Krugman/Wells Review of This Time is Different

Archiving a good review of Rogoff and Reinhart's This Time Is Different. Nice thumbnail historical account of recovery post Depression vs recovery since 2008-09 financial crisis.


http://www.nybooks.com/articles/archives/2010/may/13/our-giant-banking-crisis/?pagination=false

Lately, the big concern roiling financial markets has been fear of Greek default. The risks seem obvious: Greek government debt is at levels that have historically signaled deep trouble for middle-income nations, and debt is still rising rapidly thanks to a large deficit. Meanwhile, Greece is suffering a severe recession in large part because costs have gotten far out of line with the rest of Europe. And one more thing: Greece has a long history of default—in fact, the nation has been in arrears on its debt for half its modern history.
Yet as recently as last September, nobody seemed worried. Credit default swaps on Greek debt—insurance against a possible default—were fairly cheap; Greece was able to borrow at only modestly higher interest rates than that paragon of fiscal rectitude, Germany. Why were investors so complacent? The answer was that almost everyone believed that historical precedents were irrelevant. Greece was now part of Europe, and even more important, since 2001 part of the eurozone—sharing a currency with its more affluent neighbors. And that changed everything. Except that it didn’t.
The Greek crisis came after the publication of This Time Is Different: Eight Centuries of Financial Folly, by Harvard’s Kenneth Rogoff and the University of Maryland’s Carmen Reinhart, but it was a dramatic illustration of the point they make with their sarcastic title: the more things change in the financial world, the more they stay the same. The Greek debt crisis of 2010 bears a strong resemblance to the Mexican debt crisis of 1827; inflation in Zimbabwe is just the latest episode in a history of currency debasement that goes back to ancient Greek city-states; and last but not least, the US subprime crisis of 2008 followed the script of scores of banking crises past, going back at least as far as eighteenth-century Scotland.
1.
From an economist’s point of view, there are two striking aspects of This Time Is Different. The first is the sheer range of evidence brought to bear. Reading Reinhart and Rogoff is a reminder of how often economists take the easy road—how much they tend to focus their efforts on times and places for which numbers are readily available, which basically means the recent history of the United States and a few other wealthy nations. When it comes to crises, that means acting like the proverbial drunk who searches for his keys under the lamppost, even though that’s not where he dropped them, because the light is better there: the quarter-century or so preceding the current crisis was an era of relative calm, at least among advanced economies, so to understand what’s happening to us one must reach further back and farther afield. This Time Is Different ventures into the back alleys of economic data, accepting imperfect or fragmentary numbers as the price of looking at a wide range of experience.
The second distinguishing feature is the absence of fancy theorizing. It’s not that the authors have anything against elaborate mathematical modeling. Professor Rogoff’s influential 1996 book Foundations of International Macroeconomics, coauthored with Maurice Obstfeld, contains literally hundreds of fairly abstruse equations. But This Time Is Different takes a Sergeant Friday, just-the-facts-ma’am approach: before we start theorizing, let’s take a hard look at what history tells us. One side benefit of this approach is that the current book manages to be both extremely useful to professional economists and accessible to the intelligent lay reader.
The Reinhart-Rogoff approach has already paid off handsomely in making sense of current events. In 2007, at a time when the wise men of both Wall Street and Washington were still proclaiming the problems of subprime “contained,” Reinhart and Rogoff circulated a working paper—now largely subsumed into Chapter 13 of This Time Is Different—that compared the US housing bubble with previous episodes in other countries, and concluded that America’s profile resembled those of countries that had suffered severe financial crises. And sure enough, we had one too. Later, when many business forecasters were arguing that the deep recession would be followed by a rapid, “V-shaped” recovery, they circulated another working paper, largely subsumed into Chapter 14, describing the historical aftermath of financial crises, which suggested that we would face a prolonged period of high unemployment—and so we have.
So what is the message of This Time Is Different? In a nutshell, it is that too much debt is always dangerous. It’s dangerous when a government borrows heavily from foreigners—but it’s equally dangerous when a government borrows heavily from its own citizens. It’s dangerous, too, when the private sector borrows heavily, whether from foreigners or from itself—for banks are basically institutions that borrow from their depositors, then make loans to others, and banking crises are among the most devastating shocks an economy can face.
Yet people—both investors and policymakers—tend to rationalize away these dangers. After any prolonged period of financial calm, they either forget history or invent reasons to believe that historical experience is irrelevant. Encouraged by these rationalizations, people run up ever more debt—and in so doing set the stage for eventual crisis. (One odd omission by Reinhart and Rogoff, by the way, is their failure to mention the late Hyman Minsky, a heterodox economic thinker who made a similar argument and is now experiencing a renaissance in influence.)
Debt-driven crisis can take a variety of forms. There are sovereign debt crises, in which investors lose faith in the ability and/or willingness of governments to fulfill their financial obligations. There are inflationary crises, which happen when governments turn to the printing press either to pay their bills or to inflate away the real value of their debts. There are banking crises, in which people lose that trust in private-sector promises that is essential to a fully functioning market economy. And all of these afflictions are often associated with currency crises, in which speculation leads to a sharp fall in a currency’s value in terms of other currencies.
What we’re in the middle of right now is what Reinhart and Rogoff call the “second great contraction”—a giant banking crisis afflicting both sides of the Atlantic, with effects that have spilled over to the entire world. The first great contraction was, of course, the Great Depression. In the past, banking crises have often led to sovereign debt crises as well, since banking collapses depress the economy, reducing government revenue, at the same time that they often require large outlays to rescue the financial system. Greece may be only the first of many stories of troubled governments; most obviously, Spain, Portugal, and Italy are all in some danger.
It’s worth noting, as an aside, that the Reinhart-Rogoff interpretation of the Great Depression is, implicitly, a critique of other interpretations—most notably, Milton Friedman’s famous claim that the Depression was fundamentally a failure of monetary policy, which could easily have been avoided if only the Fed had prevented a fall in the money supply. Although This Time Is Different doesn’t provide an extensive discussion of events leading up to the Depression, it’s easy to confirm from other sources that the late 1920s looked very much like the prologue to other severe financial crises: irrational exuberance in the stock market, a surge in household debt, and an ever more overextended banking system. There was even a real estate bubble in Florida, memorialized by the Marx Brothers in The Cocoanuts: “You can have any kind of a home you want. You can even get stucco. Oh, how you can get stucco.” That’s not to deny that better policy could have alleviated the pain, a question we’ll return to later. But the Depression looks much more like the product of excessive private-sector debt than like the government failure of monetarist legend.
2.
So now we’ve experienced a severe financial crisis, fundamentally similar to those of the past. What does history tell us to expect next? That’s the subject of Reinhart and Rogoff’s Chapter 14, “The Aftermath of Financial Crises.” This chapter can usefully be read in tandem with two studies by the International Monetary Fund that take a similar approach, published as chapters in the April 2009 and October 2009 editions of the semiannual World Economic Outlook. All three studies offer a grim prognosis: the aftermath of financial crises tends to be nasty, brutish, and long. That is, financial crises are typically followed by deep recessions, and these recessions are followed by slow, disappointing recoveries.
Consider, for example, the case of Sweden, which experienced a severe banking crisis in 1991, following a major housing bubble. Sweden’s government has been widely praised for its response to the crisis: it stabilized markets by guaranteeing bank debt, and restored faith in the system by temporarily nationalizing and then recapitalizing the weakest banks. Despite these measures, however, Swedish unemployment soared from 3 percent to almost 10 percent; it didn’t start coming down until 1995, and progress was slow and fitful for several more years.
It’s true that there have been some “phoenix-like” recoveries from financial crises, to use a term introduced by Columbia University economist Guillermo Calvo. But such recoveries, like South Korea’s bounce-back from the 1997–1998 Asian crisis, have invariably been associated with large depreciations of the afflicted nation’s currencies—the Korean currency, the won, for example, lost more than half its value against the dollar—followed by huge export booms, presumably due to the way a weak currency made that nation’s exports more competitive. Nothing like that can be expected for America now. For one thing, the dollar actually rose in the face of the crisis, as investors sought the safest haven they could find. Beyond that, this is a global crisis, and we can’t all export our way out of it—not unless we can find another planet to trade with.
How long does the pain last? According to the second of those IMF studies, the answer, to a first approximation, is “forever”: financial crises appear to depress not just short-term performance but also long-term growth, so that even a decade after the crisis real GDP is substantially lower than it would otherwise have been.
Reading these studies, we find ourselves wondering what Obama administration economists were thinking when they circulated their now-infamous prediction that the US unemployment rate would peak at 8 percent in the third quarter of 2009. If that had happened, it would have been an exceptional performance, in that both the rise in unemployment and its duration would have been much less than is normal in these cases. In fact, of course, things have turned out considerably worse than the administration’s prediction, and are running fairly close to the historical norm. As Rogoff told one of us in conversation, the United States is experiencing a “garden-variety severe financial crisis.”
3.
History says that the next few years will be difficult. But can anything be done to improve the situation? Unfortunately, This Time Is Different says little on this score.
In part, that may reflect the limits of a history-based, theory-shy approach. In important ways the Reinhart-Rogoff approach resembles that of Wesley Mitchell, who founded the National Bureau of Economic Research in 1920. Under Mitchell’s direction, the NBER focused on quantitative studies of business cycles, tracking just what happens during booms and busts; to this day the organization is responsible for officially dating the beginnings and ends of recessions. Valuable work—but by itself it offered little guidance to policy: it could tell you what usually happens but not how to change the outcome. It wasn’t until John Maynard Keynes offered a theoretical explanation of how it is that economies come to be persistently depressed—an explanation that was informed by historical experience but went far beyond a simple description of past patterns—that economists could offer useful advice to policymakers about how to fight a slump.
That said, history can offer some evidence on the extent to which Keynesian policies work as advertised. As we’ve noted, Reinhart-Rogoff don’t address that question, but others have. Thus the IMF, squinting hard at a relatively limited run of experience (it looks only at advanced countries since 1960), finds evidence that boosting government spending in the face of a financial crisis shortens the slump that follows—but also finds (weak) evidence that such policies might backfire when governments already have a high level of debt, a point we’ll come back to. Interestingly, the IMF also finds that monetary policies, usually the recession-fighting tool of choice, don’t appear effective in the wake of financial crises, perhaps because funds don’t flow easily through a stricken banking system.
There has been even more suggestive work from the economic historians Barry Eichengreen of Berkeley and Kevin O’Rourke of Trinity College in Dublin, who have coauthored two hugely influential papers exploiting the similarities between the current slump and the Great Depression. In the first of these papers, they showed that from a global point of view the first year of this slump was every bit as bad as the Depression: world industrial production fell as steeply, world financial markets were if anything more disrupted, and so on. All this suggests that the shock to the system was just as big this time around.
In successive updates, however, they have shown current events increasingly diverging from the historical record, with the world experiencing a recovery that may be disappointing, but is far better than the continuing downward spiral between 1929 and 1933. The obvious difference is policy: rather than emulating the grim austerity of policymakers three generations ago, who slashed spending in an effort to balance budgets and raised interest rates in an effort to preserve the gold standard, today’s leaders have been willing to run deficits and pump funds into the economy. The result, arguably, has been a much smaller disaster.
An even better test comes from comparing experiences during the 1930s. At the time, nobody was following Keynesian policies in any deliberate way—contrary to legend, the New Deal was deeply cautious about deficit spending until the coming of World War II. There were, however, a number of countries that sharply increased military spending well in advance of the war, in effect delivering Keynesian stimulus as an accidental byproduct. Did these countries exit the Depression sooner than their less aggressive counterparts? Yes, they did. For example, the surge in military spending associated with Italy’s invasion of Abyssinia was followed by rapid growth in the Italian economy and a return to full employment.
Since conditions in the 1930s resembled those now in important ways—as Eichengreen and his coauthors put it, now as then we live “in an environment of near-zero interest rates, dysfunctional banking systems and heightened risk aversion”—this seems to suggest that the right course of action now is to spend freely on stimulus and pay for it later.1 But doing so would mean running large budget deficits and adding to debt levels that are already historically high in many countries. How dangerous is doing that?
Much of This Time Is Different is devoted to sovereign debt crises, in which governments lose the confidence of lenders, are unable to service their debt, and respond by defaulting, engaging in inflation, or both. Implicitly, then, the book warns against taking it for granted that nations can get away with deficit spending. On the other hand, advanced nations have historically been able to go remarkably deeply into debt without creating a crisis. Britain’s debt, for example, was larger than its gross domestic product for four decades, from World War I until the 1950s, yet the country’s credit remained good. Japan has run large budget deficits for almost twenty years, yet it can still borrow long-term at very low rates.
So should we be comforted or worried by the historical record? One reason to worry is that advanced countries today may not be as creditworthy as they once were. Reinhart and Rogoff write of the “debt intolerance” of nations suffering from “weak institutional structures and a problematic political system”; might not that description be applied to America today?
In work that postdates This Time Is Different, Reinhart and Rogoff have also argued that there are hidden costs to debt. In a recent working paper they show that even among advanced countries that have not had debt crises, economic growth has historically been lower when government debt exceeds 90 percent of GDP—a threshold the United States might cross in a few years. This result has been widely cited by deficit hawks.
A closer look at the data suggests, however, that in this case correlation may not imply causation. In the case of the United States, for example, the years of high debt were all in the immediate post–World War II period. During that period US real GDP did, in fact, fall—but not because of debt. Instead, GDP was falling thanks to postwar demobilization, as Rosie the Riveter became a suburban housewife. In the case of Japan, the high-debt years all followed the financial crisis of the early 1990s, from which Japan has never fully recovered, so that debt is arguably a consequence of slow growth rather than the other way around.
The truth is that the historical record on the consequences of government debt is sufficiently ambiguous to admit of different interpretations. We read the evidence as supporting a policy of stimulate now, pay later: spend strongly to promote employment in the crisis, but take measures to curb spending and raise revenue once the crisis has passed. Others will see it differently. The main thing to notice, perhaps, is that there is no safe path: debt has long-term risks, but so does failing to engineer a solid recovery. The IMF’s research suggests that the long-term cost of financial crises is less when countries respond with strong stimulus policies, which means that failing to do so risks damage not just this year but for years to come.
4.
Clearly, the best way to deal with debt crises is not to have them. Is there anything in the historical record indicating how we can do that?
Reinhart and Rogoff don’t address this question directly, but Chapter 16 of This Time Is Different, which provides an overview of the ups and downs of crises over the course of the twentieth century, is suggestive. What the data show is a dramatic drop in the frequency of crises of all kinds after World War II, then an irregularly rising trend after about 1980, with a series of regional crises in Latin America, Europe, and Asia, finally culminating in the global crisis of 2008–2009.
What changed after World War II, and what changed it back? The obvious answer is regulation. By the late 1940s, most important economies had tightly regulated banking systems, preventing a recurrence of old-fashioned banking crises. At the same time, widespread limitations on the international movement of capital made it difficult for nations to run up the kinds of large international debts that had previously led to frequent defaults. (These restrictions took various forms, including limits on purchases of foreign securities and limits on the purchase of foreign currency for investment purposes; even advanced nations like France and Italy retained these restrictions into the 1980s.) Basically, it was a constrained world that may have limited initiative, but also left little room for large-scale irresponsibility.
As memories of the 1930s faded, however, these constraints began to be lifted. Private international lending revived in the 1970s, making possible first the Latin American debt crisis of the 1980s, then the Asian crisis of the 1990s. Bank regulation was weakened, enabling the mid-1980s savings and loan debacle in the United States, the Swedish bank crisis of the early 1990s, and so on. By the early twenty-first century, the rapid growth of “shadow banks”—institutions like Lehman Brothers that didn’t accept deposits, and so were not covered by conventional banking regulations, but that in economic terms were carrying out banking functions—had recreated a financial system that was as vulnerable to panic and crisis as the banking system of 1930.
As all this happened, proponents of looser regulation extolled the virtues of a more open system. Indeed, there were real advantages to laxer control: without question, some people, businesses, and governments that would not have had access to credit got it, and some used that credit well. Others, however, ran up dangerous levels of debt. And the old cycle of debt, crisis, and default returned.
Why didn’t more people see this coming? One answer, of course, lies in Reinhart and Rogoff’s title. There were superficial differences between debt now and debt three generations ago: more elaborate financial instruments, seemingly more sophisticated techniques of assessment, an apparent wider spreading of risks (which turned out to have been an illusion). So financial executives, policymakers, and many economists convinced themselves that the old rules didn’t apply.
We should not forget, too, that some people were making a lot of money from the explosive growth both of debt and of the financial industry, and money talks. The world’s two great financial centers, in New York and London, wielded vast influence over their respective governments, regardless of party. The Clinton administration in the US and the Labour government in Britain succumbed alike to the siren song of financial innovation—and were spurred in part by the competition between the two great centers, because politicians were all too easily convinced that having a large financial industry was a wonderful thing. Only when the crisis struck did it become clear that the growth of Wall Street and the City actually exposed their home nations to special risks, and that nations that missed out on the glamour of high finance, like Canada, also missed out on the worst of the crisis.
Now that the multiple bubbles have burst, there’s obviously a strong case for a return to much stricter regulation. It’s by no means clear, however, whether this will actually happen. For one thing, the ideology used to justify the dismantling of regulation has proved remarkably resilient. It’s now an article of faith on the right, impervious to contrary evidence, that the crisis was caused not by private-sector excesses but by liberal politicians who forced banks to make loans to the undeserving poor. Less partisan leaders nonetheless fret over the possibility that regulation might crimp financial innovation, even though it’s very hard to find examples of such innovation that were clearly beneficial (ATMs don’t count).
Equally important, the financial industry’s political power has not gone away. Banks have waged a fierce campaign against what many expected to be an easily passed reform proposal, the creation of a new agency to protect financial consumers. Despite the steady drumbeat of scandalous revelations—most recently, the discovery that Goldman Sachs helped Greece cook its books, while Lehman cooked its own books—top financial executives continue to have ready access to the corridors of power. And as many have noted, President Obama’s chief economic and financial officials are men closely associated with Clinton-era deregulation and financial triumphalism; they may have revised their views but the continuity remains striking.
In that sense, this time really is different: while the first great global financial crisis was followed by major reforms, it’s not clear that anything comparable will happen after the second. And history tells us what will happen if those reforms don’t take place. There will be a resurgence of financial folly, which always flourishes given a chance. And the consequence of that folly will be more and quite possibly worse crises in the years to come.
—April 15, 2010
1. See Miguel Almunia, A. S. Bénétrix, B. Eichengreen, K.H. O'Rourke, and G. Rua, "The Effectiveness of Fiscal and Monetary Stimulus in Depressions," VoxEll.org, November 18, 2009

regret minimization

The 80-years-old-in-rocking-chair-reflecting is a heuristic I often invoke to help with answering tough, what-do-I-do-with-my-life questions. Bezos does something similar, and I thought quote below was interesting in imagining that time in his life.

Jeff Bezos: I went to my boss and said to him, "You know, I'm going to go
do this crazy thing and I'm going to start this company selling books online."
This was something that I had already been talking to him about in a sort of
more general context, but then he said, "Let's go on a walk." And, we went on a
two hour walk in Central Park in New York City and the conclusion of that was
this. He said, "You know, this actually sounds like a really good idea to me,
but it sounds like it would be a better idea for somebody who didn't already
have a good job." He convinced me to think about it for 48 hours before making a
final decision. So, I went away and was trying to find the right framework in
which to make that kind of big decision. I had already talked to my wife about
this, and she was very supportive and said, "Look, you know you can count me in
100 percent, whatever you want to do." It's true she had married this fairly
stable guy in a stable career path, and now he wanted to go do this crazy thing,
but she was 100 percent supportive. So, it really was a decision that I had to
make for myself, and the framework I found which made the decision incredibly
easy was what I called -- which only a nerd would call -- a "regret minimization
framework." So, I wanted to project myself forward to age 80 and say, "Okay, now
I'm looking back on my life. I want to have minimized the number of regrets I
have." I knew that when I was 80 I was not going to regret having tried this. I
was not going to regret trying to participate in this thing called the Internet
that I thought was going to be a really big deal. I knew that if I failed I
wouldn't regret that, but I knew the one thing I might regret is not ever having
tried. I knew that that would haunt me every day, and so, when I thought about
it that way it was an incredibly easy decision. And, I think that's very good.
If you can project yourself out to age 80 and sort of think, "What will I think
at that time?" it gets you away from some of the daily pieces of confusion. You
know, I left this Wall Street firm in the middle of the year. When you do that,
you walk away from your annual bonus. That's the kind of thing that in the
short-term can confuse you, but if you think about the long-term then you can
really make good life decisions that you won't regret later.

Scotches on deck

Scotches to try:

Aberlour
Glenmorangie

Tried:
Lagavulin (16 yrs)
Talisker (10 yrs)

Article: The Youtube solution

Below, an interesting Forbes article on IP, applying past experience with oil rights to predict how media IP will play out on the Internet.


By Daniel Fisher

In his new book, Gridlock Economy, Columbia University Law School Professor Michael Heller paints a scary picture in which property rights--copyrights, patents or individual parcels of land--strangle the economy and stifle innovation.

In Heller's world, new cures for Alzheimer's remain in the lab, films flounder unreleased and even hip-hop albums go unrecorded because it's simply too hard to buy off all the owners who are in a blocking position with their pesky property rights. It's a great theory, but is it true? I studied this problem during a year as a Knight Fellow at Yale Law School several years ago, and came to a different conclusion. In an unruly capitalistic playground like the Internet, the concept of "ownership" will get stretched beyond the breaking point and replaced with rules that allow creative works to be produced at a cost of some royalties going uncollected. Surprisingly, oil led me to this conclusion.

Oil is what economists call a "fugitive resource," a thing, like water or wild game, that migrates where it wants and is difficult to own in any conventional sense. Kind of like a grainy copy of an old episode of WKRP in Cincinnati that somebody posts on YouTube.
Sure, the content belongs to Fox and the songs playing the background are covered by a profusion of ownership claims. But a recent check showed at least 148 clips from WKRP on YouTube, including one with the Beatles hit "Come Together" playing in the background. That song, you might recall, includes a line filched from Chuck Berry's earlier single "You Can't Catch Me."

In other words, somehow the oil leaked out.

That's what usually happens with fugitive resources. Not only are they hard to control, but it's hard to figure out whether they are worth controlling in the first place. This is the problem with oilfields, a subject University of California-Santa Barbara Professor Gary Libecap has been studying since he was teaching at Texas A&M University in the early 1980s.

Oil must be managed properly or it will remain trapped in the ground. Too many wells release the natural pressure in the field, like fizz from a soda can, and it becomes too expensive to pump the oil out. This, economists will tell you, leads to a "tragedy of the commons," where individual owners, acting in their own self interests, destroy the resource.

There is a solution called unitization. This is where somebody--the government, usually--imposes an orderly drilling plan to get the maximum amount of oil out of the ground. Individual owners lose the right to drill, but get paid according to their "fair share" of the reserves. Legal academics call this substituting a property rule for a liability rule. You don't get to name your price, but you do get paid something.

Here's where it gets interesting: What Libecap found is that while most fields are eventually unitized, it often happens late in their lives. Before that, the owners of the common pool fight over their "fair share," with owners in the center holding out for better terms than the people on the periphery. The process slips into chaos when a large number of small landholders are involved, as when the Oklahoma City field was discovered in the late 1920s. The governor had to call in troops to halt the destructive drilling on single-family home lots.

Libecap's insight: When this gridlock occurs, the owners are fighting about information as much as oil. How can you agree to sell something when you don't know its value? It takes more information, or a crisis of some kind, to bring everybody to the table and work out a deal.
A similar process led to ASCAP and BMI, the licensing groups that give bars, restaurants and radio stations access to entire music libraries in exchange for a flat fee. In this case, the music is like a common pool of oil. It has thousands of owners, but those owners recognize that it makes no sense for them to hire lawyers and investigators to walk the streets of New York, listening in doorways to see if they're entitled to a 10-cent royalty for the public performance of their tune.
What does this have to do with YouTube? Columbia's Heller talks about a "tragedy of the anti-commons," where creative works are stifled because nobody can assemble the package of rights that make them possible. WKRP is one of his best examples--the DVD version was stalled for years because producers couldn't secure the rights to all the background music. Yet there it is on YouTube, copyright or no copyright.

Somebody had a grainy VCR copy of the original broadcast, perhaps, transferred it to digital and posted it on the Web. We're in the fighting stage over a vast common pool of ideas, and nobody knows what they're worth with new distribution outlets like YouTube, Facebook and cellular phones. Meanwhile, the oil is leaking out, in the same messy way it was sucked up through hundreds of backyard wells in Oklahoma City in 1931 before the troops marched in.
Henry Smith, my intellectual property law professor at Yale, says the problem boils down to "exclusionary rules" vs. "governance rules." Every first-year law student learns about Blackacre, a mythical estate whose owner has the sole right to decide who can enter and at what price. That's an exclusionary right, and Smith believes society hands these out when the boundaries of ownership are easy to grasp. I own this watch, you don't. If you want it, you have to buy it from me at a price I agree to.

With governance rules, the owner has some rights but gives some away; some of his oil gets sucked up another person's well, or patent royalties go uncollected because a group of manufacturers decided to throw all their patents into a common pool to cut down on the fighting among them. It's a collective system of ownership governed by rules, not exclusive control. Fugitive resources tend to shift toward governance rules, Smith said, because it's so hard to figure out the exact boundaries of the "property" and what it's worth.
Of course, companies that own intellectual property would prefer to extend the Blackacre analogy into cyberspace, barring unauthorized access to their Web sites and controlling every stray bit of intellectual content. Cyberlibertarians would do the opposite and infinitely expand the concept of fair use, or limited exemption to copyright protection.

"My personal view is it should be somewhere in between," said Smith. He compares cyberspace to private land in New England. Hunters have the right to cross property lines in search of game unless the property is clearly marked "no trespassing."

What does this mean for the consumer listening to the Beatles rip off Chuck Berry in the background of a WKRP episode? My guess is the various owners of the intellectual property leaking onto the Internet will admit defeat and form an uber-licensing agency, like ASCAP, that will collect a monthly fee in exchange for nearly universal access to music, movies and other forms of entertainment. Where the value is known--like a heavyweight boxing championship or real-time stock quotes--the content owner will be able to charge consumers on an a la carte basis.

But in many cases, the content will go fugitive and the rules will be simpler: Enjoy it yourself, and it's practically free. Make a business out of it, and you'll probably hear from Fox's lawyers.

Murakami musical references

Musical references from Kafka on the Shore (from J Shifty's blog):

• Schubert Piano Sonata in D Major
• Crossroads - Cream
• Heigh - Ho - Andre Rieu
• Mi Chiamano Mimi - Puccini (Maria Callas)
• As Time Goes By - Billie Holiday
• 4th Time Around - Bob Dylan
• (Sittin' On) The Dock Of The Bay - Otis Redding
• Corcovado - Getz/Gilberto
• Sexy MF - Prince
• Archduke Trio - Beethoven
• My Favorite Things - John Coltrane

Musical references from The Wind-up Bird Chronicles (anonymous poster on J Shifty's blog):

• Sonice Wind--Calexico
• Speechless--Cibo Matto
• Opening--Philip Glass
• The Gunner's Dream--Pink Floyd
• Looking At The World from The Bottom of a Well--Mike Doughty
• In Our Gun--Gomez
• Waiting for My Real Life to Begin--Colin Hay
• Starting Over--Crystal Method
• Hallo Space Boy--David Bowie
• Pepita--Calexico

Another reason I study Chinese

Well, it's not high on the list of reasons why, but it makes more sense to others than the joy of staring at the hordes passing by the Starbucks at Wang Fu Jing. The following an excerpt from a transcript (thanks to Whitney) of a Charlie Munger talk at USCL

Another example of not thinking through the consequences of the consequences is the standard reaction in economics to Ricardo’s law of comparative advantage giving benefit on both sides of trade. Ricardo came up with a wonderful, non-obvious explanation that was so powerful that people were charmed with it, and they still are, because it’s a very useful idea. Everybody in economics understands that comparative advantage is a big deal, when one considers first order advantages in trade from the Ricardo effect. But suppose you’ve got a very talented ethnic group, like the Chinese, and they’re very poor and backward, and you’re an advanced nation, and you create free trade with China, and it goes on for a long time.

Now let’s follow and second and third order consequences: You are more prosperous than you would have been if you hadn’t traded with China in terms of average well-being in the United States, right? Ricardo proved it. But which nation is going to be growing faster in economic terms? It’s obviously China. They’re absorbing all the modern technology of the world through this great facilitator in free trade, and, like the Asian Tigers have proved, they will get ahead fast. Look at Hong Kong. Look at Taiwan. Look at early Japan. So, you start in a place where you’ve got a weak nation of backward peasants, a billion and a quarter of them, and in the end they’re going to be a much bigger, stronger nation than you are, maybe even having more and better atomic bombs. Well, Ricardo did not prove that that’s a wonderful outcome for the former leading nation. He didn’t try to determine second order and higher order effects.

If you try and talk like this to an economics professor, and I’ve done this three times, they shrink in horror and offense because they don’t like this kind of talk. It really gums up this nice discipline of theirs, which is so much simpler when you ignore second and third order consequences.

The best answer I ever got on that subject – in three tries – was from George Schultz. He said, “Charlie, the way I figure it is if we stop trading with China, the other advanced nations will do it anyway, and we wouldn’t stop the ascent of China compared to us, and we’d lose the Ricardo-diagnosed advantages of trade,” which is obviously correct. And I said, “Well George, you’ve just invented a new form of the tragedy of the commons. You’re locked in this system and you can’t fix it. You’re going to go to a tragic hell in a handbasket, if going to hell involves being once the great leader of the world and finally going to the shallows in terms of leadership.” And he said, “Charlie, I do not want to think about this.” I think he’s wise. He’s even older than I am, and maybe I should learn from him.

Makes sense to me.

Movie: Eternal Sunshine of the Spotless Mind

We saw Eternal Sunshine of the Spotless Mind last night (finally) and thought it was very good.

I think the most moving scene was when Jim Carrey and Kate Winslet just broke into the abandoned oceanfront house, the same day they had just met at a beach party. The contrast between their characters manifests itself with Carrey's decision to return to the beach party, "running from his humiliation." At that point the surf is surrounding the house and the rafters are collapsing, indications that this last memory of Winslet are being erased. He begins to share with Winslet that her offhanded comment, "just go," was belittling to him, and that plus his discomfort with illegally entering a stranger's home caused his snap decision to leave. Their final kiss in the scene is made more poignant by his admission that he always regretted his decision to run, and that this last, fading memory would serve as their final goodbye.

I liked the imagery of the Lacuna technicians chasing Jim Carrey's consciousness around as a little dot on a brain scan. It's probably not very accurate as memories are probably big clouds of dots, but consciousness feels like a single dot.

Bezos on quarterly retreats

Watching Bezos interview on Charlie Rose (from Kindle launch on Nov 19, 2007) he talks about his retreat:

Every quarter Bezos takes 2-3 days, completely alone, isolated from family and friends, no phones or interruptions. “With a little bit of isolation, I find I get more creative.” He’ll think, reflect, surf the Internet, see what people are doing, what hobbyists and hackers are doing (things on cutting edge). Then he’ll write several 2-3 page memos – either to himself (wakes up next day and decides they’re worthless) or to others. Once a quarter is the right “Metronome.” Come up with principles, themes, even tactical inventions. Bring back to the office and socialize with broader executive team. At end of process, he’s not sure if he really invented anything or not. Result of having a bunch of smart people, because you get all t heir criticism and suggestions.

This is similar to Bill Gates’s practice of going away occasionally for several weeks, taking a stack of books.

He also mentioned Blue Origin's company theme: "Gradatim Ferociter" (Step by Step, Courageously). Hokey, but it captures the engineering/MIT/Edison ethos.

Comments on Scotch from JoeP

here's a somewhat simple way of thinking about scotch. there are blends and there are single malts. blends tend to have a more balanced taste -- that makes them popular and well liked and that is kind of the point of blending. single malts have a more distinctive character and tend to vary regionally. the older, more expensive stuff tends to be more smooth and complex, while younger scotches tend to me more brash and less sophisticated. there is also a trend now towards casking in oak barrels used for sherry, port, and such, making them kind of subltly "flavored." i mostly look down on this trend. anyway, in my simple model, you can further divide single malts into highland malts and Islay malts. the most popular highland malts are the best-selling (in the u.s.) glenlivet, glenfiddich (the two best selling in the us), and macallan. although the older more expensive stuff can be quite tasty, i am a big fan of Islay scotches, which are distilled on an island dominated by peat bogs that conveys a smokey taste. the most popular islay scotches are laphroig and lagavulin. another very nice scotch is talisker, from the isle of sky. kind of in-between islay and highland. if i was getting steve a bottle, keeping in mine my bias towards my own personal tastes, i would get him lagavulin 16 ($65-95) or talisker. you can even find christmas-y gift boxes that come with cute little glasses -- i know i've seen talisker sold in this fashion.

This is what the flowers look like a day later, once they've woken up.

Flowers from Kari in Mexico

Lots of tulips from sweety Kari in Chacala. There were so many I needed to get an extra vase! The Space Needle should be visible in the doors behind the flowers.

Estimating life expectancy

The IRS has published some useful data based on calculations from the dismal science's cousin, actuarial statistics. This data was compiled into a spreadsheet by the website retireearlyhomepage.com. I placed their spreadsheet into a Googledoc spreadsheet here. It's interesting that life expectancy seems to increase when the person in question has a spouse. For Kari and I, our table is as follows:

So each of us has a 50-50 chance of living for another 45.11 years. As a couple, the last survivor of the two of us has a 50-50 chance of living another 51 years.

Christmas in Mpls

Back at the ranch...


After service at St. Johns

Opening presents

...and more presents

McChaCha Slide

Funny new commercial from McDs...

Increased data costs to financial websites

In May 2006 NYSE Arca filed a rule change with the SEC to charge per user fees for sites like Yahoo and Google to publish delayed stock price data. The NetCoalition intervened and the SEC agreed to put a stay on the rule change, after a committee in the SEC had approved the change. Supposedly NYSE and Nasdaq proposed in Jan 07 a more reasonable flat fee (WSJ article indicates $100k/month for NYSE) for real-time data feeds.

(for perspective on text below, Yahoo Finance has 15M monthly UU, 14% of total UU in Oct 07. Google Finance was 1.2M, 1% of their total UU. These nunmbers are US only, based on Nielsen)

An excerpt of the SEC's response to the NetCoalition is below. The SEC is still considering this. Given the revised rates from NYSE, it seems reasonable to expect that there will be fees imposed, and that they will likely be flat rate and reasonable.

The proposals made to Internet companies by the now for-profit exchanges have been exorbitant. They have ranged from $75 per unique visitor per month for Nasdaq data to $15 to $30, or $10 or $9 per unique visitor, per month for NYSEArca data to the $1 per unique visitor per month for the NYSE non-professional rate. At $75 per month for the roughly 49 million Americans visiting financial web sites, fees would theoretically run more than $3.6 billion per month, or $44.1 billion annually. (These numbers are, of course, in addition to the hundreds of millions of dollars already collected annually from the broker-dealer community). If all Internet users of financial pages sought NYSEArca data at the $9 rate, that would still run $441 million a month, $5.3 billion annually. Even the "bargain basement price" of $1 per month for NYSE non-professional data would still render the not-so-Spartan sum of $49 million per month, or $588 million per year. Any and all sums would be, of course, in addition to the actual transaction charges that would be levied on retail investors if they opt to engage in a transaction.

Relatively few of our members' customers are going to purchase market data at $75 per month. It is unclear how many would buy NYSEArca data at $9 per month, but clearly even at $1 per month - where one might expect more user participation - the Commission staff is authorizing a transfer from retail investors to a for-profit monopoly of hundreds of millions of dollars annually, with literally zero showing of any cost basis.

By not submitting any information to provide a factual justification for its proposed fees, NYSEArca prevents the Commission from considering, for example, whether charging Internet companies for access to real-time market data based on the number of users - or "eyeballs" - that visit the site can be justified against the mandate that fees be "fair and reasonable." Given the fact that the ECNs were providing real-time market data to Internet companies at no cost, it seems reasonable that a "flat rate" for access to market data is more appropriate than a "per user" structure that puts the availability of real-time market data out of reach for the vast majority of Internet users.

A more recent article from WSJ via Reuters:

NYSE plans test of real-time Web quotes - WSJ

NEW YORK, Jan 12 (Reuters) - The New York Stock Exchange plans a pilot
program later this year that could bring real-time stock quotes to Internet
users, The Wall Street Journal reported on Friday. The NYSE Group Inc. (NYX.N: )
unit is expected to file a proposal with the U.S. Securities and Exchange
Commission on Friday, the Journal reported.

If the SEC approves the plan, the NYSE will allow Web sites to publish
trade prices with nearly no delay in return for payments of $100,000 a month,
the Journal reported. The test program could be available as early as March,
depending on the SEC's response, the paper said.

Google Inc. (GOOG.O: ) and business news television station CNBC have
said they would offer data for free to their users, the paper said. The NYSE
also has had discussions with other Internet service providers such as Yahoo,
the Journal added. Google is a member of a group called NetCoalition, which has
complained about a lack of real-time stock data offered through services owned
by the NYSE Group and Nasdaq Stock Market Inc. (NDAQ.O: )

看见阎登洪

Pictures from visit to see 阎登洪.


With Jim and Kermit




With Terp


In front of 94th Aero Squadron near College Park

it is at moments after i have dreamed (e.e. cummings)

I found this on a random blog through stumbleupon. It works for me (stumbleupon and the poem).


it is at moments after i have dreamed
of the rare entertainment of your eyes,
when (being fool to fancy) i have deemed

with your peculiar mouth my heart made wise;
at moments when the glassy darkness holds

the genuine apparition of your smile
(it was through tears always)and silence moulds
such strangeness as was mine a little while;

moments when my once more illustrious arms
are filled with fascination, when my breast
wears the intolerant brightness of your charms:

one pierced moment whiter than the rest

turning from the tremendous lie of sleep
i watch the roses of the day grow deep.

- e.e. cummings

How music prefs predict personality...

...or is it the other way around. Anyway, results from a music psychology test at outofservice.com, a collection of psychology self-tests. The music test on there, from a researcher named Jason Rentfrow at the University of Cambridge. Supposedly 90,000 people have taken tests on that site. My results are here. The hope is that this plays into online personalization in a Pandora-esque way.

Salmon Roe

My beautiful triathlete wife registering for the Fat Salmon 1.1 mile swim in Lake Washington. Note birthmark on arm.

The end of the cheap credit ride...

Interesting Seattle PI article below. Growth rate profile matches the rate of housing starts (graph from RBC Sep 19, 2007 report from Gerard Cassidy)



Note peak in 2005. It also matches the peak of subprime and alt-a loan home sales.




SeattlePI:Seattle home values hottest in U.S.
Click here for article

Wednesday, September 26, 2007Last updated 7:27 a.m. PT
By AUBREY COHENP-I REPORTER

Seattle-area home appreciation has been the hottest in the nation for 11 months in a row, despite steadily slowing for the past year and a half, according to data released Tuesday.
July's price for a typical home in King, Pierce and Snohomish counties was up 6.9 percent from July 2006 and 0.2 percent from June 2007, according to the S&P/Case-Shiller Home Price Indices, which do not give actual prices.

The August median home price was $439,000 in Seattle and $415,000 in King County, according to the Northwest Multiple Listing Service. Both medians figured in condominiums and single-family homes.

While July's annual increase was the smallest for the Seattle area in nearly four years, it was still the largest in July among the 20 metropolitan areas the indices track, just five of which posted an increase.

The story is a bit different for month-to-month appreciation, with nine other areas posting increases and all but one of those exceeding Seattle's percentage change. The 20-city composite index declined 0.4 percent from June and 3.9 percent from July 2006.

"The decline in home prices clearly continued into the summer months," Robert Shiller, chief economist at MacroMarkets LLC, said in a news release accompanying the report.
Detroit was simultaneously worst among the 20 cities for annual price change, with a 9.7 percent decline from July 2006 to July 2007, and first for monthly change, with a 1.3 percent jump from June to July.

Tampa, Fla., had the second-highest annual decline, at 8.8 percent, while Charlotte, N.C., was second to Seattle for increases, at 6 percent. Miami posted the biggest monthly decline, with prices down 1.7 percent, followed by Tampa and New York, which were both down 1 percent.
The drop in the 20-city index was the largest ever for that measure, which goes back to 2000, while the 4.5 percent decline in S&P's 10-city index was the largest for it since July 1991.
S&P Index Committee Chairman David Blitzer said prices might level off nationally by the end of the year.

"Maybe the first stage is steep declines, and we're just about done with those," he said. "The second stage is not much gain, not much loss. The rest of the economy has to catch up to home prices."

Shiller, an economist at Yale University, told lawmakers in a statement last week that the loss of a boom mentality among consumers posed a "significant risk" of a recession within the next year.

Unlike monthly sales statistics, the Standard & Poor's indices try to track the price of typical houses in a market by applying a formula to repeat sales of homes.

They screen sales for distortions, such as foreclosures or sales between family members, and weigh them for such factors as remodeling, neglect and the time between sales.

The Seattle area saw 33 months of double-digit annual appreciation, peaking at 18.5 percent in November and December 2005.