The Pebble and the Avalanche

Read Some History, Congressman

Wed, 01 Jul 2009 09:33:00 -0500

A few days ago I wrote about the financial consumer protection agency that the Obama Administration intends to create. This agency will regulate all credit card offers, all mortgage agreements, all checking accounts, and myriad other details of how ordinary citizens manage their finances. In fact, the government intends to automatically enroll people in retirements savings plans — I'm reminded of "anything that is not prohibited is mandatory."

Congreessman Barney Frank responded to criticism about the agency:

"The fear that this will somehow be an out-of-control entity ravaging the private sector is unsupported by anything in American history."

I'm not certain what history books he's been reading, if any, but perhaps he should look back at the actions of Roosevelt's regulatory agencies; they had no trouble regulating every jot and tittle of financial transactions. Or, if that's too far in the past, perhaps Frank remembers from personal experience the wage-and-price control regulations during the Nixon administration and Carter's regulation of, among other things, thermostat settings in commercial office buildings. Once a goverment bureacracy begins to regulate, they regulate; after all, they are not being paid to not to issue regulations. Like any other animal without natural predators, they increase without limit and devastate their ecosystem.

Home Mortgages and Tulip Bulbs

Thu, 25 Jun 2009 09:03:00 -0500

Alan Greespan continues to claim that the economy won't revive until housing prices stop falling.

Imagine, if you will, that the date is February, 1637; we're in Holland, and the commodities market has completely collapsed. Greenspan, Obama, and the Democratic Party step in with a massive stimulus package, new rules and regulations, increased taxes, and endless exhortations focused on one task only: to re-inflate the prices of tulip bulbs to their previous high levels. Government officials assure the public that spending, the markets, and companies will slide into deeper and deeper trouble until tulip bulbs recover.

I'm afraid I don't understand why a housing-price bubble is more important than a tulip bulb-price bubble. The housing bubble was the inevitable result of easy money — low interest rates and a deliberate government policy, on the part of Fannie Mae and Freddie Mac, to make loans available to people who did not meet standard risk criteria. To claim that the bubble must be re-inflated is simply another way to claim that prior government policies did not contribute to the crash.

When You Lose Sight of Your Goal

Thu, 18 Jun 2009 08:49:00 -0500

One of the most important things to know about disaggregation is that you must still maintain some sort of feedback loop if you want the disaggregated parts to work together. For example, if a factory that makes nuts and bolts splits into a factory that makes nuts and another factory that makes bolts, the two new factories must work together to make certain the sizes, shapes, and material work together.

We see this problem in the US drug industry. The drug companies create new products, but the government decides if the prodcuts can be sold. While in theory this might enhance drug safety, in practice the government agency has entirely different goals than the drug company and the people who consume drugs: the bureaucrats' main goal is the preservation of their careers. Their performance is not measured in terms of profit earned or lives saved; their performance is measured by how well they follow the rules and whether or not a product they approved harms anyone. As a matter of course this means that the government demands draconian, hideously expensive testing and then refuses to let even the safest drugs be released for sale unless they're "better" than existing drugs; this makes no sense if the goal is safety, but the real goal is to avoid possible bad publicity. Complete disaggregation, in this case, leads to fewer lifesaving drugs.

Bear this in mind as the Obama administration attempts to create new regulatory agencies. One proposal would create a consumer oversight agency with broad powers to regulate any new financial products intended for consumers — an agency that would be completely disaggregated from the people who provide the products and the people who consume them. Without any doubt, this new agency will stop financial innovation dead in it tracks.

"Bad Boy" and Bad Consequences

Wed, 17 Jun 2009 11:03:00 -0500

One of the most clever innovations in business was the corporation, which allows a business to rise and fall on its own merits. If the business goes bankrupt the owners are not personally liable and as a consequence people can start a new business without risking their entire financial future.

The bankruptcy of Extended Stay Hotels, according to the Wall Street Journal, triggered "bad-boy provision" that made the owner of the chain personally liable for one hundred million dollars. The goal was to deter any rush to bankruptcy. This interesting breach of the corporate protections against personal liability was in turn modified: the creditors, faced with the reality of cash flows and consequences, will shield the owner against at least some of the personal liability. In other words, they've had to accept that disaggregation of personal and business finances can lead to better business decisions.

Profiting from Pain Doesn't Always Work

Thu, 11 Jun 2009 08:49:00 -0500

Let's say a bundle of subprime mortgages are about to become worthless. You can buy a "credit default swap" to cover this event — that is, you can pay for insurance against the default. Of course, if the default is a virtual certainty you'll have to pay through the nose for the insurance.

Some organizations decided to speculate on the failure of a few bundles of securities that were about to default:

Traders can buy credit-default swaps on securities they don't own. At one point, at least $130 million of bets had been made on the performance of around $27 million in securities, according to a person familiar with the matter.

In other words, they gambled.

The gamble didn't pay off. The company that sold the insurance made certain that all the loans were paid off and therefore the insurance payments wouldn't be made. All legal, of course, and investors who made the actual loans got their money back. The speculators are outraged because they can't profit from the pain of the actual lenders. There's a lesson here about disaggregation, finance, ~~gambling~~ investing, and disaggregation, but I'm not certain just what it is.

Thirty-Five Thousand Servings of Chopped Liver

Fri, 05 Jun 2009 09:45:00 -0500

Today's newspapers report that Steve Jobs is about ready to return to Apple after a long medical leave.

Steve Jobs led Apple out of its former doldrums; Apple now has a significant portion of the computer market as well as a dominant position in music. Still, I doubt that Mr. Jobs is the only person at Apple who creates the elegant design and packaging that makes Apple so appealing. When I read the news reports about Jobs and Apple, I have to imagine the other 35,000 employees of Apple asking themselves "What am I, chopped liver?"

Phrased differently, the owners of Apple have a vested interest in a clear and coherent vision of the company without Steve Jobs at the helm. If he's hit by a truck tomorrow, that should not spell the end of the company. They must separate the company from Jobs.

The GM Disaster

Mon, 01 Jun 2009 08:51:00 -0500

While I don't usually discuss politics, I can't turn aside from the Obama Administration's seizure of General Motors. President Obama and his advisers have committed a mistake of historic proportions, the kind that future generations look back on in amazement.

The fundamental rules of capitalism dictate separation between government and business. Unless these two systems — with their very different goals and their very different rules — remain disaggregated one from the other, the inevitable result is disastrous. At this point, the only question is how bad the situation will become.

The past several months have show just how deadly government interference can be. Over $30 billion of wealth has been destroyed as government subsidies disappeared to no effect: can you imagine any private institution that would dole out money with such abandon and with so little prospect of success? As bankruptcy approached, President Obama used his official and unofficial powers to browbeat bondholders.

As for the prospects for the future, one need only look to previous horrible examples, from UK (Jaguar) to France (Citroen) to Romania (Dacia). Governments run car companies not based on how well the cars will run, how much profit will be made, or return on equity; they run car companies as they run any other enterprise: politicians maximize votes, not profits. I expect a series of ever-more desparate political interventions in the marketplace over the next several years to keep GM and Chrysler afloat regardless of the economic sense or economic consequences.

About Trying to Do Everything...

Thu, 28 May 2009 08:48:00 -0500

Yesterday I wrote about companies that have shifted from their initial niche into the "everything" business; Amazon did this effectively, but I doubt Best Buy can pull this off.

I'd like to draw a sharp distinction between this and companies that expand their niche within their industry. Voxeo, which is one of my favorite companies, has a nice of automating inbound and outbound telephone calls. Now that people expect to interact using instant messaging and the like, Voxeo just purchased Imified, a company that specializes in automating instant messages.

I've created applications that combine speech recognition over the phone with instant messages — trust me, if you're trying to get flight information from a machine or a human, it's far easier to get that over the phone. Voxeo will certainly integrate Imified's capabilities with their own, and I expect to be able to send and receive instant messages while on the phone, or make launch telephone calls from within an IM applications. Now that's expanding your niche, not a dilution of brand name.

Stick to Your Knitting: Should You Get Into the Knitting Business Too?

Wed, 27 May 2009 06:49:00 -0500

A quick look through the business news over the past few days reveals that very large operations, such as Best Buy and eBay, continue to expand their business into new and more puzzling directions.

Amazon is an old example; they've been in the "everything" business for quite some time. I understood their transition from just books to both DVDs and music, and I understand why they sell both new and used items. But when they started to sell everything else (watches? bicycle parts?) I admit that I didn't quite understand their strategy.

Recently I've seen a number of news articles about other large companies that have embarked on the same idea: if they sell items in category A, while not sell them in category B? Best Buy recently started selling musical instruments; I believe I can understand why. But patio furniture and barbecue grills? And eBay has transformed itself from an auction site to an all-purpose site that sells a great deal of new goods.

Forgive me if I'm wrong, but this seems to be exactly the wrong strategy. eBay's charm and strength came from its selection of auctions; now the company will compete with Amazon in the area of new goods instead of playing to their own strength. eBay seems to believe that since their web site can be infinitely deep and broad, they can profitably and reasonably sell any goods they please under any business model they please. I don't agree.

Best Buy's actions remain utterly incomprehensible. They've chosen to compete with other major chains; I don't see any tie-in between lawn chairs and televisions; certainly the internal dynamics of the sales are completely different — will Best Buy sell expensive & unnecessary warranties for the lawn chairs? This feels like a desperate attempt to grab some business away from competitors during bad economic times.

I have to wonder about the general trend. Some companies believe that the company's brand can be stretched to cover any goods at all. I'm skeptical, as it runs contrary to the consumer's expectations: a company such as Best Buy succeeded in the first place because it was not a department store that sells everything.

Cluecon Keynote

Fri, 22 May 2009 09:29:00 -0500

I'd like to quote the fine people at Cluecon:

Dr. Moshe Yudkowsky will once again kick things off with the opening talk on Tuesday morning. Moshe is very energetic and really gets the crowd going. Stay tuned for more information as we wait for Dr. Yudkowsky to give us his topic.

I swear I'll send them the topic as soon as I figure out what it is... that is, after I send my latest article off to SpeechTek Magazine.