On the Other Blogs I Like at left, the "Kevin Drum" link now correctly points to Kevin's blog at Mother Jones. The previous Drum link has been renamed "Washington Monthly" since it points to Kevin's old place of blogging (but it's still good!). "War or Car?" has been moved to Fun Stuff since it really belongs there. Also, sadly I've removed the link to Fair Game, since it went off the air (actually, quite a while ago, March 2008, but since I get it on pod cast it took me a couple months to realize it and by then it seemed too late to make a big to do).
Anyway, likely no one cares but just an FYI for... well me I guess.
Thursday, October 2, 2008
On The Other Hand...
Something does need to be done. I don't think a "wait until January" strategy is viable. The fourth quarter of 2008 is long enough that serious damage could be done to the US economy in that time. For example: the commercial paper markets are effectively dead (or perhaps more accurately, in suspended animation). This is VERY BAD. Look, lets say you run a business, oh, making ... bedsheets! Ok, you have a factory, you have to pay for your materials on a semi-regular basis, depending on what you are making and how much, plus there's usually 30-60 day window in any account payable. You get revenue from your accounts receivable on a semi-regular basis, since it depends on what you make, how much and again, there's the 30-60 days of fudge time on any bill. Over a year this all comes out in the wash and you make a profit (if you are a successful company), but you still have to make payroll every week. There will be times when you have a bunch of cash sitting around because you just got a $20 Million dollar check from K-Mart, and there will be times when you need to order $15 Million in raw materials but you won't get paid until next month. What to do?
Enter commercial paper. Think of it sort of like a giant corporate credit card, but one that can loan money too. So if you have a few extra million over the next pay cycle, you can get an extra 1/2% of interest on it while maintaining liquidity, and if you need to charge a few thousand tons of material, you can do that until you get that check from Linens & Things. This all works because we have a working economy, and I'm not worried that your company is going out of business next week, and there is lots of money out there (both from other companies and in "money market accounts") to insure liquidity. But as soon as people worry (especially banks) that they might not get their money back, the interest rates jack up and the amount of money shrinks. According to that Bloomberg article, the Commercial Paper market lost almost $95 Billion with a "B" dollars. There's a good chance that if I try to use that giant corporate card to make payroll, the market will just say "sorry, there isn't any money left." Now I'm looking for a short term loan from a bank... good luck. And if I don't make payroll, that's thousands or millions of dollars that doesn't get into the community for people to buy food and gas and new bed sheets and... mortgage payments! VERY BAD.
Another effect of the tightening of credit is the effect on government bonds (you know, those things you vote on to build schools, roads and, if you're unlucky, a tax payer funded stadium). Road work in Maine and a new emergency room in Billings, Montana are just some of the current victims. Even if a project does get funded, more of that cost will go towards paying interest, and less will go towards building that park or school or bypass. That hurts everyone no matter where you live.
All this is to say that while I'm not a supporter of THIS bill, I am not some sort of nihilist. It is true that SOMETHING needs to be done relatively soon, and if this is the ONLY way they can do it, it is probably better than nothing. I just don't believe that the conditional statement is true. I think a much better bill could be designed if the current proposal was thrown out the window and congress started from scratch. Best would be, I think, some combination of the "Swedish Solution" and a forced mortgage adjustment (see below), plus a real hard collar on executive compensation for any company that participated (to avoid the moral hazard problem, real collars now would make future decision makers want to avoid behaving irresponsibly enough to require a bailout).
But again, I'm not an expert at all. I'm just an interested layperson. Brad Delong, Dan Drezner, Tyler Cowen, Duncan Black and Calculated Risk. Everyone on that list has a PhD in Econ except for Calculated Risk, who is anonymous but is, in my estimation, eminently reliable.
UPDATE: And, wouldn't you know it, Clicking over to Tyler Cowen's Marginal Revolution brings me to this interesting post on Net Worth Certificates as an alternative bailout solution, leading to this interesting article.
Which is to say that there are LOTS of options out there, and the idea of using the "Paulson Proposal" as a starting point for negotiations is just foolish.
Enter commercial paper. Think of it sort of like a giant corporate credit card, but one that can loan money too. So if you have a few extra million over the next pay cycle, you can get an extra 1/2% of interest on it while maintaining liquidity, and if you need to charge a few thousand tons of material, you can do that until you get that check from Linens & Things. This all works because we have a working economy, and I'm not worried that your company is going out of business next week, and there is lots of money out there (both from other companies and in "money market accounts") to insure liquidity. But as soon as people worry (especially banks) that they might not get their money back, the interest rates jack up and the amount of money shrinks. According to that Bloomberg article, the Commercial Paper market lost almost $95 Billion with a "B" dollars. There's a good chance that if I try to use that giant corporate card to make payroll, the market will just say "sorry, there isn't any money left." Now I'm looking for a short term loan from a bank... good luck. And if I don't make payroll, that's thousands or millions of dollars that doesn't get into the community for people to buy food and gas and new bed sheets and... mortgage payments! VERY BAD.
Another effect of the tightening of credit is the effect on government bonds (you know, those things you vote on to build schools, roads and, if you're unlucky, a tax payer funded stadium). Road work in Maine and a new emergency room in Billings, Montana are just some of the current victims. Even if a project does get funded, more of that cost will go towards paying interest, and less will go towards building that park or school or bypass. That hurts everyone no matter where you live.
All this is to say that while I'm not a supporter of THIS bill, I am not some sort of nihilist. It is true that SOMETHING needs to be done relatively soon, and if this is the ONLY way they can do it, it is probably better than nothing. I just don't believe that the conditional statement is true. I think a much better bill could be designed if the current proposal was thrown out the window and congress started from scratch. Best would be, I think, some combination of the "Swedish Solution" and a forced mortgage adjustment (see below), plus a real hard collar on executive compensation for any company that participated (to avoid the moral hazard problem, real collars now would make future decision makers want to avoid behaving irresponsibly enough to require a bailout).
But again, I'm not an expert at all. I'm just an interested layperson. Brad Delong, Dan Drezner, Tyler Cowen, Duncan Black and Calculated Risk. Everyone on that list has a PhD in Econ except for Calculated Risk, who is anonymous but is, in my estimation, eminently reliable.
UPDATE: And, wouldn't you know it, Clicking over to Tyler Cowen's Marginal Revolution brings me to this interesting post on Net Worth Certificates as an alternative bailout solution, leading to this interesting article.
Which is to say that there are LOTS of options out there, and the idea of using the "Paulson Proposal" as a starting point for negotiations is just foolish.
Bailout Options
Ok, take a minute to read this story. A lot has been made about irresponsible borrowers and "subprime" loans to people who were encouraged to lie about their income. And both of those things did happen, and did contribute to the crisis. But there are plenty more like poster DarkSyde's co-worker, who trusted people, mortgage brokers, lawyers and bankers, who were supposed to have the buyer's best interests in mind. People who they thought would be scrutinizing the details for them fairly, but who really just wanted to get someone to sign on the dotted line so they would have yet another loan to sell up stream to investment banks desperate for more securities to sell.
Which brings us back to the bailout. The big advantage of a top down bailout is the small number of players. If you are going to hand out money and gain oversight, it is easier to do it with a few hundred banks rather than a few million homeowners. BUT, there is no reason you couldn't structure this problem as a cram-down to change the borrowing terms in favor of homeowners.
Look, these securities are already worthless because no one expects people like DarkSyde's co-worker to keep making payments on his crazy loan, the logical thing for him and people like him to do is just move out and leave the keys at the bank. You owe more money than your house is worth, why are you paying down the loan? If he had a mortgage with a small local bank (that didn't sell his mortgage upstream) he could go down to the bank and renegotiate terms. The bank doesn't want his house. If he dropped the keys off, the bank would instantly lose money, PLUS they would have the time and expense of selling a house. A bank would much rather set up a situation where they take a significant loss spread over 25 years than a big up front loss today (for very sound mathematical reasons, see this on the time value of money). So why can't people like this go renegotiate their loans? It would be good for the banks, and it would be good for them!
Ah, but you need to understand the perverse incentives that have been created. You see, "Local Bank" that wrote you that loan didn't keep it. They sold it on to "Investment Bank" in exchange for a quick profit. Investment Bank then pooled that mortgage with hundreds or thousands of others like it, and tied the payments to special bonds, consolidated debt offerings or CDO's. These bonds were then sold to banks and other investors. So now Joe Shmoe's loan is owned not by one person, but LOTS of people. But it gets worse! Those people who bought these bonds often bought insurance. For a small percentage fee of their expected return, another company would insure them against default. The bond holders only collect on their insurance IF people default on their loans. In other words, they don't want to renegotiate your loan, because if you default, they get paid and the insurance company is left holding the bag.
And that works fine until everyone starts defaulting, and insurance companies start going out of business, so nobody gets paid.
An alternative solution would be forced cram-down. In other words, the government could force a renegotiation, or more likely a standard set of terms with lower interest rates over all mortgages. This would reduce (or in some cases eliminate) the profits to bond holders (because they were supposed to pay out higher rates of interest), but considering these assets are basically worthless now (because no one expects people to stay in houses that are under water) they would actually have value again. Losses around 10/20c on the dollar instead of 70-90 cents. Home owners would benefit because they would be able to stay in their homes and the reduction in mortgage defaults would probably slow the rate of decline in property values.
I don't know if this is the best solution. There's a lot of upside, but the problem is the transaction cost. How do you decide who qualifies? And if you set up criteria, you need to have a set of impartial people to verify these conditions. Dunno... but it sure sounds better than the US government buying billions of dollars of bonds that everyone in the private sector seems to think are worth about 10 cents on the dollar.
Which brings us back to the bailout. The big advantage of a top down bailout is the small number of players. If you are going to hand out money and gain oversight, it is easier to do it with a few hundred banks rather than a few million homeowners. BUT, there is no reason you couldn't structure this problem as a cram-down to change the borrowing terms in favor of homeowners.
Look, these securities are already worthless because no one expects people like DarkSyde's co-worker to keep making payments on his crazy loan, the logical thing for him and people like him to do is just move out and leave the keys at the bank. You owe more money than your house is worth, why are you paying down the loan? If he had a mortgage with a small local bank (that didn't sell his mortgage upstream) he could go down to the bank and renegotiate terms. The bank doesn't want his house. If he dropped the keys off, the bank would instantly lose money, PLUS they would have the time and expense of selling a house. A bank would much rather set up a situation where they take a significant loss spread over 25 years than a big up front loss today (for very sound mathematical reasons, see this on the time value of money). So why can't people like this go renegotiate their loans? It would be good for the banks, and it would be good for them!
Ah, but you need to understand the perverse incentives that have been created. You see, "Local Bank" that wrote you that loan didn't keep it. They sold it on to "Investment Bank" in exchange for a quick profit. Investment Bank then pooled that mortgage with hundreds or thousands of others like it, and tied the payments to special bonds, consolidated debt offerings or CDO's. These bonds were then sold to banks and other investors. So now Joe Shmoe's loan is owned not by one person, but LOTS of people. But it gets worse! Those people who bought these bonds often bought insurance. For a small percentage fee of their expected return, another company would insure them against default. The bond holders only collect on their insurance IF people default on their loans. In other words, they don't want to renegotiate your loan, because if you default, they get paid and the insurance company is left holding the bag.
And that works fine until everyone starts defaulting, and insurance companies start going out of business, so nobody gets paid.
An alternative solution would be forced cram-down. In other words, the government could force a renegotiation, or more likely a standard set of terms with lower interest rates over all mortgages. This would reduce (or in some cases eliminate) the profits to bond holders (because they were supposed to pay out higher rates of interest), but considering these assets are basically worthless now (because no one expects people to stay in houses that are under water) they would actually have value again. Losses around 10/20c on the dollar instead of 70-90 cents. Home owners would benefit because they would be able to stay in their homes and the reduction in mortgage defaults would probably slow the rate of decline in property values.
I don't know if this is the best solution. There's a lot of upside, but the problem is the transaction cost. How do you decide who qualifies? And if you set up criteria, you need to have a set of impartial people to verify these conditions. Dunno... but it sure sounds better than the US government buying billions of dollars of bonds that everyone in the private sector seems to think are worth about 10 cents on the dollar.
Could Be Worse
We're in the grip of a major financial crisis. Several major banks have collapsed. It looks likely that Congress will pass a rather ill advised rescue plan. Then again, it could be worse.
Zimbabwe currently has inflation of 40 Million percent per year (really). Thank God we only have a few more months of president Mugabe. Er, Bush.
Zimbabwe currently has inflation of 40 Million percent per year (really). Thank God we only have a few more months of president Mugabe. Er, Bush.
Wednesday, October 1, 2008
Fight Over Digital Music Continues
According to CNN, the National Music Publishers' Association (NMPA) is asking the Copyright Royalty Board (CRB) to increase the royalty they receive from iTunes from 9 to 15 cents per track.
Short explanation is in order first. NMPA represents "music publishers." That's the people who obtain and license the copyright for sheet music. Music publication, now a very small part of the industry, used to be a major source of revenue. Before recorded music, a song became a "hit" when lots of sheet music was sold for people to play on their pianos at home. When recorded music became possible, it was decided that the music publisher would receive a royalty for the sale of recorded music. It was decided that the royalty would be determined by a special royalty board, the CRB. The CRB now has jusrisdiction over a number of legal issues related to copyright.
The music industry has a love-hate relationship with Apple and iTunes. iTunes is the number one seller of retail music in the United States. As such it generates a huge amount of royalties for the industry where the year-over-year CD sales are cratering. The industry NEEDS iTunes. And that's why they hate them. Apple has so much control even the entire industry combined can't really fight them effectively. When music was sold through many different retail chains, prices for their product (and their profit margins) were much easier to control. The industry has repeatedly tried to change the pricing policy of the iTunes store, and never been able to succeed. Furthermore, the digital rights management (AKA "DRM" this is software designed to prevent people form sharing files bought on iTunes) which the industry insisted on is proprietary to Apple. If you buy an "iTune" you can only play it on an Apple device. So the success of iTunes not only gives Apple a large market share, but it locks in their customers to their proprietary system.
This move by the NMPA is an attempt to get a regulatory body to do what the RIAA/NMPA couldn't get with negotiations. A few things could happen. Right now Apple is threatening to shutter the store if it loses. That almost certainly won't happen, but they may force the record industry to renegotiate their deals or eat some of the royalty increase out of their cut.
We shall see.
Short explanation is in order first. NMPA represents "music publishers." That's the people who obtain and license the copyright for sheet music. Music publication, now a very small part of the industry, used to be a major source of revenue. Before recorded music, a song became a "hit" when lots of sheet music was sold for people to play on their pianos at home. When recorded music became possible, it was decided that the music publisher would receive a royalty for the sale of recorded music. It was decided that the royalty would be determined by a special royalty board, the CRB. The CRB now has jusrisdiction over a number of legal issues related to copyright.
The music industry has a love-hate relationship with Apple and iTunes. iTunes is the number one seller of retail music in the United States. As such it generates a huge amount of royalties for the industry where the year-over-year CD sales are cratering. The industry NEEDS iTunes. And that's why they hate them. Apple has so much control even the entire industry combined can't really fight them effectively. When music was sold through many different retail chains, prices for their product (and their profit margins) were much easier to control. The industry has repeatedly tried to change the pricing policy of the iTunes store, and never been able to succeed. Furthermore, the digital rights management (AKA "DRM" this is software designed to prevent people form sharing files bought on iTunes) which the industry insisted on is proprietary to Apple. If you buy an "iTune" you can only play it on an Apple device. So the success of iTunes not only gives Apple a large market share, but it locks in their customers to their proprietary system.
This move by the NMPA is an attempt to get a regulatory body to do what the RIAA/NMPA couldn't get with negotiations. A few things could happen. Right now Apple is threatening to shutter the store if it loses. That almost certainly won't happen, but they may force the record industry to renegotiate their deals or eat some of the royalty increase out of their cut.
We shall see.
Monday, September 29, 2008
Thanks To Our Flexible Lending Standards
Dear US Taxpayer: Prepare to be hit with bowling balls and scalded with coffee.
Digital Rights Management: Still Terrible
Hey, did you buy music on line from Wal-Mart? Well guess what? After October 9, you lose your music.
Had you downloaded that music from limewire, you'd be totally ok. Perhaps it's best to just download music and then send your favorite band a check.
Had you downloaded that music from limewire, you'd be totally ok. Perhaps it's best to just download music and then send your favorite band a check.
Bailout Needs Bailing Out
It looks like the "bail out bill" has failed.
I'm a bit ambivalent on this. Duncan Black (AKA Atrios) is against it. On the other hand, Paul Krugman is for it. I have been an avid follower of the business pages and the general mortgage paper mess but one thing I'm sure of is that I don't know enough to know if this is a good idea or not, so my best option is to look to the opinions of those who know more than I.
Fundamentally I'm not convinced that this is necessary. Look, there's a really big problem, but it isn't a short term cash problem, it's a "people borrowed lots of money and made terrible investment decisions with it" problem. If the government rescue plan pays market rates for all this bad debt, the banks will still fail. If the government pays enough to actually rescue the banks, the treasury department (i.e. us) loses billions. Because of this, a bail out without government equity (government buying or taking over the stock rather than only buying bad debt) is going to have problems any way you slice it. We may be better off just taking the banks as they fail.
The other major problem with this whole thing is that it will be implemented by people chosen by George W. Bush. Every major policy created or administered by people chosen by George W. Bush has been at best a failure and at worst a disaster beyond what anyone would have thought possible. I don't trust people chosen by George W. Bush with $700 Billion dollars.
I like Brad Delong's plan here.
I'm a bit ambivalent on this. Duncan Black (AKA Atrios) is against it. On the other hand, Paul Krugman is for it. I have been an avid follower of the business pages and the general mortgage paper mess but one thing I'm sure of is that I don't know enough to know if this is a good idea or not, so my best option is to look to the opinions of those who know more than I.
Fundamentally I'm not convinced that this is necessary. Look, there's a really big problem, but it isn't a short term cash problem, it's a "people borrowed lots of money and made terrible investment decisions with it" problem. If the government rescue plan pays market rates for all this bad debt, the banks will still fail. If the government pays enough to actually rescue the banks, the treasury department (i.e. us) loses billions. Because of this, a bail out without government equity (government buying or taking over the stock rather than only buying bad debt) is going to have problems any way you slice it. We may be better off just taking the banks as they fail.
The other major problem with this whole thing is that it will be implemented by people chosen by George W. Bush. Every major policy created or administered by people chosen by George W. Bush has been at best a failure and at worst a disaster beyond what anyone would have thought possible. I don't trust people chosen by George W. Bush with $700 Billion dollars.
I like Brad Delong's plan here.
Saturday, September 27, 2008
Creative Use Of Censorship
New Fatboy Slim video "Toe Jam" featuring David Byrne of the Talking Heads.
I love the look of this video too. They did a great job on the hairstyles and clothes, but the best part is the film (or the post treatment digital ... shrug) they shot it on. The texture of the image really captures 70's porn film.
THE BPA - TOE JAM FEAT. DAVID BYRNE & DIZZEE RASCAL
I love the look of this video too. They did a great job on the hairstyles and clothes, but the best part is the film (or the post treatment digital ... shrug) they shot it on. The texture of the image really captures 70's porn film.
THE BPA - TOE JAM FEAT. DAVID BYRNE & DIZZEE RASCAL
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