Throwing $2B at startups isn't going to create a new generation of entrepreneurs.
1. Fix the healthcare system.
Right now, you're punished if you don't work for a large company in the sense that you're charged up the wazoo for health insurance. Work for a large company and it's close to free.
2. Fix student loans.
One could argue don't go to college but I think we can agree there's some value to good schools.
3. Educate tomorrow's would-be entrepreneurs.
A lot of America is taught to go to college and get a job at a large corporation after. Let's shift the perspective. Let kids know that starting your own business is a possibility and not something to be ashamed of.
> 1. Fix the healthcare system. Right now, you're punished if you don't work for a large company in the sense that you're charged up the wazoo for health insurance. Work for a large company and it's close to free.
No, it's not "almost free". It's paid for by the company.
And yes, paying yourself is tax-deductible in many circumstances.
I've actually paid for health insurance out of pocket as an "older american". Rent was more expensive.
That said, healthcare could be a lot less expensive, but since much of that expense comes from govt involvement, it's unclear why anyone would think that even more govt involvement would help.
For example, there are a lot of procedures for which I don't want coverage, but thanks to govt requirements, I can't opt out and pay less.
> 2. Fix student loans. One could argue don't go to college but I think we can agree there's some value to good schools.
Student loans are one way to pay college costs. The method of payment doesn't actually affect the costs much.
Increased student aid seems to increase college cost.
No, it's not "almost free". It's paid for by the company.
You are correct, but large companies get dramatically better rates and better coverage than small companies. My family's small business has seen healthcare premiums increase more than 20% each year for the past few years. We have had to cut benefits (increase deductibles and copays, etc). It's a sad state of affairs that employees of large companies are insulated from (for now).
More or less because reasonably-priced health insurance requires a risk pool in which membership isn't voluntary, and large companies provide such a pool by requiring that all their employees enroll in the company health insurance as a condition of employment (and pay their portion of the coverage fee with no opt-out allowed). The insurers assume that the number of people who'll turn down the job solely due to disagreeing with the mandatory-insurance aspect is small, so the coverage pool is in effect a large, mandatory-coverage pool selected for mostly-health-unrelated reasons, which is the kind that works as a risk pool.
Entrepreneurs don't have anything similar unless there is a way to aggregate themselves into a pool where the opt-ins don't correlate with health condition too strongly, which currently there isn't. Insurers for good reason don't give good terms to non-mandatory-coverage risk pools, because of the strong bias towards high-risk people in such pools. And good luck if you have any congenital health issues; my friend who has a from-birth heart defect is essentially banned from ever doing a startup due to the employment-tied nature of the U.S. healthcare system and the preexisting-condition rules that make the health-insurance-via-corporate-job approach the only one open to him.
The issue is whether opting in is correlated with worse health. When one large company opts in, it's usually not because the company's CEO is himself sick: it's just a general policy decision to offer employees health insurance, and then thousands of people with overall "average" levels of health are non-voluntarily enrolled (the only way to opt out is to quit their job). But the decisions of individuals and small companies to choose or not choose to buy health insurance are much more strongly driven by their own personal health, with less-healthy people and people who suspect they're likely to have health problems soon more likely to buy in, and healthy entrepreneurs more likely to opt out / self-insure.
Large employer insurance plans are often self-funded, meaning that the insurance company charges administration fees but does not truly insure the plan financially.
Certainly small employers are worse at negotiating health care plans, but I'm not sure how much leverage they could possibly have in negotiations given economies of scale and switching costs.
(in a past life, I worked for a benefits consulting firm which specialized in union plans - one positive of how these plans operated was that they disclosed their benefits costs as $/hr rate per member.)
The US and Canadian government spend the same amount per person on healthcare but Canada has universal health care. On average the US and Canadian healthcare systems provide vary similar outcomes on average.
So, clearly more government involvement is an option. But, so is less the US could save a ridiculous amount of money if we could stop wasting it on end of life care that proves little to no benefit. Healthcare is an endless money sink and because the US government agrees to hand over money with little veto power we have are left with the worst healthcare system money can buy.
Just think about this for a second would you rather have an extra 250,000$ to spend when your young, or have a 50/50% shot of spending an extra 2 months on your death bead in a semi lucid state?
> The US and Canadian government spend the same amount per person on healthcare but Canada has universal health care.
As does the US, it just doesn't go by that name.
Yes, there is free healthcare in the US. It isn't unlimited and you can buy better, but the same is true of Canada.
However, I'll note that the US govt directly pays for about half of US healthcare (employees, etc.). If US govt healthcare will be so good, why isn't it? (Half of the population is enough to prove what it can do.)
However, I'm willing to give Obama free rein over US govt paid healthcare to show how much better it can be. All I ask is that he spends the same per-person this year, 10% less per person the 2nd year, and 20% less the third year. (Since govt healthcare advocates claim far more savings to be had, this should be easy.)
FWIW, pointing out how the US govt can't do healthcare isn't much of an argument for more US govt involvement in healthcare....
Going to the emergency room when you're on the brink of death doesn't count as "free healthcare," no matter how many times they beat their chest claiming it is. Emergency room healthcare is significantly more expensive than getting your blood pressure checked every couple of months.
The right to healthcare isn't something that only applies to the emergency room.
> Going to the emergency room when you're on the brink of death doesn't count as "free healthcare,"
So?
You're ignoring medicaid and the free clinics that are in many areas. Medicaid is especially interesting because the vast majority of the "poor uninsured" are eligible and get signed up as soon as they actually need care.
Both programs are fairly well publicized, so it's interesting that you mentioned emergency care as if it's the only option.
And there's a third option which is less well known. With the possible exception of much of Alaska (due to population density), every county has a public hospital that provides free healthcare.
Because in the vast majority of cases the US government does not provide heath care it provides heath insurance. The only large scale government healthcare in the US is the VA which costs a lot less than the rest of the US healthcare system because they pay for the doctors directly and cut out a lot of middle men that drive up costs everywhere else in the US system. They also have more leverage when it comes to malpractice and doctor pay etc.
Now, your rhetorical idea that prices can drop 10% the first year and 10% the second would probably not be far off the mark. (Just compare VA costs with the average hospital etc.) But, in the end it's only going to save around 40% because until we see some real automation there is only so much costs you can cut before quality is impacted.
> But, in the end it's only going to save around 40% because until we see some real automation there is only so much costs you can cut before quality is impacted.
How can that be? After all, we have all these stories about significantly lower costs in other countries. Do they have automation that we don't?
Umm a 40% discount on healthcare is huge is ~16% of US GDP which is significantly higher than the rest of the world. For reference that's savings is larger than the interest on the national debt. In other words the money we waste on healthcare is like doubling the national debt. Or twice what we spend on oil.
PS: Japan spends 1/2 what we do on healthcare despite a rapidly aging population. But, I would assume we would end up somewhere between them an Canada, because a significant portion of Canada's costs relate to it's vary low population density.
Are you really suggesting that a few ethnic diseases would render the Canadian healthcare system unworkable? I find it very hard to believe that a few more cases sickle cell or whatever would have that kind of effect.
What the fuck, downvoters. Seriously, health insurance is regulated differently on a state to state level, and some states have more consumer-friendly laws than others on the matter.
Govt mandates that "health insurance" cover things for which I have no interest. Those things increase the cost. Govt mandates that I can't buy health insurance across state lines, which reduces competition.
There are so many ways in which govt increases the cost of healthcare that I could post large numbers of citations and not even scratch the surface.
> (In other words, you're wrong. And you know it.)
Are you claiming that govt involvement hasn't increased the cost of healthcare at all, or just quibbling about the size of the net increase?
I wholeheartedly agree with your first two points.
On that last note, I think we're already far ahead of the curve when it comes to entrepreneurship. We're encouraging our kids to take chances, but giving them little when it comes to financial education. I think that alone contributes to the large amount of debt per capita in this country.
But since we're on the topic of entrepreneurs, good ideas don't succeed on their own, nothing new here. To elaborate on that, you can't execute without having the capital to get yourself from idea to prototype. That said, I can't tell you how many times I've seen talented individuals hold themselves back from following through on great ideas because they don't know how to set aside money that would later provide them with the time to focus on those great ideas.
Regardless of how one views our educational system, we aren't doing enough to teach the fundamentals of managing money. It's both surprising and depressing how many people don't comprehend the basics of credit cards, loans, insurance, bills, etc..
I put myself through school on a student loan. I was very grateful for it. I was charged a reasonable tax deductible interest rate. So I'm curious about what is actually broken?
Many public institutions have had their government funding drastically cut in the last few years. Simultaneously, there is plenty of support for student loans.
bingo. plus a wide spread effort and propaganda from higher education proponents that misleads kids into pursuing "no job" degrees. philosophy? communications? women's studies? please. if you're going to spend big bucks, especially fellow tax payer dollars, spend it on something real and non-obvious at least, something you can't just self-educate on at home, in your free time.
Boom! I can't agree with you more on the proponents of "no job" degrees. I've lost count of the number of students pursuing degrees in philo, comm, psych, sociology, and to some extent even undergraduate business degrees who give little or no thought to how these degrees will help them in the job market. Slightly less common are the people who know what they might want to do with their degree, but haven't investigated whether or not their plan is realistic.
A) The democrats pushed through Student Loan reform alongside the healthcare bill last year. "The new law will eliminate fees paid to private banks to act as intermediaries in providing loans to college students and use much of the nearly $68 billion in savings over 11 years to expand Pell Grants and make it easier for students to repay outstanding loans after graduating."
B) A month ago Obama announced a plan to allow college graduates to cap federal student loan repayments at 10 percent of discretionary income starting in January, two years before the cap was due to take effect under federal law.
> A month ago Obama announced a plan to allow college graduates to cap federal student loan repayments at 10 percent of discretionary income starting in January, two years before the cap was due to take effect under federal law.
Explain to me why this is a good thing for entrepreneurship. It seems to leave students free to party for a few years and rack up loans for degrees of dubious market value.
And leave the taxpayer (read: responsible students and entrepreneurs) with the bill.
it's $1Billion of tax payers money, the other $1billion is in private services, fees, and software provided. This is like the Microsoft BizStarts program.
this also includes funds to reshape american schools, to include entrepreneurship programs for k-12.
finally this looks like Obama is finally trying to reinvent SBA loans which are great for restaurants to start up, but not great for tech startups that are creating a massive number of new jobs.
I'm doing my part to help with #3. If more people would take direct action, in large numbers, we can move the needle. Identify bureaucracy/obstacles? Route around them.
I'm disappointed by the amount of political commenting on this post, as opposed to what I was hoping to find—discussion of how the fund will actually work and how to take advantage of the various elements of the initiative.
I'm trying to make sense of the press release, but finding it difficult. It's full of announcements, but seems to be missing any calls to action.
It contains this promising paragraph: "…the gap is particularly acute in the so called “Valley of Death” for financing rounds between $1-4 million. Over the past 4 years only 6% of all venture capital has been deployed in that stage … The Innovation Fund will target this gap, providing a 1:1 match to private capital raised by early stage seed funds."
Does this mean that access to money in this fund is only through existing VC firms? Or does it mean something else?
If anyone can extract the actionable information from all this static, please do share.
It would be great to know if new funding methods were actually opening up, or if this is just an infusion of cash to VCs.
It's full of announcements, but seems to be missing any
calls to action.
Ok. Here is the call to action: hire a lobbyist or ex-Congressman who will get you in front of Startup America. Preferably a large bundler like George Kaiser. They will get you sweetheart loans and endorsements from the President and
Vice President.
We've seen this dozens of times before when "free money" is available. Scarcity requires an allocation mechanism. In the case of the very similar Qualifying Therapeutic Discovery Tax Credit (QTDTC) from last year, those who lobbied were those who got the bling.
http://www.bizjournals.com/sanfrancisco/blog/2010/10/winners_losers_in_race_to_biotech_tax_credits.html
Clearly somebody — probably a few thousand somebodies —
are going to lose out.
...
The takeaway for those biotech companies that miss out on
the tax credit, according to Eisenberg: Tell your member
of Congress to extend and expand the program.
And as with the QTDTC there will be a catch. Failure is criminalized. The failure of Solyndra prompted an FBI raid. What did the executives know and when did they know it? All government "grants" are like this. For example, to get the biotech "Qualifying Therapeutic Discovery Tax Credit" from last year, you had to essentially submit to an IRS audit.
http://www.irs.gov/newsroom/article/0,,id=224505,00.html
Q5. What type of documentation and records related to the
application should applicants maintain in order to satisfy
IRS requirements in the event of a future audit of
“qualified investment” claims?
A. Documentation and recordation should include
information sufficient to verify and explain costs treated
as qualified investments, e.g., detailed work papers and
invoices.
Translation: embarrass us and we will retroactively find your definition of "qualified investment" to be at variance with that of the IRS. Bottom line, it is unlikely this program will be substantively different from those preceding it.
Congress has to do that, the executive branch can't. To the extent that the executive branch is streamlining the existing immigration system, they're being derided as amnesty-offering traitors by the xenophobic know-nothings that want Berlin Wall 2.0.
No, that's how a dictatorship works, not a parliamentary democracy. The prime minister/head of state may set policy, but it's still subject to an up/down vote in the parliament. In all cases I can think of, a prime minister can't unilaterally make such drastic changes without (parliamentary) referendum.
The U.S.'s federated system just makes it more explicit what's going on.
The above isn't meant as a comment - it was a question that was answered by an edit in the grandparent, but I then carelessly edited this instead of deleting it. By the time I noticed the error the edit/delete window had closed.
You might want to reconsider broadly slurring a bunch of your fellow citizens as "know-nothings" while writing a comment seemingly ignorant of the fact that the Berlin Wall was designed mostly to keep people in.
Actually, probably unintentionally, Know-Nothings isn't a bad term. The Know-Nothings were an anti-immigrant political party in the 1840's and 50's. http://en.wikipedia.org/wiki/Know_Nothing
Indeed so. They were named as such not because they didn't know anything, but because of their habit of saying 'I know nothing' if questioned about their political activities. Immigration is kind of my specialty knowledge domain, actually :-)
As for the Berlin Wall crack in the grandparent, of course I know the Berlin Wall was meant to keep people in. That doesn't stop people who want to militarize the border with Mexico from explicitly holding it up as a model. Read the comments on any Wall Street Journal story about immigration and you can be pretty sure of seeing it cited approvingly within a few pages.
Actually not, because their commenting system uses flash so you can't search for/link to individual comments. As you can see from a simple Google search, though, I am far from the first to make the comparison: https://www.google.com/webhp?sourceid=chrome-instant&ie=...
All the examples on the first page of google (except maybe for the youtube and facebook links - didn't bother reading those) consist of proponents of increased Mexican immigration stupidly comparing a proposed border fence to the Berlin wall.
However, I'll admit that I've also seen proponents of secure borders making Berlin wall comparisons under one circumstance. Often proponents of increased Mexican immigration claim a secure border is impossible to construct, and the Berlin or Korean DMZ is brought up by their opponents to prove they are incorrect.
We just had a candidate that flamed out in the race for the GOP nomination speak with approval of an electrified fence. I have never claimed this to be the majority position on the right (it isn't; about 40% of GOPers support restriction ist policies), but if you think immigration restrictionists aren't in love with the idea of walling off the border you're in denial.
I never disputed that many people want to secure the border. I disputed that "people who want to militarize the border with Mexico [...] explicitly hold[...] it [the Berlin wall] up as a model."
Per your own comment, you are ignoring some sources, including those which present counterexamples. In any case, I suggest you back up from this indivudal tree and take a look at the whole wood.
That is a really bad comparison. I suspect that you misused the word Apartheid because of its emotional connetation (which circumvents any rational reasoning that a non-emotional argument might entail).
Apartheid was concerned with the area people lived in the same country (in this area it might be seen as unjust - since people had citizenship to the country. Then again, SA is a country that should not have existed in the first place - the only ties that bind South Africans together is that they were all subject to British colonialism and their mutual dislike for each other).
In any case, the Apartheid regime tried (very successfully) to prevent illegal immigration from neigbouring countries (since for some strange reason South Africa was the only industrialized country). This was done with fairly great success. The motivation for this was twofold: to prevent insurgents from infiltrating the country and protect the jobs of black people (the white minority government was fearful of black unemployment - for this reason unemployment of black people were far less than 10% then and regularly 30-50% after '94).
To come back to my point - after '94 illegal immigration significantly increased. There are several reasons for this, e.g. The military was no longer responsible for enforcing the border (which fell to the police), liberal policies wrt immigration, Mugabe's experiments in Zimbabe, etc...
Post '94 there were two patterns of migration - skilled people left the country (e.g. to Usa, Canada, aus and new zealand), and unskilled people immigrated to South africa (mostly from other African countries). The size of the illegal immigrant population is difficult to estimate, but probably 10% of the population.
What was the result of this 'free' immigration?
Higher unemployment for the poorest of South Africans, increase in crime (with a large part of crime done by unemployed illegal immigrants) and then of course the fairly recent xenophobic killings(which saw a return of the brutal necklacing killings). I think it would be justified to say that illegal immigration is the biggest threat to stability in SA today.
TL;DR: South Africa should be used as an example of why immigration control is absolutely necessary. illegal immigration threatens the poorest of the poor (those struggling to find employment), leads to higher crime and threatens societal stability.
"Apartheid was concerned with the area people lived in the same country (in this area it might be seen as unjust - since people had citizenship to the country."
I use the term Apartheid advisedly. I do not regard place of birth a legitimate discriminator any more than I do race.
As for the "poorest of the poor", they live in poor countries. Again, I do not see the relatively poor of wealthy countries as being more worthy than the absolutely poor of poor countries. There are huge gains to be had in economic growth and human rights from free migration.
> However, it is a far from perfect analogue. Bryan Caplan cites evidence that immigrants to the U.S. commit crimes at a far lower rate than U.S. citizens.
So? This is expected! It shows the success of current immigration policies. The current policy is to only let the best of the best into the country (i.e. Those without criminal records and who has at least a degree in a technical field/ or doctor).
The blog post makes no argument that th crime rate of immigrants would still be lower if this barrier and selection would be removed (it would not!).
Furthemore, look at the South African example in this area - illegal immigrants (without work, etc...) turn to crime. Zimbabweans and Mozambiqucans esp. In violent crime. Many Nigerians ar involved in drug crime and other crimessuch as prostitution and human trafficing. Not pretty.
I strongly suspect that if South Africa enforced its border, Mugabe would have been overthrown.
But currently, most of the Zimbabweans that would be responsible for a coup de ta in Zimbabwe (18-40 year old males), are doing manual labour in South Africa.
The current policy is to only let the best of the best into the country (i.e. Those without criminal records and who has at least a degree in a technical field/ or doctor).
That is most certainly not current US immigration policy, which explicitly provides priority for family connections. Technical qualifications are a secondary factor and a modest advantage only for employer-applied visas. The vast bulk of visa applications are family-based.
The blog post makes no argument that th crime rate of immigrants would still be lower if this barrier and selection would be removed (it would not!).
[citation needed]
Usage of the word Apartheid in your link is bogus! The word Apartheid is only used in order to evoke white guilt.
Oh FFS. I have no guilt about being white but if you're going to argue that apartheid was in any sense a fair system then you're welcome to it.
> That is most certainly not current US immigration policy, which explicitly provides priority for family connections.
That is true. But the person who broughthif family over, how did he get here? Because he is skilled and already at the top of his field! So, a skilled person bringing over his family or an American whi brings over his foreign wife is already at the top of society.
I myself looked at immigration (chiefly yo USA, Ireland and Britain) - almost impossible for me to do if I didn't have an advanced degree.
> [citation needed]
You are willing to believe an unfounded assertian of the nlog post, yet evidence of countries with more liberal policies you ignore?
I stated the example of South Africa with an open border. In many Nordic countries with a liberal immigration policy, crime by immigrants is much higher (finland, sweden, etc...).
> i have no guilt about being white...
Yet the premise of article is that the world is divided into rich white people and poor black/asian people and the reason for that is "International Apartheid".
So according o the article, if a person supports rational immigration policies, he is a racist who supports global apartheid.
Perhaps you did not comphrehend the article or you feel the same - hence no need for white guilt since you support open borders.
> if you are going to argue...
I am not arguing that Apartheid was a fair system (it was not). Yet the world is a lot more nuanced than good/bad black/white.
South Africa is an extremely complex country (11 national languages, four capital cities, traditional leadeship, two Europen populations, massive inequality between black and white, rich black and poor black, inequality between urban and rural, more people on welfare (13 million) than tax payers (<5 million), probably more illegal immigrants than white people, more HIV+ people than tax payers, etc...). An incredibly complex (and interesting) country that you describe in terms of a black white world view.
Usage of the word Apartheid in your link is bogus! The word Apartheid is only used in order to evoke white guilt.
It is argued that because of Apartheid, blacks were poorer (even if blavk poverty increased significantly after '94, that is not the point.) The point is that the stereotype is that in South Africa black poverty is due to white people.
Your article implicitly makes the same claim. Here is the quote:
> Like the world, it was about 15% white, the rest African and Asian. Like the world, the whites were segregated from the non-whites by law (of course the West does have some blacks and Asians, but it segregates the vast majority of them). The whites lived in prosperity, the blacks in poverty,
So here is the question: how can whites still be (implicitly) blamed for African poverty? Most african countries have been sovereign for more than half a century. Many of them have been sovereign for as long as history (or only had short periods of colonial rule) - e.g. Swaziland, lesotho, ethopia.
The crude (and wrong) comparison ignores issues of culture, historical development patterns, traditional power stucture, etc...
Agreed, but that would likely cost more than $2Billion in terms of legislators' time elapsed and hot air expelled. Although I do believe the supply of hot air is near infinite.
But seriously, exempting smaller firms and fundraising efforts from costly regulations is a good part of this initiative. Routing public funds through private investors, not so much.
While they're at it, they should completely eliminate the wealth tests for 'accredited investor' status. If some fig leaf of 'accreditation' is still needed, it should be experience-based or net-worth proportional. For example, everyone with certain business/economics/legal degrees or certifications (Series 7?) should be 'accredited' as knowledgeable enough for private investing. Or, anyone who has an equivalent amount of money in public investments or government-approved retirement accounts, should be able to invest that same amount with 'accredited' status in private investments.
I don't recommend angel investing for anyone who can't afford to lose a fairly substantial amount of money, which pretty much excludes anyone who isn't already an accredited investor. Finding the next Facebook or Google is a lot harder than you might think, and even if you did, they probably don't want your money. You are better off investing in your own self (education and the like).
Eliminating the wealth test would mainly benefit scammers.
I wouldn't 'recommend' it either. But there's a difference between 'not recommending' and 'effectively prohibiting via a wealth test'.
We don't prevent people from spending their entire net worth, and then some via loans, on poker or state lottery tickets. Nor do we include wealth tests against investing in public stocks, derivatives, real-estate, or dubious collectables – all of which can also 'go to zero' quite quickly, especially with easy access to leverage.
Is private investing, especially in things like friends/family/personal-expertise-related startups, so much more treacherous than these other things that it alone needs special protections?
Public stocks and the like are heavily regulated. If we let random people invest in startups, a bunch of people would get scammed out of their money, then there would be calls for more regulation to protect investors, which would only serve to hurt startups. Meanwhile, none of those little investors would make any money because the median startup is a bad investment (vs the median public company, which is an ok investment). Nearly all of the startup returns come from a small number of outliers, and those outliers will most likely continue getting funding from larger investors.
Public stocks and the like are heavily regulated, yes, and they can still drive anyone's bankroll to zero. And via leverage or iteration you can make them as risky and rapid-loss-prone as private investments (or even outright scams). See for example: forex, real-estate, and casino ads in every medium.
So this rule protects fools from losing their money in private investing, but they still have a thousand other ways to lose their money. Meanwhile, this rule also prevents lots of people of moderate means from making wise, moderate investments in areas they know well.
These sorts of from-the-masses, for-the-masses investments wouldn't necessarily follow the valley hit-driven model of "nearly all of the startup returns come from a small number of outliers".
But even if they did, why shouldn't people of all wealth levels be able to take their chances on finding an outlier? The current rule essentially says: the very best investments are only, by legal rule, allowed to the already-wealthy. Everyone else, here, buy a scratch-off.
What is "fairly substantial" here? $10k? $20k? $100k? I certainly know people willing to risk the first two but not the third (primarily early 30s professionals). $20k is plenty to participate in the seed round of a software startup. It seems silly to forbid people to invest an amount smaller than they would spend on a car (a guaranteed-depreciating asset over the next 10 years).
> You are better off investing in your own self (education and the like).
agreed, and wise. my attitude towards eating and exercise changed significantly once I looked at it as a form of investment. Only one that didn't take much money to do, mostly a little time and making different choices. A little life hack.
The problems with proportional would be twofold:
1. How can the company taking the investment verify that the investor doesn't have other Angel investments? Remember: this is most important from a startup perspective to make sure you're able to do clean funding rounds without dealing with the fallout of non-accredited investors.
2. There's nothing to stop people from repeatedly losing 10% (or whatever percent you allow) on stupid gambles.
I'm not convinced that academic credentials would be that useful either. I'd trust someone who's run a plumbing business for ten years far more to evaluate a startup investment than I would your average MBA. I thought it amusing that Swenson talks about university professors as if they are automatically financially sophisticated (one of the few points not backed up by data in Unconventional Success).
There is nothing to protect someone who is reckless or gullible: they can lose all their money on currently-legal schemes, as well.
If an investor provides false/incomplete documentation that their investment qualifies (as an acceptable proportion of their net worth or other 'government approved' investments), then that fraud should be the investor's problem when things go south, not the receiving company. Current 'accreditation' is not verified by the government, but rather asserted to the company/lawyers with enough credibility to convince them.
Is someone who inherits a million dollars more qualified to invest $10K-$990K into a risky tech venture than someone who's actually earned $10K-$990K in the same field as that venture? Because that's the logic a dumb-money wealth test suggests.
lots of alt energy companies? you bet. risky? of course. will some fail? always. do people make mistakes? yes. would you prefer instead that a thousand new Wall Street firms bloom? a thousand new oil companies? And Solyndra's cost to taxpayers, and impact on debt, is a tiny tiny drop in the bucket compare to what's been spent on Iraq and Afghanistan, or the Bush tax cuts for the richest Americans. put things in perspective, sorting by amounts, at the very least.
I think we do agree on the idea that we should make it easier, or more meritocratic, to invest. And less bureaucracy. No arguments there. And there's a bill going through Congress now, I believe, and which Obama supports, to help do just that.
agreed. well, somewhat. funding for software-centric startups is fairly easy right now. large capital/infrastructure-requiring startups is harder, and for mom-and-pop businesses it can be harder (though crowdfunding is shifting that, it appears.)
making it easier for highly-skilled, rule-following foreigners (cough-Mexico-cough) to immigrate in and start at or work at US based startups, would be an easy win. And fixing the patent system. And defending the Internet from attack by big corporate interests. All would move the needle more than just making a little more money available for yet another shallow frothy "me too" web startup.
The biggest problems the government should be solving with energy are fixing the messed up regulation of the electric grid, and reducing subsidies for energy/oil.
Currently, utilities have zero incentive to take any risks, and zero incentive to save money. They only act under duress -- essentially, when the PUCs force them to do something.
Maybe Obama should stop "investing", we've seen how that turned out with Solyndra, Light Squared, Fisker Automotive, etc.
Maybe Obama and the Federal government shouldn't be in charge of "fixing" economic aspects of society, as that is not what the founding fathers of this country intended, and that is not really within the authority of Congress.
Government picking winners and losers is a proven way to eradicate innovation and destroy wealth.
> Maybe Obama and the Federal government shouldn't be in charge of "fixing" economic aspects of society, as that is not what the founding fathers of this country intended, and that is not really within the authority of Congress.
demonstrably not true. think the US federal postal service, department of treasury, the patent system, right to regulate and tax trade. All of which helps to both "fix", promote and tax economic activity throughout the nation. Also keep in mind that those same founding fathers whose "intent" you seem to want to honor, birthed a country where neither women or black people (for the most part, as slaves) were not allowed to vote. So unless you agree with that original state of affairs, clearly their intent can be wrong or evil, in some cases. And therefore just citing their intent is not sufficient to win an argument.
If you google the "Early Stage Innovation Fund" this is the first result:
Early Stage Innovation Fund - COMING FY 2012 | SBA.gov
www.sba.gov/node/15261
Early Stage Innovation Fund - COMING FY 2012. Earlier this year, the President announced the launch of "Startup America," an initiative to support high-growth ...
Seems rather fitting for a government effort. Further digging shows that these funds are really only open to VC firms with $20 million in funds already. http://www.sba.gov/inv/earlystage
Laissez faire, telle devrait être la devise de toute puissance publique, depuis que le monde est civilisé ... Détestable principe que celui de ne vouloir grandir que par l'abaissement de nos voisins! Il n'y a que la méchanceté et la malignité du coeur de satisfaites dans ce principe, et l’intérêt y est opposé. Laissez faire, morbleu! Laissez faire!!
(Trans: "Leave it be, that should be the motto of all public powers, as the world is civilized ... That we cannot grow except by lowering our neighbors is a detestable notion! Only malice and malignity of heart is satisfied with such a principle and our (national) interest is opposed to it. Leave it be, for heaven's sake! Leave it be!")
I was going to respond with something along the lines of "how's that working out for you" but really Alan Greenspan is still a staunch capitalist that would more or less agree with the quote above. If anyone has had the benefit of studying the market since that time it would be him.
Edit: After a minute of posting this I've realized I've committed a logical fallacy, Appeal to Authority. Granted I was responded to a comment based on a logical fallacy (Appeal to Time?) but I would like to expand my thoughts.
The best way to allocate resources is to have knowledgeable parties commence in free exchange. The role of government is to ensure that force and fraud are absent from the marketplace. If there is any further goal of the government it could possibly be encouraging the spread of information, although that is rife with conflicts of interest.
Even if Obama's fund nets a positive return, the cost at which it does is unknown. Pumping money into sectors of the economy mis-aligns investment. The free market is the best allocator of wealth.
> The best way to allocate resources is to have knowledgeable parties commence in free exchange. The role of government is to ensure that force and fraud are absent from the marketplace. If there is any further goal of the government it could possibly be encouraging the spread of information, although that is rife with conflicts of interest.
We have about 50 years of research showing that there are way more barriers to efficient allocations via the market than just information asymmetries. Start here: http://www.hss.caltech.edu/~camerer/ribe239.pdf
Regulation is one solution to market failures. It's not the only solution, but in many cases it works well. The Clean Air Act, for example, has been extremely successful at addressing the negative externalities created by air pollution.
Beyond that--the lesson that we're learning from modern economics research is that there are no touchstones. Humans aren't rational actors, the efficient allocation theories are predicated on unrealistic assumptions about the behavior of economic actors and the lack of transaction costs, etc. "Laissez faire" isn't any more of a guiding principle than "big brother knows best." The only way to proceed is empirically--use measurements to determine when government solutions are needed and when market solutions suffice.
It's a fairly uncontroversial claim that the market naturally under invents in R&D. It's something you'll see in any basic economics 101 textbook. So why shout "laissez faire" to a government initiative addressing such a market failure?
No. Regulation CAN be a solution to market failures. However, it is absurd to think that regulation necessarily solves market failures.
> The Clean Air Act, for example, has been extremely successful at addressing the negative externalities created by air pollution.
It's always interesting when an economic argument ignores either costs or benefits. While the clean air act provided benefits, that doesn't imply that we couldn't have gotten the benefits for less, let alone that every regulation in the face of claimed "market failure", or even actual externalities, is a good idea.
> So why shout "laissez faire" to a government initiative addressing such a market failure?
Because "government initiative" doesn't necessarily work. In fact, it tends to fail wrt R&D. Yes, the small projects, especially those run by DoD, do well. (I'll note that even that hasn't been all that good recently.) However, the big projects, especially those influenced by VCs, tend to be disasters, especially lately. Since this is one of the latter....
> It's always interesting when an economic argument ignores either costs or benefits. While the clean air act provided benefits, that doesn't imply that we couldn't have gotten the benefits for less, let alone that every regulation in the face of claimed "market failure", or even actual externalities, is a good idea.
There are several studies showing the huge benefits of the CAA relative to its costs. Banning leaded gasoline alone was a net $16 billion/year benefit.
And no, there is no implication that we couldn't have achieved the benefits of the CAA for less. That's the reality of the world we live in. Neoclassical economics only guarantees us efficient market allocations in the face of demonstrably false assumptions about consumer behavior, transaction costs, lack of externalities, etc. The "laissez faire" touchstone is good and debunked. All we have left is empiricism. Use the tools we have to address perceived problems, then see if the benefits outweigh the costs. There will be no guarantees that you'll have chosen an efficient solution, but any regulation where the benefits outweigh the costs can be justified on its own merits.
> There are several studies showing the huge benefits of the CAA relative to its costs.
Yes, but that wasn't the question.
> Banning leaded gasoline alone was a net $16 billion/year benefit.
The last time this came up, someone cited a study claiming that the CAA was responsible for 1/6th of the US economy. While I agree that there were net benefits, the 1/6th claim is absurd.
While every one of these "studies" claims to be conservative, I've never seen one that actually is.
Moreover, as with the space program, we may have gone through a "golden age" wrt certain kinds of regulation, where the small things might work but the big ones are one disaster after another. (That's not unexpected - we started with the low-hanging fruit.) Note that the acid-rain regulation is one of the disasters. (Yes, there was a problem, but the regulation was overkill.)
The statement is very general though. I think it suffices. The economy is not a zero sum game. To deny that today, I think, is to lack sophistication, not gain it.
Egads - having filled out the application forms for government export grants, I can only imagine all the strings attached, hoops to jump through and everything else.
Use the money to pay down the debt and just relax the regulations on capital formation and hiring and let the private sector do the work. And work some type of internet freedom into the constitution alongside freedom to have guns.
Oh great so now rather than compete with other entrepreneurs on a level footing we have to compete with companies that are partially owned and funded by the federal government.
"Specifically, the President has called for increasing limits on “miniofferings,” allowing “crowdfunding,” and phasing in some requirements for small firms as they go public."
I am so frustrated with these government programs that supply hyperactive, startups (Solyndra! Argh!) with too much funding, then crash and sully the reputation of entire fields with their profligate spending and successive failures.
The scientific grant system is even worse! With the rate of grants being accepted at 5%, everyone becomes extremely conservative. Many professors spend most of their time fundraising, not doing science. There is a good case that science would be progressing faster with no government funding at all.
There are obvious things the government could do to improve entrepreneurship. Like simply not kicking our entrepreneurs out! Stapling a green card to our graduate's diplomas -- the fact that we invest nearly a quarter million dollars in each STEM PHD and then don't let them stay has been a known absurdity for more than decade, yet they still don't fix this problem.
Or how about taxing oil and gas like everything else! Even ignoring the trillions of dollars spent policing the persian gulf region, the tax policies surrounding oil amount to an enormous subsidy, making it cheaper in the US than almost anywhere in the world. Simply taxing it would save the budget and dramatically improve prospects for green energy.
The list goes on. I'm stunned by the collective incompetence of the government in stimulating startup growth. Maybe there are good, structural reasons for inaction in the short term, but these issues have been around for years!
Here's my idea, up that to $2T by ending our current wars, forget start-ups, and instead invest it all into installing gigabit fiber to every home in the country. This would assure America's competitive infrastructure edge, and create more market opportunity than we can currently fathom.
$2 Billion is probably all that can be afforded until the bigger political battles can be won - ie: the 1% issue and getting corporate tax back into the public coffers. Quite a gamble to take however that the next generation of public funded Delaware startup corps will realize their longer term tax potential.
$1 trillion for banks, $1 billion for startups, you can really see how important this administration feels startups are. Why not just tell banks, lend half the money we're giving you to startups, instead of using it to prop up your balance sheets.
The bailout was a mess, but I feel there's some truth to what Kissenger wrote a while back: basically, a leader will never be given credit for choosing between two evils (a possible crisis, or a poorly-executed bailout) because you will never be able to prove with certainty how bad the other option would have been. We have no way to truly know what things would be like without the bailout, and we really ought to think of long-lasting solutions. Like funding startups, right?
Frankly, your comparison doesn't make much sense. The administration is making an obvious effort, but there's a big difference between investing in startups and attempting to patch an economy that looks like it will collapse. Investing in startups is quite literally an investment for a future economy. The bailout was a bit of the opposite -- a quick-and-dirty patch up.
Yeah, one is an accounting trick that penalizes everyone who saved money and the other has a serious chance of working.
If startups were important they could have just cancelled the V-22 Osprey program which eats $2.8 billion per year, or ballistic missile defense at $9.9 billion, or DHS at $60 billion.
$1 billion dollars over three years is probably less money than the gov't spends on toilet cleaning. It's equivalent to withdrawing from Iraq a week early. Sorry, if I'm unimpressed it doesn't look like effort, it looks like a PR campaign.
Yes, but these are all separate decisions with their own (opportunity) costs, aren't they?
Think of it this way:
Why would the government invest in Facebook or Twitter when there are plenty of people who already have their wallets open? That goes for many tech startups -- YCombinator alone is very beneficial for the government in an indirect way because the government no longer needs to think about funding tech startups -- someone else is already doing it really well for them.
So the real necessity for government intervention is for extremely risky and potentially extremely unprofitable ventures that allow for amazing possibilities (think NASA when the US was afraid of the Soviets). Pure scientific research is often this way as well.
And even NASA is a small fraction of the federal budget (I remember Neil DeGrasse Tyson repeating "half a penny to a dollar" a lot.
So my point is this: startups, research, or pretty much any economy-advancing investments aren't going to exceed the cost of trying to keep people happy. The War in Iraq is an example: we wouldn't be there if we weren't scared 10 years ago. We wouldn't have been eager to go to war unless it made us feel happier or safer or more content. In contrast, how content do people feel when they hear about a space shuttle explosion? Or money "wasted" on research that could be used to feed the poor?
Why did we even fund NASA again? Oh yeah, we were afraid. The United States collectively didn't give a crap about space until we imagined the Soviets creating the Death Star before us.
I'm not saying any of this is rational. Actually, I really agree with you, but the fact that money is going to startups is a good sign. The quantity is low because nothing will cost more than making people feel happy, safe, and secure right now.
No, he is simply an ignorant conservative hack. The boom and bust happened in the subprime loan market. Subprime loans are by definition those which are "sub-prime" (i.e. don't qualify for backing from Federal Agencies). This is why they were aggregated, sliced into parcels and sold on the market as CDOs rather than simply transferred to Fannie Mae.
> Sorry, if I'm unimpressed it doesn't look like effort, it looks like a PR campaign.
I think you're both right and wrong that it's a PR campaign. It can be both. Something positive, and something done for political benefit. The context is that it's very hard to get a bill passed in Congress right now unless both parties support it, and the Republicans have repeatedly blocked efforts to do things that help middle/working class folks, or help the the most serious environmental problems, etc. unless there's also kickback to the richest Americans and their favored industries (oil, military, etc.), or at least doesn't have anything that drops tax cuts or closes loopholes for them. They've opposed extended unemployment checks, for example. They've brought the nation to the very brink of default on it's debts, on an issue which historically is a routine ceremony of raising the "ceiling". That brinkmanship alone scares people, raises fiscal and market uncertainty and has a negative effect on spending -- this is beyond obvious to economists, a no-brainer. They opposed extending payroll tax cuts which disproportionately help middle/lower income class folks, and that most economists will tell you have a positive economic stimulus effect. Trying to pass anything in Congress gets turned into a political point scoring match, regardless of the actual objective merit or wisdom of it's benefits. In that context, it's much easier for a President to figure out which things they can do, just within the power of the Executive branch, to do something positive, however far from ideal it might be.
This is also the chronic PR problem of public health efforts to stop epidemics: if they succeed in stopping a plague before it gets huge, then it looks like they got all worked up over nothing.
The efforts of big gumment to get people who couldn't afford a house into one that blew a housing bubble that popped and created the worst financial and economic disaster since the Great Depression "was a mess".
The 'bailout', that is, the TARP program was not "a mess" at all but a grand success:
(1) TARP made money. All or nearly all the money has been paid back with very high interest, about 11% per year.
As far as I know, all the TARP money will be paid back without difficulty.
(2) The money was nothing like a 'bailout' but just loans to tell the world that the institutions would not go bust. So, TARP stopped 'runs' on the banks.
(3) TARP was not a 'bailout' but just to solve a short-term 'liquidity' problem, that is, as in 'runs' on the banks.
Note: A 'liquidity' problem is when you are worth $10 million but have only $500 in cash and suddenly have a traffic ticket for $600 and have to pay up or go to jail right NOW.
You have the money but just don't have it in cash right away; you can get the cash easily enough but will need some days or weeks to do so.
So to solve your 'liquidity' problem, you get a loan using some of your $10 million in assets as collateral. The loan is not really at risk; you pay your $600 bill; then a few weeks later you repay your loan with interest.
You are not broke. You are not begging for welfare. The loan is not a gift. The loan is not at risk. The loan is NOT a 'bailout'.
(4) Secretary Paulson called the nine bank CEOs to DC, sat them on one side of a table with a form in front of them, and told them all, "You WILL sign this form before you leave here today.". They all signed.
Goldman Sachs was one of the nine, didn't want or need the money, signed, took the money, but paid it back, with interest, as soon as Paulson would permit.
(5) Paulson's main point was just to tell the world that those nine banks were NOT bust and, thus, to stop 'runs' on those banks.
What Paulson did was fine. It was a good solution to a serious problem. The effort cost the taxpayers $0.00 and actually showed a nice little profit (11% was HIGH interest for such a loan).
To have not done TARP, we might have had cascading runs on all the major financial institutions in the US and all of the industrialized world and, then, been well into a second Great Depression, WWIII, global nuclear war, etc.
Yet too many people want to leap to call TARP a 'bailout'. It was no such thing.
Lesson: Those sources that call TARP a 'bailout' you should realize are providing toxic sewage in place of information for a well informed citizenry. For such sources, you should put on a rubber suit, hold your nose, dump the swill, pull the chain, and call a toxic dump cleanup crew.
Why do these 'news' sources scream 'bailout'? Because they want to grab you by the heart and the gut so that your eyeballs will follow for their ads and know that to grab you they should scream versions of greed, corruption, danger, scandal, etc.
So, they spout glowing, fuming, bubbling, sticky, toxic nonsense.
If the newsies had actually informed us, then we wouldn't have gotten into the popped housing bubble nonsense in the first place. In Iraq, we would have known that there was no good evidence that Saddam had WMDs. If we invaded Iraq anyway, then we would have dumped the Saddam regime and gotten out in three weeks instead of staying for 10 years and losing 5000 dead, 50,000 wounded, and $1.5 trillion. If we had good information on Akrapistan, then we would have been out'a there years ago. With good information, China wouldn't have wiped out much of our textile, manufacturing, and other industries and been ripping off our intellectual property.
Meanwhile, back in the US, the media was telling us ALL about Brit, Paris, Lindsay, Kim, etc. BUMMER.
Bad information from the newsies, such as screaming 'bailout', is the worst and most dangerous problem facing civilization at present.
PG and HN don't like for me to criticize 'big media', but I do so anyway because the media nonsense is the most dangerous problem facing civilization at present. Sorry PG.
Couldn't agree more. It definitely is a 'populist' trend to bash TARP and 'bailing out Wall Street', and while I do agree that the 15% capital gains tax needs to be raised (along with closing various loopholes that financiers and oil companies use to pay lower taxes), that oft-repeated position doesn't hold water.
It's infuriating because people don't understand when the gov't actually acts in their best interest - even if it doesn't seem like that.
As you so rightly pointed out, without TARP and the actions of the Fed, we would probably be in WW3 right now. People just don't get that.
Btw, this is partisan politics aside - because both Geithner and Paulson did a fabulous job at handling the worst crisis their generations have ever seen.
Some of the money the US Treasury 'invested' in GM may not get paid back.
So, we might say that GM got 'bailed out'.
Hmm. As I understand it, there was a little more to the story:
One approach to GM was just to let it go through an ordinary bankruptcy. But DC didn't want that.
Why? My understanding is that in an ordinary bankruptcy, GM would have gotten off the hook in their labor contracts to pay for retirees' health and pensions but, then, by law, the US Federal Government, that is, taxpayers, would have to make up the difference.
So, if all these guesses at the facts are correct, then, net, the 'arranged' bankruptcy essentially wiped out the stockholders, cost the Treasury some money, gave much of GM to the UAW pension and health care funds, and got the US Treasury off the hook for propping up ('bailing out') the UAW pension and health funds, then maybe, net, the Treasury came out best possible!
So, when there is screaming about the 'bailout' of GM, remember that the final arrangement was likely the "lesser of two weevils".
For the GM stockholders, well, GM messed up big time. So, first cut, in simple terms, it was up to the owners, that is, the stockholders to take the loss.
For a real 'bailout', there is Solyndra, ESPECIALLY after the renegotiation that had the taxpayers go from being first in line to get paid to being last in line to get paid.
And AIG was a real 'bailout'. The idea of bailing out AIG was to stop the spread of the sickness just at AIG. In part AIG was a bailout because it was not at all clear that AIG could repay. Last I heard, AIG may actually, finally, by slowly selling off everything it had, including its pens and pencils in Hong Kong, be able to pay back all the Federal bailout money. It was still a bailout.
But TARP, no, that was a vulture capital loan from the lender of last resort, the US Treasury, not 'help', not a 'gift', not really at risk, and not really a 'bailout'.
Of course, in all of this, the real villain is DC and what it did, especially having Fannie and Freddie back junk paper, in blowing the housing bubble. Why was the bubble so bad? Because during the price rising, there was a lot of dirty mortgage manipulations going on. But mostly the problem was that when the bubble burst, the 'reserve capital' of much of our banking system was wiped out and about 50% of the houses in the US went 'underwater'. So, we drained the financial capital lubricating oil out of the crankcase of our economic engine; the engine stopped; and millions of people in the US were seriously hurt.
Here's the situation: Banks will make loans on assets. But if the banks make enough loans on just some focused assets, then the asset values will rise which will let the banks make more loans on those assets, ..., and we blow a bubble. Then when the last loan is made, prices start to fall; the banks don't get paid back; the financial system dies; and the economy dies. So, really, don't want banks making loans on 'financial assets'. Well, for stocks, after the Great Depression, we stopped that. But with housing, essentially the same scam got started again, with the help of Fannie and Freddie.
Fannie and Freddie, along with the Federal Reserve, along with major parts of DC cheering it all on, were the real problem. The last time we did that, a wacko house painter and some of his buddies killed 50 million people, or maybe it was 100 million, I can't remember just exactly.
We shouldn't do such things. The media should keep us informed so that we don't.
GM would have gotten off the hook in their labor contracts to pay for retirees' health and pensions but, then, by law, the US Federal Government, that is, taxpayers, would have to make up the difference.
The PBGC is capped at $54k/year and no benefits. The government would not have had to pay for retirees health benefits (often described as "gold-plated"), and only would have had to pay for part of their pensions.
Also, in the event of bankruptcy, secured bondholders would have been paid before unsecured union benefits. The bailout was circumventing the rules of bankruptcy in order to minimize damage to the UAW. I wonder why?
I agree with most everything...Solyndra...definitely..that was gov't interferring with the markets at its worse. GM, I definitely agree...much better to go through a 'controlled bankruptcy' and have new mgmt negotiate with the UAW on more amenable pension & health arrangements. They are already making good progress there.
As for even AIG getting a 'bailout', I don't quite agree with that. Yes, they did get a ton of money, on seemingly 'cheap terms', but the logic is the same. If the insurer of all these financial instruments can't honor it's contracts...imagine the implications for the economy as a whole. Not only would they be reneging on contracts, enshrined in law, but many firms that purchased all sorts of insurance (not just on CDOs) - GE, Walmart, etc - on various assets/products would instantly be SOL.
So even if you take just the financial firms and their tanglings there out of the picture, in terms of getting back 100 cents on the dollar on their CDS Swaps, if AIG can't honor ANY of their contracts at a time when companies (all throughout the country in hundreds of industries) are experiencing softer aggregate demand and falling revenue, just that alone would be catastrophic beyond anything we have ever seen.
So I don't see it as an 'AIG bailout', but rather saving the US economy. Besides, they will be able to recoup their investment once they finish selling the useful assets and repairing the balance sheet over the long term.
Also, it's not just Fannie and Freddie that are to blame - as Bernanke said the exhorbitant global imbalances with countries running massive current account surpluses that creates an incentive for investors to put money to work. China doesn't want it's $3T sitting in cash, even just $100B sitting in cash could cost China about $2B - $10B/year depending on where it is sitting (just in inflation alone). So the pressure to at least do something to protect it against inflation is immense and that's just China.
Suffice it to say, there are many factors (from the mortgage tax credit to Fannie & Freddie to global imbalances to misaligned incentives on Wall St.) that are to blame. The damn media likes to play on the most populist and it's annoying.
One of the things I can say, is that I am impressed that people like Bernanke and Paulson can hold their nose and go against EVERYTHING they believe in (i.e. non-intervention in markets) and everything they have been taught and learned over their entire professional careers and completely violate these beliefs in a matter of days/weeks. It's easy to sit on the sidelines and vilify these people for their actions, when you don't quite understand the implications of non-action and even how tough it was for them to make those decisions. The fact is, these people ignored their beliefs and acted in the country's interest.
I am not even American and I can admire their actions.
Edit 1: To put their actions into perspective, it's the equivalent of being a 'pro-lifer' your entire life and in order to save the entire country you have to personally sanction wide-scale abortions. How many people would be able to do that? Might be a little dramatic, but I believe the parallels are similar.
No, sorry to say this, but we are in 100% agreement! :-)!!!
I was 100% for the AIG 'loan' for just the reasons we both explained. But since it was not clear that AIG would ever be able to pay back all the loan, I was willing to call the loan at least in part a 'bailout', that is, 'help' or a 'gift' that might not get repaid.
It's too bad the media wants to use the Paulson, Bernanke, etc. excellent efforts to save the US and most of the world as a source of a coveted scandal by screaming "bailout", but, again, I fully agree with you that what the US did for (with) AIG was just essential.
I will insert: The stuff about a 'balanced budget amendment' and, much worse, Ron Paul's desire for essentially a gold standard instead of a Fed, would mean that there would be no Federal 'lender of last resort' which would force us back to the results we got in the 1930s when we were far too afraid to print money until people started shooting at us.
In addition we would not be able to fight any major wars at all; we might as well shut down most of the DoD.
Paul seems to believe that the Fed is the cause of all bubbles and that with a gold standard we would have no bubbles; history clearly shows otherwise. Even with a gold standard, there still is 'fractional reserve banking' and the possibility of bubbles, crashes, financial 'panics', etc. As I recall the history, at one point J. P. Morgan personally saved the financial system, and that situation was much of the motivation for creating the Federal Reserve.
Moreover, I'd go farther: A comparatively few bucks would have kept Lehman afloat long enough mostly to 'unwind' slowly. That is, there is a good chance that Lehman was mostly the victim of a 'run on their bank', some of it urged on by some short sellers. Sure, I would have expected that the Lehman stockholders would still have lost their shirts, but keeping Lehman going for their 'counter parties' might have greatly reduced the effects that gave us the Great Recession. Houses would still have gone underwater, CMOs and CDSs would still have been in trouble, but some of the intensity and volatility would have been reduced. Alas, the media was so eager to scream 'bailout' that it would have been politically too hot to 'save' Lehman, even if all the owners lost all.
For Paulson and Bernanke going against their beliefs, that shouldn't be too difficult! No one should ever have taken all that simple minded stuff as always 100% true anyway! Besides, Bernanke was a leading Great Depression scholar. Also, Paulson saw instantly the threat of 'bank runs' and 'cascading contagion'.
I do fault Greenspan for drinking too much Ayn Rand Russian Kool-Aid! Of course eventually he admitted before Congress that his belief that the firms would do the right things was expecting too much.
I do have some remaining questions: (1) I can understand what Country Wide and Fannie and Freddie did. But I don't fully understand the other flows, e.g., through the ratings agencies and the 'tranches' and to the CMOs and their CDSs with AIG, etc. I don't have any good data on how much of the paper was held in small banks, large banks, outside the US, or where. Just why the problems were mostly just in Florida, Arizona, Nevada, and California but not the rest of the US I don't get. Just why the problems in just those four states did so much damage to housing and the economy nearly everywhere in the US I don't get. Just what happened to routine commercial banking and why I don't have either good data or good understanding. (2) Actually there were some surprisingly similar housing bubbles outside the US, at least in Australia. So just how the US housing bubble made it to Australia I don't get. Then Canada was largely immune; just why Australia got sick but Canada didn't I don't get.
We should ALL have GOOD data and answers to these and other questions and should have had all along during the bubble blowing over the past 10 years. We didn't. At least this time we're not at much risk of a Hitler, but we've come close and are not fully out of the woods yet.
Wow....reading you type, is like seeing a mirror of me type. It's insane how much we agree on. I feel like I have been trying to dispell these myths here on HN for the last 2.5 years and here you come along spouting the EXACT same stuff I been saying. It's soo refreshing :)
I mean...really, the longest time period between recessions in that approx 90 years (1836 - 1926) was 5 years. Imagine that, literally...over other year (almost) America had a recession. That's batshit crazy.
Is THAT what we want to go back to? Fractional reserve banking and central banking is the damn cure to all of that.
Ron Paul is off his knockers when he talks about this stuff, and the most painful part is that so many people listen to him. They don't know any better.
As for your questions, as far as I understand it, the housing bubble CDOs were just the tip of the iceberg. When I lived in FL, there were many small community banks, that went bust because they held tons of CDOs backed up by subprime car loans and credit cards - YES!!! These guys were insane.
As for Canada, the truth is, I don't quite get that one either...because as far as I know, the 'standard' mortgage up there is actually a variable rate. I haven't done much research into it, but I have a few friends that live up there and are goin through the house-buying phase now. It's so bad that we had a debate about whether 30-year fixed mortgages even exist anywhere in the world. I kindly linked him to the relevant US regulators that explicitly show rates on up to 40-year fixed. He was flabbergasted. So, I honestly don't know what's happening over there.
I agree that we should know, I am sure the data is there...I have just been busy trying to keep my startup dreams alive (no time to do all that research - as much as I would love to).
Yes, one of the reasons a bank had architecture borrowed from some ancient Greek temple was to convince depositors that the bank was 'solid' and not about to go bust, which long far too many banks did.
(3) TARP was not a 'bailout' but just to solve a short-term 'liquidity' problem, that is, as in 'runs' on the banks.
Note: A 'liquidity' problem is when you are worth $10 million but have only $500 in cash and suddenly have a traffic ticket for $600 and have to pay up or go to jail right NOW.
You have the money but just don't have it in cash right away; you can get the cash easily enough but will need some days or weeks to do so.
So to solve your 'liquidity' problem, you get a loan using some of your $10 million in assets as collateral. The loan is not really at risk; you pay your $600 bill; then a few weeks later you repay your loan with interest.
You are not broke. You are not begging for welfare. The loan is not a gift. The loan is not at risk. The loan is NOT a 'bailout'.
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What would define a 'bailout' as then?
Your example may be a bit extreme. If you're "worth" $10 million, but don't have $500 in liquid cash, you're stupid. You're not prepared for every day eventualities in your line of work (or just life in general). When people are unprepared for otherwise predictable things (washing machine breaks, you need an oil change, flat tire, etc) they have to suck it up and deal with it. They don't get to tie up all their money in investments and have someone loan them money for 100% foreseeable day to day life realities.
"You have the money but just don't have it in cash right away; you can get the cash easily enough but will need some days or weeks to do so."
I get emails from these guys in Nigeria all the time.
"You are not broke. You are not begging for welfare. The loan is not a gift. The loan is not at risk. The loan is NOT a 'bailout'."
Yes, you are broke. No, you're not begging for welfare. But, the loan is a gift to save you from otherwise going to jail.
When normal people in their every day lives don't have a safety net/cushion/rainy-day-fund to fall back on, they're labelled irresponsible, lazy, deadbeats, or charged with "living beyond their means". But if a bank does it... WTF? It's just normal business?
It's to "help" someone in a "predicament". The context is that the someone is in trouble and to need the help is pejorative.
But with this definition, TARP was not a 'bailout'.
Help? The "help" is usually much like a gift and not likely to be paid back. The banks had to pay HIGH interest, and did. The US Treasury made out like vulture capital. In the end it was the banks, and their stockholders, who gave 'help' to the US Treasury and the US taxpayers.
Need? At least Goldman Sachs didn't need the money in any sense.
In most respects, the banks didn't really need the money; that's why they were able to pay back the money quickly with interest.
Any need there was was due just to the liquidity issue.
The main reason Paulson acted was to stop international runs on banks and, thus, save the world from something that stood to be worse than the financial collapse that caused the Great Depression.
Pejorative? Whatever the banks did wrong in blowing the housing bubble, the TARP effort was short term and not really the fault of the banks but caused by the Bear Stearns and Lehman problems and, thus, the FEAR (the seed of a bank run -- remember FDR) in the world that might have led to a run.
Recall also the 1987 stock market crash: Greenspan was at a big meeting, left, went to a phone, got the news, called the major NYC banks and told them "The window at the Fed is open". Greenspan was going to provide liquidity and avoid a liquidity problem that could have done serious damage.
My little example on the meaning of a liquidity problem was pitched at the grade school level. You SHOULD be able to understand it. Your reactions are way, WAY off base. If you don't like the ratio of $600 and $10 million, then assume $1 million and $10 million.
Or improve the example to be a college student who just inherited an office building worth $10 million but needs $600 for a DUI case. He's not broke, but he does have a liquidity problem. He can get the $600 but not in just a few minutes to get out of jail.
In finance, 'liquidity' is a crucial topic; you should quit straining to misunderstand it.
If you want a real example, then when my wife died, I faced $6000 in funeral expenses. I didn't have the $6000 in my checking account. But within the next month, I sold some stock, raised the $6000, and paid the bill. So I had a 'liquidity' problem. I could have borrowed money using the stock as collateral. Such a loan would not have been a 'bailout', or 'help' and nothing pejorative.
You seem to have missed the recent story [1] from Bloomberg that the Fed made 7.7 TRILLION dollars--10x TARP, and half of the US GDP--available to banks at 0.01 interest. They used that money to buy Treasuries--ie, loaned the money back to the government at interest, earning an estimated $13 billion in profit.
So yes, they were able to pay back TARP pretty easily.
Yes, the Fed did 'quantitative easing' which is obscure nonsense for they printed some money and gave it to the banks. The bank stockholders should thank the Fed. Actually the taxpayers should own the banks and slowly sell them back to private investors as the economy recovers.
When Greenspan did such money printing, he called it "rebuilding the balance sheets".
A 'secret' is that the large banks are creatures of the Fed. They just are.
Yes, it might be more fair to the taxpayers, who really gave the money to the banks, and who are BACKING the banks, to have the banks be so tightly regulated that they are "boring" with little chance of going bust or of putting people in the "1%". So, for the risky stuff, let hedge funds like MF Global, LTCM, etc. do that. And break up the big banks so that if one fails it won't bring down the whole economy. But these changes are too hot politically.
I doubt that the Fed's quantitative easing was the main reason those nine banks were able to pay back TARP. Again, TARP was just some fast money to stop runs on the banks and, as your data suggests, a relatively small amount of money.
So, why did the Fed print money and give it to the banks? Because otherwise we would have no financial system and, then, no economy and then hunger, revolution, war, massive death, etc., little things like that.
So, what happened to the money the banks were supposed to have, that is, the money the Fed replaced? It disappeared! Uh, actually with 'fractional reserve banking' the banks can essentially 'create money'. Or you borrow $100 from a bank and deposit the loan in your checking account. Then the bank loans out $90 which is deposited in a checking account. Then they loan out $81 which is deposited in a checking account. It's called the 'multiplier effect'. So, that's mostly the same $100 loaned out 3+ times.
It may be that the bank only has about $10 of the stockholders' money and the rest is from depositors via checking accounts ('demand deposits'). So, the bank has maybe $10 but about $300 loaned out.
Loaning money this way on 'financial assets', e.g., to buy stocks, especially on thin margin, that is, with high leverage, can blow an asset bubble -- 1929. So we passed some laws keeping banks from loaning money for such purposes and put in place some higher margin requirements. Then the sneaky bankers discovered houses, Fannie, Freddie, the CRA, adjustable rate mortgages, the Countrywide business model, and 'social justice' and blew a bubble based on housing instead of stocks.
When the stock market bubble burst in 1929, we got The Great Depression. When the housing bubble burst in 2008, we got The Great Recession. See a pattern here?
Now if the economy gets sick from, say, a popped bubble, then some of that $300 in loans won't get paid back. If as much as $10 of that $300 doesn't come back, then the bank is bust. In simple terms, that's what happened in the housing bubble, both its growth and its shrinkage.
So, when the bubble burst, some of that $300 or so the bank created is destroyed.
So, we can try to continue on with that money destroyed, but that would cause deflation. In a credit economy, deflation is a bummer because the easy way to make money is just not to spend it and just to put it under a mattress. So the economy goes into the tank and just stays there as people get poor, sick, cold, and dead. We can get wars that way. At least we can get people 'occupying' city parks.
So, the Fed is trying to avoid deflation. But the economy is very sick, and even with interest rates near 0.00% per year the economy is plenty sick. Why? We don't get good answers from the newsies, not even Bloomberg, but first cut businesses don't want to borrow for inventory, expansion, etc. because the customers aren't coming, and the banks don't want to lend because the businesses are sick and might not pay back. Or, the Fed's money has the banks flush again, but that money is not yet in the hands of small businesses and consumers.
Maybe a better solution would have been Milton Friedman's Helicopter: Print up some money, about what was destroyed, load it into a helicopter, fly across the US, scatter it, and let people pick it up and spend it. This is not entirely a joke.
There is a great title for a magazine and maybe a Web site -- Secret Romantic Confessions. It's TOO tempting not to look! Well, Bloomberg is a newsie site so has Fed "secrets", 'secret money given away'. BS. Total, 100%, reeking, fuming, bubbling, sticky BS. Grab'm by the heart, gut, and below the belt nonsense BS and collect the ad revenue. Net, Bloomberg is spouting nonsense to get yahoos up on their hind legs. Deliberate, deceptive, destructive nonsense. Of COURSE the Fed gave money to the banks: That's EXACTLY what 'quantitative easing' meant to anyone but a total yahoo, idiot, fool. There was no 'secret' involved!
It was just such nonsense from yahoos that was largely responsible for killing about 100 million people from the crash in 1929 to the end of WWII in 1945. How? Because when the US stock market bubble burst in 1929, a LOT of money the banks had created by loaning money to buy stocks on thin margin was destroyed. Remember "The Roaring 20's?" -- lots of parties from lots of money created by bank lending.
So, when the bubble burst, we had no banking system. Even out in Kansas, depositors lost 100%. We were back to a barter economy. We had massive deflation:
"For Sale. Nearly new car. Lost all in stock market. No offer too low."
"Deflation is the easiest thing in the world to fix: Just print money.". But we didn't. Various yahoos didn't understand we needed to PRINT MONEY. However even Betty Boop understood. Still we didn't.
So we went from 1929 to 1941 refusing to print money as needed. Unemployment was a disaster. Some of the problems in loss of US 'social capital' are STILL with us. Dumb. Really dumb.
Since the US was not buying, foreign developed economies were not selling to us. Since part of their economy was not selling, that part was not buying, and other sellers in that economy were not selling. Nearly no one was either buying or selling. The economy shut down. People were cold and hungry. So, the sickness of the US economy spread around the developed world.
Then along comes a wacko house painter with a solution: "Ein Folk. Ein Reich. Ein Führer". He gets dictatorial powers over the economy for four years. With those powers, actually he puts people back to work, building roads, bridges, ships, guns, tanks, etc. Yes, he abolishes the labor unions. Then he gets four more years of dictatorial powers and decides that he wants some new 'living space', say, to the east to a line from, say, Stalingrad to Moscow to Leningrad or, really, just to the Urals. For the people there, kill a lot of them right away (as 'inferior breeds') and kill the rest slowly as slaves on 1000 calories a day. What he did resulted in 50 million, maybe 100 million, people dead.
Then in 1941 or so people started shooting at us.
Then we got serious, and in about three months we had about three jobs for everyone who could work and were OUT of the Great Depression. Why? We printed enough money to start to replace what was destroyed in the 1929 market crash.
For now? We can be back to work anytime we want within about three months -- JUST PRINT MONEY. That's what the Fed is trying to do, but apparently Friedman's Helicopter would be more effective.
There's more, but I know; I know: This is post is already too long for a trivial little subject like putting 25 million people back to work. But, gotta tell you: Don't look for anything real on this subject from the newsies.
But, if another 100 million people die, or a billion or few, then the newsies will be right there reporting on the pains, the passion, pathos, and poignancy, with poetry, about the human suffering. They won't have even as much as a weak little hollow hint of a tiny clue about what caused the problem or how to fix it, but they can report what it 'feels' like.
I'm in full agreement about the media commonly distorting... everything in some way, but to say that we wouldn't be in Iraq or Afganistan if it weren't for them? I don't think it was Fox News who broke the story about 'Uranium shipments from Niger', it was the White House. Clearly the media had NO part in constructing CIA intelligence that led us to Iraq, they just repeated what we were told.
Same thing with your China implication, that they wouldn't be where they were without the US media distorting information... that just doesn't make sense to me. Please explain if you can
Iraq: The "tubes". They clearly were NOT for gas centrifuges to enrich uranium. The US Department of Energy knew this. But Secretary Rice kept saying that the tubes were evidence of efforts at uranium separation. In fact, as eventually did come out in the media, the tubes were to be bodies of crude rockets. Then W said "tubes" in his big speech. The media didn't clarify the situation and loudly call BS.
The uranium from Niger was maybe not real after all but even if real likely not very important: As I recall, that uranium chemical is a standard industrial item. E.g., one use of uranium is to color plastic lenses for cars or some such. Getting uranium is not so tough; enriching it enough for a bomb is. Running a uranium reactor is not so tough; getting the plutonium, 239 as I recall, and don't want 240 or some such, is tougher. Then to separate the plutonium, use just chemical means. Then to compress it enough to have a critical mass is tricky and likely needs some testing, and tests are now essentially impossible to hide.
The media should have helped make it clear that the evidence that Saddam was close to any very serious WMDs was very thin stuff.
W invaded Iraq on very thin stuff. The media should have made that fact very clear to the voters.
Okay, maybe we should have dumped Saddam. Maybe. I would have tried making him an offer he couldn't refuse, but maybe we're not supposed to do that. So, maybe we should have dumped him.
Getting to Baghdad took, what, 23 days? Then the big mistake started: Bremer decided to do 'nation building'. And his first step was to fire the Iraqi army -- dumb, dumb, dumb. Nearly every common thug criminal, gang leader, organized crime leader, terrorist leader, out of work soldier, Shiite leader, Sunni leader, Kurdish leader, Iranian politician, etc. saw how dumb it was and took advantage. Nearly the only one in Iraq who didn't 'get it' was Bremer.
Our media didn't keep us informed.
On China, it's simple: Our media didn't keep us informed. We still don't know the actual flows. First cut we need to know the flows.
Sometimes the media is silent; sometimes they pay attention to an important topic but make a mess, out of bias or just sloppy work; often they assume that the audience wouldn't want to know; usually it's just a lot cheaper to do sloppy reporting. Whatever, we're, net, getting the mushroom treatment from the media -- keep us in the dark and feed us BS.
Actually likely and apparently quite a lot of quite solid information is available. Likely a lot of it is on the Internet. I keep looking and hoping to find good sources although finding them is not my full time job.
I upchuck at FOX, NYT, LAT, WaPo, ABC, CBS, NBC, MSNBC, CNN, PBS, and about everything else I can find. Law, medicine, engineering, etc. -- in none of these do we try to get by with the mushroom treatment we get from the media. If an airplane were designed with the information quality of the media, then it'd never get off the ground which, net, would be a good thing.
My concern is not partisanship but stupidity.
As voting citizens, we need solid information. With solid information, there's no way we'd be in the mess of The Great Recession or two wars each 10 years old.
$700 billion was made available. "Only" $400 billion of this was actually spent. It was used to buy so-called toxic assets. Many of those assets were later converted back into cash: half of the $400 billion has already been repaid. Based on the value of the remaining assets, after they get sold and the money returned to the pot, it looks like the cost of TARP will be about $42 billion. That's a lot of money, but far from $1 trillion.
The TARP money was just a payday loan until QE1, QE2, and now QE3 can take effect. Of course the banks paid the money back, they got the money from the discount window for free, which was printed by the gov't printing T-bills. Why stay on TARP when you can borrow money for free and pay TARP back?
The money goes from the Govt to the Fed who lends it to banks via the discount window, IIRC the rate for the discount window is still 0. The Fed still holds $2 trillion in assets which is up from $500 million pre-2008, there's the $1.2 trillion (and a bit more). The TARP verbiage is just a smoke screen because that's where people will look, so they moved it to the discount window.
I think the graphs over at ZeroHedge that come from Bloomberg terminals are a tad bit more accurate than XKCD, that's just my opinion though.
This is the common misconception....the money doesn't come from the Gov't to the Fed. The Fed prints the money, any sienorage (earnings) it earns on the money it prints and lends is paid back to the Treasury. Also, when the Fed prints new money it either lends to the financial institutions via the discount window or it buys Treasuries directly from the government (i.e. the Fed gives money to the Gov't).
When the Fed lent money to the banks via the discount window, they did that to shore up the capital bases of the various financial institutions. The Treasury never paid for it....matter of fact, the argument can be made that if inflation runs away like doomsayers have been predicting since QE1, the Treasury will benefit - because inflation is simply a tax on the poor.
But, inflation has been subdued, despite constant harranging from doomsayers, and growth has been tepid. The Fed took on over $2T onto it's balance sheet because it is the only organization in the world that can. It wasn't up from $500M, it was up from $500B. You were off by only a factor of 1,000. So it only swelled 4X....considering that the price of not doing that would have been a great depression that made the depression of the 40s look like a mild recession, I would say it's worth every penny.
Also, the reason public debt has expanded is because of the borrowing the government has had to do to finance things like increased unemployment insurance, increased medicare/medicaid claims and tax cuts for everybody.
Also, because interest rates have been at all-time lows...i.e. most investors still see US Treasuries as the safest asset around (comparatively speaking).
The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.
Is money really the limiting factor for startup growth right now? I feel like it's skill and experience. Maybe if students or recent grads could get apply for student loan sized-stipend (~$6K at a time, renewable every 6 months, up to 3x total for $18K)? $1T would cover 50M students (or $1B would fund 50K students) and people would get a chance to work on something, learn, make stupid but risk-free mistakes, and either get something successful, learn that entrepreneurship isn't for them, make connections that would help them in a career, or who knows what. Wouldn't be the worst way the govt ever spent $1B.
good point. and I don't disagree with you, but I'd take your argument to the next level about education and say we can educate a heck of a lot more people, more cheaply, and do it on more useful topics, which build more useful, core, long-term, non-profession-specific skills, if we wanted to.
It doesn't necessarily require throwing more money, in aggregate, at the education space. May mean spending less, but smarter. Lots of free ways to learn between the Internet, public libraries, family, neighbors, the physical opportunities of the world around us, and life itself. Helping more people to have better focus and willpower, and better emotional balance, and health, would go a long way to improving a lot of other things with the economy, even if indirectly.
For example, given a choice between having 1 more fellow citizen become a scientist or engineer, or instead having 10 more fellow citizens not steal, hurt people, be lazy, lack the ability to think logically, be swayed by propaganda when voting, lack ability to manage their own money, lack ability to plan for their future and understand consequences of their choices, and understand the impacts of their choices on their children, family, neighbors, future generations, etc -- I'll take the second option, please.
More "higher" education? Good. Much better "lower" education? Ten times as good, I bet.
Because a) that would be wreckless and create more problems for the economy - i.e. handing out a few 10s of billions to startups, b) the banks DO need to prop up their balance sheets - we can argue about the reasons until the cows come home, but if they don't increase their capital, they will take down the entire financial system, and c) the last thing a startup (well, a 'startup' in the Valley/high-tech definition) needs is a loan from a bank.
I understand your frustration with the way the economy has performed (or not) in the last 2 years, and the seeming 'cronyism' that Obama has enacted - but the fact remains that if he didn't do what he did...we wouldn't even be having this discussion now. There is no telling what state the US would be in, after the rioting and such.
I know it's hard to envision, but believe me....rioting on a wide scale and massive police crackdowns (on a scale America has never seen) could not be ruled out.
1. Fix the healthcare system. Right now, you're punished if you don't work for a large company in the sense that you're charged up the wazoo for health insurance. Work for a large company and it's close to free.
2. Fix student loans. One could argue don't go to college but I think we can agree there's some value to good schools.
3. Educate tomorrow's would-be entrepreneurs. A lot of America is taught to go to college and get a job at a large corporation after. Let's shift the perspective. Let kids know that starting your own business is a possibility and not something to be ashamed of.