Category Archives: Politics

Is Sub-prime the New Dot-com?

Posted on May 20, 2009 | 1 comment

I recently came across an article that I wrote in 2001, right after the dot-com bubble had burst in the San Francisco area, and I was struck by how similar the themes were to articles that are being written now in the wake of the mortgage meltdown. In fact, replace “dot-com” with “sub-prime” and I could nearly publish the article as is. But I would never be so lazy with Thoughtbasket, so instead I’m going to point out some parallels between then and now. I would like to do this in table format, but my friends at WordPress haven’t added that technology yet, so I’m going to use paragraphs (very Gutenberg, I know (no, not Guttenberg)) instead.

The first, and most obvious, parallel is that of income and spending. During the dot-com boom folks in the Bay Area were making tons of money, and spending it freely. Salaries were high, and nobody bothered saving because their options were all going to be worth zillions. Every fancy restaurant in SF was packed, and there were waiting lists at the BMW and Mercedes dealerships. Audi too, but that’s an SF thing. This is remarkably similar to the mortgage and hedge fund frenzy of the past few years, including my paradigmatic example of the Cristal-swilling mortgage-writing meathead.

A second, and much less obvious, parallel is that both bubbles had specious intellectual theories trying to justify what were obviously market failures. The dot-com’s sham theory was the “new economy,” in which economic cycles were banished, cast into the dustbin of history by the ever-increasing productivity that computer technology would drive forevermore. As the recession of 2002 clearly demonstrated, the new economy was a fairy tale. The mortgage meltdown was fueled by the theory that financial firms could, using mathematical models, split up and quantify the risks in a basket of securities and then sell off the pieces to parties who had corresponding risk appetites, as calculated by their own mathematical models. As the recession of now is clearly demonstrating, the efficient market for risk is a fairy tale. Sound familiar?

The last parallel is the aftermath of the bubbles, the hangovers resulting from what were really drunken bacchanalia of faux-mastery of the universe, with the lucky few guzzling goblets of their own press and in their dizzy haze thinking themselves geniuses. Ex post partyo, of course, there is a period of regret and soul-searching (“I’m never going to drink again”), as people are humbled and their bank accounts flushed, and they try to make sense of their sudden fall from grace. In the case of the dot-com, this period lasted a few years. For a while, VCs lived by their stumbling home mantra (“I’ll never again invest in a company without a business model”), until they saw Twitter. Wall Street remains chastened, still debating whether it should stay in bed or go out for a greasy breakfast, but how long will that last? Wall Street spinmeisters are already pumping out stories about how they have to pay fat bonuses to retain good people. My prediction: by the fall of this year, we’ll see Wall Street reaching again for their beloved goblet.

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The Internet and Democracy

Posted on April 24, 2009 | 3 comments

I have always been something of an internet contrarian, claiming since 1996 – despite having worked in the internet industry the entire time – that the whole thing is overrated. And now, finally, I have someone on my side. Harvard law professor Cass Sunstein, who President Obama named head of the White House Office of Information and Regulatory Affairs, recently published a critique of the internet.

Specifically, Sunstein claims that the Internet creates self- reinforcing communication systems, in which internet users choose to associate solely with like-minded individuals, thereby reducing the diversity of opinion to which they are exposed, and so become more and more fixed in their viewpoints. Sunstein is not the first to discuss this, and it seems fairly common sense that single-viewpoint exposure will narrow one’s range of beliefs.

But Sunstein adds empirical data from several studies he has worked on. He had groups of Democrats and Republicans fill out surveys and then enter discussion groups with like-minded citizens. After the discussion groups, they again filled out surveys. The post-discussion surveys showed significant decrease in diversity of opinion relative to the pre-discussion surveys. Again, this shouldn’t surprise anyone, but it’s good to have the data to back it up.

Taking this concept a step further, Sunstein comments on the negative impact these self-reinforcing systems have on democracy. For him, the free flow of ideas is the essence of the democratic process. He quotes Alexander Hamilton, who believed “the jarring of opinions” would help promote thoughtful deliberation and curb excesses.

But in a world of Fox News and the blogosphere, is Sunstein simply tilting at windmills? Have Hamilton’s jarring opinions been swept away by the internet, much like travel agents and your daily paper? To some extent, and I say this with a heavy heart, I think the answer to both those questions is yes. It’s hard to see a Fox Newser switching to CNN, just as I don’t visualize a lot of Daily Kosers heading over to Ann Coulter’s pleasant little blog.

Of course, the editors of various online publications could address this by adding opposing viewpoints to their mix. Perhaps Daily Kos could add a couple of conservative columnists, or even have a “Conservative’s Corner” on the home page. But would that even help? According to Sunstein, only 2% of Daily Kos readers are Republicans so it might be too late. And it might drive away Daily Kos readers, who could leave to visit a site that caters more purely to their liberal views.

If editors of politically tilted websites and publications can’t, for business reasons, add diverse opinions, then maybe we all need to do it ourselves. Perhaps each liberal should read one conservative article a day, and vice versa. Of course this will take discipline, and sometimes even holding our noses, but if it helps promote a Hamiltonian jarring of opinions, isn’t it worth it?

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Posted in Politics, Pop culture, Technology

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Saving the Environment – We All Need to Give

Posted on January 25, 2009 | 4 comments

President Obama’s inaugural address has gotten me thinking about responsibility and sacrifice. The President said what we have all known for a long time: that Americans are too profligate – spending money we don’t have, burning energy we can’t afford – and that a day of reckoning would come. In fact, the President made clear that the day of reckoning is here: “our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed.” As a result, I am planning a series of entries on this topic, on the theme of sacrifice. Today’s item: the environment.

A recent article in the Wall Street Journal (regular readers know I love my WSJ) discussed Cape Wind, which aims to put 130 windmills off the coast of Cape Cod, reducing greenhouse gas emissions an amount equivalent to taking 175,000 cars off the road. A no brainer project, right? Wrong, because the wealthy folks who have their weekend houses on that part of the Cape don’t want their views marred by windmills out on the horizon. They have been protesting the project and putting up legal barriers, enlisting the help of their most powerful neighbor, Teddy Kennedy, whose family has a fabled compound in Hyannisport.

Massachusetts is famously liberal, and based on my two years in Boston, the people who weekend on the Cape would consider themselves environmentalists. They recycle, they install solar power, they drive their Prius to Whole Foods to buy local produce. But when it comes to windmills in their expensive view, suddenly they aren’t so green. This is where they need to listen to our new president and stop protecting their narrow interests. They need to sacrifice a little for the good of the environment.

Broadening the scope of this discussion, if we are going to defeat global warming, everyone is going to have to chip in. The NIMBY (not in my back yard) protests that stall projects like new power lines, or wind farms, are going to have to stop. Of course, nobody wants a giant tower in their back yard, or a windmill right off their front porch. But nobody wants temperatures to go up several degrees either, or ocean levels to rise to a point where Cape Cod weekend houses are under water. Global warming is a major problem that affects everybody, and we are all going to have to sacrifice a little – give up our SUV, or allow windmills near our weekend house – if we are going to solve it. As theologian Sallie McFague put in her new book regarding climate change, “either we will all make it together or none of us will.”

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Posted in Environment, Politics, Trends

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Stop the Bailout Madness

Posted on December 22, 2008 | 1 comment

Today’s Wall Street Journal reported that commercial real estate developers are aggressively lobbying for a government bailout, trying to get into a $200 billion program designed to “salvage the market for car loans, student loans and credit-card debt.” Because the developers have a ton of debt coming due next year, and the frozen credit markets will prevent them from refinancing that debt, they want the government to step in. If they cannot refinance the debt, then their lenders will take over the high-rises and malls and hotels that the developers currently own.

This is where the bailout madness must end. Real estate developers are in a completely different league than banks or car companies or consumer debt. The bailouts for those industries could at least be defended, since credit and employment and consumers are essential for the economy to work. But allowing developers to keep the speculative properties they built does nothing for the economy. It doesn’t prop up employment or consumer spending. All it does is shift dollars from taxpayers to a few very wealthy and connected developers. If developers were erecting new buildings, at least they could claim to support construction jobs, but in this economy, not a lot of new buildings are being built.

Here are several of the problems I have with a bailout of developers:

  • As noted above, there is no economic benefit
  • Developers usually finance each project separately, so even if they lose one to the banks, it won’t bring down their whole firm
  • Developers push strongly against government regulation (zoning, height limits, etc.) when they are building, standing on the spurious rubric of “property rights.” So why don’t they rely on their precious freedom now instead of turning to the government?
  • The same issue of the WSJ also had a piece on how some real estate developers saw the crash coming and conservatively boosted their cash reserves, and are now sitting pretty. So why should we bailout the developers who were not so prescient?

Finally, I should note that generally speaking, developers are wealthy and sophisticated individuals or families. They weren’t talked into these investments by shady mortgage brokers, and they already have plenty of resources to deal with their problems. In fact, let’s look at the three named developers in the article. There is William Rudin, whose family “is a large Manhattan office building owner.” If you are a large owner of Manhattan high rises, then you are very very rich. The Related Cos, a major developer has, according to its web site, a $10 billion real estate portfolio, and this privately held company remains under the control of rounder and CEO Stephen Ross. Vornado Realty Trust is a huge landlord, publicly traded, with a market cap of $9 billion. Vornado CEO Steven Roth was paid $1 million last year and exercised options worth $68 million. On December 8 of this year, he exercised more options, with a net gain of $13 million. Do these guys need a bailout?

The government can’t keep giving money to every industry that asks for it. Let’s draw a line, and let’s draw it at the hugely wealthy individuals who don’t need and who won’t help the economy.

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Auto Company Bailout: Make it Hurt

Posted on November 18, 2008 | 9 comments

Politicians in Washington are debating whether the government should bail out the Big 3 American automakers: Chrysler, Ford and GM. In addition to the $25 billion in low cost loans the government has already committed to Detroit, the Democrats, including President-elect Obama, are pushing for more aid. I have long been fascinated by the utter incompetence of American car companies, and came out against the $25 billion in loans, so of course I have some thoughts on this push for additional help.

I’m going to ignore ideology (eg. in a free market we should let companies fail) and focus on practical issues. But practically speaking, giving money to the car companies would be rewarding failure. For 30 years the Big 3 have been getting spanked by Japanese, German and now Korean car companies. They have relied on trucks and SUVs to generate profit and have proven themselves completely unable to produce an appealing small car. They have also demonstrated a fantastic inability to retool their processes to compete with the imports.

NYU business professor David Yermack calculates that GM and Ford alone have invested $465 billion in capital since 1998 and have seen their combined market capitalizations drop from $117 billion to $6 billion today. These are not companies that spend money well, so why should the taxpayers give them any more? And let’s not forget that GM CEO Rick Wagoner made $3.3 million last year while Ford CFO Lewis Boothe made $3.1 million (I’m letting Ford’s CEO off the hook for his $9 million because he’s new and they had to pay up to recruit him from Boeing). Why should our money go to support multi-million dollar salaries for guys who are screwing up?

Conservative commentators (hello Wall Street Journal) blame much of Detroit’s problems on expensive union contracts and hefty benefits paid to retirees. The usual estimate is that retiree legacy payments add $1,500 to the cost of each vehicle. But even if you could take $1,500 off the price of American cars, they would still lose market share because the cars suck. A comparable Toyota is worth $1,500 more because it is better made and will last forever. Also, I should note that it was the executives of the car companies who signed those rich union contracts. That being said, the UAW is way out of line with the overall labor market. Gold-plated health benefits, ridiculous work rules and no-layoff clauses are no way to help your company beat the competition.

So the main argument against bailing out the Big 3 is that it would be throwing good money (OUR money) after bad. What are the reasons to support a bailout? It turns out that there are 3 million of them; that’s the number of jobs that analysts have tied to the auto industry. And the theory is that if we let the Big 3 fail, all those jobs will go away. The car companies are saying that nobody will buy cars from a bankrupt company. I don’t totally believe that – I think that Americans have flown enough airlines that were in bankruptcy to understand that a bankrupt GM doesn’t really go away – but nor do I agree with Yermack that Toyota and Honda can just take up the slack. Realistically, it will take years for the foreign car companies to ramp up production to take over for a failed Detroit company. There is also the argument that the auto industry drives America’s sophisticated manufacturing industry, which is essential for both national security and future economic growth. I don’t know enough about that to comment intelligently, but it makes some sense on its face. Finally, there are all those retirees with health insurance and pensions. If the Big 3 fail, the obligations to support all those people will fall on taxpayers anyway.

So maybe, on balance, some sort of bailout is a good idea. If even 500,000 jobs were lost and the Big 3 pensions put onto the taxpayers, that would not be good for the economy. But good idea or bad idea, the bailout is still going to happen; the Democratic leaders (Nancy Pelosi and Harry Reid) are pushing for it, and Barack Obama owes the unions big time for getting out the vote. And if it’s going to happen anyway, let’s at least push for it to be done the right way.

Any federal bailout of the Detroit automakers needs to A) be onerous to shareholders and executives, and B) force restructuring on the industry to make it competitive. Paul Ingrassia, who won a Pulitzer Prize for his Wall Street Journal coverage of the auto industry, argued for removing current management, wiping out shareholders and restructuring contracts. He is absolutely right. And wiping out shareholders has to include the Ford family, who continue to dominate Ford Motor Company. Michael Levine, a lecturer at NYU School of Law, adds that the dealer networks have to be restructured. It has long been known that the Big 3 have far too many brands and dealers relative to the cars they sell (GM has 7,000 dealers while Toyota has 1,500) but state laws protect dealers from being closed. These state laws exist because dealers are big players in local economies; unfortunately, they are not big players at the national scale, and these state laws need to be trumped by national concerns.

All of these objectives can be realized through a packaged bankruptcy, which was suggested by Edward Altman, a business professor at NYU (lots of NYU references in this post). Packaged Chapter 11 bankruptcies, in which the financing that takes you out of bankruptcy is pre-negotiated, are pretty common. The government would provide the financing, and that would address the concern that consumers won’t buy cars from a bankrupt manufacturer. In fact, a packaged bankruptcy is the only route I can see that achieves all important goals:

  • Management removed and compensation limits implemented
  • Current shareholders wiped out
  • Union contracts renegotiated
  • Dealer contracts renegotiated and state laws changed.

So please, politicians, I implore you: don’t give in to corporate and union lobbying and just hand the car companies money. Use this opportunity to force on the car companies the changes that they need.

An interesting side note is that this is another case of the metaphysical phenomenon of current actions sowing the seeds of one’s eventual destruction. For decades the Big 3 have fought against fuel efficiency, spending gajillions of dollars lobbying against the CAFE fuel economy standards instead of just building better cars. And now, because they can’t build a good small car, the Big 3 are begging for help. In the same way, Republicans have for years been resisting any legislative efforts to push fuel economy, and look what just happened to them. Congressman John Dingell of Detroit, although a Democrat, has been the Big 3’s biggest supporter in DC (his wife is an executive at GM), and now Henry Waxman is trying to take away Dingell’s precious chairmanship of the Energy and Commerce Committee. In all these cases, we are seeing people and groups being beaten by that against which they fought the hardest. Very Jungian, don’t you think?

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Posted in Business, Environment, Politics

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The GOP is Splitting in Two

Posted on November 7, 2008 | 3 comments

In the wake of sweeping Republican losses on November 4, we are seeing the GOP fracture into two wings. The first wing is the traditional, intellectual wing, as personified by George Will. This is the low taxes, small government, muscular foreign policy wing. The second wing is the Main Street, rail against the elites wing, as personified by Sarah Palin. This is the social conservative, religious right, law and order wing. These two wings always had a tenuous coexistence in the party, with the intellectual wing using wedge social issues to get the Main Street wing riled up, and then screwing them economically. The intellectuals provided the money and ideas while Main Street provided the votes.

This tenuous coexistence, however, has now turned into open hostility, with each side blaming the other for McCain’s loss. And as the GOP tries to figure out what it really is, and how to avoid a third consecutive stomping in 2010, these two wings are fighting for dominance. Unfortunately for the future of the Republican Party, the two wings can’t reconcile, and neither wing can win an election on its own. After all, even with the wings combined, they just got smoked by Barack Obama’s politics of hope. On their own, they are doomed.

The intellectual wing itself has two components – the rabid neocons and tax cutters versus the more moderate Rockefeller Republicans – but they both share a commitment to lowering taxes and shrinking government. They also share a slavish devotion to President Reagan. McCain, despite his campaign rhetoric in 2008, is part of this wing. As Joe Klein from Time described him:

He believed in the unilateral exercise of American power overseas, with an emphasis on military might rather than diplomacy. He believed in trickle-down, supply-side, deregulatory economics: his tax plan benefited corporations and the wealthy, in the hopes that with fewer shackles, they would create more jobs.

But widening income disparity and the financial crisis of 2008 have fundamentally discredited that economic approach. Reaganism failed. And while the Rockefeller Republicans might be able to craft a workable economic theory, they are so marginalized in the party that they can’t ever win. Moreover, there simply aren’t enough Americans driven by desire for lower taxes to support this wing of the party. There are too many citizens who actually want their government to provide something.

The Main Street wing of the GOP is the part that believes there is a “real America,” as opposed to the liberal “fake America.” It’s anti-elite, anti-intellectual and anti-media. Which is its main problem: it’s against everything and for nothing. It is fueled purely by anger and self-pity. This is unsustainable; without new ideas, this wing will wither and die. It will be consumed by a black tumor of hate, like Lee Atwater‘s brain.

Also, much like the intellectual wing, the Main Street wing isn’t large enough to win on its own. There aren’t enough voters who buy into its false dichotomy. This wing, however, has a chance. If it were to embrace a truly populist economic strategy, it might be able to peel off enough blue collar Democrats to build a winning coalition. Even the Wall Street Journal notes that “new Republican voices are popping up to argue that the importance of working-class voters means the party needs to develop economic policies more obviously directed toward the working class than the capitalist class.” But that would require a complete reworking of Republican economics: supporting unions and trade protection at the expense of corporate interests and wealthy individuals. It would require an approach that sounds strikingly similar to….the Democrats.

This is the problem facing GOP strategists as they figure out what to do. They want to chase the voters, but that will require moving away from their core philosophy, because that’s what the voters are doing. As Politico put it, the GOP is “a party that is overwhelmingly white, rural and aged in a country that is rapidly becoming racially mixed, suburban and dominated by a post-Baby Boomer generation.” Some strategists want to pursue growing demographics, namely black and Hispanic voters. But how do you do that when your two wings cater to wealthy WASPS and white rednecks, respectively? Both wings of the GOP have painted themselves into electoral corners, and there is no obvious way out.

Perhaps the recent election marked the generational shift that we all knew was coming. For the past 20 years government has catered to, and been run by, people of our parents’ generation – those who grew up in the 1940’s and 1950’s – often leaving those of us from later decades mystified at the decisions being made. And we kept wondering, as old fogeys (Ted Stevens!) retired or died, and young folk grew old enough to vote, when our generation would start making decisions. Nobody WE knew hated blacks, or thought that poor people should be abandoned, so why was government pursuing such crappy policies? Why was the GOP so out of touch with our generation? After all, when you belong to a generation where a third of you have tattoos, it’s hard to see how branding a black candidate as “Muslim” is going to work. And it didn’t: Obama won, while conservative congressional candidates lost.

The GOP isn’t dead; its basic message of small government and individual liberty will always resonate. But it needs to do a lot of work to retool that message into a governing philosophy that will appeal to the new generation.

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Shock & Awe – The Good Kind

Posted on November 5, 2008 | 1 comment

Last night’s results created the type of shock and awe that we can all use. Not so much shock for me, since I’ve been confident of an Obama win for about a week, but definitely awe.

I was watching the results last night with about 20 friends, and we are generally a boisterous crowd. But when Obama gave his acceptance speech, we were utterly silent. That silence was not because we wanted to hear Obama’s dulcet tones; it was because we were struck speechless by the import of the moment.

America’s first black president. Think about it. We did; in mute awe my friends and I contemplated the greatness of that achievement. None of us are black, but we all recognized how important this was. Obama’s election probably won’t solve all the country’s race problems, but it sure feels like a big step. How can you not love a country where a black man named Barack Hussein Obama can rise from modest means to become president?

Yet our awed silence transcended Obama’s race, for there was a sense that his election represented a transformation of American politics. Votes for Obama were votes against divisiveness and for unity. They were votes against dishonesty and for solutions, against paralysis and for progress. They were votes that swept aside the past eight years, years of Bush and DeLay, of crony capitalism and Terri Schiavo. We were silent because Obama’s victory justified – wait for it – the audacity of our hope, our hope for change.

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Treasury Plan Turns Taxpayers into Dumb Money

Posted on November 4, 2008 | Leave a comment

Yesterday’s Wall Street Journal ran an article about how the Treasury’s bank buyout fund is luring “thousands of banks.” When the program was first announced, banks were afraid to apply, thinking it would make them look weak, but now they are afraid not to apply, since not having government money could make banks look like they were too weak to qualify.

But the article also noted that banks are thronging the Treasury because the Treasury capital – taxpayer capital – is so cheap. Here is the money quote:

Now institutions across the U.S. worry that if they don’t try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments.

Many years ago I worked for a venture fund that was captive to a small investment bank. All the other VCs looked at us as dumb money. “Nobody else will invest in it, call those guys…they’ll do anything to get a banking fee.” Dumb money is who you call to bail out your losers. Dumb money accepts whatever price you offer, and doesn’t ask for better terms.

The Treasury department, acting on behalf of the taxpayers, is dumb money. WE’RE dumb money. That sucks.

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End of the Tax Revolt?

Posted on October 23, 2008 | Leave a comment

Back in early 2007 Mark Schmitt wrote an interesting piece in Washington Monthly suggesting that America might be approaching a time when talking about tax hikes was not an automatic loser. He pointed out the financial crises that are likely to come if the government doesn’t increase revenues, and then discussed various ways that a bipartisan consensus could emerge. In the midst of the current financial crisis, with government spending suddenly increasing by a trillion dollars, Schmitt’s argument is even more powerful. Check it out here.

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In Defense of Elitism

Posted on October 22, 2008 | Leave a comment

The McCain-Palin campaign, and Republicans in general, keep attacking “elites.” What’s so terrible about being elite? When the US military has a difficult assignment, who does it send? Its elite commando teams, the SEALs and the Green Berets. If you want to win a gold medal, who do you send? An elite athlete like Michael Phelps. If you have a heart problem, what doctor do you want? An elite cardiologist.

For doing difficult things, we generally want the best prepared person we can get. After all, you wouldn’t get on an airplane piloted by someone who had barely gotten through flight school. But when it comes to the presidential election, the contest for possibly the hardest job in the world, suddenly the approach gets reversed. Advanced training and cerebral approaches are eschewed in favor of plain speakin’ and gut instinct.

I’m not saying you have to go to fancy schools in order to be a good president. George W. Bush went to two of the fanciest, and he’s pretty well cheesed things up. But neither should prestigious degrees or eloquent speech preclude one from being elected. There is nothing inherently bad about being elite, nor inherently good about being average. That being said, I don’t want Joe the Plumber running this country, although I want my president to remember who Joe the Plumber is. Or as Jon Meacham put it, “Do we want leaders who are everyday folks, or do we want leaders who understand everyday folks?”

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