Felix Salmon

It now seems all but certain that Gene Sperling is going to get Larry Summers’s (and his own) old job at the NEC. And David Corn has a long piece in Mother Jones defending the choice. (He’s not the only person to have this idea: Jacob Weisberg has a similar column.) I’ve said my piece about Sperling; there’s no point relitigating this. But it’s fascinating to see how Corn reports on the institutionalization of the revolving door between Wall Street and Washington, to the point where taking $887,727 from Goldman Sachs is positively self-abnegatory:

After the Clinton administration ended in 2001, Sperling, according to a former Clinton administration aide, spoke to several “wise men” about what he should do next. As a former NEC director, he was in great spot to cash in. And he received the same career advice from all of these counselors: go to Wall Street for the next eight years, make millions, and then return to public service (when there might be a Democratic president). He didn’t follow this guidance. Instead, Sperling devoted most of his time to addressing the challenge of global poverty…

A friend of Sperling adds, “After having been head of the NEC for Clinton, he could have immediately gone to Wall Street and made a lot of money. That’s what most people in his situation do. But he didn’t. A lot of us who know him scratched our heads about that.” …

At some point, according to a source familiar with the episode, Goldman Sachs approached Sperling for advice on globalization… On the advice of friends, he requested that he be paid what the investment firm might pay a top lawyer or dealmaker: $70,000 a month.

Corn never identifies the “friends” and “wise men” who sagely intoned, when asked for their opinion, that Sperling should go off and make millions of dollars. But it’s easy to guess that Rubin and Summers were among them — not least because they, too, did exactly the same thing upon leaving the Clinton administration.

If the revolving door is really as institutionalized as Corn says that it is, that’s a very serious problem — and all the more so for the fact that people like Weisberg try to paint it as a positively good thing:

I suppose that in a perfect world, officials would be members of a flagellant order, coming to Washington from their monastic cells and reaffirming their vows of poverty afterward. But that wouldn’t work, either, because economic policymakers would have no feel for markets, business, or life in the real world.

It’s worth pushing back against this notion that earning a seven-figure sum on Wall Street automatically gives you a feel for markets and business — or even that in order to have a feel for markets and business, you have to earn a seven-figure sum on Wall Street. Neither is true. Advising Goldman Sachs on setting up a charitable foundation might teach people a lot about how to navigate the internal politics of Goldman Sachs, but that’s about it. And while there are certainly many highly-remunerated bankers who do know a lot about markets and business, there are equally many who don’t. Wall Street jobs tend to be hyper-specialized: a detailed knowledge of, say, the custody trail in reverse repo transactions is highly unlikely to give you any insight into the state of the US economy.

As the testimony at the FCIC from the Goldman executives involved in the Abacus transaction shows, bankers tend to live in a highly distorted reality where the outrageous is accepted as a normal and ethical way of conducting business: insofar as working on Wall Street does give people a feel for how business is conducted, it can give people a very distorted impression indeed. Like, for instance, the impression that an annual income of $2.2 million is head-scratchingly low, rather than mind-blowingly high.

Volcker to step down from White House panel — Reuters

Good summary of the political imbroglio around Muhammad Yunus in Bangladesh — Economist

“I’m sure I’ve read worse sentences from a National Book Award-winning writer, but I can’t recall them offhand.” — NYT

Why does the internet seem so slow even as bandwidth is growing? Bufferbloat. It’s a big problem — Cringely

The NYT is reporting that Goldman Sachs only made its $450 million investment in Facebook after its in-house private equity fund, Goldman Sachs Capital Partners, passed on the deal.

Many people — including the NYT — have been talking a lot in recent days about the “ancillary business” that Goldman is likely to get as a result of this investment, including fees from any future IPO and wealth-management fees for looking after Mark Zuckerberg’s fortune. There’s no formal agreement about any such things, I’m sure, but the general understanding seems to be that if Goldman scratches Facebook’s back by raising a couple of billion dollars for it now, then Facebook will scratch Goldman’s back in future with various lucrative bits of investment-banking business.

Goldman, it seems, would have loved to get all those fees without having to put its own money into the deal — and then when GSCP said no, it ponied up the requisite cash itself.

But that means something important: that from the point of view of Facebook, Goldman’s client, there’s really no difference between Goldman investing and GSCP investing — whether the money was borrowed from the Federal Reserve or invested by rich clients. Goldman Sachs and GSCP are two faces of the same company and either way Goldman is likely to end up with those ancillary fees.

That, in turn, makes a mockery of all the talk about Chinese Walls between banks’ sell-side and buy-side operations, or the idea that speculative trading is fine, the Volcker Rule notwithstanding, just so long as it takes place in the asset-management arm rather than the bank itself. (Ask Bear Stearns just how insulated a parent bank is from losses at a subsidiary fund.)

If an investment from a bank’s asset-management operation gives that bank all of the relationship-based upside of a principal investment by the bank itself, then it’s clearly silly to think of those investment subsidiaries as being divorced from the investment-banking business. It’s something regulators should think hard about, as they put together clear rules and guidelines about what kind of activity is acceptable where.

Does anybody actually like the person that Julian Assange has become of late? He seems to infuriate everybody he comes into contact with: his former spokesman, for instance, is writing a book about him which accuses him of “high-handedness, dishonesty and grave mistakes”. And then there’s this, from Guardian journalist Nick Davies, who worked very closely with Assange:

At the beginning of August, I cut off contact with him in order to protest at several things he had done — the first time I have cut off a source in 34 years as a reporter. This was nothing to do with the sex allegations in Sweden.

Intriguing! And even more so, now that Sarah Ellison has told the story of just what Assange did to cause the split:

On Saturday, July 24, the day before release, Davies received a call from someone he knew at the television network Channel 4. “You’ll never guess who I’m with,” said the voice on the other end of the phone. “I’m with Julian Assange. He’s just given me the entire Afghan database.” Davies was livid. Assange got on the phone and explained, falsely, according to Davies, that “it was always part of the agreement that I would introduce television at this stage.” Davies and Assange have not spoken since that afternoon.

This just feels incredibly unsatisfactory. The Afghan logs were already appearing in three different newspapers — the Guardian, the New York Times and Der Spiegel — so it’s not like Davies had some kind of exclusive he was trying to protect. In 34 years, I’m sure that Davies had been treated much worse than that by sources.

Instead, there seems to be something about Assange personally which sets people on edge and makes them dislike him intensely: his biggest fans are often those who have never met him or who have known him only for a very short amount of time.

That’s unfortunate, to say the least: it takes an issue which is messy to begin with and makes it a great deal messier. But at the same time, Assange has clearly been under an enormous deal of stress — and this is a man who once checked himself into hospital with depression after being charged with computer hacking in Australia. It’s easy to see how he wouldn’t have considered that to be an option in recent months.

My suspicion is that there’s something quite unstable and destructive about Assange’s current mental state and that there has been since before he was in Sweden. I hope his publishers have a lot of patience: getting his very expensive book into a publishable state could be a very arduous process indeed.

What to make of Bill Cohan’s big Vanity Fair piece on a slightly skeevy lawsuit where a pair of Democratic party operatives are trying to pull a Winklevoss on Arianna Huffington? Arianna’s flack, Mario Ruiz, is clearly enjoying being asked to comment on it:

It’s a great story — if you read it backwards. At the end of the article, the writer takes apart Boyce and Daou’s case piece by piece, leaving it in tatters — and rendering everything that has come before it pointless.

Meanwhile, the plaintiffs’ attorney seems much more well-disposed towards the story, despite the fact that — as Ruiz says — it’s almost impossible to read the whole thing and think that they have any case at all.

The question of who’s got the stronger moral and legal case is pretty clear, from Cohan’s reporting: it’s Arianna. As Jay Yarow says about the Winklevii, “ideas are a dime-a-dozen. It’s execution that counts. Mark Zuckerberg executed. The Winklevosses didn’t.” Similarly here: Peter Daou and James Boyce had an idea for a “liberal Drudge Report” in late 2004, at much the same time as about a million other people had exactly the same idea. (Even Gawker launched one such site, Sploid, in April 2005; it closed in August 2006.)

The idea was, as Larry David says in the piece, “terrible”: the site was to be called fourteensixty.com, after the number of days between presidential elections. It had hypocrisy baked in to its business plan:

www.fourteensixty.com will be a Democratic-leaning site with enough non-partisan news so as to appear more mainstream than it truly is; this is critical for credibility and for advertising revenue.

And rather than build one big site, the idea was to build lots of little ones, including (I’m not making this up) mamadonkey.com, “a blog aimed at Democratic supporters over the age of forty”.

On top of that, the site was envisaged as a way to sell the services of political operatives:

1460′s staff technical and web-communication strengths will enable 1460 to offer candidates a full range of strategic and technological tools…

1460 will also help shape a candidate’s overall communication strategy, develop television and radio communications and coordinate that strategy through the Internet. Utilizing Peter’s extensive knowledge of online political communication, 1460 will develop and manage a candidate’s web site, email acquisition and communication strategy, blog communication strategy, volunteer acquisition and deployment, and more.

The plan goes on to detail all the different ways this would make money for the site, including taking “a percentage of monies raised, online and off”, as well as a percentage of all media buys.

No wonder that, when he saw the plan, Kenny Lerer told Arianna that “this doesn’t work for me on many levels”; the two of them went on to do something much smarter, much more innovative and, as befits a news site, much less beholden to party-political interests. And, I daresay, much less likely to ever dream of writing the words “blog communication strategy”.

But what of Cohan’s story? Given that this entire lawsuit seems to be a nonevent, is it reasonable for the Huffington Post to criticize Vanity Fair for printing it in the first place?

There are certainly good reasons why VF might have spiked the story, or buried it on VF.com somewhere. Rich and successful people get sued opportunistically all the time. There’s little new news in the piece. And the conflicts are enormous: not only has VF’s editor hosted Arianna’s book party, one of the plaintiffs has actually worked as a consultant for the magazine.

On top of that, Cohan overstretches in his attempt to demonstrate that there even might be a real story in the lawsuit:

The questions raised are profound: Did Huffington and Huffington Post co-founder Kenneth Lerer take ideas from Daou and Boyce—ideas the two men call “groundbreaking”—without properly compensating or acknowledging them? Or is this just a case of sour grapes, with Daou and Boyce looking to cash in on the hard work of Huffington and Lerer now that the site is successful and valuable?

Er, no, those aren’t profound questions at all. Even if Arianna and Lerer did take an idea or two, it’s hard to see that the plaintiffs would have any claim to compensation — and indeed neither of them asked for compensation or even the opportunity to invest in Huffington Post for six years, before they suddenly decided that they had been so egregiously wronged that they had no choice but to sue.

But the fact is that Vanity Fair loves nothing more than a gossipy tale of celebrity entanglements and the name-dropping in this piece is truly something to behold: Larry David, David Geffen, Brian Grazer, Aaron Sorkin, Meg Ryan, Tom Freston. Graydon Carter simply isn’t capable of passing up a story which includes a sentence like this one:

On Election Day 2004, after attending a Bruce Springsteen concert for Kerry the night before, he, the Davids, and Kristen Breitweiser, a 9/11 widow and political activist, were visiting polling places in Ohio before boarding a private jet to fly to Boston.

The biggest celebrity of all in this piece, is Arianna herself, a blow-dried visionary in a glamorous large-format portrait by Robyn Twomey. The picture speaks much more loudly than the words: she’s clearly the winner, not the men wearing suits lent to them for the duration of the photoshoot by VF staffer Peter Holleran.

This story isn’t bad publicity for Arianna then — the vast majority of VF readers will look at her picture but not read the article. And most of the ones who do read the article will come to the obvious conclusion. My guess is that when Arianna next bumps into Graydon, it’ll be kisses all round, like nothing happened. Especially if he agrees to write something for her website.

(Cross-posted at CJR)

Bill Cohan raises an interesting point:

Goldman’s cost of capital is close to zero — as a bank holding company, it can borrow from the Federal Reserve at negligible interest rates — so any capital gain it makes on its venture in Facebook will be sheer profit.

Isn’t this the kind of thing the Volcker Rule was supposed to prevent? Goldman is a regulated bank, with access to essentially unlimited Federal Reserve funds at very low interest rates; it should not be using those funds for speculative bets on its own behalf. But that’s what the Facebook investment looks like.

I’m not saying that the Facebook investment is illegal — for one thing, the details of the Volcker Rule have yet to be fully hashed out, which means it doesn’t yet have the full force of law. But this does look like it violates the spirit of Dodd-Frank.

As Robert Cyran says, the deal “looks like classic merchant banking”, where banks invest as principals in client companies. Under the Volcker Rule, however, I thought that only investment banks could make such bets — not regulated bank holding companies with access to Federal Reserve funds.

“You want to believe these are real questions, given that Business Insider feels like such a reputable source” — Technology Woman

“In Canada 80% of postdocs earn $38,600 or less per year—the average salary of a construction worker.” — Economist

The Consumer Financial Protection Bureau is all about plain English. So why is its press release a 69-word sentence? — Treasury

World Bank Issues Yuan Bond — WSJ

George W. Bush and authorship — Atlantic

LeBron’s ego, in pastry form — Last Angry Fan

Adventures with Bowdlerization, Huckleberry Finn edition — Publishers Weekly

Women Laughing Alone With Salad — The Hairpin

Magnus Carlsen seems unnaturally well-adjusted, for a 19-year-old world chess #1 — Chessbase

“It’s outdated to think that snacks are dry and beverages are wet” — WSJ

Holly Petraeus to the CFPB, charged with protecting the military from predatory lenders — HuffPo

Miguel Helft explains why Facebook is going to have to go public sooner or later:

Mr. Zuckerberg’s quest to keep Facebook private will not last forever. Federal regulations require companies with 500 or more investors to disclose their financial results, eliminating one of the principal advantages of staying private.

This is a classic non sequitur: Helft’s first sentence simply doesn’t follow from his second. Yes, it’s nice for companies not to have to disclose their financial results. But just because you’re disclosing your financial results doesn’t mean you have to go public. Indeed, there are many privately-held companies which issue bonds and therefore disclose financials, but which have no public shares outstanding.

Follow Helft’s link, and you arrive at Steven Davidoff explaining the conventional wisdom in a bit more detail:

The company can still stay private even if it is forced to begin reporting to the S.E.C. However, in the case of Google, which faced with a similar choice several years ago, it chose to go public. Google decided that if it was going to have to release its nonpublic financial and other information to the S.E.C. and the public, it might as well get its bang for the buck and do it in connection with an I.P.O. Though not required to do so, Facebook would probably come to the same conclusion if the S.E.C. brings this reporting requirement to a head.

The problem is that I’m having a lot of difficulty working out what kind of “bang for the buck” Facebook would get from going public. Indeed, it seems to me that for Mark Zuckerberg, the downside of being public outweighs the upside, whether or not Facebook is reporting its financials to the SEC.

The main thing to remember here is that Zuckerberg is the CEO, he’s always wanted to be the CEO, and he has zero intention of relinquishing that job. He’s not like Larry Page and Sergei Brin, who are happy being founders and letting Eric Schmidt do the less pleasant things associated with being CEO: this is Zuckerberg’s company, and he’s going to run it.

The problem is it’s been hard enough for Zuckerberg to grow into being CEO of a private company: he’s certainly gone through quite a few executives along the way. The job of being CEO of a public company is very different, and much more outward-facing. For one thing, it involves lots of interaction with journalists and analysts. More invidiously, it involves being judged by share-price performance to the exclusion of almost everything else. Public shareholders have the right to demand that the CEO do his utmost to increase the value of their holdings from quarter to quarter and from year to year; it’s easy to see why Zuckerberg has no interest in bringing upon himself that kind of pressure.

It’s easy to see Zuckerberg being attracted to the idea of living like, say, Mike Bloomberg, running a multi-billion-dollar company exactly how he wants, without constantly being second-guessed. And remembering too the cautionary tale of Apple, where the founder, Steve Jobs, was forced out by angry shareholders when the stock failed to perform.

Of course, Zuckerberg does have shareholders right now, but he reports only to a very small board of directors comprising himself, Marc Andreessen, Jim Breyer, Don Graham, and Peter Thiel. Those are not the kind of people to care much about complaints from people who bought at a high valuation that they’re having difficulty selling their stake at a profit.

If Facebook remains situated at one remove from the harsh scrutiny of public markets, then, it’s likely to be able to follow its own path much more easily, without having enormous pressure to justify its $50 billion valuation with massive growth in revenues and profits. That’s probably attractive not only to Zuckerberg, but also to much of his executive team, and even to the board, none of whom to be in any hurry to exit their positions.

So why go public at all? The main reason for an IPO is to raise money, but Facebook has just demonstrated, in its deal with Goldman Sachs, that it’s more than capable of raising as much money as it needs privately. Any time Zuckerberg needs new equity capital, Goldman can find it for him at a very attractive valuation, no IPO required. And if Facebook is now profitable, it probably doesn’t need any more equity capital anyway.

The secondary reason for an IPO is to provide a mechanism for shareholders and early investors to sell their stake in the company. Again, Goldman will happily perform that role, acting as a broker between Facebook insiders looking to sell and its own high-net-worth clients looking to buy. No public listing required.

The final main reason for a public listing is to give the company an acquisition currency—but even without a public listing, Facebook is more than capable of offering to buy other companies with its own stock. It’s very rare for a private company to have stock which is as liquid and as easily valued as Facebook’s—but now that Facebook has got there, it doesn’t really need to go any further.

There are other reasons to go public, but none of them are very convincing in the case of Facebook: the idea that a public listing gives a company a higher profile, for instance, or that it expands the pool of possible shareholders, thereby increasing its valuation.

So my feeling is that insofar as Goldman has just bought itself Facebook’s IPO mandate, it might have bought a unicorn. Not that Goldman would mind in the slightest if Facebook stays private—right now, it’s in the highly enviable position of having the exclusive ability to parcel out Facebook shares to its own clients, and to make money on pretty much every trade in Facebook shares. That, surely, is more valuable than any one-off IPO fee.

Update: A couple of other things I forgot I wanted to say. Firstly, public shareholders tend to be a litigious bunch. And secondly, there’s a real chance that the Goldman-brokered secondary market will fall, rather than rise, in value from $50 a share. And there’s no chance of an IPO below $50 per share in the foreseeable future.

In April 2006, Robert Rubin and Roger Altman launched the Hamilton Project under the aegis of the Brookings Institution. The aim, broadly, was to push the kind of fiscally-conservative liberalism beloved on Wall Street: Rubinomics.

At the time, New York Observer columnist Michael Thomas sent Altman the letter I’ve embedded below; it makes for hugely enjoyable reading. Thomas sent it to me after reading my post yesterday on Altman and the other members of the shortlist to replace Larry Summers; I have to admit I’d forgotten just how close Rubin and Altman were. The whole letter is well worth reading, but here are a few juicy extracts:

What I read prompts me now to write to urge that you and your colleagues in this amazingly self-congratulatory undertaking cease and desist…

There are no new ideas in the statement. “Economic security and economic growth can be mutually reinforcing” is not a new idea, nor is any to be found in the page-long gloss that follows the enunciation of this bold new “principle.” If I may paraphrase Churchill’s well-known apothegm on the late Soviet Union, what we have here is platitude wrapped in cliché inside bromide – over and over and over.

Thomas then launches into a wonderful breakdown of the Hamilton Project’s advisory council: 12 Wall Streeters, 10 academics, 2 think-tankers, a publisher, and a management consultant. “At a time when enterprises like General Motors and Ford are back to wall,” he writes, “one might have thought some representation from the ‘make and do and hire and fire’ sectors of American commerce would have proved helpful, even insightful.” He then continues:

The sad truth seems to be, at least in the eyes of one who has spent enough time at the Four Seasons to have a sense of how this stuff works, that this really isn’t a program about helping the less-advantaged or getting the country straightened out in a fiscal and intellectual sense, this is an advertisement for a government-in-waiting.

This was highly prescient. The Hamilton Project’s first director was Peter Orszag, its second was Jason Furman, and its third was Doug Elmendorf. All three went on to high-profile roles in the very first Democratic administration to be put together after the Hamilton Project was founded.

If Obama chooses Roger Altman to replace Rubin’s former deputy Larry Summers, it will be clear that Rubin continues to have an intellectual chokehold on the White House — even after the financial crisis showed just how dangerous Rubin’s Wall Street-inflected worldview can prove to be in reality.

Altman

Chrystia Freeland has a long essay in the Atlantic on the new global elite, which will eventually become her next book. It’s well timed to coincide with the self-congratulatory plutocratic gabfest that is Davos, which kicks off in three weeks’ time, and with which Chrystia is very familiar.

The difference between the new global elite and the old global elite is that today the world is owned and run largely by first- or second-generation money: people who tend to think that they’ve earned it, somehow, especially if they came to their wealth from a background in the lower-middle classes:

While you might imagine that such backgrounds would make plutocrats especially sympathetic to those who are struggling, the opposite is often true. For the super-elite, a sense of meritocratic achievement can inspire high self-regard, and that self-regard—especially when compounded by their isolation among like-minded peers—can lead to obliviousness and indifference to the suffering of others…

When I asked one of Wall Street’s most successful investment-bank CEOs if he felt guilty for his firm’s role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford. One of America’s top hedge-fund managers made a near-identical case to me—though this time the offenders were his in-laws and their subprime mortgage. And a private-equity baron who divides his time between New York and Palm Beach pinned blame for the collapse on a favorite golf caddy in Arizona, who had bought three condos as investment properties at the height of the bubble.

It’s not that these people are utterly bereft of noblesse oblige: Chrystia points out that “in this age of elites who delight in such phrases as outside the box and killer app, arguably the most coveted status symbol isn’t a yacht, a racehorse, or a knighthood; it’s a philanthropic foundation.” But those philanthropies don’t benefit the left-behind middle classes: they tend to follow a barbell distribution, with the money going either to the world’s poorest or else to well-endowed universities and cultural institutions. The US middle class is sneered at for being fat and lazy and unworthy of their wealth:

The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”

This mindset is dangerous, but it’s not clear how dangerous it is.

The real threat facing the super-elite, at home and abroad, isn’t modestly higher taxes, but rather the possibility that inchoate public rage could cohere into a more concrete populist agenda—that, for instance, middle-class Americans could conclude that the world economy isn’t working for them and decide that protectionism or truly punitive taxation is preferable to incremental measures such as the eventual repeal of the upper-bracket Bush tax cuts.

Mohamed El-Erian, the Pimco CEO, is a model member of the super-elite. But he is also a man whose father grew up in rural Egypt, and he has studied nations where the gaps between the rich and the poor have had violent resolutions. “For successful people to say the challenges faced by the lower end of the income distribution aren’t relevant to them is shortsighted,” he told me. Noting that “global labor and capital are doing better than their strictly national counterparts” in most Western industrialized nations, ElErian added, “I think this will lead to increasingly inward-looking social and political conditions. I worry that we risk ending up with very insular policies that will not do well in a global world. One of the big surprises of 2010 is that the protectionist dog didn’t bark. But that will come under pressure.”

If this is true, then the members of the super-elite should be falling over each other to pay more in taxes out of simple enlightened self-interest—rather than saying that a perfectly sensible tax hike is “like when Hitler invaded Poland in 1939.”

But it seems to me that the inchoate anger of the masses shows no sign of cohering into anything at all, let alone protectionism, which seems to have been dying a slow death ever since the protests against Nafta. The Tea Party, which is the closest thing we have to a populist revolt, is bought and paid for by plutocrats and shows no protectionist tendencies whatsoever. If they keep on going on their present trajectory, they’re just as likely to continue unimpeded as they are to run into some kind of atavistic class warfare.

So I’m unconvinced that the plutocrats have any real incentive to restrain themselves, or to stop moaning around an Upper East Side dinner table that $20 million a year isn’t all that much—it’s really only $10 million a year, after taxes.

And I’m also unconvinced that we actually need the plutocrats as much as Chrystia says we do:

Not all plutocrats, of course, are created equal. Apple’s visionary Steve Jobs is neither the moral nor the economic equivalent of the Russian oligarchs who made their fortunes by brazenly seizing their country’s natural resources. And while the benefits of the past decade’s financial “innovations” are, as Volcker noted, very much in question, many plutocratic fortunes—especially in the technology sector—have been built on advances that have broadly benefited the nation and the world. That is why, even as the TARP-recipient bankers have become objects of widespread anger, figures such as Jobs, Bill Gates, and Warren Buffett remain heroes.

And, ultimately, that is the dilemma: America really does need many of its plutocrats. We benefit from the goods they produce and the jobs they create. And even if a growing portion of those jobs are overseas, it is better to be the home of these innovators—native and immigrant alike—than not. In today’s hypercompetitive global environment, we need a creative, dynamic super-elite more than ever.

I would put this another way. The Silicon Valley mega-wealthy are good for the US economy, but they’re not going anywhere: Silicon Valley hasn’t managed to reproduce itself elsewhere in the US, let alone anywhere else in the world. When it comes to US plutocrats, however, most of them are very similar to the Russian oligarchs who seized their country’s natural resources — they’re bankers and hedge-fund managers who seized their country’s financial resources. They produced no goods, and they created no jobs — quite the opposite. And so it makes sense for Americans who have lost their jobs and their hope to reclaim those financial resources, through mechanisms like a wealth tax or a financial transactions tax. The Silicon Valley elite would happily pay such things. And if the angry bankers went off to destabilize some other financial system, they wouldn’t actually be missed.

Long Beach wants to be bike-friendly. Yet its cops still hand out $400 fines for having an unregistered bicycle — LAT

What a rising stock market does: the govt might conceivably end up making a profit on its GMAC bailout — NYT

Now that Twitter has replaced RSS, the next step is for RSS to replace Twitter — Scripting

Hitchens, it turns out, sometimes drinks non-alcoholic beverages — Slate

It was COLD out! Thank you, Olek, for knitting such a beautiful coat for the Wall Street bull — Vimeo

My headline in April 2010, less than eight months ago, said “Ivory Coast’s bond exchange gets it exactly right”. Clearly, I spoke too soon: it seems that they should have simply held off until after the elections.

Ivory Coast’s Eurobonds sank to a record-low 40 cents on the dollar after the world’s biggest cocoa producer missed a $29 million interest payment amid a fight for political control of the West African nation.

Neither of the claimants to the presidency is talking about this issue, although the winner of the election, Alassane Ouattara, says that there isn’t any money left, and his predecessor, Laurent Gbagbo, has been cut off from state accounts.

The chairman of the London Club, Thierry Desjardins, is putting on a brave face, saying that “there is a willingness from the Ivorians to pay” — but it’s unclear who if anybody he’s talking to, or how he can have any good reason to believe that.

If the chaos in Ivory Coast continues past February 1 without the $30 million coupon being paid, the country will have defaulted within a year of restructuring, which would surely be some kind of record. But let’s get real here about this kind of thing:

Ivory Coast’s debt has already been restructured twice because of past defaults, and any repetition would leave it frozen out of international debt markets.

Ivory Coast is already frozen out of international debt markets; there’s no way that it will be able to issue debt in the foreseeable future, whether it makes this particular coupon payment or not. Even if Ouattara takes power and there’s no civil war and the best-case scenario works out, he still won’t be able to issue an international bond for the duration of his term in office. Which, admittedly, hardly gives him an enormous incentive to get that $30 million coupon paid this month.

By weird coincidence, Whole Foods was sold out of bananas today, as the latest issue of the New Yorker arrived on newsstands with a great (but sadly paywalled) article about the way in which the world of bananas-for-export is threatened by something known as Tropical Race Four.

It turns out that the banana we all know and love — the Cavendish — is actually the second type of banana grown in enormous quantities and exported across Europe and North America. The first was the Gros Michel, which was wiped out by Tropical Race One; you might be saddened to hear that “to those who knew the Gros Michel the flavor of the Cavendish was lamentably bland.” Indeed, Chiquita was so sure that Americans would never switch to the Cavendish that they stuck with the Gros Michel for far too long, and lost dominance of the industry to Dole.

In both cases, the fact that the same species of banana is grown and eaten everywhere constitutes a serious tail risk, even if today’s desperate attempts to genetically modify a disease-resistant Cavendish bear fruit:

A new Cavendish banana still didn’t seem like a panacea. The cultivar may dominate the world’s banana export market, but, it turns out, eighty-seven per cent of bananas are eaten locally. In Africa and Asia, villagers grow such hetergeneous mixes in their back yards that no one disease can imperil them. Tropical Race Four, scientists now theorize, has existed in the soil for thousands of years. Banana companies needed only to enter Asia, as they did twenty years ago, and plant uniform fields of Cavendish in order to unleash the blight. A disease-resistant Cavendish would still mean a commercial monoculture, and who’s to say that one day Tropical Race Five won’t show up?

This is exactly what I was talking about a year ago, in my post about Dan Barber, world hunger, and locavorism, when I talked about how monocultures are naturally prone to disastrous outbreaks of disease, and how a much more heterogeneous system of eating a variety of locally-grown foods is much more robust and equally capable of feeding the planet.

Also today, my friend Katherine Maher’s Bookforum review of Nick Cullather’s The Hungry World has finally appeared online. Food has been a national-security issue for decades, and the Americans used it as a weapon in the Cold War. Sometimes, the results were simply comedic:

In the Philippines and Vietnam, for example, Cullather chronicles the introduction of IR-8, a visually distinctive, specially cultivated Green Revolution rice strain, in a sobering and revealing exposition of how scientific research can contort itself in pursuit of a favored policy. He provides a sharp account of the media firestorm over discoveries in 1969 that North Vietnam had initiated its own independent cultivation of IR-8; Congress expressed grave concern that seeds would fall into Cuban or Chinese hands, and the CIA was tasked with evaluating the threat of a grain gap opening up between the superpowers.

But at other times, they were scandalous:

In the aftermath of the 1965 Indo-Pakistani War, the word famine itself became a tool for setting policy priorities—a lexical weapon that the administrations of both Indira Gandhi and Lyndon B. Johnson wielded in a masterstroke of politics. The strategic withholding of US aid helped touch off a severe drought in some Indian states; citizens suffered mass unemployment, inflation, and displacement, while the cities saw strikes and riots. This panic produced the specter of wider political instability—and that threat, in turn, allowed the Gandhi government to consolidate power, ensuring Johnson a friendly, democratically aligned ally on the Subcontinent.

Maher points out that high-tech agriculture has had mixed results in much of the world: “many beneficiaries of the Green Revolution remain among those nations with the highest rates of chronic malnutrition”, and 70% of the children most likely to be malnourished are living in middle-income countries.

The problems with monoculture aren’t purely agricultural, either. Anil Dash has a post up today about the decline of Google search quality, and diagnosing the problem as being that “Google has become a monoculture”; Alan Patrick quotes a commenter at Hacker News as saying that if search were more heterogeneous, spamsites would find it more costly to scam every site.

I’m not completely convinced that seeing large numbers of SEO sites atop search results for consumer goods is entirely a function of the fact that Google is a monoculture. My guess is that in fact what we’re seeing is simply the result of enormous numbers of SEO sites, all using slightly different methods of trying to game the Google algorithm. Even if only a small percentage of those SEO sites succeed, and even if they only succeed briefly, the result is still a first page of Google results dominated by SEO spam — a lose-lose proposition for everybody, but one which wouldn’t be solved by having heterogeneous algorithms: they would all simply have different SEO sites atop their various search-result pages.

But maybe if Google wasn’t a monoculture, there wouldn’t be quite as many SEO sites all trying to hit the jackpot of, however briefly, landing atop the Google search results. In general, monoculture is a bad and brittle thing — and that goes for search as much as it goes for bananas.

Jeff Grabmeier reports on some interesting research from Ohio State’s Stephanie Moulton, which shows that borrowers with low incomes or bad credit are significantly less likely to default on their loans if they borrow from a local bank than if they borrow from a distant bank or mortgage company.

Moulton tells Grabmeier that “local banks seem to offer some protection to homebuyers, particularly those with low incomes who may be seen as risky borrowers”, and comes up with a few hypotheses as to why this might be:

Many mortgage brokers base their decisions on whether to offer a mortgage on one or more key numbers, such as a credit score. In other words, if your credit score is above a certain level, and you meet other criteria, the broker will offer the loan. The same may be true of large, non-local banks, Moulton said.

But local lenders may place more weight on other factors, such as how long you’ve been working for your current employer, and whether you make regular deposits in a savings account…

In addition, local bankers are more likely to have a continuing relationship with the borrower, through the checking and savings accounts held by the customer.

“If there’s a relationship, the borrower may feel more obligated to make their payments. And the banks may provide more education and information to the borrowers, equipping them to be better homeowners,” she said.

I think the relationship point here is absolutely key. With bank loans, the give-and-take is all very asymmetrical: the borrower gets a large sum of money up front, and then does nothing but send money back to the lender from then on in. The incentive to stop paying the money back is clear.

If the borrower has a personal relationship with the lender, however, things change — and not just because of formal education and information. Making mortgage or other loan payments is a painful chore, most of the time. But for some people it can be a happy, joyful thing: I’m buying my house! I’m getting out of debt! And it’s a lot easier to think that way if you have a human local banker who is helping you reach your goals.

When reading Grabmeier’s piece, I couldn’t help but be reminded of Maha Atal’s post about Andhra Pradesh. The problem in AP, she says, and in India generally, “is not profit or size; it’s geography”:

When Yunus first started making loans to the local poor, he was pushing back against an argument from banks that people in poverty weren’t credit-worthy, that they couldn’t understand the concept of credit and therefore couldn’t be expected to pay. There was something to that argument: credit is a learned thing, both a legal concept and a social one that emerged in the developed world over centuries, whose core component is the creation of a sense of obligation between two perfect strangers.

Dr. Yunus did not actually challenge this notion; rather he sought to get around it, by demonstrating that loans did not have to be made between perfect strangers. The essence of microlending as he devised it was not simply that the loans were small, or that the rates were friendly, or even that the group system created a culture of pressure to repay the lender. It was that the groups were self-formed, that the members already knew each other, and that the obligation to repay was constructed as an obligation to one’s peers. He did not teach them to be obligated to the creditor; he saw that they were obligated to one another…

In India, the community component of micro-lending has never been taken seriously. Both the MFIs and the SHGs rely on the national financial system, not on local capital, to get started. Neither is able to operate as a borrower-owned community bank. And so both structures take as an assumption that grouping borrowers together can lead them to feel obligated to a third party, even though that is precisely the opposite of what the Bangladesh success story showed. As the sector has expanded, the distance–physical and therefore social–between lender and borrower has expanded it with it, and it is that distance, not the size of the industry itself, that is the problem.

A loan from a friend, or someone we know, is always qualitatively different from a loan from a faceless corporation. If you’re a college-educated sophisticate moving fungible funds from one account to another, it’s easy to forget this, but come down to my local credit union on check day, when a lot of local residents receive their Social Security checks. All of them have the option of having the money paid automatically into their account, but there’s always a long line of people queuing up to deposit their check in person, with a human teller. And it stands to reason that, ceteris paribus, the people who do that are more likely to pay back one of our loans than someone hundreds of miles away who just gets a printed-out statement in the mail each month.

The spectrum from India’s poor to America’s rich is a continuous one, and U.S. subprime borrowers are somewhere in the middle when it comes to financial sophistication and trust in institutions. Similarly, successful subprime lenders tend to be pretty high-touch institutions, which take great pains to position themselves both geographically and in terms of marketing materials as close as possible to those they would lend to. The average payday lender is much more likely to know any given borrower’s name, when they walk in to the branch, than any banker — and that gives the payday lender an advantage when it comes to the borrower’s willingness to repay the loan.

The problem, of course, is that opening up local branches is a strategy which is expensive, hard to scale, and difficult to implement overnight. But it certainly helps explain why lending strategies enforced in a top-down manner from distant executives with spreadsheets can end up underperforming.

Brad DeLong has an excellent response to my post this morning about Larry Summers’s replacement at the NEC. Brad is open about being a Rubinite himself, and in truth he does a much better job of defending Rubin than Rubin’s biographer Jacob Weisberg did back in May. (On the other hand, since he’s concentrating on today’s post, he ignores the long list of substantive reasons why Rubin is particularly culpable in the financial crisis.)

Brad judges Rubin qua politician, nothing that he made the tax system more progressive, spent many years “raising lots and lots of $$$$$$$ for Democratic and progressive causes,” and was “squarely in the middle of the Democratic senatorial caucus.”

Brad doesn’t say that Rubin moved the Democratic party broadly to the right, and specifically towards the monied classes (a/k/a the bond vigilantes) who care about fiscal prudence and who make millions of dollars a year on Wall Street. Whether or not that was the correct thing to do from a policy point of view, it effectively neutralized any potential opposition to the people Brad really blames, especially Phil Gramm. It’s true that Gramm went further than Rubin or even Summers was willing to go. But it’s also true that insofar as there was concerted opposition to Gramm, the debates seemed highly technical and recondite, since at first glance everybody wanted pretty much exactly the same thing.

More generally, Brad’s take on Rubin sounds a bit like Ezra Klein on Gene Sperling, when he says that Sperling’s advantages include “extended experience in politics, including during a previous period when a Democratic president had to negotiate with a Republican Congress.”

Brad goes on to describe the search for Summers’s successor in explicitly party-political terms:

I would say that you want to draw your White House staff from successful managers–people who have had lots of experience bossing other people and who have done very well at it–and that there are only three groups of successful managers who are Democrats: Hollywood studio executives and their ilk, people who have made careers in government and academia, and executives who have worked for traditionally-Jewish investment banks. If you want managers in a Democratic administration, that’s where they have to come from. And I don’t think you want to throw out a third of your potential talent pool at the very start.

It’s worse than that, actually: my point was that the people who have made careers in government and academia—people like Richard Levin, or Larry Summers, or Peter Orszag—are also very much part of the Wall Street money culture, and invariably end up earning quite a lot from bankers, one way or another. So if you’re confining yourself to Brad’s three groups, and if you want to exclude the taint of Wall Street, then you’re left with Hollywood studio executives. Yikes.

On the other hand, if it’s really true that the only successful managers who are Democrats fall into one of Brad’s three groups, then the Democrats have much bigger problems than working out who the next head of the NEC should be. I don’t think it is true: I think that America is full of successful Democrats in flyover states. But also, I don’t think that it’s necessary or even particularly desirable that the next head of the NEC should be a wizened political strategist or, for that matter, a Democrat. Better that it’s someone who has seen at first hand how the economy works in America, by creating real value rather than living parasitically on those who do. And one thing that most politicians, academics, and bankers have in common is that they are fundamentally parasitical creatures.