Year: 2010

Summer “Vacation”

By James Kwak

Tomorrow I am beginning my summer internship (for those who don’t know, I’m a law student between my second and third years). I’m going to be working in death penalty defense.

Sometimes people ask me how I find the time to write this blog. The answer is that being a student at the Yale Law School takes a good deal less time than a real job. (You can, of course, make yourself very busy with clinics, journals, and other activities, but you don’t have to.) But this summer will be like a real job, and I intend to spend the time that I’m not working with my family, which means that I will be cutting way, way back on blogging this summer. I’m guessing that I’ll write about two posts per week, but I would not be too surprised if I don’t even manage that, and there’s a small chance I won’t have time for anything at all.

I expect that I’ll get back to something close to my usual frequency in late August or early September.

Thank you for taking the time to read the blog.

The Future of Personal Computing, Part 2

By James Kwak

(This is Part 2 of 2; Part 1 covers the shift in personal computing from the age of the standalone PC to the age of cloud computing.)

We left off with the idea that personal computing was inexorably, though slowly shifting toward a Web-based model in which our computers’ main purpose is to run browsers and we spend most of our time on the Internet. A decade ago when this idea became popular it was not particularly practical, because you simply couldn’t do very interesting things in a browser; it was originally designed, after all, for reading static web pages. But in the past decade, web sites have become much richer and interactive — think about something like Gmail, with its automatic refreshing and keyboard shortcuts, or Google Documents, which allows multiple people to edit a document at the same time — to the point where most of what people do most of the time can be done in a browser.

But then there was Apple.

Continue reading “The Future of Personal Computing, Part 2” →

Regulatory Capture Underground and At Sea

By James Kwak

First there was the financial crisis. Then there was the West Virginia mine explosion. Now we have the BP oil leak. In each case, we were treated to news stories about the cozy relationships between the industry and the regulators who were supposed to be regulating it. (Here’s the latest New York Times story on how the Minerals Management Service was captured by industry — a problem that has existed for a long time, but that the Obama administration apparently did little to fix.)

Occasionally people say that the story we tell in 13 Bankers is really the same in every industry. That would not surprise me. I do think that the financial sector is unusual for a couple of reasons. One is that the interconnections between the major financial institutions make each one too big to fail in a way that, say, Enron was not. Another is that modern finance is so complex that it makes it easier for industry lobbyists to run roughshod over congressional opponents. But the problem of regulatory capture is obviously not restricted to finance, and it is a problem that we are seeing all over.

I’ve been meaning to write about this, but I haven’t had and won’t have the time. Arianna Huffington wrote an article on the parallels between the financial crisis and the West Virginia mine disaster. Lawrence Baxter has two recent posts (on his new blog) on regulatory capture and the role of regulation. Obviously this problem is not easily solved, especially in the wake of the Citizens United decision, which gave corporations even more influence over our political life. But hopefully the BP oil leak will produce a wave of anger — and a demand for answers — similar to what the financial crisis gave rise to.

The Future of Personal Computing, Part 1

By James Kwak

This week, Apple passed Microsoft to become the most valuable technology company in the world (measured by the market value of its stock).* I’ve been wondering about Apple and, in particular, why “apps” — which at first glance struck me as a giant step backward in computing technology — have gotten so much buzz in the media. Then I bought an iPad, and while I understand apps a little better, I’m still perplexed. But since this isn’t a particularly technology-savvy audience, this is going to take some setting up. The background is here in Part 1; Part 2 will be coming shortly.

(Note that here I’m talking about personal computing, which is what people like you and I do on our own; enterprise computing is something very different that I’ve written about before, and still largely takes place on mainframe computers.)

A Little Background

Rather than recap the entire history of computing (hilarious synopsis here, hat tip Brad DeLong), I’ll start in the early 1990s. At this point, many people had personal computers, but for the most part they weren’t connected to anything except maybe a printer. (Actually, in the early 1980s my father brought home one of those primitive modems where you actually placed your phone receiver into a socket to communicate, so we could log into the mainframe at his university, but that was the exception.)

Continue reading “The Future of Personal Computing, Part 1” →

The Consensus On Big Banks Shifts, But Not At Treasury

By Simon Johnson, co-author 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

Attitudes towards big banks are changing around the world and across the political spectrum. In the UK, the new center-right government is looking for ways to break them up:

“We will take steps to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this will take time to get right, the commission will be given an initial time frame of one year to report.”

The European Commission, among others, signals that a bank tax is coming; presumably, as suggested by the IMF, this will have higher rates for bigger banks and for banks with less capital. And other European officials are increasingly worried by the lack of capital in German banks, by the recent reckless lending sprees in Ireland and Spain, and by the dangers posed by banks that are much bigger than their home countries (e.g., Switzerland).

Yet top Obama administration officials refuse to change their opinions in the slightest; they have dug in behind the idea that they represent the moderate center on banking policy. This is a weak position; it is simply a myth with no factual basis – the people who pushed effectively for more reform over the past few months were the center, not the left, of the Democratic party. Continue reading “The Consensus On Big Banks Shifts, But Not At Treasury” →

Is The SEC Still Working For Wall Street?

By Simon Johnson

The Securities and Exchange Commission (SEC) under Mary Shapiro is trying to escape a difficult legacy – over the past two decades, the once proud agency was effectively captured by the very Wall Street firms it was supposed to regulate.

The SEC’s case against Goldman Sachs may mark a return to a more effective role; certainly bringing a case against Goldman took some guts. But it is entirely possible that the Goldman matter is a one off that lacks broader implications. And in this context the SEC’s handling of concerns about “high frequency trading” (HFT) – following the May 6 “flash crash”, when the stock market essentially shut down or rebooted for 20 minutes – is most disconcerting. (See yesterday’s speech by Senator Ted Kaufman on this exact issue; short summary.) Continue reading “Is The SEC Still Working For Wall Street?” →

Good Government vs. Less Government

Or: Why the Heritage Freedom Index is a Damned Statistical Lie

This guest post was contributed by StatsGuy, a frequent commenter and occasional guest on this blog. It shows how quickly the headline interpretation of statistical measures breaks down once you start peeking under the covers.

Recently, a controversy raged in the blogosphere about whether neo-liberalism has been a bane or a boon for the world economy. The argument is rather coarse, in that it fails to distinguish between the various elements of neo-liberalism, or moderate deregulation vs. extreme deregulation. But if we take the argument at face value, one of the major claims of neoliberals is that countries in the world which are more neoliberal are more successful (because they are more neoliberal). I disagree.

My disagreement is not with the raw correlation between the Heritage Index and Per Capita GDP. A number is a number. My disagreement is with the composition of the index itself, and interpreting this correlation as causation between neo-liberalism and ‘good things.’

My primary contention below is that many of these measures used in the composite Heritage Index have nothing to do with less government, and a lot more to do with good government. It is these measures of good government that correlate to economic growth and drive the overall correlation between the “Freedom Index” and positive outcomes. Secondarily, I will argue that many of the other items in the index (like investment freedom) are not causes of growth, but rather outcomes of growth.

Continue reading “Good Government vs. Less Government” →

So Damn Little Money

By Simon Johnson

The financial reform legislation currently heading into a June Senate-House conference will, at best, do little to affect the incentives and beliefs at the heart of the largest banks on Wall Street. Serious attempts to strengthen the bill through amendment – such as Brown-Kaufman and Merkley-Levin – were either shot down on the floor of the Senate or, when their prospects seemed stronger, not allowed to come to a vote.

Senator Blanche Lincoln is holding the Alamo with regard to reining in the big broker-dealers in derivatives. But these same people are bringing to bear one of the most intensely focused lobbying campaigns of recent years, bent on killing her provisions (or weakening them beyond recognition). All the early indications are that the lobbyists, once again, will prevail.

At one level, Robert Kaiser nailed this topic in his recent book, “So Damn Much Money: The Triumph of Lobbying and the Corrosion of American Government.” Elections have become more expensive, with most of the funding provided by special interests. You can argue about which is the chicken and which is the egg, but the basic facts are inescapable. Continue reading “So Damn Little Money” →

Wall Street CEOs Are Nuts

By James Kwak

“Geithner’s team spent much of its time during the debate over the Senate bill helping Senate Banking Committee chair Chris Dodd kill off or modify amendments being offered by more-progressive Democrats. A good example was Bernie Sanders’s measure to audit the Fed, which the administration played a key role in getting the senator from Vermont to tone down. Another was the Brown-Kaufman Amendment, which became a cause célèbre among lefty reformers such as former IMF economist Simon Johnson. ‘If enacted, Brown-Kaufman would have broken up the six biggest banks in America,’ says the senior Treasury official. ‘If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.'”

Oh, well.

That’s one passage from John Heileman’s juicy article in New York Magazine. It provides a lot of background support for what many of us have been thinking for a while: the administration is happy with the financial reform bill roughly as it turned out, and it got there by taking up an anti-Wall Street tone (e.g., the Volcker Rule), riding a wave of populist anger to the point where the bill was sure of passing, and then quietly pruning back its most far-reaching components. If anything, that’s a testament to the political skill of the White House and, yes, Tim Geithner as well.

Continue reading “Wall Street CEOs Are Nuts” →

The Last Hold Out: Senator Blanche Lincoln Against 13 Bankers

By Simon Johnson

By now you have probably realized – correctly – that “financial reform” has turned into a victory lap for Wall Street.

When they saved the big banks, with massive unconditional support (both explicit and implicit) over a year ago, top administration officials promised they would be back later to fix the underlying problems. This they – and Congress – manifestly have failed to do.

Our banking structure remains unchanged, the rules will be tweaked at the margins, and the incentive and belief system that lies behind reckless risk-taking has only become more dangerous. (The back story, if you can still stomach it, is in 13 Bankers).

There is only one small chance for any sensible progress remaining – and you are about to see this crushed in conference by the supporters of unfettered big banks. Continue reading “The Last Hold Out: Senator Blanche Lincoln Against 13 Bankers” →

Regulation vs. Structural Change

By James Kwak

Robert Reich discusses a theme that I think I’ve discussed before (and first heard expressed by Ezra Klein):

“The most important thing to know about the 1,500 page financial reform bill passed by the Senate last week — now on he way to being reconciled with the House bill — is that it’s regulatory. It does nothing to change the structure of Wall Street.”

Continue reading “Regulation vs. Structural Change” →

Why Does Steve Ballmer Still Have a Job?

By James Kwak

So, after questioning the iPad, I bought one.* My primary motivation was that I wanted to be able to watch old TV episodes on the commute to and from my internship this summer, and I think an iPod Touch is just too small. I also bought an Android phone, because my three-year-old Motorola RAZR2 v9m (who comes up with these product names, anyway?) developed a crack in the hinge, and because I wanted the best camera I could get on a phone. (My #2 use for a phone is not email — it’s taking pictures and videos of my daughter.)

Anyway, catching up on the last three years of mobile technology has provided ample food for thought. I have a long post on the Apple-Google(-Microsoft) war rolling around in my head somewhere, which I will hopefully write down later this week. In the meantime, here’s John Gruber‘s verdict on Microsoft:

“Three years ago, just before the original iPhone shipped, here’s what Steve Ballmer said in an interview with USA Today’s David Lieberman:

‘There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60 percent or 70 percent or 80 percent of them, than I would to have 2 percent or 3 percent, which is what Apple might get.’

“Not only was he wrong about the iPhone, but he was even more wrong about Windows Mobile. Three years ago Ballmer was talking about 60, 70, 80 percent market share. This week, Gartner reported that Windows Mobile has dropped to 6.8 percent market share in worldwide smartphone sales, down dramatically from 10.2 percent a year ago.”

Continue reading “Why Does Steve Ballmer Still Have a Job?” →

The Road To Economic Serfdom

By Peter Boone and Simon Johnson

According to Friedrich von Hayek, the development of welfare socialism after World War II undermined freedom and would lead western democracies inexorably to some form of state-run serfdom.

Hayek had the sign and the destination right but was entirely wrong about the mechanism. Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe. All industrialized countries are at risk, but it’s the eurozone – with its vulnerable structures – that points most clearly to our potentially unpleasant collective futures.

As a result of the continuing euro crisis, European Central Bank (ECB) now finds itself buying up the debt of all the weaker eurozone governments, making it the – perhaps unwittingly – feudal boss of Europe. In the coming years, it will be the ECB and the European Union who dictate policy. The policy elite who run these structures – along with their allies in the private sector – are the new overlords. Continue reading “The Road To Economic Serfdom” →

The Mystery of Capital

By James Kwak

So the dust has settled on the Senate bill, and it remains studiously vague about capital requirements — no hard leverage cap, for example. This is what the administration wanted, for two reasons: first, they claim that regulators need ongoing flexibility to modify capital requirements; second, they claim that they need flexibility to negotiate a uniform international agreement.

There is one thing in there that is controversial enough to get the attention of the bank lobbyists: the Collins Amendment, which Mike Konczal has written about here. The main provision of the amendment is that whatever capital requirements apply to insured depositary institutions (banks), they also have to apply to systemically important financial institutions, including at the holding company level.

Sheila Bair of the FDIC is in favor of the amendment, on the argument that bank holding companies should not be able to evade capital requirements that are imposed on their subsidiary insured banks; she doesn’t want to regulate the depositary institutions but have all her work rendered irrelevant because the holding company collapses, triggering a mess of cross-guarantees.

This seems entirely unobjectionable, but as Konczal points out, the real threat to the banks is that it makes it harder for them to engage in financial engineering on the holding company level to evade capital requirements. According to the Wall Street Journal, not only the banks, but also the administration itself is planning to try to kill this amendment (at this point, in conference committee).

Continue reading “The Mystery of Capital” →

The VC Tax Break

By James Kwak

The House of Representatives is considering a bill that would change the tax treatment of venture capitalists’ income (and that of private equity fund managers as well). Currently, VCs typically are paid “2 and 20” — that is, an annual fee of 2 percent of assets, plus 20 percent of profits. For example, let’s say a fund starts out with $200 million. Most of that money is invested by the fund’s limited partners — pension funds, endowments, insurance companies, the usual suspects. After ten years (roughly the average life of a VC fund), the investments made by the fund are now worth $400 million — a pretty humdrum return of 7 percent per year (before fees). The venture capitalists themselves will earn about $14 million ($200 million x 2% x 7 years)* plus $40 million (20% x ($400 million – $200 million)) equals $54 million. (Note that they earn that $40 million even for doing worse than the stock market’s long-term average return.) The limited partners get what’s left over after those fees. And before you start crying for the VCs, remember that a typical VC firm will have multiple VC funds going at once.

Right now, the $14 million is taxed as ordinary income, but the $40 million is taxed as capital gains — that is, at a tax rate of 15%. The bill would tax the $40 million as ordinary income (actually, 75% as ordinary income and 25% as capital gains), for an effective tax rate of about 35%.

The current tax treatment has never made sense to me. The lower rate on capital gains is supposed to provide an incentive for capital investment.** This is why, if you buy stock and sell it more than a year later, you pay tax on your gains at a lower rate. So clearly the actual investment returns on money invested in the VC fund should be treated as capital gains — but not the VCs’ 20 percent fee, since that’s compensation for fund management services, not returns on their investment. (VCs typically invest their own money in a fund, but it is only a small fraction of the whole, and no one is debating how that money should be treated.)

Continue reading “The VC Tax Break” →