“The FSOC’s decision to expand the too-big-to-fail designation to nonbank firms will be seen as the most damaging action taken under Dodd-Frank”

Instead of going away, “Too Big To Fail” is expanding:

 

It was no surprise that the Financial Stability Oversight Council (FSOC) decided last week to cite a number of nonbank firms as systemically significant, placing them in line for greater regulatory scrutiny by the Federal Reserve. What was a surprise is that — in the midst of a huge outcry in Congress about banks that are too big to fail (TBTF) — neither Congress nor the administration asked the FSOC to stop the designation process until the too-big-to-fail issue had been fully thought through. After all, by designating some nonbanks firms as TBTF — GE Capital, AIG, and Prudential Insurance are in the group — the FSOC has created a whole new set of institutions that will now be considered TBTF. [via The American]

 

America move from entrepreneurial capitalism to state crony capitalism continues step-by-step.

IMO, companies that are “too-big-to-fail” need to be broken up.

 

 

Time for a Theme Song for the “Financial Cliff”

My choice is “Ship of Fools” by World Party:

I’ve used it before.

Idea for Avoiding the Fiscal Cliff: 4 X 4 X 4

How about this idea for 4 year plan:

• 4% across the board income tax surcharge for all taxpayers regardless of income bracket
• 4% across the board reduction in real spending (not projected increases in funding) for year one
• In each subsequent year, total real spending has to decrease an additional 4% (it doesn’t have to be 4% across the board though)
• At the end of 4 years, the income tax surcharge expires automatically
• If in any year, total real spending doesn’t decrease 4%, the Income Tax surcharge is suspended
• If in any year, total real spending doesn’t decrease by 4% the permanent base pay of members of congress, congressional political staffers, POTUS, VPOTUS, and executive branch political staffers decreases by 4%

Its better then the cliff. Also a “4 year” plan sounds like a “5 year” plan so the lefties should like that. I think Instapundit’s  ideas should be included as well.

Call it the Purpleslog 4 x4 x 4 Plan.

 

Keep the Dollar Bill, Ditch the Penny

This, not this.

I like the idea of Lincoln Nickles.

Amen to This: “it’s important it’s seen as a socially desirable thing to be an entrepreneur”

Quoting Elon Musk via Next Big Future. Read it.

Anti-Spam Lawfare

It sounds like some Computer Scientists…

A team of computer scientists at two University of California campuses has been looking deeply into the nature of spam, and they think found a ‘choke point’ [PDF] that could greatly reduce the flow of spam…If a handful of companies like these refused to authorize online credit card payments to the merchants, ‘you’d cut off the money that supports the entire spam enterprise,’ said one of the scientists. [Link]

…has caught up to my thinking…

Often much of the cost of an information security incident falls not onto the party that is responsible for providing the Security but onto third parties. While the enterprise/individual that has the incident may incur costs, much of the cost of this InfoSec externality is put onto others (organizations/individuals/taxpayers).

What is lacking is proper incentives. By incentives I do not mean government regulations or criminal statutes.

I mean money. Getting money is a good incentive. Avoiding loosing money is a good incentive. Not having your Balance Sheet, Income Statement, and Cash Flow Statement be effected by information security loss is a good incentive.

What is needed is Information Security Lawfare.

If an organization or individual deploys information technology in such a way that normal best practices are not followed (read: Duty of Care) and is subsequently used as part of an information security incident, those effected by that information Security incident should sue for a Tort Remedy.[link]

Why leave Lawfare just to the bad guys?

Message from the Fed: Bend over, here it comes Proles! (On the Bailout Series)

My fellow Americans, prepare to get fucked again.

Bad news from the Federal Reserve.

01. Quantitative Easing is DC newspeak for increasing the money supply big time.

02. This type of monetary action has the effect of causing Inflation.

03. Yes, my follow Moorlocks, the Fed wants to ramp inflation up.

04. They don’t have the balls to say so.

05. And they waited until after the election, so those of us who do…well fuck us there is nothing we can do about it.

…anyways..

06. Inflation sucks.

07. Inflation devalues your debt.

08. Inflation devalues your savings.

…in other words…

09. Inflation rewards bad economic behavior and punishes good economic behavior

10. Inflation-as-policy is a way for the Political Class to deal with the Debt issue that protects them and their fellow elites and Big Gov types (both here and abroad), saves those who made really bad economic decisions, and punished everybody else.

11.  I was never one of those who wanted to alter or dismantle the Fed. No longer. My mind is a clean slate on this issue. The Fed is was supposed to be about fighting inflation. Now that they have dropped that duty by their actions, what should the next/future US Central Bank Systems look like (properties to include simplicity, transparency, mission focus, smaller-size)?

Listen to World Party’s Ship of Fools – Purpleslog’s chosen financial debacle theme song

What is Wealth?

Arhering’s post got me thinking. I don’t think this post will interest anybody.

What is Wealth?

Personal  wealth is:

>>The value of all my tangible and intangible stuff

…less…

>>The ongoing costs (real and opportunity) of that stuff.

Tangible “stuff” is things like the net of  material possessions, property, investments, NPV of income streams, currency, living situation physical comfort, leisure/recreation time  and I would even say things like NPV of future employment income.

Intangible “stuff” includes things like current and future health, gains from family networks, gains from social networks, education, opportunity variety, experience variety, and so on.

Costs would be things like: time I spend at work, Mortgage, rent, upkeep, and opportunities forgone.

So, how wealthy am I?

(old found draft post) Hands off my 401k

Oct 25, 2008 @ 8:35

This must have been inspired by some Obama advisers who wanted to get rid of 401ks. Their plan was to force the same contributions and give Americans something like a 2% return off it. This would have effectively decreased the wealth of Americans as more money would need to be saved for retirement (out side of the government plan) and this savings would have no tax favoured status. I haven’t heard anything about this recently though, so that is good news.

—

http://hotair.com/archives/2008/10/23/democrats-to-kill-401ks-for-privatized-social-security/

http://hotair.com/archives/2008/10/23/pethokoukis-on-401k-demolition-socialism/

Anna Schwartz on the current economic mess (On the Bailout)

Wisdom from an old Monetarist:

The credit crunch, which is the recession’s actual cause, comes only from a lack of trust, argues Schwartz. Lenders aren’t lending because they don’t know who is solvent, and they can’t know who is solvent because portfolios remain full of mortgage-backed securities and other toxic assets.

To rekindle the credit market, the banks must get rid of those toxic assets. That’s why Schwartz supported, in principle, the Bush administration’s first proposal for responding to the crisis—to buy bad assets from banks—though not, she emphasizes, while pricing those assets so generously as to prop up failed institutions.

What about what the administration is doing?

President Obama’s stimulus is similarly irrelevant, she believes, since the crisis also has nothing to do with a lack of demand or investment.

What about “systemic risk”?

Schwartz considers this an excuse for bankers to save their skins after making so many bad decisions. “The worst thing for a government to do, though, is to act without principles, to make ad hoc decisions, to do something one day and another thing tomorrow,” she says. The market will respond positively only after the government begins to follow a steady, predictable course. To prove her point, Schwartz points out that nothing the government has done to date has really thawed credit.

Deflation and Inflaton?

“The risk of deflation is very much exaggerated,” she answers. Inflation seems to her “unavoidable”: the Federal Reserve is creating money with little restraint, while Treasury expenditures remain far in excess of revenue. The inflation spigot is thus wide open. To beat the coming inflation, a “new Paul Volcker will be needed at the head of the Federal Reserve.”

Her and Friedman’s book has long been in my anti-library.

“…scientists in Australia have found a way to stop the body from attacking organ transplants…”

This is awesome news if it works out.

Now we just need to allow folks or estates to be compensated for Organ Donation to increase the supply/availability.

One Way Investment Banks looted their customer: The IPO Process

I am just capturing my comment at TDAXP:

One area in which Investment Bankers did great harm to the US Economy was in the area of handling IPOs.

Investment Bankers essentially used the process as a means of looting wealth from the entrepreneurial firms going public for the benefit of the investment bank and some its choice customers to the detriment of the Entrepreneurial Company and its founder/owners.

While I don’t know if the process started out that way, by the time of the internet boom in the mid 1990’s it was.

Here is how the looting worked.

ACME Systems is a growing Network Service Provider. The founder and the VCs decide to take the company public in order to raise cash for growth for company, to reward the founders and reward/payback the early investors and VCs.

ACME Systems hires investment bank Natas, Laab & Ikol (NLI) to help with this. ACME will pay NLI to 1) Value the company and 2) Manage the Public Offering.

NLI will get a shitload of money for this.

Preparing for the IPO, NLI determines that the ACME public offering will be 10 million shares at $20/share valuing ACME at $200 million. The source of the shares will be from the founders (some of their shares), the early investors (some of their shares),  but mostly the shares will be new shares with purpose of raising money for the company to further grow (and become profitable or more profitable.

So, IPO day occurs and lo and behold the stock price jumps up to $27/share. The business journalist and shareholder are giddy at the day one bump. By the end of the week the price is $32/share. The company is now valued at $320 million and market value increase of $120million.

This IPO day scenario happened again and again.

So, everybody was happy right? It is a good thing that the stock price jumped up so high on day one,right?

The answer is no. The founders, initial investors and the company just got looted NLI.

Besides the large pile of cash paid to NLI for their “expertise” in handling IPO, they also bought shares at that opening price and let choice customers of theirs (favorite insiders) all by shares at that opening price.

Rarely did the stock price drop after IPO day. It almost always rose. This suggests that through malice, NLI purposefully recommended an IPO price/share that undervalued the company. The $120million rise in market price – that wealth should have gone to the founders, early investors, and the cash accounts of ACME. The $120 million that should be in ACME bank accounts for growth and job creation has instead mostly ended up in the bank accounts of NLI and its favored customers.

NLI did nothing to “earn” this extra wealth. Remember, they were paid big time to manage the IPO and value the company. This extra wealth is money they looted by manipulating the process. How many companies with good ideas and products would have survived if they had more of the they should have had in order to get their product or service offering up and running? How many jobs would that have been? How much has lost by these companies not surviving because NLI pilfered from them?

I am glad NLI and real-world banks like them are going or gone. Fuck them. They are not needed anymore. Maybe in the old days, there was no other way to do IPOs. That is no longer true.

The right way to do IPOs is through an Open Auction [1] after a set time period by which firms and individuals can use their individuals skills to determine an appropriate share price. Using this Wisdom-of-the-Crowds approach a good share price can be derived and the IPO can do what it is meant to do: raise cash for the company by selling a percentage of the company at a fair price.

[1] http://www.wrhambrecht.com/ind/auctions/openipo/index.html

Protectionism Rising?

I am troubled by the by the anti-free trade signals being made by USGOV toward Mexico as documented by TDAXP.

I think the default view of many Americans (maybe all humans) is that of protectionism. I think our brains evolved in a zero-sum economic world, and while we are still evolving this is still la hard concept to shake.

I think this is demonstrated by the rising interest in so-called local currencies which I think is just another expression of a default protectionist PoV.

Photo by: Aimeedars – http://www.flickr.com/photos/aimeedars/3125918354/

Entrepanuerial Solutions to the Bailout (On the Baliout aka The Great Looting)

How about new banks?

Let Wal-Mart get into banking like they hinted at a few years ago. I could give a fuck if current bankers and their lackeys in congress are opposes. Wal-Mart would have a customer focus and would optimize.

Hey, I’d even let the US Postal Service get back into banking. Let them open a US Postal Service Credit Union and use post officers as branches.

If Congress want to feel like they are doing something, let them set up a expedited process for issuing federal banking charters.

Close down the insolvent banks.

No more bailouts (aka taxpayer lootings).

We need new banks.

Out-of-the-Box thinking on Pension and Social Security reform

From that Instapundit guy:

But even much more modest progress–extending healthy middle age from 60 to, say, 80–would permit significant shifts in retirement ages and allow for a longevity dividend that could go a long way toward preventing the looming pension meltdown. Greater progress might make the problem go away entirely. So perhaps it would make sense to steer some of the federal money currently going to research on treating the diseases of old age–an approach that leads to older, but frailer, people who are a drain on public resources and whose quality of life is iffy–to research on slowing or reversing the damage that aging does, leading to healthier old people who can work (and pay taxes) longer, while feeling better and enjoying life more.

That sound pretty smart to me. We need to keep a future focus on policy ideas.

Listen to this: “Bad Bank” from This American Life…

…here. It is not just from This American Life, but from the folks associated with Planet Money (and their Podcast).

Part of “On the Bailout”.

Anybody read anything from Bobbit recently on the “Market-State”?

I have not been able to find anything too recent (post financial meltdown) from him on the Market-State concept. I should dig up my state notes and post them. I wasn’t sold on the Market-State model and have some alternatives that are (or may be) evolving.

Washington Math Sucks: $30,000 (On the Bailout)

$275 Billion / 9 million = $30,000 (rounded down)

I am a sucker. Partially I rent becuase I didn’t buy becuase I didn’t want to buy into a bubble.

$30k is essentially being given to those that bought houses they couldn’t afford with the money taken from those who did not behave that way.

WTF is going on with the USA?

Let housing prices drop.

Let the homes be foreclosed on.

Let the banks go under.

Say no to Lemon Socialism. Say no to a new liberal fascism.

Death to zombies.

Death to Zombies

The PurpleStimulus or Let Banks Fail…but fast and other goodies (“On The Bailout” Series)

This started out as a comment at TDAXP [1].

Here is what the USAGOV should do (not what they plan to do [2]) – and it should be done quickly and without mercy:

1) Have Bank regulators set the appropriate capitalization level for the bank

2) Assuming level not met, declare bank insolvent.

3) Wipe the shareholders (common and preferred) equity out.

4) Wipe out a significant amount of the long term debt (at least 50%)

5) Convert the rest of the debt to “equity”.

6) Fire the Board. Fire the Executive Leadership team. Fire the Auditors.

7) Hold an Open Auction for Preferred Stock and Common Stock to get capital infusions.

8 ) If the appropriate capitalization level set by regulators is not reached, USAGOV also makes an investment as either as a secured loan or as a purchase of prefered stock (plus warrants) at an above market coupon rate (say 1.5 X market rate) to reach that level while also transferring all of the “toxic  assets” to a USAGOV fund that maybe the Taxpayers can get something back someday.

9) The executives, boards and auditors should be investigated for fiduciary misconduct and civil litigation undertaken by US Attorneys to recover cost and looted wealth on behalf of the old shareholders.

Primary End Result: A working publicly-tradeable bank with an appropriate level of capitalization that is without “toxic assets”.

Secondary End Result: Taxpayers/USGOV may collect some money eventually from the Toxic Assets.

Note 1: USGOV should create closed-end mutual funds to sell off pools of the Preferred Stock to recover USGOV upfront outlays [3] and lessen USGOV temptations to interfere with those banks.

Note 2: I don’t have any “rescue” for Mortgage holders. Let the mortgages fail, and don’t prop up housing prices. This needs to correct.

Note 3: I don’t have any “rescue” for long failing companies. Let them die. Let Creative Destruction take place. Don’t feed the zombies.
http://www.wisegeek.com/in-business-what-is-a-zombie.htm

Note 4: The only stimulus I am interested in [4] is something along the lines of:

(a) Create Incentives for Businesses to Make Capital Investments by allowing 100% immediate depreciation
(b) Cleanup and rebuild America’s National Parks – and the state and local parks too.
(c) Finish the Yakima Nuclear Waste project
(d) Clean Up the Brownfields and toxic dumping grounds
(e) Start planning and constructing a national network of Smart Power Grids
(f) Install Municpal Plasma Furnaces [5] [6] across the country to create energy and elimnate landfill trash dumps.
(g) Pick a single “Wow” project.

Note 5: I would be okay with just (a), (e) and (f) from above.

Note 6: On that too-big-to-fail crap. Any enterprise that is “too big to fail” should have anti-trust action taken against it by USGOV/DOJ to break it up rapidly. [7]

Note 7: The currently regulatory alphabet soup is a failure. SOX is a failure. They should be replaced with something. I will leave that something for now to Future Purpleslog.

If USGOV tries to lessen this, they will just stretch it out and make it worse. Nor will the Political class be able to avoid giving rewards, favors, and protection to allies. They just can’t help themselves.

Update – Note 8: USGOV should fast any regualtory red tape for those startup up brand new banks from scratch.

—

[1]
http://www.tdaxp.com/archive/2009/02/11/what-is-the-difference-between-sirius-and-citi.html/comment-page-1#comment-239335

[2]
http://hotair.com/archives/2009/02/11/the-only-man-for-the-job-lays-an-egg-on-wall-street/

[3]
https://purpleslog.wordpress.com/2008/11/16/monetize-the-tarp-on-the-bailout-part-27

[4]
https://purpleslog.wordpress.com/2008/11/28/a-better-stimulus-plan-on-the-bailout-32/

[5]
https://purpleslog.wordpress.com/2008/06/23/a-tech-based-energy-idea-tha-i-like-municipal-plasma-furnaces/

[6]
https://purpleslog.wordpress.com/2008/11/13/energy-entrepreneurship-plasma-gasification-of-trash/

[7]
https://purpleslog.wordpress.com/2008/11/24/public-policy-guidance-on-too-big-to-fail-on-the-bailout-part-28/

—

“Malcolm Gladwell: What we can learn from spaghetti sauce”

I have been running through all of the old Ted Talks via my iPod. It was a joy to hear this one again: “Malcolm Gladwell: What we can learn from spaghetti sauce”.

Here is the video version from youtube:

Creative Destruction Example in Milwaukee

The local Schwartz’s bookseller chain just died (it couldn’t compete with B&N in the fleshspace, or Amazon.com in cyberspace), but its 800-CEO-READ:

At a time when independent, bricks-and-mortar general bookstores all over are closing, 800-CEO-READ is an independent that’s thriving. With just 15 employees and 3,000 square feet in a renovated office building in the Third Ward, it has not only successfully held its own against Internet and large-chain booksellers but has also carved a spot for itself as one of the nation’s premier sellers and arbiters of what is best in business literature.

Today it further secures its reputation as the tastemaker. Covert, the founder and chief mentor of 800-CEO-READ, and Todd Sattersten, the company’s new president, are coming out with their first book, “The 100 Best Business Books of All Time: What They Say, Why They Matter, and How They Can Help You” ($25.95).

I used to go to Schwartz’s all the time. It wasn’t as good a the University Bookstore, but it was some much better then the old bookseller chains. Then I discovered Borders (I would drive to Madison) and Barnes & Noble (I would go down to Chicago), and the wonderfully online Amazon.com.

Capitalism‘s Creative Destruction works. We are all better for it. Death to Zombies.

“County Executive Scott Walker and other county officials hope to reap significant savings by issuing the pension debt at about 6% and investing the earnings at 8%” (Fixing Milwaukee)

What idiocy!

So who will get fucked on the most on this?

1) The taxpayers who stick around  and will have to pony up in increased taxes and reduced services to cover this action which is sure to fail?

…or…

2) The larger pool of creditors, retirees, and taxpayers when the county declares bankruptcy in 10 years?

“Stimulunacy” – (On The Bailout Series)

Sigh.

While the various interest groups disagree over what the hundreds of billions should be spent on, they all buy into the superstition that government spending boosts “demand”. In fact, it does no such thing. A year from now, when the “stimulus” has disappeared without a trace and unemployment is higher than it is now, economists will be claiming that the “stimulus” bill was too small, or was spent on the wrong things, or that “consumers saved the money instead of spending it”. Superstition is notoriously impervious to facts.

The definition of “insanity” is, “doing the same thing over and over again, expecting a different result”. Given the failure of “stimulus” everywhere and every time it has been tried (the U.S. in the 1930s, 2001, and 2008, Japan in the 1990s, etc.), Keynesianism is actually a form of insanity. Accordingly, let’s call the belief in stimulus “stimulunacy” and the people who believe in stimulus “stimulunatics”.

As they battle to the death over the specific allocation of the spending (infrastructure, aid to the States, food stamps, tax rebates, etc.) the stimulunatics ignore the one thing that all such plans have in common. The very first step in every “stimulus” program is for the government to go out into the market and sell bonds.

When the government sells bonds, it takes money—and therefore demand—out of the economy. Then, some time later, the government puts the money back into the economy in the form of spending or tax rebates or whatever. Later, when the data becomes available, economists are shocked, shocked to find that “consumers saved their rebates” or “business investment fell by an unexpected amount”, or “imports increased”, thus completely negating the “stimulus”. Their hopes dashed, but their belief in “stimulus” unshaken, the stimulunatics then call for more “stimulus”.

[…]

While it is not possible for the Federal government to stimulate “demand”, it is possible to stimulate private business investment. It is private business investment that directly creates both employment and GDP growth.

The most potent way to stimulate private business investment in the U.S. would be to abolish the corporate income tax. Based upon recent CBO numbers, eliminating the entire corporate income tax would cost only about $326 billion the first year. This is less than half of the money that the stimulunatics are planning to pour down their various rat holes this year.
[Link: Real Clear Markets]

The US case for radical energy use efficiency and for switching to alternative energy sources

I have been looking to blog on this for sometime, but it came out in a comment at TDAXP:

The best case for the US to move to radical energy use efficiency and to switch a lot more to alternative energy (while sharing or selling the techniques and technology to the rest of the world to use as well) is that it will reduce the economic power and freedom of action of lots of bad actors in the world who tend to work against the interest of the US and other democratically inclined actors.

To be clear: I am not a green, I am not a watermelon. I have not been sucked into the faux-science quasi-religion of Global Warming. I don’t secretly want to de-industrialize the west. I do not advocate lower growth or less industry.

I want to drive an affordable electric or gas/electric or some sort of flex-fuel vehicle as a mobility device. I want to take a train once a month to Madison or the Fox River Valley. I want to see a new nationwide network of smart electrical grids powered by small scale nuclear plants, municipal plasma furnaces, wind and solar (where the make sense) or whatever else entrepreneurs can dream up and successively execute. I long for the day of orbital solar power.

I love the idea of (and the change it will make) of Russia and Saudi Arabia and the others of their ilk being deprived of their ability to make mischief  and misery for the rest of the world. I welcome their fall. This will be a good thing for the world.

I want the science fiction future promised to me as a kid, and I want it shared with the world.

One day…

The Folly of Keynesian/Stimulus Thinking or David Manley is My New Hero (on the Bailout #33)

Here is what David Manley, my new Economic Hero, wrote in a comment on ManSizedTarget:

My foolproof ten point plan to end the recession:

1) Boost infrastructure spending and reduce the cost of consumer goods by building a 6-lane highway across the Pacific Ocean to China

2) Lower the interest rate to negative 101% – people will be sure to borrow and spend if they can get more money back than they spend

3) Outlaw retirement savings to encourage consumption

4) Connect every major city in the United States with a high speed, green eco-train capable of running on sunshine and good vibrations

5) Synergize Green Technology with Social Entrepreneurship

6) Extend the Head Start program to include everyone over 65 years of age

7) Give Americans confidence in their home equity by outlawing foreclosures and adding one zero to all home prices

8) Boost retail spending by declaring 11 new “Federal Christmases” to occur on the 25th of each month.

9) Outsource all manufacturing to China so the U.S. economy can refocus on its strengths, such as dog grooming salons, reality TV production, and advising China on how to sell us stuff

10) Boost Americans’ confidence in the economy by pointing out that never, ever, in the history of the United States has there been a recession while an African-American has been president.

I think his “proposals” would be mod’d up on Digg.