in such short supply?  What we have is a shortage of trust.

Debt is the quantitative version of trust.  I'll work more and consumer less now and you'll consume more now and work to pay me back later.  That basic promise of trust is made at lots of levels, from the unspoken accord about sharing the dish-washing duty, right up to the biggest and most liquid market on the planet. 

GD 1.0 was a failure of that trust on the private level.  The crash of '29 was only the trigger for that loss of trust; the real collapse happened when people lost faith in the banks where they had stored those promises of a brighter future, a destruction of trust that was a self-fulfilling prophecy.  And GD 1.0 was eventually solved by a restoration of trust -- people began to trust the banks and those promises again because they trusted their governments.  In fact, they came to trust their governments so much that they ran off a cliff for them.  Trust is always a crowd phenomenon, even when it happens between two individuals.

GD 2.0 is a new twist on the same problem.  Underlying everything is the same crisis of trust, the same panic of promises, the same fear that all that hard work won't get us what we imagined.  Only this time the crisis reaches all the way up to our trust in government.  Fundamentally, we no longer trust that our system of portioning out promises is fair.  We no longer trust our governments when they say, "get back to work and we'll make sure everybody gets their share".  Why work when it seems so obvious that the game is rigged against you?  Why dedicate yourself to the arduous cooperation needed to carry out any large project when it's every man for himself?

Obviously, an economist will talk about all this as question of monetary or fiscal policy.  He'll tell you about multipliers and balance sheet recessions and inflation and optimal currency zones.  He'll make the same argument Keynes so correctly made (more correctly than he might have hoped) so long ago:

The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.

But what about Greece and all that? Look, right now sovereign debt problems are taking place in countries with a very specific problem: they're part of the euro zone, AND they're badly overvalued thanks to huge capital inflows in the good years; as a result they're facing years of grinding deflation. Counties not in that situation are not facing any pressure from the markets for immediate cuts; as of this morning, 10-year bonds were yielding 3.51 in Britain, 3.21 in the US, 1.27 in Japan.

And he'll miss the point that our fundamental problem is that we no longer trust the last line of defense.

So how much we spend on supporting the economy in 2010 and 2011 is almost irrelevant to the fundamental budget picture. Why, then, are Very Serious People demanding immediate fiscal austerity?

The answer is, to reassure the markets — because the markets supposedly won't believe in the willingness of governments to engage in long-run fiscal reform unless they inflict pointless pain right now. To repeat: the whole argument rests on the presumption that markets will turn on us unless we demonstrate a willingness to suffer, even though that suffering serves no purpose.

So wise policy, as defined by the G20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets — demands that economies suffer pointless pain to show their determination, demands that markets aren't actually making, but which serious people, in their wisdom, believe that the markets will make one of these days.

These market responses look less irrational than they seem at first when you realize that they are the final desperate flailings of a bankrupt system of trust.