Philip Greenspun (via Luke Froeb):
I spent a few days recently in the company of some money managers with a total of about $2 trillion to invest, precisely the sort of folks whose confidence the government is currently trying to win. How did they feel about all of the rule and policy changes coming out of Washington and the new more muscular government? Terrified.
The “real money” investors didn’t want to invest alongside the government. Their concern is that if things go south, the government will take 100% of the value left in the bank or whatever and leave private investors, including recent ones, with nothing. This is precisely what happened to recent investors in Fannie Mae.
The “real money” investors didn’t want to see judges modifying contracts, e.g., bankruptcy judges resetting mortgage payments at a lower level and reducing the principal owed. As far as they were concerned, a central tenet of the U.S. Constitution is that people are free to make contracts. Given how mortgages are split up among investors, a foreclosure is greatly preferable to these folks than a modification. In a foreclosure the most senior investors get what they expected, i.e., their money back. The holders of the most junior tranches, which carried a higher return and were known to be high risk, would get nothing. This is also what they would have expected. If mortgages are modified by government action, however, it is unclear how the obligations among the various private parties should be adjusted.
The punch line:
Much of the justification for government intervention comes from the assertion that markets have failed. One money manager scoffed at this idea. “The markets are working fine, but they’re giving people answers that they don’t like, so people cry market failure.” Stocks and bonds low? That’s because investors are afraid of a prolonged depression and continued government interference. House in a jobless region of Michigan worth almost nothing? A place with 50% of its former jobs only needs 50% of its houses. There are plenty of former steel towns where the price of a comfortable house stabilized at $20,000 decades ago and has barely moved since.
What did these guys want the government to do? Nothing, basically. “Back in the 19th Century, there were a lot of steep crashes, guys got wiped out, and the economy came back quickly.” What’s different now? The government is a lot bigger and more powerful. Rich companies and people can put some of their wealth into lobbying and demand that the government prevent them from getting wiped out (or at least slow the process).
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This is kind of funny. Greenspun was a participant in the last big Fed induced boom and crash, the late 1990′s tech bubble. The company he helped found, Arsdigita, imploded in late 2000. It had lots of legal problems and infighting as well. Apparently, $38 million was flushed down the toilet and many people, understandably, were not happy about it.
A former employee has a very interesting take on this. Link: http://michael.yoon.org/arsdigita
Favorite quote: “One time, a group of us were standing around in the atrium of ArsDigita HQ, and Philip was holding court. (As you may know, Philip is a talented public speaker with an exceptional ability to entertain an audience.) This time, Philip was describing how cool it would be to have a koi pond suspended from the ceiling of the atrium, so you could see the fish swimming from beneath and from all sides. Brian Stein replied, ‘You know what would be even better? A solid-gold trash can, burning cash 24/7.’”
I forgot to mention something about Greenspun’s post on government action. He’s right and so are his “real money” investors.
So, J Cortez, basically you’re saying that he’s a moron and no further attention should be paid to him.
heuristic: So, J Cortez, basically you’re saying that he’s a moron and no further attention should be paid to him.
No. I guess my post was pretty pointless. It’s just rambling criticism. My apologies.
He’s just another smart person that, like many others, caught the bubble hysteria and paid the price.
Regarding the current government machinations, his post was totally right on.
Education and Ethics
Saturday, February 14, 2009
Entrepreneurs Can Set The Record Straight!
Entrepreneurship can be a very specialized skill but we are living in a time when entrepreneurship needs to become something more, something more encompassing. It is like the difference between good economics and bad economics. It is like being able to see the long run (not just the short run) or being able to see how everyone is affected rather than just a few.
The reason I say this is because entrepreneurs who accomplish their specific goal may find that their success in the future is greatly interfered with if they do not expand their role. Entrepreneurs whose social conscience is more world embracing will be alert to the destruction of the market and alertly realize that there is a serious attack on entrepreneurship in these, the Dark Ages of economics that we are living in.
Are you only partially entrepreneurial? Or are you alert to the destruction of the entrepreneurial environment but too cowardly to do anything about it?
Entrepreneurs are the driving force of the economy so they are very powerful. Therefore it is their voice that will command great authority. And that authority is authentic and moral since it is a natural part of the economy.
It is time for entrepreneurs everywhere to use their keenness to find ways to reach people with the truth of the market – that it is the bringer of liberty and justice – and the falsehood of the government – that it is parasitic, corrupt, and inept.
The problem was that after those crashes in the 1800′s, the economy did not come back quickly.
From Wikipedia:
“The depression started in the United States following the Panic of 1873. The National Bureau of Economic Research dates the contraction following the panic as lasting from October 1873 to March 1879. At 65 months, it is the longest recession identified by the NBER.[1] The depression has been dated from 1873 until as late as 1897.[2]
Some commentators suggest that the depression actually lasted into the 1890s, and was a price depression, not a production depression. According to some economic historians, this was not really a Depression if production and GDP grew throughout the period (see table below). The confusion comes from the fact that prices were falling because of greater industrial productivity and the presence of sound money (gold and silver). There is no clear agreement among historians and economists.”
mickslam: “The problem was that after those crashes in the 1800′s, the economy did not come back quickly.”
Actually they did, and far more quickly than depressions in the 20th century. As the Wikipedia article notes, the “recession” of 1873 to 1879 was not a recession at all. Most historians have the mistaken idea that falling prices indicate economic problems. They don’t. Robert Higgs has an excellent book on that particular “recession” and shows that output and wealth grew very rapidly during the “recession.” In fact, prices will fall naturally if the money supply doesn’t grow as fast as the economy grows, but it’s no problem, as that period in US history demonstrates.
Just as economists today adjust nominal prices by deflating them with an index, they would need to adjust the prices in the late 1800′s for price deflation to get a true idea of how the economy was doing. But based on production figures, they would find that no recession or depression happened at all.
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