Dan Krohn's Blog

Kentucky Seizes Domain Names

edwin@aldridge.com — Wed, 19 Nov 2008 09:58:00 -0600

Late last month I sent out an email dealing with the Kentucky case in which the state seeks to seize domain names of Internet gambling sites, arguing that they are just like roulette wheels - devices used for illegal gambling. See reprint below. Several groups, including the Electronic Freedom Foundation, have filed motions with the appellate court to have the trial court's procedure halted. The appellate court has put the matter on hold pending arguments before it in December. So the final result is not yet known, but at least the issue is set to get a more appropriate examination. Stay tuned. Kentucky Seizes Domain Names October 28, 2008 The State of Kentucky is upset about online gambling. In a creative effort to shut down Internet gambling, Kentucky is pursuing a court case in which it seeks to seize the domain names of several Internet gambling sites. This has been the subject of considerable controversy in the legal community, and this writer expects the case to go through rounds of appeal if both sides continue to pursue it. A number of interesting questions arise. One is how much credit would be given to such an order from a Kentucky court by courts/governments of other nations. If a server is located in another nation which permits such activities, that country is unlikely to care more about Kentucky's revenue raising efforts. Hence, the effort to seize the domain names and not the servers. But this raises the questions: what kind of property is a domain name, how can it be seized, and from whom? Will domestic ISP's be effectively ordered to block access to certain domains? Will domain registrars be required to change ownership on their records as the court has held? (It seems at this point that the registrars are split with some complying with the court's order and some retaining counsel to oppose it.) What kind of property is a domain name anyway? In some cases a domain name is a trademark, but not always. Yet domain names can have value. Often a domain name is legally just an address. If illegal gambling were occurring in a building at 1000 Main Street, one could expect the police to raid and carry off people and equipment - but 1000 Main Street, the location, would remain. Thus far the trial court has held that such domain names are the same as roulette wheels for the purposes of this case. The Kentucky court bases some of its ruling on the asserted ability of online casinos to put up geographic blocks that would prevent computers in Kentucky from accessing their domains. But how effective would such blocks be, and what if clever Kentucky gamblers found ways around the blocks? These are just some of the questions raised by this new Kentucky effort, but I doubt the questions will be resolved in this lawsuit. The ramifications are tremendous as the same enforcement technique, if permitted and effective, could be used in an almost infinite number of e-commerce situations. This is the kind of situation that makes the intersection of computers and law so fascinating. Changes are rapid and often unpredictable. I love it!

More Reason for Trust Busting

edwin@aldridge.com — Mon, 10 Nov 2008 13:20:02 -0600

Interestingly the big insurer AIG which already has been the subject of a government bailout is on the verge of getting another one. Now the federal governmetn already owns roughly 80% of AIG by way of the initial bailout. However, it seems that AIG continues to burn through money at an extraordinary pace, and it continues to hold a load of toxic (gotta love that word in this context) assets. So the government is looking to put in more money, then presumably when that is spent, again more money - with no announced plan to end the draining. Oh, except for the proposal that the U.S. government take on the toxic assets itself. Now it seems that AIG has gotten itself so intertwined with other parts of the economy that the thought of it's failing is scary (this writer finds an indefinite unlimited money whirlpool scary, too, so take your pick). An example of that intertwining is public transportation. It seems that many public transport agencies have raised money by selling assets (in this case rail cars and buses - presumably not toxic in themselves) for cash, then leasing the same vehicles back from the investors who bought them. The investors required that the lease payments be insured by a highly rated company, and guess who insured the lion's share of these deals. Surprise! It was AIG. It's failure or flirtation with failure threatens to put quite a number of local transportation agencies into default. So now those agencies are leaning on their congressmen who are leaning on the Fed and other federal financial policy maker to help. If AIG were not so big and so dominant in certain markets, we could just let it fail. If it is too big to fail, it is too big to exist. As this blog has argued before, companies too big to fail should generally be broken up under antitrust laws. If there is a good reason for their being too big to fail, then they should be heavily regulated (and that means really heavily regulated - like government agency approval of all executive pay packages) by the government or owned by the government outright. That's no more contrary to our capitalist market system than taxpayer bailouts of big companies which have made bad decisions.

Subsidized Problem Creation

edwin@aldridge.com — Thu, 23 Oct 2008 09:35:23 -0500

Apparently with government approval, several big U.S. banks are planning to use new capial being supplied by U.S. taxpayers to fuel an acquisition binge. In the short term, government officials see this as positive as the big banks might acquire troubled smaller banks preventing further bank failures. However, as is often the case with the U.S. government, this is very short sighted. If there are banks that will fail, let that be the case. The government can handle sales of their assets and deposits to other banks at that time. What is troubling is that in this era of the "too big to fail" attitude towards big banks requiring a huge and yet to be defined taxpayer bailout, the government is subsidizing the exacerbation of the too big to fail problem. Government funds, if provided at all, should be used to shore up banks' capital positions to enable them to increase lending and not fail themselves. Poorly managed banks should not be given taxpayer money to increase market share. As previously argued in this blog, banks in the too big to fail category should be candidated for breaking up through antitrust action - not encouraged to grow. And if such big institutions are allowed to exist with the public insuring them against failure, then there should be an extra tax on such companies to serve as an insurance premium and they should be subject to greater regulation than their smaller rivals which would be allowed to fail if that demise were dictated by the market.

Deflation?

edwin@aldridge.com — Sat, 11 Oct 2008 14:09:40 -0500

In previous entries on economic matters, this blogger has warned of inflationary risks. But now things have turned so grim that the reverse is actually a possibility. A tremendous amount of wealth has been lost during the last two weeks with the stock markets crashing. In a very short period of time many dollars have been erased from the economy. With fears of recession or worse increasing we have seen oil and other commodity prices fall. Last week saw an announcement of very high U.S. job losses. Business leaders everywhere are afraid to make decisions, which puts much buying of labor, services and materials on hold. Those businesses seeing decreased orders will decrease their own spending. Inventory will sit idle if no one is buying. Families with decreased income decrease spending. When there is no demand and supply remains, prices inevitably drop. This has not happened on a large scale in the U.S. since the Great Depression. A vicious cycle can develop where both employers and employees decrease spending to match decreased income. Such a cycle can only be broken when people are able to buy again. So now we have the government going to extremes pumping dollars into the economy in an effort to create enough money to keep things moving. Most other nations are finding themselves in similar situations. What is interesting is that the fundamentals of the world's economies did not change in an instant. The emotions did. Fear dominates almost everyone's mind. It's fear that has led to stock markets crashing; the world economy did not downshift twenty percent in a week. Clearly there have been problems with the overleveraging of mortgage loans, but the change from feast to famine is not justified in such short order. Thus far in the U.S. and most everywhere else the steps being taken to combat the ravaged economy have been big steps aimed at helping the big boys stay afloat (primarly big banks and investment banks but some other large companies as well) - hoping this will trickle throughout the economy. Undoubtedly we need such steps. But if things are this bad, programs should immediately be cranked up on the other end as well. One of the criticisms leveled at the Bush bailout plan was that it included no relief for the common man � particularly the homeowner. Several steps should be taken quickly to help the American middle and lower classes. True bankruptcy reform should be undertaken so that the process does not destroy consumers forced to go that route. Bankruptcy courts should be empowered to flex mortgage loans as needed, and the standard plans for individuals should be made less onerous. The federal government should begin acting as an employer of last resort as it did with programs during the Great Depression. Put people to work on an assortment of projects which will benefit the country such as improving our national parks, and the economy will benefit from those persons� ability to buy. The federal government should send money to the states with reasonably strict requirements that people be employed but leaving the states with discretion as to the projects. The U.S. infrastructure is in terrible shape. The government should begin a crash program to improve infrastructure which will both put money into the economy and prevent tragedies such as bridges collapsing. Thus far almost all government efforts have been focused on liquidity injections into the banking system. But there are no requirements placed on those banks to lend, and with the current emotional climate they will be slow to do so. The treatment of this economy requires both increased liquidity in the financial markets and increasing the financial well being of average Americans. Let�s hope the government takes steps to help the newly fabled �Joe Six-Pack� as well as the Wall Street wizards - and soon.

Renewal of Trust Busting?

edwin@aldridge.com — Sat, 04 Oct 2008 15:11:34 -0500

It appears that most economic and political leaders in the U.S. are in agreement that there are some companies that are simply too big to allow to fail. That raises some interesting questions. As a rule of thumb, this blogger suggests that if a company is too big to fail, then it is too big to exist. The too big to fail test ought to be enough to trigger an antitrust effort to break the company up in the public interest. Then we will not have companies around which are so big as to require the public to bail them out. Some will argue that in certain industries companies need to be exceedingly large (at least big enough to fall into the too big to fail category) in order to compete or effectively provide services. This blogger suggests that any such company which is allowed to exist should be subject to very intense government regulation and/or should pay substantial extra taxes for being permitted to exist. One old example of such a company is the AT&T of the old days. It was thought then that telephone service was a natural monopoly, and to prevent the public from predatory pricing and such, the old AT&T was subject to intense regulation. This is still the case with utilities in some places, in many instances utilities are owned outright by governments (for an example look at water suppliers). Some would argue that certain companies need to be big (falling into the too big to fail category) because such size is necessary to compete globally. But if one takes a close look at the competitors in such global markets where immense size is being called for - one finds that much of the competition is very heavily regulated by foreign governments if not being owned by a foreign government outright. Shouldn't the same rules apply here? At least to some extent? Any company which is allowed to exist without extensive regulation or substantial government ownership yet falls into the too big to fail category is having its existence insured by the taxpayers. Such companies should be required to pay a healthy premium for this very valuable insurance. Call it what you wish, but it's only fair for too big to fail sized companies that have their existence insured by the taxpayers to pay extra taxes, such taxes being essentially insurance premiums. Interesting idea at least. Comments?

The Race Card Gets Played

edwin@aldridge.com — Thu, 02 Oct 2008 19:00:53 -0500

During the recent days I�ve begun to receive emails claiming to explain the financial crisis. The bottom line of these emails is that the problems are entirely due to black people and the Democrats who love them. Ever since Barack Obama was nominated I�ve been waiting for the race card to be played by the Republicans and wondering what form it would take. Now we know - at least for round one. The play takes the form of blaming the entire financial crisis on the Community Reinvestment Act. This statute was passed in response to a clear pattern of racial discrimination in making home loans. That statute was passed only after substantial research demonstrated that mortgage loan applicants with identical financial credentials received different responses to their loan applications depending on the color of their skin. It was civil rights legislation. Nothing in that legislation required bad loans to be made to unqualified borrowers. More obviously, that legislation had nothing whatever to do with the current financial crisis which arose from the foolish assumption that property values would only increase and the belief that more leverage is always good. The new derivative securities which enabled leveraging mortgage loans to absurd levels were creatures invented on Wall Street - all invented well after and independently of the Community Reinvestment Act. Lending to black borrowers is in no way related to the invention of credit default swaps. If one wants to look for legislation to blame, then look at Republican sponsored legislation prohibiting regulation of these new instruments of leverage and the repeal of the Glass Steagall Act. People hate to admit that they have done something wrong. And people hate to admit that their core beliefs, in this case the belief that all government regulation is bad and that free markets should be left entirely alone, could have flaws. But people love to find scapegoats on which to blame their problems, and traditionally the best scapegoats are easily identifiable minorities. With a black nominee for president, this is all the more tempting. So a blast of blog entries and hogwash emails have hit the Net blaming black borrowers and the Democrats who love them for the failures of Wall Street's unbridled greed. What is even more worrisome is recognition that we have not seen the worst of the financial crisis, which is yet to come to most Americans (especially given the bailout bill which contrary to gibberish from members of both parties is not designed primarily to help the average American). Previously this blog warned of the risk of very high inflation. Germany between the world wars suffered extraordinary inflation which caused great pain to the German people, making them vulnerable to beliefs which they would have never accepted in normal times. Then it was the Jews who were blamed for the economic problems. People could not accept any fault as their own. Let's hope that this economy does not get so bad. And let�s hope that after the election the need to blame blacks for economic ills will pass quickly. I�d like to hope that Americans have come too far to believe this nonsense, but people who should know better are forwarding those emails. If you are one of those tempted to believe the black bashers, please stop and think. If you are not one and meet one, please take the time to try to teach. The stakes are too high to ignore.

The House Zaps the Bailout Bill

edwin@aldridge.com — Mon, 29 Sep 2008 17:21:39 -0500

Admission of error. This blog predicted that the bailout bill would pass. It did not - at least on first vote. Apparently congressmen and women can be made to listen when enough of their constituents make their voices heard - loudly. Given the political season there will be lots of finger pointing concerning the state of the economy and who is to blame. Ultimately, there should be some blame passed out for this fiasco, but it will be years before it is understood. Meanwhile, what's to happen next? It appears that Republican representatives were hearing from their constituents and became terribly afraid to vote for a bailout of the rich, when they have a history of sticking it to the less fortunate; and a number of Democrats in the house had heard enough from voters to vote against the bailout bill, too. To their credit, some intellectually honest conservatives oppose this bill because it goes contrary to their philosophy. This blogger believes that the current fiasco arises largely from a miscalculation by the Bush administration. Some news stories have been suggesting that the administration knew that the current crisis was coming some months ago and had already prepared the basic legislation they proposed. Well, it is to be hoped that they saw this coming a few months ago; otherwise the U.S. has had extraordinarily poor leadership. (Well, it seems as if that�s given.) But this blogger believes that the bailout bill was held back intentionally. Remember all seats in the House are up for reelection, and it's only about five weeks away. Ths suspicion of this writer is that the Bush administration knowingly held back its bailout proposal in an effort to get it passed without scrutiny. Remember that the Bush bill as originally presented gives exclusive control of the $700 billion to the Treasury Secretary, who Bush appoints. And there was to be no second guessing by the courts or anyone else. So the Bush administration would be empowered to reward its friends in the investment and banking communities while letting others go down the tube. Given its history of rewarding the very big and giving the short end of the stick to smaller businesses, it is likely that smaller banks thrown into crisis (at least in part by government negligence) would not see much help. In any event, they are smaller and capable of only smaller campaign support. And most interestingly, the full bill has not been publicized or reviewed much by anyone. Wno knows what skullduggery is hidden in the pages of print. It is classic Bush administration scare and ram through strategy. And it cannot be trusted. But we do seem to have a genuine financial crisis that could easily cause great hardship as it ripples through the economy. Pity politicians will play with such high stakes when the chips are ours not theirs. My colleague, attorney Terry Baggott, mentioned another interesting but overlooked aspect of the bailout proposal. Remember the bailout has the federal government buying the bad mortgage loans from lenders, etc. Under the Bush pushed Bankruptcy Reform Act, things were made much tougher for the regular people. Bankruptcy Courts have no ability to change the terms of a family's mortgage loan. But bankruptcy can wipe out the debt on a home once the home has been lost and various other conditions fulfilled. But debts owed to the federal government generally are not dischargeable in bankruptcy. So we could well have people losing their houses and still owing the federal governement on those loans - with no ability even in bankruptcy to get relief. That is another blow hidden in the Bush bailout bill to stick it to the regular Americans which has received basically no news coverage. Doesn't that make a bailout of the big boys of Wall Street feel better? There is a crisis. Something must be done. It must involve big numbers. But there must be consequences for the people heading up big financial institutions who made bad decisions. And there should be rewards for those financial executives who have managed their companies well. Once a bill is proposed which accomplishes that, the American people will be able to swallow it - like foul tasting medicine.

Bailout Legislation - Welfare for the Wealthy?

edwin@aldridge.com — Mon, 22 Sep 2008 15:49:23 -0500

Emergency legislation has been proposed to deal with the credit crisis. At this point, most of the details are not generally known and have received little press coverage. No doubt the bill is several hundred pages long. Congress is being pressured to pass the legislation before the legislators have time to read it - let alone understand its implications. But based on the press coverage so far, this blogger offers some observations. The financial institutions bailout legislation proposed by the Bush administration appears to be a very nasty thing indeed. It may well be that additional action is necessary to calm the financial markets, and that legislation is needed. And it may well be that a big part of that legislation is a necessary injection of additional funds into the system. But that said, there are some aspects of the proposed plan that smell badly. Most frightening, this appears to be a financial version of the Patriot Act. The Patriot Act was passed in a frenzy of excitement and without study. As a result it included provisions, which in the opinion of many including this blogger, went too far in eliminating basic rights of Americans - and it clearly did not impose adequate controls (checks and balances) on the executive branch. Now it is no secret that the Bush administration would like to establish an imperial presidency, a modification of the historic American system by giving the president almost the unchecked power of a monarch. The history of Bush signing statements to legislation alone makes that clear. That effort was greatly furthered by the Patriot Act and its siblings and cousins. Now we have an apparent financial crisis, and once again there is an opportunity to rush through sweeping legislation without adequate review. It has been reported that the proposed legislation includes provisions to the effect that nothing done by the Treasury Department pursuant to the bill could be reviewed by the courts or any other agency. That's strong. Remember that the Treasury Secretary serves at the pleasure of the president. So presumably, the Treasury Department could bail out banks whose executives have been active Republican supporters and let other banks fail. And if Obama were to be elected, the reverse would be true. Can anyone believe that there would be no giving in to that kind of temptation (though it would probably be done in an indirect hard to trace way). A second stinky aspect of the proposed bill is that it is a generous gift to bankers and bank shareholders. The federal government is proposing to buy the stinky assets from the banks, paying far above market for them, so the banks can stay financially healthy. Though President Bush has publicly stated that this is necessary to help small business people, that's baloney. Sure, there might be some trickling down of relief of smaller companies, but there is no guaranty and no direct benefit to anyone below the top tier. Understand this - this proposal is aimed at helping big banks and their executives and shareholders to continue business as usual without regard to bad business decisions at taxpayer expense. So we have the same people who have claimed that people must be responsible for their actions and suffer the consequences (like losing a home) if they borrow too much also making sure that the lending professionals need not suffer the consequences of their bad decisions. Hypocrisy at its worst. This legislation stinks unless there is some provision for the shareholders and executives of the banks to be held accountable like anyone else. With all its flaws, and this blogger suspects there are many to be discovered, this legislation will probably pass. Recent history indicates that Congress will pass just about anything in an apparent crisis situation. And the Democrats have generally been wimps when it comes to facing down the Bush administration. If this blogger's concerns turn out to be well founded, this legislation will bring about a major change to the United States economic system, essentially moving it towards one based on capitalism for the middle class and a socialist welfare system for the very wealthy elite. Some experts have suggested that any injection of funds from the federal government be structured as a purchase of stock, perhaps preferred stock, in the entity receiving the funds. This approach at least has the effect of diluting existing shareholders' positions (which seems only fair) and gives the government a better chance of recovering the money in the future. And it avoids an undesirable aspect of the administration's proposal: rewarding poorly managed institutions and punishing their competitors which cleaned up their garbage themselves.

The Big Bad Bailout

edwin@aldridge.com — Fri, 19 Sep 2008 15:29:12 -0500

This blogger cannot resist a follow-up to my post of yesterday, especially in light of the rapid changes taking place. In yesterday's entry, it was noted that no one could tell where the current financial crisis would go or how much new debt the federal government would take on. It was pointed out that in this blogger's opinion, the huge threat looming and being insufficiently discussed (which is to be expected in our short term focused society) is inflation. Not just ordinary inflation, but a really high rate of inflation. While optimistic that the U.S. will avoid the kind of hyperinflation suffered by Germany between the two world wars (and which certainly played a role in the buildup to World War II), this blogger believes we should all - especially our leaders - do a quick crash course on that historical event for the healthy sobriety it might bring. In a comment to the prior post to this blog, Ed Schipul suggested candidates for federal office needed to start talking of such things as "accountability". He's quite correct. The tough question is the picking and choosing of who to hold accountable. Well, tough for some but not those in control in Washington it seems. There the clear principle is that the smaller you are - the more accountable you should be. Cast your mind back a few months, and remember the political discussions of what ought or ought not be done to aid homeowners in deep doodoo over their mortgages. Two problems were affecting the situation at that time. One, which has dominated the news, was that adjustable rate mortgages were being adjusted upwards - quite a bit upwards, and homeowners were finding their monthly payments rising to levels never anticipated. The second was falling housing prices, which also clobbered owners. Say you want to move to another city and need to sell your house. It's a real bummer to learn that you can only sell for a price thousands less than your mortgage. Imagine selling and needing to bring and extra $25K to the closing just to pay off what you owe. Many people did and could not, and those added to the default mortgage figures. Now a few months back, many policians (including at least one presidential candidate and President Bush) were saying that the government has no business bailing out those homeowners who were so dumb as to buy more than they could afford. What is happening now? The U.S. government has bailed out Bear Stearns, Fannie Mae, Freddie Mac, and AIG to the tune of unknown billions. The U.S. national debt has more than doubled (no one knows yet what the final multiple will be) in the process, and someday somehow that debt will have to be paid. Already the Fed has been actively taking all sorts of actions to assist both investment banks and traditional banks, and there is no clear number as to the amount of debt created by those maneuvers. But today the U.S. government moves to new heights ..... or depths. Apparently it has been quickly decided that the U.S. government should insure money market funds. The money market funds which invest only in federal paper are already carrying the backing of the government, so those are not the ones affected. Now in a quick decision, the federal government is insuring money market funds which invest in corporate short term paper. Who does this help? Obviously it is of immense benefit to corporations who now get a better interest rate on their paper because the U.S. government indirectly guaranties it. Gee whiz government, would you consider doing this for the debts of the little guys? Second, it is of immense benefit to those who have invested in these money markets. Now the people who invest in corporate money market funds ought to know that they are not insured like bank deposits, just like homeowners with adjustable rate mortgages ought to know that the rate could go up. Clearly the people who have lots of moola in money market funds are more important than the family stuggling to make its monthly mortgage payment, not to mention the corporate borrowers. Now the latest talk is of quickly creating a superduper new federal agency/corporation for the purpose of buying the trashy assets of financial institutions at prices way above market. Yes, that's right, friendly reader; without your permission you are suddenly going to find yourself the owner of your disproportonate share of the fancy securities and derivatives that the wizards of Wall Street cooked up but which are worth nothing now. And this is being done with the backing of those kindly chaps who did not want to bail out stressed homeowners (and in all likelihood still do not want to bail out the fools who will vote for them). The prestigious magazine The Economist has estimated that this bailout could cost an easy $500 billion. (Would someone from the government please call me and make a nice offer on my 1997 Buick? Heck, Uncle Sam, you'll get a better return on your investment.) In this blogger's opinion, this seems like a quick and bad idea. When something is done in a hurry, it is usually done badly and it is almost a sure bet that in this kind of a rush governmental intervention some undeserving someones are gong to make out like bandits. If a crisis bailout is the short term answer, then it should be done on terms to be determined - so that the taxpayer does not get unduly shafted. Senate Banking Committee Chairman Chris Dodd in his comments on the plan stated �none of us have any idea what the details are.� Ah, isn�t that always where the devil dwells? Why not simply require these troubled companies to raise capital at the market price? A solution along these lines was suggested in a column in the Financial Times by Raghuram Rajan. Their new stock issues would be worth something. If the price is low, and existing shareholders suffer a loss -- well that was the risk they took when they bought. Surely they knew what they were doing at least as well as the borrowers on adjustable rate mortgages. Now this idea is a bit tough in that it might not inject liquidity quickly enough. But the principle is sound. In any bailout of any kind, the existing shareholders should take the hit. When all the ink is dry, the government should not be paying more than market price or lending at below market rates (and those loans should be secured - well secured). With very few exceptions, there is little talk of the executives who have gotten into all this trouble and whose companies are being saved by high finance versions of welfare (remember that naughty word), losing their jobs as part of the deal. And we do not yet know where things are going in terms of re-regulation of the financial markets. We have learned that unbridled capitalism is not a very good idea. That�s telling it like it is in straight language, so some readers might be shivering in rage. Some hate that lesson so much, that we can count on many suffering from serious denial. And count on that denial being costly. So, yes, Ed, it's about time our leaders started talking about accountability, and no doubt in time they will. But how much will be just talk? And whose account will they be talking about?

Inflation on the Way

edwin@aldridge.com — Thu, 18 Sep 2008 16:35:12 -0500

The last few days have seen exceptionally frightening economic turmoil thoughout the world, but particularly in the U.S. After bailing out one big investment bank along with Freddie and Fannie, the government decided it needed to let Lehman just fail. Then it did an about face and took over AIG (potentially leaving its shareholders with some value - one wonders if they should have any hope of anything at all). The venerable firm of Merrill Lynch found itself a bartered bride in a semi-shotgun marriage. And more major financial institutions are wavering with the potential cost to the taxpayer left to the imagination. One thing is clear: the national debt has more than doubled and the total is yet to be determined. (The Fed has already been involved in major dealings effectively increasing the national debt load but subtle enough to avoid mainstream news.) Yet, the real cost to Americans has not been fully felt and will not appear clearly in taxes. There is substantial talk now of the Fed lowering interest rates when just weeks ago it was talking of raising them to combat inflation. And how will we pay that huge federal government debt bill when it comes due? What nations do in such situations is "print" enough money to pay the debt off. The problem with creating so many new dollars is that those dollars are worth less. Bingo! Inflation! Potentially Big Inflation! The average American cannot create more dollars at will, so will be left with the same number of dollars in her/his wallet - but they will buy less. This is a real danger lurking in the current economic climate, and everyone should be keeping an eye on it. In this election year, it will be interesting to see if any candidates for federal office indicate an understanding of the economic situation and the inflation risk. (One can only hope that it will be reported if any do.) It's definitely not a sexy as many other issues; it just matters much more to many more people.

Ethanol Politics

edwin@aldridge.com — Thu, 07 Aug 2008 18:03:07 -0500

Today the Houston Business Journal ,in one of its daily emails, carried a story concerning the EPA's rejecting a request from Texas Governor Perry to reduce the federal ethanol mandate in Texas by one-half. The article goes on to quote a number of people criticizing the federal program's diversion of corn from food to fuel. Well, this is old style farm state politics at its best (or should we say worst). But the worst part of the story is not the ruling on Gov. Perry's request. The United States seems to have taken a clear position preferring petroleum imports from the Middle East to ethanol imports from Brazil. There is no import tariff on the imported oil, but there is a high import tariff on Brazilian ethanol (which is largely produced from sugar cane which is far more efficient and cheaper than corn based ethanol). Brazil is so annoyed by this tariff that it is threatening to file an action against the U.S. with the World Trade Organization. But look at the number of representatives and especially senators from corn growing states and all becomes clear. Yes, the use of corn for ethanol is a factor in keeping both U.S. food and fuel prices high. Yes, removing the tariff on cheaper Brazilian ethanol might reduce fuel and food prices. Yes, the U.S. maintains that it favors free trade in the international market (and often files WTO actions against other nations which it believes impose unfair restrictions on U.S. imports to their countries). But NO, old style politics means that the U.S. will support expensive oil imports and prevent less expensive ethanol imports because (1) the farm lobby likes the windfall, and (2) the Bush administration loves the oil industry and does whatever it can to assist it to profit. In all fairness, this blogger lives in Texas and benefits from good times in the oil industry, so perhaps I should like this policy. But you might not.

Politics and the Economy

edwin@aldridge.com — Tue, 22 Jul 2008 09:55:21 -0500

It has often been said that small businesses are the growth engine of the U.S. economy. Frequently politicians cite the potential damage to small businesses as the reason for opposing a proposed bit of legislation or regulation. Yet, small businesses by their nature do not have as much to spend on lobbying and campaign donations as the very large. So what do we see happening? The federal government is increasingly bailing out big businesses, which means taxpayers will pick up the burden. First we have the subsidized takeover of Bear Stearns. Now we are watching the taxpayer being saddled with subsidizing Freddie Mac and Fannie Mae. And if you look carefully, you will find that investment banks are being given unprecedented access to the Federal Reserve window - a right previously available only to traditional banks. (Admittedly that line has been blurred for many over the last decade.) There are plenty of other financial institutions and corporations walking towards the federal bread line. So what is happening to small businesses? If a small business goes under, off it goes to bankruptcy where it is liquidated and where the owners get nothing. That is exactly what should be happening to big businesses that are insolvent. And while we're at it, maybe their top executives should be fired and not receive multimillion dollar severance packages. The laid off employees of many big companies certainly aren't seeing much in the way of severance. But the small businesses are being forced to contribute to the government's big business bailout efforts through their taxes. All of this federal activity, along with foolish economic practices (like record setting federal deficits) has clobbered the dollar. And now the Fed, citing concerns about inflation, is about to increase interest rates - that will clobber small business as their lines of credit and other loans will cost more - if they can get loans from struggling banks at all. This amounts to an additional hidden tax on small businesses to help finance the bailout of big ones. In this campaign year, don't pay too much attention to what the candidates say. Rather take a serious look at what they've done. And check out their primary advisors. As Don Miguel Ruiz wisely wrote many years ago, "If you choose to believe what a person says rather than what that person does, you are choosing to lie to yourself."

Time for More Mortgage Euphemism

edwin@aldridge.com — Sun, 13 Jul 2008 13:50:40 -0500

There are experts on Wall Streed stating outright that Fannie Mae and Freddie Mac, the monster U.S. mortgage guarantors, are insolvent. If that is true, then one way or another the U.S. taxpayer will end up in their places. The loan guarantees by those two outfits exceed half the total national debt - hence the use of the word monster. Imagine the national debt up 50% in an instant. Since calling this as it is would be beyond our government's capability, you can be sure that all sorts of interesting terms and phrases will be bandied about. Only the politically blinded and ignorant will be buying the official line. If these outfits are ready to go, and if this amount of debt is suddently going to appear on the U.S. balance sheet (in reality even if some sort of off balance sheet razzle dazzle is tried) you can bet it will hurt. For one, this added federal debt will cause further weakening of the dollar. Foreign governments will not be fooled, and may start moving out of the dollar more quickly. And mortgages in the U.S. might become even harder to get - which will intensify the housing crisis. Keep an eye on this one, and read between the lines. The lines themselves will be less true than those lines tossed about in singles bars.

eBay Ruling - Renewal of a Trend?

edwin@aldridge.com — Sat, 12 Jul 2008 12:24:21 -0500

For years certain brands have been doing their best to ensure that their products are sold only in retail outlets which they approve. Generally speaking these have been luxury goods trying their hardest to maintain an air of exclusivity by being available only to a select few wealthy customers. The classical approach has been to permit only exclusive boutiques and high end department stores to carry the items. Of course, there has been a nice history of lawsuits and legislation dealing with this technique. But now, the issues emerges on the Internet in a very big way. A French court has ruled that eBay has not been doing enough to prevent fake versions of these elite brands from being sold at auction. But the court's decision went further by upholding at least some brands' rights to require that their products be sold only in authorized stores. This blogger has some sympathy for the fake products problem. If a buyer decides not to like the Dior brand because of a bad experience with a product which was not Dior though labelled as such - Dior has a right to be annoyed. But what if this blogger gives some real Dior perfume to his wife, who decides it's just not her scent. Under this ruling, it is unlikely that I would be able to resell that bottle of perfume online. And this seems hardly fair. This represents one aspect of something the Internet has brought into focus in many arenas. What control should an original manufacturer have after the first sale? The performing arts are at the forefront, but ponder where this ruling could go. Imagine that you have bought a music CD and then decided that you don't like the music. Should you be legally prohibited from giving that CD to a sibling or friend who might like the music? You sneak - that's just what you claim to have done. Really you have put that music on your MP3 player and are ripping off the artist - or so it will be argued. Imagine the Christmas police, waiting with your family for the presents to emerge from under the tree. When the perfume is opened, they demand to see the receipt to assure it came from an authorized seller. The same thing happens when dad unwraps his designer tie. And imagine the turmoil erupting when someone unwraps a music CD which is not in its original shrinkwrap! A happy holiday indeed. Merry Christmas.

Correct But a Bit Too Early Today

edwin@aldridge.com — Fri, 06 Jun 2008 16:54:57 -0500

Earlier today this blog suggested that caution was the word on the U.S. economy. That was before this blogger saw the close of market headlines showing oil prices back up to their all time highs and the Dow falling almost 400 points today. Apparently others have also concluded that the worst rise in unemployment statistics in 22 years combined with the other factors stated above and the weak dollar warrant pessimism. To top matters off, a high ranking Israeli official stated forthrightly that if needed to prevent Iran from having nuclear weapons, an attack on Iran would be made. Allegedly Iran has spread out its nuclear program geographically, so an effective attack would likely do serious damage to Iranian oil exports. An ongoing war with Iran would certainly have an effect on oil production. Readers might want to note that U.S. officials have been making more aggressive noises concerning Iran during the last couple weeks. Israel might not be going alone. From an economic point of view, such a war would clearly raise oil prices, and since oil prices affect almost everything else, inflation would naturally follow. Inflationary periods going back to about 1970 were generally the result of overheated economic activity with rapidly rising incomes. This kind of one commodity driven inflation is a different breed, if not a different animal (note rising unemployment does not typically accompany an overheated economy); and the usual cure of raising interest rates will not be as effective. If there were war with Iran, there would be an increase in government spending (wars always do that) and such an increase would be an additional inflationary factor. There are cynics who believe that a war with Iran will be launched in time to assist the McCain candidacy - people would vote for the war hero during wartime. But would McCain really want that? What is clearly true is that the next president of the U.S. will inherit a real economic mess and will be blamed for much of it no matter what. Such was the fate of the first President Bush. (Nothing in this entry should be read as an opinion on whether or not Iran should be attacked in some way. Given its president's clearly stated dedication to the total destruction of Israel and the recent activities of its client group Hezbollah in Lebanon, one cannot blame the Israelis for being concerned.)

More Economic Bad News

edwin@aldridge.com — Fri, 06 Jun 2008 12:07:56 -0500

News on the U.S. economy continues to flow at high speed. There was a warning from FDIC that bank failures should be expected. Today we learned that unemployment rates are rising more rapidly that was expected. And surprise: unemployment data for April was revised, guess which direction. Previously this blog has warned readers to expect such revisions - standard Washington procedure to make things look better than they are. More interestingly, mortgage rates are rising quickly along with other medium to long term interest rates. Even the Fed is hinting at interest rate increases to battle inflation. To readers of this blog, this comes as no surprise. If there is an unexpected aspect, it is that the Fed's hinting at interest rate increases has come sooner than expected. Previously this blog has noted that the Fed is not so powerful as it once was due to the global nature of the economy. Interest rates in Europe are notably higher than in the U.S. and the European bankers are talking increase. Perhaps concerns about money leaving the U.S. and heading to stronger currencies and better rates abroad pushed the Fed to speak sooner than it would have liked. After all, it seems like just yesterday that rates were being lowered dramatically. Readers be warned that there will be all sorts of short term fluctuations which cannot be trusted as clues to long term direction. For example, many were gleeful to see oil prices drop about $10 per barrel - but today they are back up. Where are we going over the next year or two? This blogger believes that the real problems have not yet been addressed or fully felt. The U.S. housing market is still very sick, and rising mortgage rates only make it harder for buyers - whether they are buying from willing sellers or out of foreclosures. Most foreclosures are yet to occur as homeowners have been hanging on through payment increases due to adjustable rate mortgages, by credit card borrowing, and in spite of rising prices for other items (think gasoline and food). It takes no rocket scientist to understand that unemployment will not make things easier for homeowners. The effects of lower house prices, higher interest rates, and higher prices for most everything else have yet to work their way through the economy. There is much difficulty to come. The only bright side is that the falling dollar seems to have helped the manufacturing sector by increasing exports of "cheaper" U.S. goods. But interestingly that does not seem to have prevented layoffs in the manufacturing sector. This blogger truly hopes his pessimism as to the economy is misplaced. But nothing has yet occurred to give cause for celebration.

Latest on Economy

edwin@aldridge.com — Wed, 28 May 2008 16:05:47 -0500

The numbers continue to arrive in confusing ways, and the pundits continue to be confused. We are entering into a recession, but it does not look like the others of recent memory and the prior definitions are not fitting very well. The signals are mixed. Part of the confusion arises from the fact that this time we are on a slow path. We are not seeing a quick downturn which is reflected in all economic indicators. We are seeing a slower downturn which is being reflected in the indicators in a confusing way. But the result is that U.S. consumers, and soon many other parts of the economy, are being caught in an economic pincer movement. First we must consider inflation. Fuel and food and increasingly other things are costing more, in some cases much more. And the falling dollar, which helps U.S. manufacturers sell more abroad, also makes all imports more expensive for U.S. buyers. U.S. consumers have for quite some time been enjoying a steady supply of cheaper goods from overseas, but those goods are no longer getting cheaper. One thing which is costing much more is money, as banks and other lenders have continued to increase interest rates. Forget the Fed's lowering the discount rate to 2%. The lenders are looking longer term and they are not sanguine. Add to that the fact that they own buckets full of questionable loans, and the need for liquidity is continuing the credit crunch. We are used to seeing inflation in good, even over-heated, economic times. And we are used to seeing the Fed increase interest rates to combat inflation. This blog has predicted that this will indeed come to pass; and in other places such as Europe, the central banks are already addressing inflation more vigorously. But from the consumer's point of view, everything is looking as if it costs more, including the cost of borrowing. There are exceptions. As this blog has previously pointed out, those same consumers are watching wealth evaporate with the value of their houses. Housing prices are falling rapidly on a nationwide basis, and there is yet no sign of a bottom. Here in Houston, thanks to a booming energy industry, things are better at least for now. The other exception that bears watching is income. Classic inflation is often described as a wage-price spiral. But this time wages are not part of the game. Real income in the U.S. has been roughly steady for several years. That should come as no surprise as increasingly U.S. labor has been competing with cheaper labor overseas. So the price of labor is not increasing and is not keeping pace with the rising price of most commodities. Less income and higher prices - does that make for a recession? So the classical economic indicators of the last few decades are not fitting. This economic story is still being written, and this blogger thinks we are still in the early chapters with too much excitement yet to come.

Time for Mass Transit?

edwin@aldridge.com — Thu, 22 May 2008 17:22:53 -0500

This blogger resides in Houston, Texas, a city which has traditionally been hostile to the concept of mass transit in a state which has been similarly hostile. After all, this is the land of oil, and we like to drive. Houston has also been dominated by real estate developers who have lobbied consistently and successfully for roads to their developments to take priority over mass transit. But now with gasoline at $4.00 per gallon and rising, perhaps the culture needs to change. Houston has one rail route in place, whcih was conceived as the spine for a reasonably thorough light rail system. But the ribs remain unbuilt. There is a bus system, but it has not been conceived as a full mass transit system for the majority of Houstonians. In the words of Houston's mayor's campaign, it's time to get Houston moving. With fuel prices at current levels, businesses might be hesistant to move to Houston or expand in Houston when their employees might not be able to afford transportation to work. The same can be said of Texas as a whole. There has been talk of a passenger rail system connecting the major Texas cities -- but it has never been serious. Efficient passenger service connecting Dallas/Ft. Worth, Austin, San Antonio, and Houston would be a boon to the Texas economy.

This Blogger Is Not Alone

edwin@aldridge.com — Wed, 14 May 2008 16:38:12 -0500

The Financial Times today reports comments from the president of Germany having printed that "Global financial markets have become 'a monster' that 'must be put back in its place', the German president has said, comparing bankers with alchemists who were responsible for 'massive destruction of assets'. (By the way, the Financial Times is highly recommended for anyone interested in economic coverage.) This blog had not referred to the creators of exotic overly leveraged derivatives and other creative instruments as "alchemists" but the label is apt. These folks were indeed trying to make gold from base metals. Additionally former Federal Reserve Chairman Paul Volcker testified before Congress to the effect that the Fed was not taking an adequately anti-inflation stance. That means he wants to see higher interest rates - something this blog has been predicting for a while. It's nice to have such people in essential agreement with one's position. But this blogger wishes we were all more optimistic.

Crippling the Invisible Hand

edwin@aldridge.com — Wed, 14 May 2008 10:11:21 -0500

Here's something new to ponder. As part of its effort to stabilize the economy, the Fed has been loaning to financial institutions to which it did not loan money in the past. The line between traditional banks and investment banks has been blurred to its greatest degree since the Great Depression. And many of the assets which the Fed is taking as collateral or perhaps purchasing outright from "banks" are greatly overvalued in those transactions. If those assets default to any substantial degree which is at least a 50 - 50 shot, the Fed will take a big hit. That his will either be added in some creative way to the federal deficit (probably in some governmental equivalent of "off balance sheet" accounting) or taxpayers will have to make up the difference. Translated: much of the financial razzle dazzle currently underway is merely a postponement on paying the piper for excesses of the overly creative financial markets. Now there are many who will be arguing that we should trust the market and let things play out as they will. These folks, many of whom are found within the Bush administration, have dug in against the concept of a "bailout" for foolish consumers who committed to mortgages they could not afford. There has already been a threatened veto which has delayed action in Congress. Note that this anti-bailout language is not being applied to financial institutions which have made bad credit decisions, and there is plenty of activity underway to help them bail. (Logical to expect consumers to be financially savvy, but not hold to the same standards for bankers, isn't it?) The market is not being left alone to operate freely. At this point, the market would not be able to get the job done even if allowed to do so - without extraordinary pain. We have crippled Adam Smith's invisible hand, and it's about time we admitted it. Primarily through the selling of loans among financial institutions and all kinds of creative securitization of darn near every financing in existence (including truly bizarre and arcane "derivatives" and "synthetics"), far too many financial decisions are now divorced from production of what is actually being financed. Quick review: the base theory is that people will automatically be driven by market forces ("the invisible hand") to do what is beneficial for the economy. So for example, if there is a shortage of tomatoes, the price of tomatoes will rise. This automatically leads farmers to plant more tomatoes in place of a crop less in demand and providing less profit. As this bubble bath bursts (for the bubble is not just U.S. real estate), all kinds of decisions will be made that have nothing to do with whether or not the farmer is successfully growing tomatoes. Those losing money on whatever interesting financial instrument is tanking at the moment will be pressed to increase liquidity in any way that they can. Ultimately, this trickles back to the bank holding the loan to the tomato farmer. That lender will do its best to call in that loan - whether or not the tomato crop is looking good and profitable. So the farmer is crunched and might go out of business. And with the farmer under pressure, the tomatoes just might not be harvested in an optimal manner. So tomato prices will stay high, which is just what Adam Smith's invisible hand says will not happen. Our short term operating view combined with exceedingly creative financial shenanigans has crippled the invisible hand badly. The pity is that no one seems to have the guts, ideas, power, or knowledge to fix it.