Opinion

Felix Salmon

Kickstarter vaporware of the day, Lifx edition

Felix Salmon
Sep 18, 2012 06:11 UTC

Back in March, I worried that Kickstarter was morphing into SkyMall for Vaporware. While Kickstarter is great for creative projects which can be realized by small teams, so far there’s zero evidence that it’s a good way of providing startup capital for would-be businesses. I gave an admittedly extreme example, of the kind of ultra-high-tech industry which needs much more than a Kickstarter campaign in order to succeed.

Getting a product to market is hard. Even companies with business plans and executives and millions of dollars in funding — and a fully-functioning product — can fall down on that front. Look for instance at the Switch lightbulb: in July 2011, Farhad Manjoo of Slate said it would go on sale in October 2011 for $20. In August 2011, Dan Koeppel of Wired magazine ran an article saying that the bulb would go on sale in October for $30. But here we are in March 2012, there’s still no sign of the thing, and the company’s Facebook page is filling up with comments saying things like “I’m going to start my own company making a product that no one can buy. Hmm….what should I not sell? So hard to decide.”

Six months later, the Switch lightbulb still hasn’t arrived. And Koeppel’s article explains some of the good reasons why it’s really, really hard to make these things. For instance: in 2008, the US government offered $10 million to the first company which could produce a 60-watt-equivalent bulb which would draw less than 10 watts of electricity, be dimmable, and generally be at least as good, in all respects bar cost, as incandescents. Philips won the prize, even though, as Koeppel writes, the development costs of doing so were much greater than $10 million:

Coming up with a truly worthy LED bulb is enormously complex, requiring expertise in physics, chemistry, optics, design, and manufacturing… nobody has built such a multidisciplinary lighting product before.

Koeppel’s story was of a small startup company, Switch, which was competing against the three giants in the space — Philips, Osram Sylvania, and GE. But to give you an idea of what you need to compete in this space, Switch has received “an eight-figure investment” from one company alone, VantagePoint Capital Partners. VantagePoint is an investor in a few of these companies: another is BridgeLux, which, according to CrunchBase, has received a total of $210 million in venture funding.

All of which brings me to Lifx, a small group of guys who have just launched a Kickstarter for their revolutionary dimmable LED bulb. It even has wifi! The Kickstarter campaign is going really well so far: it has raised more than $600,000 just since Saturday, far exceeding its $100,000 goal. They claim that the mechanics of the bulb (as opposed to the electronics) are really nothing special:

We are using as many standard LED lighting components as possible. These components have undergone rigid testing and stood the test of time.

At the same time, however, they admit they are still “looking into all the options on the best type/brand of LED lamp to use in the production model”. And you only get a brief glimpse of the prototype in their video; it frankly looks pretty shabby. Their big still photo, on the other hand, is gorgeous: so gorgeous that it’s not a photo at all, just an illustration. Here, compare the Lifx illustration, on the left, with the glossy Condé Nast photo of a real-life Switch bulb, on the right:

bulbs.jpg

The bulb on the light is quite lovely, in its own way, but also shows the kind of design compromises that real-life LED bulbs need to make: a big, heavy heat sink; clearly spaced LEDs, and so on. The illustration on the left, by contrast, looks just like a normal incandescent, only with the bottom half of the bulb replaced by a beautifully-contoured heat sink. You can’t see the LEDs at all.

The heat sink is crucial, especially if you want to put lots of wifi electronics into the bulb. The Switch bulb uses a patented thermally conductive gel to prevent the bulb from overheating; the Lifx bulb uses — well, we have no idea what it might use, since they’re not going into that level of detail. It’s pretty clear from the video that the prototype barely has a heat sink at all.

Lifx founder Phil Bosua, in the video, explains that what he’s doing isn’t cheap. “To produce Lifx at an efficient price point,” he says, “we need to buy thousands of RGB LED lamps, make dies for the outer casing, create custom-built computer boards, and finalize our onboard software and app development”. Does he really think he can do all that for $100,000, or even $1 million?

Put it this way: either Lifx is a genuinely revolutionary new LED bulb, or it isn’t. If it is, then it’s going to run into huge fights just on the intellectual-property front alone: I’m pretty sure they don’t have any important patents, at least on the hardware. And if it isn’t, then lots of people would be out there making LED bulbs, and Lifx would just be coming along to try to add some wifi-enabled control-this-from-your-phone whizz-bangery. (Which, Belkin, maker of the WeMo, might have some patent issues of its own.)

For while there are indeed a fair few LED bulbs on the market at this point, many of them substantially cheaper than the Lifx bulb, there are good reasons why none of them have really taken off. LED bulbs are undoubtedly the lighting device of the future; they just haven’t quite got there yet, and I can’t believe that Lifx has managed to solve the enormous problems that many huge companies have spent hundreds of millions of dollars trying — and generally failing — to fix.

All of which is to say that if the Lifx bulb ever ships, it’s going to be a gimmicky disappointment at best. The “white” light won’t be warm and rich, the illumination will come out in clumps rather than being even, the bulb will hum when it’s dimmed, the electronics will fail in the heat, etc.

And there’s a very real risk — I’d say it’s a probability — that the Lifx bulb will simply never ship at all. If Switch can’t do it, with their working prototypes and their patents and their tens of millions of dollars in funding, not to mention no desire that their bulbs be controlled from iPhones, then there’s no good reason to believe that Lifx can, as they’re promising, start delivering these things in March. Their last project, after all, was basically a collapsible cardboard box; it raised $184,500 — well above its $12,500 goal — and was meant to be delivered in July. The backers are still waiting; the most recent shipping date is mid-October.

The Lifx is priced at $49 per bulb, which means that you’re basically buying a basic WeMo switch and getting the LED bulb — and all the technology merging the two into one bulb-sized piece of hardware — for free. It just doesn’t seem likely.

Despite the fact that there’s really no reason to believe that the Lifx team can produce what it’s promising, in the first few days Lifx signed up five backers at the $5,000 level, each of whom was ordering “25 packs of four LIFX smartbulbs for resale”. That’s not actually allowed by Kickstarter any more, and they put an end to that after I asked about it. But still, there are lots of people putting in very large orders — already 108 backers have pledged $490 or more. Those people are going to be very disappointed if they end up receiving nothing.

These people aren’t just being seduced by a clever sales pitch: they’re being shepherded there by lots of very high-profile blogs, such as Wired and TechCrunch and Mashable and GigaOm. And, of course, Reddit, where at least there’s quite a lot of skepticism, not least when it comes to the question of how a phone can configure a lightbulb before the lightbulb knows what wifi network to join.

So my feeling is that both Kickstarter and the tech blogosphere should start being a lot more skeptical about the claims made in Kickstarter videos, where anybody can say pretty much anything. And anybody thinking about supporting Lifx should take a deep breath and just wait until the product exists, instead. It’s funded, now, so pre-ordering on Kickstarter doesn’t cause the product to get made, it just maybe gets you the product a couple of weeks earlier. And in return for that negligible upside, you’re taking on the risk of a huge downside — that you lose all that money entirely, with nothing to show for it at all.

Update: Lots of smart comments below, both defending Lifx and raising new problems — such as the need to get certification in multiple jurisdictions, since they’ll be shipping the bulb under their own trademark.

Lifx itself has three reactions to this post. First, they’ve made public the 12-step process for setting the Lifx bulbs up as part of your wireless network — it involves switching your phone to the Lifx network, configuring the Lifx bulb to your wifi network, and then switching your phone back to your own network.

Second is a comment from founder Phil Bosua:

Addressing the recent Reuters article: We originally had meetings with our Melbourne/Shenzen LED bulb supplier which proved the project to be viable but as the demand for the LIFX smartbulb continues to grow so will the scale of partners we work with. We have also recently had meetings with companies experienced in large scale LED light bulb manufacturing and will be utilising their experience and knowledge to attach the LIFX control chip into tried and tested LED light bulb technology.

We know that the demand for a smartbulb is clear. It takes a big vision, a lot of work and smart operations to revolutionize a main stay product and with your support this is what we are going to do.

And third is a comment on the Lifx tech blog:

An approach I’d really like to follow is “Please don’t feed the internet trolls“.  We must focus our complete attention on delivering your pledges and answering your questions and comments.  LiFx has attracted a lot of attention, not all of it good.  Some people are just waiting for a large KickStarter project to fail, without any regard for the interests of the supporters of that project.

We’ve all seen the Reuter’s opinion piece and I don’t want to waste time responding to it.  Primarily, because I don’t need to respond … thanks to “KenG_CA” whose comment at the bottom of that opinion piece has already made a rebuttal.  Thanks Ken … whoever you are !  I have nothing more to say about that piece.

So, if you think I’m an internet troll who just wants Lifx to fail and who doesn’t care about the supporters of the project, then you’re pretty much in line with the thinking within Lifx. But if you were looking for a more detailed response from Lifx, sorry — it looks like you’re not going to get one.

COMMENT

I’ve received my lifx bulb in the last week.

As a backer, I was worried about the light bulb being vaporware.

But it was a risk I was willing to take for two reasons. One, I would have liked to have the lightbulb, and two, I wanted to back someone who was willing to make it.

Do I expect the majority of what was promised? Yes. Do I expect it all? no. I’m not as stupid to believe every kickstarter project is going to be _exactly_ how its portrayed. This is close enough.

Posted by TealThanatos | Report as abusive

Counterparties: Can Mariano be a closer?

Ben Walsh
Sep 17, 2012 21:59 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

Eleven days ago, Mario Draghi announced that the European Central Bank was ready to do what he’d been hinting at for months: buy unlimited amounts of sovereign debt to hold down borrowing costs in countries like Spain. Assuming, that is, that national leaders request aid and agree to the central bank’s conditions.

As a result, since Draghi’s announcement, the burden has been on Spanish Prime Minister Mariano Rajoy to formally apply for the aid. But his immediate reaction, like that of Italian PM Mario Monti, was noncommittal. As of last week, Rajoy was still recalcitrant, saying he didn’t “know if Spain needs to ask for” help beyond the €100 billion bank bailout it received in July, which was less than a sterling success.

Economic reality appears to be limiting the amount of time Rajoy has for consideration. Spanish 10-year debt is now yielding right around 6%, which means it has now essentially risen right back to where it was just before the ECB made its announcement.

Spanish banks, meanwhile, are losing deposits at an alarming rate, with a record €26 billion withdrawn in July alone. That leaves the country’s already shaky financial institutions with worsening loan-to-deposit ratios and a clear deficit of public trust. Catalonia, Spain’s wealthiest region, isn’t happy with the amount of taxes it is shipping to Madrid and wants its “own project”, separate from the current path of the rest county.

That said, Spain does appear to be tiptoeing towards asking for aid. Reuters reports that Spain “will set clear deadlines for structural reforms by the end of the month,” which would precede an official request for assistance. Still, the final decision has to be taken by Rajoy.

As Paul Murphy at FT Alphaville put it, markets are telling Rajoy what his only option is: call Draghi. — Ben Walsh

On to today’s links:

The Fed
Why the Fed’s latest move is “shamanistic economics” - New Economic Perspectives
QE3 will help a little but, but we “need more than a little bit of help” - Jared Bernstein
Banks can’t process mortgage applications fast enough for consumers to see QE3 benefits - FT

Crisis Retro
GM would really prefer if the US sold its stake now (at a loss) - WSJ

Tax Arcana
Questioning the defining economic policy of the last decade: tax cuts - NYT

Where Are They Now?
He hired Bloomberg, predicted the crisis, and committed insider trading just to prove a point - NYT

Orwellian
The puppetry of quotation approval – David Carr
The flack-to-hack ratio has exploded - Economist

#OWS
Occupy Wall Street launches “carnival of resistance” in downtown NYC - Bloomberg
A map of the #OWS anniversary protests - BI

Regulations
FDIC providing test prep to community banks for exams - American Banker
Why we can’t simplify bank regulation - Felix

Wonks
Study says “uncertainty” raised unemployment by at least 1 percentage point - SF Fed

Remuneration
Pandit’s compensation plan magically excludes the massively failed Smith Barney deal – Bloomberg

Politicking
“No single development has altered the workings of American democracy… so much as political consulting” - New Yorker

Good Pork
Reminder: frivolous sounding studies yield scientific breakthroughs - WaPo

Oxpeckers
How BuzzFeed uses data to track how much you love cats - FastCo

Hackers
Everything is broken and nobody’s upset - Scott Hanselman

Perelman vs Gagosian

Felix Salmon
Sep 17, 2012 15:59 UTC

Ron Perelman might be the single most notoriously litigious billionaire in the world, and so it’s probably a bit much to expect his latest lawsuit against Larry Gagosian to have much real substance to it. But what’s fascinating, reading the vast amount of news and commentary on the suit, is just how many people are taking it at face value. Even when they can’t agree on what that face value is.

What’s undeniable is that Perelman agreed to buy an as-yet-unfabricated Jeff Koons sculpture for $4 million. But was that a fair price? Emma Brockes, in the Guardian, says that $4 million was “an amount it didn’t turn out to be worth”, while Page Six says that Gagosian had “fraudulently undervalued” the sculpture at that price.

It’s easy to see why they’re confused: the Perelman complaint is inherently confusing. For one thing, there’s the torture it goes through trying to persuade itself that Larry Gagosian was acting as a fiduciary on behalf of Perelman:

The potent combination of Gagosian’s unparalleled knowledge and dominant position in the art world, along with the parties’ longstanding friendship, Gagosian’s position of trust in advising Plaintiffs regarding art acquisitions and value, handling consignments of works owned by Plaintiffs, and bidding for works of art on Plaintiffs’ behalf, made Gagosian a fiduciary of Plaintiffs.

This is all very silly: you don’t become a fiduciary because you’re friends, or because you’re knowledgeable, or any of these other reasons. In fact, the whole point of buying work from primary dealers like Gagosian is that they act as middlemen, on behalf of both the artists and the buyers. Gagosian was representing Koons; he had as much of a responsibility to Koons, if not more, than he had to Perelman.

Then there’s the whole question of the value of the sculpture. Perelman wants to have his cake and eat it, here: he’s basically saying that the sculpture was worth millions of dollars more than the $4 million he paid for it, but that at the same time he was somehow forced to sell it for just $4.25 million. By far the funniest part of Perelman’s complaint is where he says that “upon information and belief, the value of works by Koons increase as delivery dates draw close and can sometimes double in value shortly after delivery”.

This, in a nutshell, is Perelman’s case: when he bought the piece in 2010, he bought it at a fair price of $4 million, but when he bartered it back to Gagosian in 2011, it was worth much more than that, and Gagosian should have given him much more than $4.25 million in credit for it.

Of course, no one was forcing Perelman to barter the piece. As Gagosian’s suit lays out, Gagosian would much have preferred to be paid cash for the pieces that Perelman bought, rather than being paid in bits and pieces of other art, including the Koons sculpture. Perelman is rich enough to be able to find a couple of million dollars if he needs it; it was entirely his choice to part with the Koons at this particular valuation.

The reality of what happened here is that Perelman agreed to buy the Koons sculpture, on an installment plan. The sculpture was delayed — as many, if not most, Koons sculptures are. At that point, Perelman had a choice: he could wait for the sculpture to arrive, at which point he would own it, or he could ask for his money back. He chose the latter — and, in fact, Gagosian paid him an extra $250,000 for good measure.

What Perelman wanted to do — and what Gagosian wouldn’t let him do — was flip the sculpture, for much more than he paid for it, before it had even been fabricated. Finding himself unable to do that, he ended up taking Gagosian to court.

Now Gagosian, as Koons’s dealer, can get up to those kind of tricks: he reveals in his own suit (check out paragraph 36, on page 8) that he did indeed sell the as-yet-unfabricated Koons sculpture to someone else as soon as he got it back from Perelman. I wouldn’t be at all surprised if the sale price was significantly more than $4.25 million.

Perelman, here, basically wants to be able to get those extra millions. But he doesn’t know who Gagosian sold the sculpture to, and he doesn’t know how to sell unfabricated sculptures, and so he feels forced to go through Gagosian when he wants to sell his Koons. If he really knew the art market, he could have entered into a contract to sell the sculpture, as soon as it arrived, to any third party he wanted. But instead, he let it go, at more or less the price he paid for it. Because, although he’s a very rich man, he’s no art dealer.

Hidden between the lines of these suits is the invidious idea that contemporary art can and should rise in value extremely sharply, and that the people buying that art can and should make a large cash profit when they sell it. The truth, of course, is that it’s the dealers who make the large cash profits, because it’s the dealers who have all of the priceless information about which buyers are in the market for which works at any given time.

Collectors like Perelman want to free-ride on the work the dealers do, and they get upset when they aren’t able to. They’d be much happier if they just bought art they loved, at a price they were comfortable with, and didn’t try to make money at the same time. But then again, if they were that kind of person, they probably wouldn’t be billionaires.

Larry Gagosian, more than any other individual in the history of the world, has perfected the art of selling to billionaires. A large part of that sales pitch, I reckon, involves explicit or implicit talk about the rate at which the value of the art he’s selling is going to rise in the future. In that sense, the Perelman lawsuit is just Gagosian’s own rhetoric coming back to bite him: Perelman is asking for just recompense when he sells a work which has gone up in value since he bought it.

But this particular suit, I have to say, is utterly ridiculous, and will almost certainly get thrown out of court.

COMMENT

Here – you all can decide for yourselves how ‘open-’n-shut’ this case is –

“In Wolf, this is the California Court of Appeals definition:

A fiduciary relationship is “‘any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party. Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter’s knowledge or consent. . . .’” (Herbert v. Lankershim (1937) 9 Cal.2d 409, 483; In re Marriage of Varner (1997) 55 Cal.App.4th 128, 141; see also Rickel v. Schwinn Bicycle Co. (1983) 144 Cal.App.3d 648, 654 [“‘A “fiduciary relation” in law is ordinarily synonymous with a “confidential relation.” It is . . . founded upon the trust or confidence reposed by one person in the integrity and fidelity of another, and likewise precludes the idea of profit or advantage resulting from the dealings of the parties and the person in whom the confidence is reposed.’”].)”

Posted by MrRFox | Report as abusive

Counterparties: How to save, America

Sep 14, 2012 21:58 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

Saving money — everyone hates it. Americans spent the period between the early 1980s and the financial crisis failing miserably at saving. In 1982 Americans saved 10.9% of their income; by 2005 the savings rate had fallen to just 1.6%.

Since the financial crisis, personal savings have rebounded, hovering between 3% and 5% ever since. But this relatively new boost in Americans’ savings, it turns out, is not equal opportunity. Nearly 30% of households don’t have access to a savings account, according to a FDIC report released this week. Another recent report suggests 28% of Americans have not saved anything at all.

The IMF has a new paper which looks at the relationship between income inequality and savings in America. (The gap between America’s rich and poor hit a 40-year high in 2011). “Lower income growth,” the authors write, “was linked to the drop in saving rates and growing indebtedness of American families”. The authors argue that without higher home prices or growing incomes, Americans are still not saving enough to fix their post-crisis financial situations.

Keyu Jin, who looks at the differences between Chinese and US savings patterns, finds big generational gaps in US savings: “the fall in savings in the US is largely due to higher borrowing by the young (rather than a fall in middle-aged Americans’ savings rate)”. Middle-aged Americans, Jin writes, actually increased their savings, relative to GDP, from 1992 to 2009.

If you’re worried that you’re not saving enough to keep up, the bad news is that you’re probably right. The rule of thumb says that you need to save at least eight times your final annual income to pay for retirement.

The good news, however, is that saving more is pretty much all you have to do. James Saft points to a new study by Putnam, which has an interesting conclusion: simply saving more and funneling it into your retirement account earned better returns than magically trying to pick the best funds or perfectly allocating your assets. — Ryan McCarthy

On to today’s links:

Innumeracy
Romney: “Middle income is $200,000 to $250,000 and less” - Fortune

Wonks
Meet the blogger/academic who may have just saved the American economy - Joe Weisenthal

Legitimately Good News
Banks are now showing a “growing eagerness to lend” to companies - WSJ
“Housing prices in Southern California are finding a bottom” - DeBord Report

The Fed
We’re either at an economic turning point, or reaching the end of central banks’ powers - Economist

Pre-Crisis
Greenspan on Fannie, Freddie in 2005: “The risk is not a credit risk” - WSJ

Financial Arcana
Now would be a really great time for banks to finally recognize their massive hidden losses - Jonathan Weil
The law that explains the folly of bank regulation - John Kay

Apple
“Last year it took 22 hours for iPhone pre-orders to stock out. This year it took less than an hour” - Fortune
Krugman: you’re probably an iPhone Keynesian and don’t know it - NYT

Oxpeckers
On the “intellectual pestilence” of Jonah Lehrer-ian neurobollocks books - New Statesman

EU Mess
Trichet: the eurozone is the epicenter of the “worst crisis since WWII” - CNBC

She Would Know
Sallie Krawcheck: bank complexity “makes you weep blood out of your eyes” - Dealbook

COMMENT

@SteveH – according to a sort of reliable source, at yr-end ’11, 23.4% of US families had no savings at all.

http://www.usatoday.com/money/perfi/cred it/story/2012-05-11/american-families-de aling-with-debt/54946154/1

Posted by MrRFox | Report as abusive

Libor: First change it, then render it obsolete

Felix Salmon
Sep 14, 2012 19:30 UTC

The CFA Institute recently interviewed 1,259 of its members from all around the world and from every aspect of the financial-services industry to ask them about Libor. And the results are clear:

libor2.jpg

Clearly no one believes that Libor makes any sense the way it’s currently set up. Libor, CFAs are agreed, should reflect actual interbank borrowing rates, not some hypothetical estimated rate at which banks think they could probably borrow if they wanted to.

What’s more, Libor submission should be a regulated activity (70% agree, 18% disagree); and the regulator should have criminal sanctions available to it (82% agree, 9% disagree).

As for the key question of what should be used as an alternative benchmark, responses varied, with no one rate in particular standing out as popular. But only 7% of respondents said that there was no alternative viable rate. Libor should be regulated, phased out, and replaced with something else.

All of which will take a little bit of time, but not a lot: less than 10% of respondents think it could take more than 3 years.

timp.tiff

In the next year or two, we are going to see a succession of gruesome headlines around Libor manipulation: Barclays was only the first. As a result, even the big banks who contribute to Libor are likely to be quite keen to put this tarnished measure behind them. First change it, then render it obsolete. As quickly as possible. Even the professionals agree.

from Ben Walsh:

Goldman’s analysts, now more like everyone else

Ben Walsh
Sep 14, 2012 14:17 UTC

The WSJ's Liz Rappaport and Julie Steinberg have the news that Goldman Sachs is dramatically changing its analyst program. The move is the result of a longstanding trend: fewer and fewer analysts in the investment banking and asset management divisions are staying at the firm past their initial two-year committment, and analysts are making exit plans earlier and earlier.

Since the 1980's, Goldman has hired undergraduates on two-year contracts, with analysts paid a base salary plus bonuses for those two years. Analysts get fairly continuous feedback from colleagues and participate in Goldman's fabled 360-degree review program throughout that time, so they have a good understanding of what their career trajectory (at least in the short term) looks like at Goldman. It's only with six months to go into their two-year commitment that analysts are allowed to begin looking for jobs outside GS or apply to grad school. At the same time, they can also look for other roles internally. Alternatively, if they want to stay in their role, they can make it clear that they want to stay and, if their manager approves, stay on as a third-year analyst.

The expectation from Goldman is that analysts will spend one and a half years with their heads down, working extremely hard, and then, with six months to go, start thinking about what to do next, while continuing to work extremely hard. Every so often, during the first 18 months, Goldman can start dropping strong hints that it would be better for all concerned if the analyst started looking for opportunities elsewhere. But generally, that takes major misbehavior or serious lack of fit.

The problem is that in the investment banking and asset management divisions, recruiters from private equity firms and hedge funds have been contacting analysts earlier and earlier into their time at Goldman. This is less of an issue in the securities (sales and trading) and research divisions. The skills learned by analysts in the banking and investing divisions are extremely valuable, and are directly applicable to entry-level roles at PE firms and hedge funds. That's less the case for analysts in the securities (where full, disclosure, I spent my first two of five years at Goldman) and research divisions .

So the analyst program is staying largely unchanged in securities and research. Over in investment banking and asset management, however, analysts will now look much more like the rest of their colleagues -- employment is year to year. Or month to month and week to week, depending on how you want to look at it. Goldman was clearly fed up with analysts spending less than a year at the firm, using that experience as a launching pad to a job somewhere else, all while collecting the luxury of another year's comp.

Now, Goldman analysts can leave whenever they want. Or they can stay forever, if Goldman will let them. And that's the same choice everyone at Goldman has.

Why we can’t simplify bank regulation

Felix Salmon
Sep 14, 2012 17:04 UTC

Is simplicity the new new thing? The front page of the new issue of Global Risk Regulator — the trade mag for central bankers around the world — features an excellent article by David Keefe about Sheila Bair, Andrew Haldane, and calls for a “return to simplicity”. Bair tells Keefe that “we’re drowning in complexity”:

“The public is tired of rules they don’t understand,” she said, adding: “We should be simplifying the rules, we should be simplifying the institutions for which the rules are made, but it’s going in the opposite direction.” …

Bair said she was in “wholehearted agreement” with Haldane’s attack on the complexity of regulation.

“Regulation”, in this context, means one very specific thing: Basel III, the new code governing the world’s banks. No one is advocating that it be abolished: it’s clearly much more robust than its predecessor, Basel II.

But if Basel II was horribly complicated, Basel III is much more complex still — and, as I and others have been saying for the past couple of years, that’s a real problem. Ken Rogoff puts it well:

As finance has become more complicated, regulators have tried to keep up by adopting ever more complicated rules. It is an arms race that underfunded government agencies have no chance to win.

More recently, bankers themselves have started saying the same thing: yesterday, for instance, Sallie Krawcheck said that the complexity of financial institutions “makes you weep blood out of your eyes”.

So perhaps there’s a consensus emerging that regulation needs to be simplified, trusting heuristics more while spending less time and effort complying with thousands of pages of highly-detailed rules. What matters is not whether financial institutions dot every i and cross every t, so much as whether they are behaving in a safe and sensible manner. After all, one of the main reasons that we haven’t seen any high-profile criminal convictions of bankers for their roles in the financial crisis is just that their compliance officers were generally very good at staying within the letter of the law. Which didn’t really help the system as a whole one bit.

But there are lots of very good reasons why even if we are reaching a consensus on this, that doesn’t mean there’s much if any chance of some new simple system ever actually coming into place.

For one thing, the window of opportunity has closed. In the immediate wake of the financial crisis, regulators found agreement that they should get tough: that had never happened before, and it’s likely that it will never happen again. Even in the Basel III negotiation process, national regulators tended to push hardest for regulations which would be felt the most by banks in other countries, rather than their own. But at least everybody was in the vague vicinity of the same page. Without another major crisis, no one feels any real urgency to implement yet another round of major regulatory change, especially before Basel III has even been implemented. And without that sense of urgency, nothing is going to happen.

And more generally, there’s a ratchet system at play here. It’s easy to make a simple system complex; it’s pretty much impossible to make a complex system simple. All of us live in a world of contracts and lawyers — and the financial system much more than most. Financial regulation will become simpler the day that contracts become shorter and easier to understand, which is to say, never.

How has the financial-services sector managed to make an ever-greater proportion of total profits over time? By extracting rents from complexity. As a result, any attempt to radically simplify anything in the sector is going to run straight into unified and vehement opposition from pretty much every bank and financial-services company in the world. (Note that Sallie Krawcheck, like Sandy Weill, only started criticizing bank complexity after she left the industry.)

So while banks opposed Basel III, at least they got increased complexity out of it, which means that the barriers to entry in the industry were raised. Which is good for them, and bad for the rest of us. Why did Simple, for instance, take so long to launch? Because it’s very, very difficult to create anything simple in today’s banking system. Complexity is here to stay, whether the likes of Bair and Haldane and Krawcheck like it or not. And with complexity comes hidden risks. Which means we’ll never be as safe as any of these people would like.

COMMENT

Felix,

And the last thirty years of so called ‘deregulation’ has driven the degree of complexity; see Dodd Frank, and THIS:

http://www.macrobusiness.com.au/2012/09/ death-by-financial-rules/

Posted by crocodilechuck | Report as abusive

Counterparties: The Fed’s bottomless punch bowl

Ben Walsh
Sep 13, 2012 21:49 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

The Federal Reserve today announced a third round of monetary stimulus, aka QE3, aimed rather directly at the housing market: the Fed will buy $40 billion of mortgage-backed securities a month indefinitely.

The Fed wants to lower yields on mortgage-backed securities and thereby lower mortgage rates for consumers. This is pretty darn close to “Uncle Ben’s Crazy Housing Sale” that Ezra Klein called for back in July. As the NYT’s Binyamin Appelbaum notes, QE3 has an open-ended timeline and variable targets: the Fed will buy mortgage-backed securities “until the outlook for the labor market improves”. For a close look at exactly what changed since the last Fed statement, the WSJ’s Phil Izzo has the tracked changes, which are significant.

The Fed says that its “highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens”. This, as Felix notes, is a big departure:

The job of monetary policy, in the famous words of Fed chairman William McChesney Martin, is “to take away the punch bowl just as the party gets going”. The Fed, here, is essentially disowning Martin, and saying that they’ll keep refilling that punch bowl with high-grade hooch even after the party is getting going.

Will it work in stimulating growth? Markets approved. Longer term, the picture is murkier. Matt Yglesias thinks the message that the Fed will keep rates low through a recovery is more important than the dollar figure. Tim Duy said before the announcement that the message would be more important than QE3 itself. In term’s of the policy itself, Mohamed El-Erian thinks the Fed is stuck in “policy purgatory: incapable of delivering the good economic outcomes it desires, yet unable to exit from an experimental policy stance that risks a widening array of collateral damage and unintended consequences“. — Ben Walsh

On to today’s links:

Charts
Why we need to worry that the US economy is very close to “stall speed” - FT Alphaville

Apple
The iPhone 5 is the greatest phone in the world, as well as cruelly boring and utterly amazing - Wired

Regulations
AIG is taking steps to avoid the Volcker Rule - Dealbook

Wonks
The mystery of why fewer women are looking for jobs - Matt Yglesias 
What official poverty rates miss: Widespread consumption inequality - Conversable Economist

Questionable
European banks just won’t stop palling around with Iran - WSJ

Bright Spots
The good news from a bad Census report: Obamacare is working – Mother Jones

Bad News
28% of US households conduct “financial transactions outside the mainstream banking system” - FDIC

Housing
How the government helps homebuyers in America’s richest communities - Reuters

Alpha
Full transcript of Ray Dalio’s interview - CFR

New Normal 
Non-shocking correlation of the day: fewer good jobs means more income inequality - The New Republic

HUH
“We do believe we are currently in a recession,” says guy nobody believes - Business Insider

 

COMMENT

This is one of those things where it shows that wall street has not only bought Both parties, but all of media as well.
The democrats used to describe “trickle down” economics as increasing the oats you gave to horses as the plan to feed the sparrows…
Really, REALLY – making sure the rich take no losses, and get more captical gains (at lower tax rates) while the price of stuff can’t come down – while wages drop like a stone…THAT IS THE PLAN!?!?

And some liberals think the Fed, a consortium of banks, are the people to run the economy!!!! You can’t make this stuff up!
Its as if the gazelles get together and say the lions aren’t eating enough -they need more!!! – - so the chief gazelle says let’s just run at the lions, lay down if front of them, and oh yeah, lets slit our own throats cause we don’t want the lions to crack a tooth…and the rest of the gazelles applaud.

http://www.census.gov/hhes/www/income/da ta/historical/families/
http://research.stlouisfed.org/fred2/gra ph/?g=9ut
http://www.ritholtz.com/blog/2012/09/the -middle-class/
etcetera, etcetera, etcetera…

Posted by fresnodan | Report as abusive

Job creation: Where are the startups?

Felix Salmon
Sep 13, 2012 20:27 UTC

Tim Kane, at the Hudson Institute, has a new paper out with a simple title: “The Collapse of Startups in Job Creation”. His paper is basically a slightly politicized version of the charts put out by the Bureau of Labor Statistics last month, under the headline “Entrepreneurship and the U.S. Economy”. The first two charts are particularly striking. The first one looks at the number of startups in America — companies less than one year old.

bdm_chart1.png

This shows a reasonably steady rise in entrepreneurship from 1994 to 2006, then a collapse as the housing bubble bursts, and — most worryingly of all — no recovery at all after the recession ends. Instead, we have significantly fewer startups right now than we did even at the depths of the recession.

If you look at the number of jobs at these startups, rather than the number of startups, the picture is equally bad, although the decline is older. This series peaked back in 2000, and has been declining ever since:

bdm_chart2.png

This doesn’t make a lot of intuitive sense. As Kane writes,

Economic theory suggests that the modern economy offers a better environment for even more entrepreneurship. First, there is a wider technology frontier to explore. Second, a wealthier society enables more individuals to explore rather than merely work to survive. Third, the shift to services requires less startup capital than manufacturing or agriculture. In other words, the downward trend in the rate of entrepreneurship should, in theory, have rebounded by now.

Kane thinks that it’s something to do with taxes and regulations; I don’t buy it. But he also has a globalization argument:

An American entrepreneur has zero tax or regulatory burden when hiring a consultant/contractor who resides abroad. But that same employer is subject to paperwork, taxation, and possible IRS harassment if employing U.S.-based contractors.

Are jobs at US startups effectively being offshored? I don’t know. But I do know that small business is where the jobs are, in this economy. Here’s the chart:

fredgraph1.png

The green line, at the top, is the number of jobs at small businesses, with less than 50 employees. The red line, underneath it, is the number of jobs at medium-sized businesses, with somewhere between 50 and 500 employees. And the steadily-declining blue line, at the bottom, is the number of jobs at large businesses with more than 500 employees. Clearly, if we want to boost job creation, the best place to look is not the blue line but the green line. And equally clearly there has been an increase in the number of jobs at small firms overall, since the recession ended.

So if small firms in general are hiring again, what’s the problem with startups? Kane has run the numbers back to 1989, to come up with this chart:

startups.tiff

There’s really nothing predictable about the dismal showing in the last three years of this chart — and especially not in the last two years, when we’ve had a recovery accompanied by record-low interest rates.

Admittedly, all of these numbers are low: at their peak, startups employed only a little more than 1% of the population, and now they employ a little less than 1% of the population. Concentrating on startups is not going to move the broader employment needle very much. But the dynamic here is surprising and troubling, all the same. Intuitively, if people can’t find work for an existing company, they should be more likely, not less likely, to go out and found a new company themselves, instead. But that doesn’t seem to be happening.

The only thing I can think of here is that for all that we think of startups as being largely high-tech things, in reality a huge number of them are in the construction industry, in one way or another. In a word, subcontractors. And no one’s starting new granite-countertop installation companies right now. But still, startups are a decent proxy for the dynamism of an economy. And these charts don’t bode at all well, on that front.

COMMENT

In my experience the only businesses getting investments are internet startups – as long as they have a potential for high user volume. Technology and how they’re going to make money is second hand.

Posted by onmyway | Report as abusive
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