Posts about creditcrisis

Bailout, schmailout

October 29, 2008 by Jeff Jarvis
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In any loan, the lender demands to know the use of proceeds. It is beginning to appear that we, the people, aren’t getting even that from the use of our money in the bailout.

The Times’ editorial this morning complains that banks may use the bailout funds to buy other banks. NPR’s Planet Money last week reported on fine print that would allow the banks to use the funds to pay dividends to shareholders (there’s some Talmudic debate on that) or buy back stock, only enriching the owners. I heard on local New York TV yesterday — for what it’s worth — that the bailout means “good news” for Wall Street employees: higher bonuses. The strictures being put on banks are merely lipstick-on-pig limitations on executive pay. BFD. They should be explicit requirements on the use of funds.

As Planet Money’s Adam Davidson said, my blood is boiling.

Now we have GM trying to remake itself into a bank to get a piece of the bailout bonanza.

First, our money should be used to shore up credit and confidence and we should be demanding that a condition of getting a penny.

Second, if you want to bail out GM and other companies, I’ll give you a new idea: Take over their health insurance obligations.

If you’re going to socialize something, don’t let it be the banks. Let it be the common good of health care. Take over health insurance and make it universal.

How will we pay for it? Taxes, of course. But won’t that put GM back in the hole? No, because it has no profit to tax. You want to redistribute wealth, then this will have the profitable paying for health care and it will take a huge and looming burden off the big, old giants, giving them a chance — one last chance — to get their acts together.

Making health care portable and universal will also, I predict, release a flood resignations as people no longer feel trapped by their jobs because it is the only way to get coverage. This can lead, in turn, to new efficiencies in companies and a wave of entrepreneurism (and with it, innovation, wealth creation, and new tax revenue). Let’s try trickling up.

And if we’re going to use federal funds to try to improve the economy, I say we should be using it to provide universal broadband internet access better than anyone in the world: our new interstate. It will lead to more new companies, new jobs, new skills, better government, more competitiveness on the world market, and better education.

And while I’m playing New York Times columnist, giving my prescription for the nation as if I were running it, I’d take advantage of low oil prices by putting a tax on fuel that guarantees a minimum price to both keep demand low and, far more important, to fund immediate and for-once-real development of — and tax credits for — alternative energy, which will also create jobs and make us competitive in the world market.

The tragedy of the bailout is that we could use this tremendous resource and get nothing for it.

: LATER: Tom Evslin has a different proposal for a gush-up (vs. trickle down) approach (tagged ‘unscientific economics’).

The failure of listening

October 13, 2008 by Jeff Jarvis
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We’ve just played the highest stake game of guess-the-number: The market was thinking of a number and the government was supposed to guess it. Lehman folding? Bzzzt. That’s not the number. Bailout of money market funds? Bzzzt. Think higher. $700 billion to buy toxic loans? Bzzzt. Wrong again. Buying equity in banks? Ding-ding-ding, you win!

Why wasn’t the government better at listening to the market? Did it ever ask what it should do?

That’s not the way government thinks. But it’s the way it should learn to think. There need to be systems to listen and expectations that we out here should speak. In a representative democracy, government doesn’t always need to act on what it hears. But now it can’t hear.

Government and regulation will need to be transparent and interactive in this, the Google economy.

The WWGD? world

October 13, 2008 by Jeff Jarvis
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In the financial crash, we are seeing two forces at work: first, a corrupt system of unregulated leverage gone mad — virtual value (which is to say, bullshit) created in derivatives — but second, a world whose fundamental structure is changing in ways we can’t yet fully fathom.

I can’t yet get my head around the new structure; no one can. So I want your help in cataloguing differences from a high altitude (and calm heart) as we figure out not only their dangers but also their opportunities and as we try to understand the new architecture of things.

I can’t help seeing this through the lens of Google, having just finished my book, What Would Google Do? Google is built for this new order – and not necessarily by design. That’s why I try to reverse-engineer Google to figure out what makes it succeed. I used those rules to re-envision various industries and institutions. Where do we land if we use them to reinterpret the ways of our world? Here are some of the laws I intuited:

* The link changes everything. We live in a hyperconnected world. Look at the financial crisis as a metaphor for what can happen in systems of information, news, commerce, regulation, education, culture, design. It’s not that one piece of information can spread fast; it’s that information is connected to information in interdependent and complex ways impossible to unravel.

But don’t see just the danger in that; see the opportunity. If we could build this tower of bullshit in derivatives through connections, what of worth can be built? Knowledge, wisdom (about, say, medicine), new understanding of the world (through data about our behavior)? And what efficiencies can be found because we can do what we do best and link to the rest?

* Atoms are a drag. Stuff sucks. GM could collapse into GMDaimlerChrysler (or eventually ToyotaTata). Nobody wants to be in the business of stuff anymore: building cars, printing newspapers, selling CDs, making gas, growing food.

The digital economy, Google’s economy, is far more appealing. In a sense it, too, is derivative as it creates value on such intangibles as knowledge and behavior. Except unlike financial bets, Google’s metaknowledge creates real value. There’s the other side of the coin of the virtual value that is tearing us down now – a way to build assets quickly and without dependence on and the limitations of stuff.

The reflexive response to this collapse of finance would be to return to the real: Buy real estate. No, not anymore. Buy into manufacturing. Nope, not now. Atoms aren’t safe. Dollars aren’t safe. Now the retreat has to be to knowledge of value.

* Small is the new big. On the one hand, big has never been bigger: Wal-Mart, $100 trillion derivatives markets, Google itself. But big is, more and more, made up of networks of smalls. Countless small retailers on eBay now make up a market bigger than our largest department-store chain, Federated. The long tail of culture (and the big butt to which it is attached, as Google’s Matt Cutts calls it) adds up to huge attention. Or, as I say in a law in the book, the mass market is dead; long live the mass of niches. We know this already and have discussed it here on the blog.

The added implication of the networked, small-is-the-new-big world today is a loss of control. A single CEO and board do not manage those commerce and entertainment markets. They are open marketplaces. And though marketplaces may have bad karma right now, that’s because they were manipulated by the few. Large, flat markets that can control themselves will be safer.

In business, we still need to reach critical mass. But we won’t do that anymore by buying up companies and going into debt to do so. Not gonna happen. No, we will reach critical mass by building networks: Google AdSense, eBay, Glam…. The key is no longer to control scarcity but to manage abundance.

* Be a platform. In an economy built on networks, you want to be a platform. Google is. It enables countless businesses to run thanks to its revenue (AdSense), its content (Google Maps), its functionality, (Google Docs), its services (Google App Engine), not to mention its distribution. Amazon has become a platform for businesses, first stores and now anything. Add eBay, Glam, Skype, craigslist, PayPal. They’re platforms.

In the book, I make a fanciful argument that a car company – any of the once-big three – could become a platform for more car companies to build atop it – if it came out with an open-source car. If it did, its capital needs and risk and labor and benefits coasts would decline; it could grow again without going into debt to do so. I have other ideas for what a car platform is. Universities should become platforms for aggregated educations. Doctors’ offices should be platforms for health. In this new world, you don’t want to own everything – indeed, if you’re like Google, you want to own as little as possible. Instead, you want to enable everything.

* Be transparent. We got into this mess thanks to opaqueness. At every stop along the financial trail, somebody was hiding something: homeowners their bad histories, loan sellers their bad loans, financial instruments their toxins, financial institutions their stockpiles of poison. The solution we hear more often than any other is transparency. If only we’d had – or rather required – disclosures, so much of this wouldn’t and couldn’t have happened. The tower of bullshit that is collapsing around us now was built on willful, wishful obfuscation and ignorance. Ignorance is both their indictment and their alibi.

Transparency will come through regulation: decrees that require financial institutions to reveal their holdings. But it will also come through the transactions themselves. That is what appeals to me about Prosper: I know who I’m lending to and for what. Prosper’s not going to replace Citibank (well, I didn’t think it could…). But Citibank has much to learn from Prosper.

I often say that transparency is a key ethic I learned online in blogs. This is just my symbol of it. Transparency is a system of trust and what we lack right now is trust. Transparency is the solution.

The ethic and attitude of transparency reaches into society and our lives. I say in the book that life is public now and so is business. Value is built now on being found – everybody needs a little Googlejuice – and on listening to the data our constituents create by their actions. Friendships will be maintained and built differently because of our new publicness.

* Give the people control and we will use it; don’t and you will lose us. I call this Jarvis’ First Law. It will become the law of the lands as we no longer have cause to trust our leaders in finance and business or government. We will not just demand control; the internet gives us the means to exercise it. Trust will not be restored from the top but from the bottom.

David Weinberger saw that when he decreed his own law:

* ‘There is an inverse relationship between control and trust.’ I come out of that saying that before the people can learn to trust the powerful, the powerful must learn to trust the people. They won’t get away with treating us like idiots who just wouldn’t understand derivatives and credit default swaps.

Return to my list of successful enterprises and you’ll see that many of them build platforms for trust: Google knows which sites we trust with our links and clicks and which are trying to spam it; eBay sets up the means for customers to anoint merchants with trust; Amazon learned that we will trust the opinions of fellow readers over reviewers; PayPal and Prosper help us to make trusted transactions. We don’t trust banks anymore; hell, they don’t trust each other.

* Don’t be evil. Why should it be surprising and rare – even amusing – that a company would make that vow as Google has? Shouldn’t it be assumed? No, it isn’t. And that’s a key to the mess we’re in: the bullshit was always someone else’s responsibility and that responsibility could always be passed on to the next and bigger fool.

Google executives say that they use their vow just to enable the question to be raised in discussions. Wouldn’t it have been wonderful if somewhere, anywhere, just one loan buyer or seller or financial institution had just asked whether knowingly buying and selling assets they now so freely describe as toxic would be evil?

There are more lessons from Google and its age that I explore in the book, such as our new speed. Life is live and mobs and problems can form in a flash. Middlemen are doomed by the direct connections the internet and Google make possible. Simplicity is an ethic; complexity is what masked our problems from us. To innovate and grow, though, we still need to make mistakes well. It would be a mistake to clamp down and outlaw every risk. It’s not the mistakes that matter so much as what you do about them. Life is a beta.

It’s dangerously short-sighted, I think, to focus on home mortgages and bank stocks to explain and solve this crisis and rebuild. I fear that we are seeing the implosion not of a bubble but of a void that is the fake value built into a $100 trillion market in derivatives that are nothing but gambles on margin. It’s a fiction and I don’t know how we find reality, how we erase perceived – only perceived – value that is far greater than every stock market in the world. But that’s the crisis. I don’t know how we will come out the other end.

I do know that when we come out the other end, we will see – or finally recognize – a different world. We have to see differently. When we do, we can build new value on platforms of openness, transparency, collaboration, networks, connections, knowledge, niches, abundance, trust, speed, and innovation. Success tomorrow will not be defined by controlling us – whether you are a bank or a cable company or an entertainment conglomerate or a politician – but by enabling us.

Our myth was that credit did all that, enabling innovation and growth. It didn’t. Credit was merely a tool.

The good news is that in web 2.0 – where you can build a useful application, product, and company on Google or Amazon or eBay or Etsy or open-source tools as platforms – you won’t need money and so won’t need credit and so you’ll keep control. You only need what you’ve always needed to succeed in a rational world: intelligence, insight, innovation, courage. That much won’t change.

Welcome to the Google economy.

Splain it to me

October 6, 2008 by Jeff Jarvis
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Drop everything and go listen to the latest This American Life, a followup to its brilliant Giant Pool of Money show, which explains the bailout and the bigger mess we’re in better than I’ve heard or read anywhere. Alex Blumberg, Adam Davidson, and Ira Glass have done it again — brillliant once more.

But first, you might want to lock away your belt, shoelaces, and for that matter, the cord to your iPhone headset. But you’ve probably taken those suicide-watch precautions already today given the apocalyptic, 10,000-busting day on Wall Street. Well, if you listen to the show you’ll at least understand better why we’re so fucked.

It turns out that the problem isn’t the giant pool of money. It’s the giant pool of debt. And I don’t mean our debt, legitimate debt used to buy houses and cars and finance startups and roads and send kids to college. I mean fake debt. Davidson and Blumberg explain the debt swap market and how it became an utterly unregulated $60 trillion marketplace — that’s more, they say, than all the money in all the stock markets in the world — built on no collateral or real value. It’s leverage, they call it. Ponzi scheme is another way (my way) to look at it. Giant pool of nothing is another way. Big, fat, fucking lie is another. The problem, as they explain better than I can, is that people made bets with no money in their pocket and now those losing bets are being called but we’re the ones getting kneecapped.

What became clear is that this is far bigger than bad mortgages. Those were just the pawns in a much more dangerous game. If economics correspondent Davidson is scared, so should we be. It’s worse than we thought, bigger than we thought. And it looks as if everyone on Wall Street listened to the show this morning.