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Campbell Conundrum
Tom Campbell gave this tutorial in a recent campaign appearance in Oakland, California. For the few political junkies actually paying attention at this early date, Campbell, a former US Congressman and Dean of the Cal Haas Business School, is running for Governor of California. Tom Campbell is stunningly competent on matters of economic theory (PhD with Milton Friedman), and he's put this in to successful practice within government service at almost every level. He also has legal knowledge of the highest caliber. For my tastes, he might hit the books on reputation theory, behavioralism, and a few other newer topics, but his foundation on the basics of monetary policy and his rejection of the cynical fallacy and false hope of applied Keynesianism and academic marxism is irrefutable.
His sensible politics aside, Tom Campbell has a resume that could land him at the helm of any university in America. This makes Tom Campbell a very valuable asset to the Republican Party, which at its apex held a small but devoted coterie of academic luminaries, a significant band of silent fellow travelers, and a solid majority of those that passed through institutions of higher learning. Today, with Joe the Plumber more articulate on economic matters than its 2008 Presidential standard bearer, the party's academic credentials need serious burnishing. Outside the party, potential allies range from the sensible sophisticates (Marginal Revolution, Reason, Cato, Heritage, AEI, etc.) to the strident blunt instruments (Rush, Hannity, etc.), whose capacity to persuade those other than the foregone is limited.
Given the growth in government financing of higher education, and the unsurprising drift toward statist ideology and conformism, it is unlikely that the Republican Party will ever be the belle of the non-hard science academic ball. Still, the party ignores academia at its perils, and it needs to do everything it can to elevate and embrace sensible academics to positions of prominence. Ronald Reagan went to a modest college, but he had WF Buckley and Milton Friedman to help light his way.
The conundrum remains: can Tom Campbell reach out to a broad enough audience with his ideas to make a difference? Jack Kemp he is not. I have these words of advice. Plato and Aristotle had little good to say about the rhetorical slight of hand employed by the sophists, however, their teacher Socrates admitted the Sophists were better teachers than he on linguistic weapons. Clinical truth and elucidiation is fine for monks, but charts and graphs didn't get Ross Perot very far, and a mastery of emotion and the dark arts of language is required to persuade the assembly. He may not be a star football player or an action hero, but Tom Campbell might aspire to Harry Potter.
Geithner 2.0: Don't Worry, I slept at a Holiday Inn
Geithner's latest on bank compensation continues a long line of fallacious thinking when it comes to effective regulation of the financial markets. Realizing that talent will flee TARP because of compensation rules, they are considering using the financial crisis as an excuse to regulate compensation at non-TARP banks, as well.
As readers of this blog are aware, the entrance and subsequent exit from the secondary market for subprime synthetics by the government sponsored entities (Fannie and Freddie) and the abject failure of the government franchisee NRSROs to accurately rate residential mortgage securities was a primary contributor to the Freeze of '07 (and Crash of '08).
The shadow credit quality market that developed in credit default swaps certainly had transparency and manipulation issues, however ultimately these instruments reflected asset changes and weren't assets themselves.
No market can remain effective when you stick $2T of fraudulently labeled securities in it, and this fraud was unsurprisingly facilitated in large part by government-sponsored actors. Meanwhile, the job the government should have been doing -- the cop on the beat to keep markets transparent and honest -- was not being done. Martha Stewart was just too big a risk to pay attention to that petty stuff like trillion dollar mortgage synthetics fraud.
So now we have a wave of promised regulations not dissimilar to Sarbanes Oxley and the Spitzer Rules that are informed by little more than the pablum of weekly talk shows and the musings of people profoundly ignorant of financial markets and what they need in order to work effectively.
Coming from a decade + of experience, I have fairly extensive thoughts on the best way to compensate people at investment banking firms. Certainly, you should not compensate people for underwriting fraudulent securities, and bonus clawbacks should be considered by the firms and their shareholders -- BUT NOT by the government.
Also, if all the grand schemes and dreams of the new Spendocracy depend on confiscating wealth from people who the free market pays more $250K to, then the Spendocrats better make sure they have some people who can make that money to tax.
As readers of this blog are aware, the entrance and subsequent exit from the secondary market for subprime synthetics by the government sponsored entities (Fannie and Freddie) and the abject failure of the government franchisee NRSROs to accurately rate residential mortgage securities was a primary contributor to the Freeze of '07 (and Crash of '08).
The shadow credit quality market that developed in credit default swaps certainly had transparency and manipulation issues, however ultimately these instruments reflected asset changes and weren't assets themselves.
No market can remain effective when you stick $2T of fraudulently labeled securities in it, and this fraud was unsurprisingly facilitated in large part by government-sponsored actors. Meanwhile, the job the government should have been doing -- the cop on the beat to keep markets transparent and honest -- was not being done. Martha Stewart was just too big a risk to pay attention to that petty stuff like trillion dollar mortgage synthetics fraud.
So now we have a wave of promised regulations not dissimilar to Sarbanes Oxley and the Spitzer Rules that are informed by little more than the pablum of weekly talk shows and the musings of people profoundly ignorant of financial markets and what they need in order to work effectively.
Coming from a decade + of experience, I have fairly extensive thoughts on the best way to compensate people at investment banking firms. Certainly, you should not compensate people for underwriting fraudulent securities, and bonus clawbacks should be considered by the firms and their shareholders -- BUT NOT by the government.
Also, if all the grand schemes and dreams of the new Spendocracy depend on confiscating wealth from people who the free market pays more $250K to, then the Spendocrats better make sure they have some people who can make that money to tax.
Confusion Profusion - Mr. Posner meet The Rapala
Richard Posner has had a long and distinguished career. After his confusing and disjointed article in today's Wall Street Journal, I recommend that he spend more time on his fishing and less time on writing.
Capitalism is about (a) the sanctity of private contracts and (b) safeguarding by private and public means honest, transparent, and liquid markets for those contracts, and (c) the hypothesis that such markets will generally do a pretty darn good job at price discovery.
Another observation of most capitalists is that the government makes a pretty bad counter-party. Why? Because of the doctrine of sovereign immunity, government actors have a pretty big incentive to lie when they can. Tough to have an honest, transparent market when the rules don't apply to one of the actors. Second, government regulators, however well intentioned, operate under a landslide of well-documented cognitive fallacies.
So, what about the Crisis of '08 represented a "Failure of Capitalism?" The $2T of falsely (arguably fraudulently) labeled securities (contracts) at the heart of crisis were labelled by 3 government monopoly licensees. Over half the market of these fraudulently labeled securities was made by hyper-levered government sponsored entities (Fannie Mae and Freddie Mac). Arguably, the insurance products that backed these synthetic securities were the product of capitalist, albeit highly regulated, enterprises. But without the implied government guarantees, would these contracts have been written?
If capitalists made one incorrect assumption in this process, it was that the government would be a reliable counter-party. But when the GSEs abruptly pulled out of the sub-prime synthetics markets after the accounting scandals of 2004-2005, this proved to be false hope. The resulting collapse in the secondary market and frozen liquidity situation precipitated the crisis we know all too well now.
But this was a failure of cronyism, not capitalism. Perhaps some time with this will reorient you.
NVCA Report - Whither Public Equities?
DISCLOSURE: I have worked within the past 18 months with David Weild, former Vice Chairman of Nasdaq, and others who have contributed to the recent NVCA "4 Pillars" report. I am also a managing director at a publicly-traded investment banking firm. The views expressed here are strictly my own and do not necessarily reflect those of my employer.
Yet, these observations do not change the fact that a $500M threshold for public offerings and an anemic marketplace for public shares of companies under a $1B market cap is a needless constraint to our economic system. Forget the NVCA for a moment. Even a company as successful as GoDaddy, which is entirely self-funded and has profits nearing triple digit millions, would be hard pressed to offer shares to the public in the current environment. If Bob Parsons were able to gain liquidity through an IPO at an attractive valuation (not the 6x EBITDA or .25 PEG that a private player would offer but a real valuation reflecting growth and discounted future cash flow), those funds would be recycled back into the investment world to spawn a whole new generation of innovative technologies. Instead, that significant wealth just sits unproductively on the sidelines, and future entrepreneurs, particularly in capital intensive businesses, sit at home idle and without resources to create jobs. You may be able to start an affiliate marketing company in your basement, with a PC, but many opportunities take significant risk capital.
Harold Bradley tackles the NVCA "4-Pillars" report head on and, unfortunately, provides conclusions that bury the NVCA's message along with its messenger.
Bradley is right to distinguish between entrepreneurs and the venture industry that serves them, but excoriating the venture industry doesn't help entrepreneurs have more financial options. Bradley is also correct to raise a red flag at the prospect of more distorting "public/private" partnerships, and he is also accurate in pointing out that the "way things used to be" included a clubby network of public market dealers who pushed Pets.com as heartily as AOL and Intel (when both were $100M market cap stocks).
Yet, these observations do not change the fact that a $500M threshold for public offerings and an anemic marketplace for public shares of companies under a $1B market cap is a needless constraint to our economic system. Forget the NVCA for a moment. Even a company as successful as GoDaddy, which is entirely self-funded and has profits nearing triple digit millions, would be hard pressed to offer shares to the public in the current environment. If Bob Parsons were able to gain liquidity through an IPO at an attractive valuation (not the 6x EBITDA or .25 PEG that a private player would offer but a real valuation reflecting growth and discounted future cash flow), those funds would be recycled back into the investment world to spawn a whole new generation of innovative technologies. Instead, that significant wealth just sits unproductively on the sidelines, and future entrepreneurs, particularly in capital intensive businesses, sit at home idle and without resources to create jobs. You may be able to start an affiliate marketing company in your basement, with a PC, but many opportunities take significant risk capital.
There is good evidence that a well-functioning public equity capital market will provide higher valuations (given the lack of liquidity discount) and generally create a win/win situation for the economy. The real questions are: what went wrong with the US equity markets? Why do they remain dysfunctional? And what will fix them? That, is a subject for a future post, but suffice it to say that effective markets are much more fragile than investors, companies and regulators realize, and it would be a mistake to assume, as many new age economists seem to, that only traders operate under cognitive fallacies.
As an asset class, venture capital (and private equity) may well have some challenging and opaque characteristics, but it operates in a private capital market relatively free of artificial constraints, governed by detailed contracts, and populated with sophisticated investors. And while the rest of equity world is effectively closed for business, VCs are still writing checks, even while their limiteds demand greater transparency and accountability. The Quadrangle case suggests a certain portion of the funds flow might be corrupted, however, the vast majority of players -- wealthy families, universities, pension plans -- have invested for decades in the market and have enjoyed decent returns. Perhaps there is a mismatch today between funds available and the natural cycle of innovation, and that will undoubtedly dampen returns, but this situation is correcting itself by the day.
Do you want our Country (and Obama) to Succeed?
Do you want the Country (and Obama) to succeed over the next decade?
If so, then pay attention to this graph.
Since 1980, the House of Representatives, which controls the nation's budget pursuant to Article 1, Section 8 of the US Constitution (subject to Presidential veto), has been controlled for 12 years by Republican Party and will be controlled for 18 years by the Democratic Party until 2010
Since 1980, the House of Representatives, which controls the nation's budget pursuant to Article 1, Section 8 of the US Constitution (subject to Presidential veto), has been controlled for 12 years by Republican Party and will be controlled for 18 years by the Democratic Party until 2010
Democratic Houses run budget deficits on average FIVE TIMES higher than Republican Houses (4.7% versus .9% of GDP).
The message: if you want real fiscal restraint, put the House in Republican hands. The data for Republican presidents is another matter, but then the President only proposes a budget, Congress enacts it (as Murtha likes to point out)
My Advice to the HuffPosters
My advice to HuffPo People still exhibiting Republican Derangement Syndrome: MoveOn.org
I understand your job, like Rush Limbaugh, is to sell self-righteous indignation to the morally superior, but please work on including some light with that heat.
Take pent up anger and focus it on learning some history and economics. Read Shlaes, Postrel, Zingales, Scott, Kindleberger, Hayek, Friedman, Jensen, etc. etc. Read behavioralists like Ubel, Gladwell, etc. and start to understand why we just went from dumb to dumber throwing our lot in with the Pelosi-Reid Keynesian team.
Republicans may be too Jesusland for you, but I don't think Pelosi, Rangel, Frank, Dodd, Reid, Blagojevich, Franken, Waters, Murtha, Conyers, Byrd, Waxman, Boxer, etc. etc. are your people either.
Obama may be fresh and he may new and he may have been your one exotic, cool, hip friend at prep school, but he hasn't done enough to stop Congress from taking a situation from bad to worse to pay off insular political cronies. When Nancy Pelosi took over primary responsibility for US Fiscal policy on January 3, 2007 (Art1Sec8USConst), the S&P stood at 1400. Today, it is half that, and the war on equities continues. A question for you: $2T of fraudulently-labeled sub-prime securities was pumped through what loyal Democratic fiefdom? Fannie and Freddy, which were not under executive branch control, independent of FDIC, Fed, etc. until they were taken over last summer. And try this presentation on for size: http://tinyurl.com/aj7dte
Or, forget about learning anything too inconvenient, go back to your dorm room, smoke some dope, cash the trust checks, read Vanity Fair, and write stupid crap on Huff Po.
Your choice.
Polonius Bound
With the new budget proposal before Congress and the free fall in equity values, we have seemingly embarked on a journey where a nation of equity -- in our homes, our stock accounts, our companies, our educational and non-profit institutions -- will see a dramatic shift in its debt-to-equity ratio. Yes, debt has increased in the previous decade, but that has been accompanied by a faster increase in equity values. http://tinyurl.com/c8ccmx
The mountain of debt that our government proposes to undertake -- and to force banks to lend -- at this time of plummeting equity values will result in an enormous pull on all other pockets from the economy -- particularly those sustained by equity, such as venture investment, educational institutions, and entrepreneurship generally.
The mountain of debt that our government proposes to undertake -- and to force banks to lend -- at this time of plummeting equity values will result in an enormous pull on all other pockets from the economy -- particularly those sustained by equity, such as venture investment, educational institutions, and entrepreneurship generally.
In this rush to embrace debt, we would do well to head the admonitions of Shakespeare in Hamlet:
LORD POLONIUS:
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
The wholesale over-leveraging of our economy and society is likely to have sorry ramifications for our ability to take risks, experiment with new ideas and be flexible in the face of future cycles of confidence.
Equities are fundamentally a statement of faith in the future. Debt has its feet firmly planted in the past.
If Virginia Postrel is to be believe that future has its enemies, then debt is certainly one of them.
This certainly argues for a look at Luigi Zingales (UofC) proposal to de-leverage the residential housing market.
If Virginia Postrel is to be believe that future has its enemies, then debt is certainly one of them.
This certainly argues for a look at Luigi Zingales (UofC) proposal to de-leverage the residential housing market.
Welcome
Welcome to my blog. Please check back soon for new entries.
