Felix Salmon

How Janet Yellen should embrace the Fed’s dissenters

Felix Salmon
Oct 9, 2013 21:42 UTC

The Fed Whisperer, John Hilsenrath, had a great insidery article yesterday about forward guidance, and about the Fed’s ability — or lack thereof — to effectively signal its future actions. And it was timely, too, coming as it did a day before the official nomination of Janet Yellen as the new Fed chair.

The job that Yellen inherits is very different from the job which faced all of her predecessors. They focused almost exclusively on the question of where to set the Fed funds rate; that’s a non-issue for Yellen, who is certainly going to keep that rate at zero for the foreseeable future. Instead, Yellen has two other tools at her disposal. One is QE: the Fed can continue to pump money into the economy for as long as it likes, although no one on the committee loves the idea of doing so indefinitely. And the second is forward guidance, or what is sometimes called “federal open mouth operations”: the ability of the Fed to set expectations by being very clear about what it intends to do in the future.

As Hilsenrath details, the Fed’s new commitment to transparency — something Yellen strongly believes in — has not gone entirely smoothly. As Fed governor Jeremy Stein said in a speech last month, there’s clear “room for improvement” when it comes to the Fed acting transparently and predictably.

The problem is that transparency and predictability are incompatible goals. Look at the minutes of the September FOMC meeting, which were released today: they reveal a tortured meeting, spread over two days, with more than its fair share of meta-worries about desirable and undesirable feedback loops between the markets, the Fed’s statement, and the minutes themselves. Frankly, the more transparent the Fed is, at times like this, the less predictable it becomes.

This is one area where I think that Yellen could be a real improvement over Bernanke. Think of Fed communication as starting with the studied opacity of Volcker and Greenspan, who once famously told reporters that “if I seem unduly clear to you, you must have misunderstood what I said”. As Binyamin Appelbaum says, central bankers historically have “regarded secrecy as a virtue and obfuscation as a prized technique”.

The Fed then evolved, as serious academic work managed to find strong evidence for the idea that transparent communication can and should be an important part of monetary policy. This was one of the great innovations of the Bernanke era: an unprecedented degree of specificity about how the Fed intended to behave in the future.

The problem is that the Fed and the markets both conceived of the forward guidance in terms of what economists might call the “stylized fact” that the Fed is a single actor making a single decision. There is a series of monetary-policy actions that the Fed is going to take in the future, and everybody started behaving as though (a) the FOMC had a pretty good idea what it was going to do; and that (b) the only question was how much leg the FOMC would show, in terms of revealing what it knew.

In reality, however, the tail soon started wagging the dog: when the Fed announced that it would keep interest rates at zero until at least mid-2015, for instance, that was not a simple expression of a decision which they had already made internally. Instead, the FOMC came to the conclusion that the announcement, in and of itself, would have a desired effect on economic conditions, and therefore said something which was carefully calibrated to have that specific effect (while also being consistent with what they thought they would probably want to do in terms of interest rates).

This was where tensions started setting in: it’s one thing for a Fed chairman to rally his FOMC troops and get them all to agree on a certain course of action at a certain meeting. It’s another thing entirely to try to get those troops to agree to a future course of action, stretching out as far as mid-2015, despite the fact that no one really knows what the economy is going to look like then. Promises can be broken, of course. But if you’re trying to build consensus, then the best way to do so is always to keep things narrow, rather than asking people to make broad, long-lasting commitments.

On top of that you have the fact that QE is an unproven experiment — and one which is pretty explicitly opposed by various FOMC members, especially some of the regional bank presidents. Making promises about the future of QE is dangerous, because those promises will be very hard to keep — but then again, not making any promises is also dangerous, since it results in markets throwing around terms like “QE infinity” or “QEternity”. And that’s a message the Fed very clearly does not want to send.

Enter Janet Yellen — someone who’s incredibly good at economic forecasting and academic analysis, and who is (I think) more comfortable with tension and conflict than Bernanke. Yellen has often been in the minority on the FOMC, and nearly always, when she has been in the minority, she was ultimately proved correct. She has far more FOMC experience than Bernanke did, when he became Fed chair — which means that she’s deeply familiar with the kind of personalities who populate the board, the range of opinions they hold, and the degree to which the chairman can nudge those opinions in a certain direction.

I suspect that when Yellen gives her post-meeting press conferences, we’re going to see something very different from what we’ve been used to with Bernanke. The current chair is patient, avuncular, friendly, eager to help people understand what he’s saying. He has a specific message, and he wants to get that message across as clearly as he can. Yellen, by contrast, is going to be more scripted, more empirical — and, I hope, more honest about the fact that the FOMC is a diverse group of people, with a range of opinions. Markets are naturally comfortable with probability distributions: they don’t need to be told with great specificity exactly what is going to happen.

What I’d like to see from Yellen is less of an attempt to artificially move markets by saying the right words at the right time, and more of an attempt to be honest and clear about the full range of opinions on the FOMC. Where Bernanke always just attempted to get across a single consensus view, Yellen should instead be more open about the full spectrum of opinions on the FOMC, and how that spectrum ultimately ended up being reduced to a consensus about what to do and say.

We live in a world where both the legislative and the judicial branches of government are racked with very open dissent — and yet where the Fed likes to pretend that it somehow manages to always rise above such things. It doesn’t; it can’t; it shouldn’t even really aspire to doing so. The most effective communication is honest communication: if Yellen can be open about disagreements within the FOMC, then that will have three positive long-term effects. Firstly, it will make market misunderstandings less likely, since there will be less of a feeling of “you said you would do this, but then you did that”. Secondly, it will give the FOMC more credibility in terms of the committee binding itself to future actions: if Yellen can show that the full spectrum of opinion falls in a certain range, then the market will be more comfortable expecting that outcome. And thirdly, it will allow Yellen to be an effective chairman even in the face of certain future dissents. She could even be an effective chairman if she found herself in the minority, once or twice — something which could never be said about Greenspan or Bernanke.

Yellen gets on very well with ultra-hawkish FOMC members: she should make that her not-so-secret superpower. If she can effectively represent the views of someone like Richard Fisher when she gives her press conferences, she will effectively move the markets from a naive expectation that Bernanke will simply tell them what he’s going to do, to a much more effective and sophisticated expectations that Yellen will be genuinely open about the full range of views on the committee. Which would be a genuine and important improvement.


I don’t quite agree that the Fed shouldn’t make forward pronouncements. Expectations are commonly modelled explicitly, with their own variable. A classic example is getting inflation expectations down. It’s going to cause pain; the Fed just needs to announce it and then do it. If it announces it and then doesn’t follow through, it loses credibility, and even members who were against the original announcement should understand that. Sometimes, bold talk is required, and it’s not a matter of “here’s what we think we will do in a year’s time;” the announcement IS the plan itself.

Posted by Daoist | Report as abusive

The un-terrifying Treasury bill market

Felix Salmon
Oct 8, 2013 19:43 UTC

Neil Irwin isn’t mincing words. “What’s happening in the Treasury bill market today should terrify you” is the headline, and this is the accompanying chart:


That is indeed a nasty spike! But it isn’t remotely as terrifying as Irwin says.

For one thing, let’s put the instrument in question into context. Here’s the chart that I get, when I bring up the same instrument on my Thomson Reuters Eikon terminal. It shows more clearly just how few data points we’re really talking about here: these things are spiky. Here’s another reason not to take these charts too seriously: if you take a second look at Irwin’s chart, it shows that the bill was trading at a negative yield in mid July; I would deduce nothing from that datapoint except for that the data is noisy, and it’s hard to draw too many conclusions from it.

Chart 912828RN2=TWEB.png

Here’s another version of the same chart, showing the price action just for the past five days. Again, this isn’t terrifying, so much as it’s just plain noisy:

Chart 912828RN2=TWEB.png

Wait, did I say price action? Scratch that, I meant yield action. The price action shows you the simple truth of the matter — and it’s so boring I can’t even work out how to make a chart of it. Still, I can give you the numbers: the Treasury bill maturing on 10/31/2013, with a coupon of 0.25%, is bid at 99 253/256, to yield 0.446%, and is offered at 100 1/256, to yield 0.184%.

So, here’s Irwin’s dystopian fantasy:

If, for example, investors were only willing to pay $950 for a 90-day, $1,000 bill (about a 20 percent annualized interest rate), then the government would run into its legal debt limit even faster than it is now scheduled to.

And here’s the reality: let’s say the yield on your $1,000 bill soars to a terrifying 0.446% from a relatively benign 0.184%. That means the price of your bill has plunged from $1,000.04 all the way to $999.88. You’ve lost a whole 16 cents — or 0.016%. If the price of your bond continues to dive at that rate every day, then after a couple of months you might start approaching a full 1% drop in paper wealth!

If you look at the actual price action in Treasury bills, then, it isn’t terrifying in the slightest; what’s more, it’s very difficult to separate signal from noise. There’s no indication whatsoever that it’s significantly raising the US government’s cost of borrowing, and there’s not even any real evidence that what we’re looking at here reflects credit risk being abruptly inserted into the interest-rate market.

For the fact is that Treasury bills trade far too close to par, far too predictably, for them to really trade at all. If you want to buy Treasury bills, you buy them at a Treasury auction, you hold them to maturity, and then — most likely — you roll them over into a new series of Treasury bills. On the other hand, if you want to trade day-to-day movements in short-term interest rates, you don’t go to the Treasury bill market at all: instead, you go to Chicago, and use the eurodollar futures market, or something like that.

The Treasury-bill market, then, is a bit like the market in US CDS: it’s a thin market which is being asked to support much more rhetorical weight than it can reasonably bear. In the real world, Treasury bills remain an absolutely safe market — and I fully expect them to continue to trade at (or extremely close to) par even if we hit the debt ceiling. The world will get much riskier, if that happens — and in a risky world, US government debt is still going to be the safest possible asset.


I know what the traders will do with the increased debt, they will collect insurance bets.

Posted by 2Borknot2B | Report as abusive

Felix Salmon smackdown watch, debt prioritization edition

Felix Salmon
Oct 7, 2013 21:45 UTC

On Thursday I said that the US is not going to default on its bonded debt, even if the debt ceiling is reached: “with Jack Lew (or anybody else, really) as Treasury secretary, you can be sure that debt service payments would be priority number one”.

This is not a popular view within the blogosphere, maybe because it’s generally associated with Republicans trying to say that hitting the debt ceiling wouldn’t be that bad. Both Cardiff Garcia and Dylan Matthews have come out with sterling attempts to answer the question of whether debt prioritization is even possible; Danny Vinik, for one, says that there’s “pretty good evidence to demonstrate that prioritizing debt payments is not possible”. The problem, however, as Garcia says, is that most of the primary sources you’d want to go to on a question like this “are vague and unhelpful”.

It’s worth stipulating up front that hitting the debt ceiling would be disastrous even with prioritization: Garcia calls it “breaking the economy’s knees with a fiscal crowbar”, while Paul Krugman says that it would be “a catastrophe”. But it would be much better than the truly apocalyptic state of affairs that we would see in the event of a Treasury bond default. Deutsche Bank says that in that event, the S&P 500 would fall some 45% — and, boldly, puts a 0% probability on that actually happening.

It’s also worth stipulating that before the debt ceiling is hit, a lot of very sensible politicians want to make prioritization seem as unlikely as possible, because that maximizes the incentive to avoid hitting the ceiling at all. On the other hand, after the debt ceiling is hit, the very same politicians should be willing to move heaven and earth to ensure those bond coupons get paid.

So, why is Matt Yglesias so convinced that prioritization is impossible? He gives four reasons.

The first is that prioritization is illegal: “Treasury is not authorized to unilaterally decide to pay certain bills and not others”. This is true — but also a bit irrelevant. Treasury is under unambiguous Congressional orders to pay lots of bills — all of them, in fact. If it fails to pay those bills, it will be violating the law as laid down by Congress. Hence the 14th Amendment argument that the president should simply ignore the debt ceiling entirely, if it comes to that. But underneath it all, it’s hard to credit any argument which says “Treasury isn’t allowed to pay its own bonds”. If that’s what Treasury wants to do, then surely it can do so. Besides, who would even have standing to sue?

Yglesias’s second reason is that prioritization is just not feasible: it can’t be done in the real world. Both he and Matthews cite the Treasury inspector general, who does indeed say what they say he says:

Because Congress has never provided guidance to the contrary, Treasury’s systems are designed to make each payment in the order it comes due.

It’s worth reading the whole letter, however, because the inspector general says a lot more than that. And while the systems are designed to make payments in the order they come due, they have also been designed so as to effectively insulate bond repayments from all other payments. Bond repayments are made through a system called Fedwire, while all other payments are made through the standard banking ACH system. Logistically, it’s entirely possible to keep up to date on all Fedwire payments without making any ACH payments at all.

And the inspector general was very careful to keep all options open:

Ultimately, the decision of how Treasury would have operated if the U.S. had exhausted its borrowing authority would have been made by the President in consultation with the Secretary of the Treasury.

What’s more, the inspector general does rather fudge the central issue of prioritization, which is whether debt repayments can carry a higher priority than everything else. “Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day,” he said — but that’s false on its face: prioritizing debt repayments is very sensible, since defaulting on Treasury bonds would be much more harmful than simply paying all bills as they come due, whether they’re a bond coupon or a fighter jet.

There is an argument from the left that prioritization constitutes “paying China first”, and would “require the government to cut large checks to foreign countries, and major financial institutions, before paying off its obligations to Social Security beneficiaries and other citizens owed money by the Treasury”. Well, yes. But I don’t think anybody in Treasury is swayed by such arguments: they know that in the grand scheme of things, all Social Security beneficiaries would be much better off receiving their money in arrears than they would be if Treasury defaulted on US sovereign bonds.

Yglesias then rolls out the timing argument, which is further developed by Zero Hedge: debt repayments are lumpy things, and it would be hard to “save up” enough money before the big repayments were due, if you were paying any other bills at all. Zero Hedge improbably says that “Treasury will simply halt new Bill issuance” if the debt ceiling is reached, but I don’t buy it: no one’s requiring that the national debt go down. And investors generally want to be able to roll over their short term debt: failure to be able to do so would be better than default, but not much.

Could Treasury decide to prioritize Fedwire payments, and then turn on the ACH payments sporadically, only insofar as they didn’t eat up enough cash to endanger bond repayments? I don’t see why not. Treasury wouldn’t like it, of course. And as Yglesias says in his final point, such a scheme might well be so messy that the markets would have to end up assigning some kind of credit risk to Treasury bonds anyway. Still, doing so would send a very clear message to markets, that Treasury cares about them more than it cares about the sick, the elderly, or any other recipients of government funds. And the markets, in return, would probably reward Treasury with lower interest rates on Treasury bonds. After all, in a crisis, money always flows into Treasuries — even when it’s a Treasury-bond crisis.


“Because Congress has never provided guidance to the contrary, Treasury’s systems are designed to make each payment in the order it comes due.”

Yup, we’re on total auto-pilot. The system cannot be stopped, re-booted, intervened – its all hard-coded. Its a doomsday machine. Its a like a shark – if it stops swimming we all die.

“…speaking as someone who covered federal civilian ADP — and who has a spouse who worked in federal civilian ADP for many years — the idea that Treasury would be able to improvise those procedures on the fly doesn’t even come close to passing the laugh out loud test.”

Really? Just how close to the mainframes did they let you get, anyway? Here’s the bottom line: We’re being told not to touch the “concentrated evil” because if we do the entire world will explode. If THAT is the case then the systems group at Treasury has been run by legions of incompetents for literally decades.

Nobody, but NOBODY, engineers systems that poorly. This is classic progressive hyperbole and I discount it in it’s entirety.

Posted by HamsterHerder | Report as abusive

Dan Loeb’s doomed Sotheby’s campaign

Felix Salmon
Oct 4, 2013 16:58 UTC

Dan Loeb is going to lose his latest fight, at Sotheby’s. That’s because it’s a Sony, not a Yahoo.

To recap: on Monday, Loeb filed his broadside against the auction house, where he said that he holds a 9.3% stake in the company, and called for the resignation of Bill Ruprecht, its chairman and CEO. It’s worth comparing Loeb’s letter to Sotheby’s with his May letter to Sony, or his September 2011 letter to Yahoo.

The tone of Loeb’s Sotheby’s letter is significantly harsher than the tone he took with either Sony or Yahoo: in those cases, while he was critical, he avoided getting personal in the way he’s doing with Ruprecht. Loeb’s latest attack, by contrast, concentrates on things like Ruprecht’s salary, and the amount of money managers spend at swanky restaurants — juicy details, to be sure, but hardly of strategic importance.

That kind of ad hominem attack was never going to be well received — and today Sotheby’s announced, to no one’s surprise, that it was retaliating with a classic poison-pill defense. Translating from the corporatespeak, Ruprecht is telling Loeb, quite simply: “you want a fight? OK, you’ll get a fight”.

Loeb concentrates on Sotheby’s competitive position with respect to Christie’s, which is owned by French billionaire François Pinault. Pinault is an avid collector of modern and contemporary art, and he has turned Christie’s into a powerhouse in that sector — which also happens to be the hottest sector of the art world right now. Loeb knows the art-auction business about as well as he knows the music business, which is to say that he knows what’s hot, and he wants to ride the trends. “Sotheby’s success,” he writes, “will be defined in large part by its ability to generate sales and profits in Contemporary and Modern art, as this is where the greatest growth potential lies.”

Sotheby’s is no slouch in that business. Just today, it announced that it is going to sell a major Warhol disaster painting, which is very likely to set a new auction record — Warhol’s record could easily be broken, and even possibly the all-time auction record as well. The announcement features some classic auction-house hyperbole, saying that Silver Car Crash (Double Disaster) “takes its place alongside paintings such as Pablo Picasso’s Guernica and Théodore Géricault’s The Raft of the Medusa as one of the definitive masterpieces of history painting”. But it actually stops short of the kind of language that Christie’s employs in its own press releases. Here’s the announcement of Christie’s own Warhol, which will appear alongside a big Koons sculpture and be sold a day before the Sotheby’s Warhol:

Christie’s evening sale in November will offer a unique dialogue between two masters of Pop, Andy Warhol with Coca-Cola (3) and Jeff Koons, with his Balloon Dog (Orange). Two different generations of Pop artists standing side by side; Andy Warhol is the father of everything we know about Pop Art and Jeff Koons is his anointed successor. Both create objects which are totally universal and loved by the public, truly POPular in that sense.

(Bizarre capitalization in the original, along with the subtle — and untrue — suggestion that somehow Warhol anointed Koons as his successor-in-pop.)

Warhols aside, it makes sense that Sotheby’s, as a storied company being run to last in perpetuity, should naturally behave differently than Christie’s, which is a billionaire’s plaything. Indeed, when Loeb first revealed his interest in Sotheby’s back in September, I thought that was his end-game: that he was looking to shop the auction house to some other billionaire. (Bernard Arnault, perhaps, or maybe even Larry Gagosian.)

Monday’s letter, however, shows that Loeb is thinking about keeping Sotheby’s public, while attempting to oust the current senior management. That’s a move akin to central-bank currency interventions: you need a lot of firepower, and you also need the trend on your side. In this case, Loeb’s arsenal has already been seriously depleted by the poison-pill defense — and shareholders aren’t particularly likely to want to side with him, not when Ruprecht’s performance has delivered a share-price rise from less than $30 at the end of last year to move than $50 today.

If you look at the success of Loeb’s strategy at Yahoo, it was based on applying astonishing leverage: with control of just 5% of the company’s shares, Loeb first managed to get himself multiple seats on the board, and then used those seats to astonishing effect, overriding the chairman’s preferences and effectively installing his own nominee as CEO — the person who could achieve the fastest run-up in the share price, after which he could exit with a large profit. In order to execute that kind of strategy, your relationships with the company and its governors can’t be personal and adversarial: you have to persuade them that your interests are aligned.

And it seems obvious to me that Loeb isn’t going to persuade the Sotheby’s board that he knows best how to run Sotheby’s, any more than he persuaded the Sony board that he knows best how to run Sony. Instead, the Sotheby’s board is going to close ranks behind Ruprecht, defending itself from a hedge-fund manager who never has the genuinely long-term health of a company at heart.

What Loeb wants is a quick boost in the Sotheby’s share price: that’s why he’s concentrating so hard on the white-hot areas of contemporary art and China. Given that, it’s going to be very easy for Ruprecht to persuade the board that he stands for something more permanent, more noble, and, ultimately, more likely to survive the when-not-if moment at which the Chinese/Contemporary art bubble bursts.

Of course, it’s entirely possible that Loeb will make money on his investment, if his shares rise in value. But I very much doubt that he’s going to succeed in ousting Ruprecht, and the chances are that he will quietly exit his position once the failure of his strategy becomes obvious. After all, he’s an activist investor. And if he can’t shake things up at Sotheby’s, he’s going to move on to another company where he can.


what about ruprecht’s history of selling his stock in sotheby’s?
at least, mr loeb puts his money where his mouth is. ruprecht’s record is damning.

and let’s talk about loeb, he’s actually been a major supporter of the arts and collector for over 20 years. he actually does know quite a bit about this world. he’s certainly done more personal business with an auction house than 99% of the world.

ruprecht also ran the company into the ground before the stock price rose to $30 and $50 a share, thanks solely to the rising tide of contemporary art values.

don’t forget that sotheby’s is a company which makes no money on any category but contemporary art, and their marketing expenses and cost of sales are astronomical.

the only thing more damaging than ruprecht’s bloated way of doing business is the anachronistic business model of both auction houses.

Posted by gimme-a-break | Report as abusive

Making sense of the market in US CDS

Felix Salmon
Oct 3, 2013 14:53 UTC

Matt Levine had an excellent post last week on the bizarre market in credit default swaps on the USA — a market which people only ever look at during times of crisis or potential crisis. The nihilists are out in force today, using this market to confirm their priors, but the problem is that it’s very, very hard to look at US CDS, or to look at the yield on short-dated Treasury bills, and draw anything much in the way of meaningful conclusions.

One reason why is that Treasury bills are unique in many ways, including the weirdest way of all: as worries about the creditworthiness of the US government increase, the price of Treasury securities tends to go up, rather than down. Even if the US hits the debt ceiling, that won’t hurt the price of US debt; instead, general nervousness will only cause investors to flow into Treasuries and out of riskier assets. Which is to say, out of everything else.

And although Levine has managed to piece together a scenario under which a temporary technical default on US debt could cause a real payout for holders of US CDS, I don’t think that scenario really explains the price action either. The problem with it is that the government would still need to miss an interest payment on its Treasury securities, and there’s no way that it’s ever going to do that, whatever happens to the debt ceiling.

Think about it this way: if I roll over my debts, then my total debt does not actually increase. So if a T-bill is coming due today, then the government can pay it off in full, and issue a new T-bill, without increasing its total indebtedness. It’s true that a failure to raise the debt ceiling would prevent the government from funding its expenditures with new borrowing — although John Carney makes a good case that the government could just issue Obama Bonds instead.

The government still receives substantial tax revenues every week. So although the government would have to live within its means, spending no more than it got in revenues, its revenues would still be far greater than the total amount of debt service. And with Jack Lew (or anybody else, really) as Treasury secretary, you can be sure that debt service payments would be priority number one. US government payroll — especially for the president and Congress — would probably be the first thing to get cut; the armed forces might be next, just to place maximum pressure on House Republicans. Then Medicare and Medicaid, maybe — the doctors and hospitals providing those services would just have to wait until the debt ceiling got raised before they received their checks. Failing to meet any of those obligations would not be considered a debt default, and would not trigger CDS.

So what’s going on in the odd corners of the financial markets which are suddenly receiving so much attention? The simple answer is that they’re trading markets. They don’t only go weird when the debt ceiling approaches: something similar happened back in January 2009. And here’s what I wrote back then:

Anybody who bought protection at, say, 25bp is now sitting on a very nice profit if they close out their position. Maybe this is just a form of black swan insurance: buying US government CDS is a way of making money when everything else plunges in value. You’re not really insuring against an actual default, you’re just betting that if the world starts to implode, the price of your CDS is going to rise even higher.

No one knows exactly how high CDS rates would go if we pierced the debt ceiling, but it’s a reasonable assumption that they would go higher than they are now, even if (as is almost certain) they never pay out a penny. The US CDS market is a speculative, greater-fool market: the trick is to buy at a low level, and then sell at a higher level. A bit like bitcoins, really. If you think that the debt ceiling is going to be hit, then it makes sense to buy CDS today, just because spreads are going up rather than down. The only trick then will be trying to time the perfect moment to sell.


At this time the areas getting the most activity are shady areas. Trying to protect the casino bets. Buying delusional insurance to pay for a bet on which way a particular market will fall. Then create the situation you want to happen (or rigging) the market to collect on the insurance that is bought and paid for buy USA workers. It is like a cheater at a casino who knows how to count cards allowing him to rob the house. At this point, money is just binary symbols bouncing around a cow casino.

Posted by 2Borknot2B | Report as abusive

The FBI and the legitimation of the bitcoinverse

Felix Salmon
Oct 2, 2013 21:57 UTC

Did the FBI just deal a fatal blow to bitcoin? Zero Hedge is at his most apocalyptic this afternoon, saying that “the end may be nigh” for bitcoin now that Silk Road, the bitcoin-fueled drugs bazaar, has been closed down by the Feds. Even Adrian Chen, who has done most of the best reporting on Silk Road, was shocked by what the FBI found:

According to the indictment, Silk Road was bigger than anyone had suspected: It boasted over $1.6 billion in sales from 2011-2013, which resulted in $80 million in commissions. (Researchers had previously estimated that Silk Road was doing about $22 million in total sales per year.)

Chen, too, sees today’s news as bearish for bitcoin: “the extent to which Silk Road underpinned the Bitcoin market is pretty amazing,” he tweeted. After all, the complaint reveals that from February 2011 through July 2013, Silk Road’s revenues totaled 9,519,664 bitcoins — that’s almost as many as the total number of bitcoins in circulation (11,744,575).

But although I’m skeptical about bitcoin’s future, I don’t see today’s news as bad for the cryptocurrency. In fact, quite the opposite. If Silk Road is now shut down and if no one else manages to enter the vacuum caused by its disappearance, then the FBI will at a stroke have managed to remove the single skeeviest aspect of bitcoin, and the main reason why people like Chuck Schumer are so suspicious of it.

On top of that, the numbers in the FBI complaint are highly misleading. The complaint says that Silk Road’s total revenue, of 9.5 million BTC, and commission, of 614,305 BTC, “are equivalent to roughly $1.2 billion in revenue and $79.8 million in commissions, at current Bitcoin exchange rates, although the value of Bitcoins has fluctuated greatly during the time period at issue”. That’s putting it mildly. Here’s how Chen described Silk Road back in June 2011:

Mark, a software developer, had ordered the 100 micrograms of acid through a listing on the online marketplace Silk Road. He found a seller with lots of good feedback who seemed to know what they were talking about, added the acid to his digital shopping cart and hit “check out.” He entered his address and paid the seller 50 Bitcoins—untraceable digital currency—worth around $150. Four days later the drugs, sent from Canada, arrived at his house.

Those 50 bitcoins are part of the FBI’s 9.5 million BTC total, but rather than being worth $50, the FBI is now valuing them at about $6,300. As a result, the $1.2 billion number should be taken with a monster pinch of salt. Besides, if you consider that the FBI is looking at 898 days of Silk Road activity, that averages out at a pretty modest 10,600 BTC per day. That’s hardly the “underpinning” of the bitcoin market, which normally sees somewhere between 200,000 BTC and 400,000 BTC per day in total trading volume.

The US government doesn’t seem to have a reflexively negative attitude towards bitcoin: in a letter sent on August 12 to Janet Napolitano, Senators Thomas Carper and Tom Coburn write that while virtual currencies come with “threats and risks”, there should also be “a sensible regulatory framework” which will “ensure that rash or uninformed actions don’t stifle a potentially valuable technology”. Meanwhile, while Treasury certainly wants to regulate such currencies, they don’t seem to want to outlaw them.

In other words, for anybody wanting to see the broader adoption of bitcoin, the shuttering of Silk Road should be considered a necessary and very welcome step — and one which will help support its value over the medium term. Sure, the price fell today — but not egregiously so: it was about $140 in the morning, briefly fell as far as $110, and is now back to $125. By bitcoin standards, that’s a surprisingly low amount of volatility on a big-news day. And with Silk Road gone, a significant source of downside tail risk has now been effectively removed from the bitcoinverse.

So if the shuttering of a significant source of bitcoin demand isn’t bad for the currency, what would cause its demise? The answer is basically just neglect. Bitcoins are a fad, and they’re a fad which will pass, a bit like Beanie Babies. There was no one thing which caused the market in Beanie Babies to implode, it was more that people just moved on to other things. Bitcoin’s the same: newer, shinier virtual currencies will arrive, the techno-utopians will latch onto something else, and eventually the people holding bitcoins will understand that if an asset doesn’t throw off any cashflow, the only way to make money from it is to sell it at a higher price than you bought it. In other words, bitcoin is the ultimate speculative vehicle, one which you might be able to trade in and out of, but one which has no value at all as a buy-and-hold investment. Which is something to bear in mind when you read the next big Bloomberg article on bitcoins as an asset class.


So Bitcoin = Beanie Babies…

I’ve read all your Bitcoin articles and more and more they seem to be written as hopeful “I told you so” with little downside risk if the author is wrong.

I’m sure if and when Bitcoin is mainstream as an asset and perhaps as a currency as well, you’ll just write “While I didn’t think that blah blah blah, blah blah blah happened and changed the blah blah blah that I based my original opinions on. However, if it hadn’t been for that one blah blah blah I would have been proved correct.

My money is on you looking like the internet skeptics of 1996.

Posted by windjc | Report as abusive

Occupy vaporware

Felix Salmon
Oct 1, 2013 18:35 UTC

What happens when a group of anarchists starts a bank? The answer is that nothing happens: the bank never opens.

One of the legacies of the Occupy movement is a bunch of groups, all looking to take on the financial system in various different ways. There’s the Alt Banking working group, for instance, which recently released a book; there’s Occupy the SEC, which is still issuing erudite and hard-hitting comment letters, most recently on money-market fund reform; there’s Strike Debt, which runs Rolling Jubilee, an attempt to buy up debt on the cheap, and then retire it.

Rolling Jubilee recently responded to criticism from Yves Smith; they promise a lot more details about what they’ve been up to coming up in mid-November, and explain that as “an all-volunteer project”, their project “takes time”. Still, they’ve done what they said they were going to do: they’ve raised more than $600,000, and retired tens of millions of dollars in debt.

And then there’s the Occupy Money Cooperative, which describes itself as being “a cooperative company that offers low-cost, transparent, high quality financial services to the 99%”. It’s also the one group which has basically achieved nothing to date. It got some high-profile press in the NYT today, complete with an illustration of what a future, hypothetical Occupy Card might look like. (Interestingly, the illustration, just like the one on the cooperative’s website, does not include the all-important Visa logo that would actually allow the card to be used in practice.) The NYT article, in turn, prompted a slightly weird defense of Occupy Money from Hamilton Nolan at Gawker, saying that even though it’s “still more of an idea right now than a reality”, it’s still a good idea in principle.

His argument, I think, misses the point just as much as Colin Moynihan did at the NYT. The card is vaporware; it will never exist, and the best you can realistically hope for, if you donate money to the cause, is that at some unknown point in the future the organizers will give up and find some way of getting you your money back.

To put this in perspective: one of the organizers behind the project, Carne Ross, told me in July that he expected there would be a physical card, in existence, by September 17. That is, he told me in July 2012 that he expected the card to be a reality by September 2012. And yet here we are, a year later, and all he can reveal in September 2013 is a fundraising campaign, with a $900,000 goal. Once that goal is reached, the NYT helpfully tells us, the cards will become available to anybody who wants one. What the NYT doesn’t mention is that right now — even with all of today’s added publicity — the total amount raised is $3,789.17, or about $270 per day. At that rate, Occupy Money will be fully funded somewhere around November 2, 2022.

When Ross first told me about the debit card, 14 months ago, it was already a little behind the time: I immediately took out of my wallet my no-monthly-fee Simple card, and told him that it could do anything his card could do, and was significantly cheaper to boot. Since then, GoBank has launched as well, along with a host of very cheap prepaid debit cards, like Bluebird and Liquid.

Occupy Money says in its FAQ that its card is “more than just a prepaid card since it features additional services. It’s our aim to make the card and its associated charges less expensive than other cards on the market.” But it doesn’t feature an explicit price comparison. And if you look down the list of fees ($0.99 per month, $4.95 to load cash onto the card, $3.74 to deposit a check onto the card at a store, 4% for instant check deposit via your smartphone, $1.95 to withdraw cash from an ATM, $2 to speak to an agent, $0.99 for a balance inquiry, etc) then it’s hard to come away convinced that the cost of this card is really going to end up being lower than the cost of its competitors. As for the “additional services”, there’s no indication of what those might be. I find it hard to believe that they include anything you can’t get from Simple or GoBank.

Ross has ambitious dreams: he’d love to open a nationwide cooperative bank, owned by its members but insured by the FDIC, rather than the NCUA. As Nolan says, Ross’s dreams are noble ones. But starting a bank is hard work — even Simple gave up, in the end, and decided to just be a glossy front end for Bancorp Bank. And while launching a prepaid debit card is a lot easier than launching a bank — after all, the Kardashians did it, how hard can it be — it turns out that even debit cards are pretty hard to launch if you don’t have any startup money and you’re run on a volunteer basis.

The Occupy Card, then, is too little, too late: it’s an idea which might have been welcome two years ago, when Occupy was at its peak, but which at this point looks rather old-fashioned compared to some of the best new products on the market. And of course on top of that it has the biggest weakness of all, which is that it doesn’t actually exist. Timing is everything, and the Occupy protests were very well timed. But at this point, the movement is losing momentum. And the anarchists are all off using bitcoin.


@ Felix: be very careful who you label anarchists, the government is shut down by a small group of wingnuts. How is this not anarchy?

Posted by lotuslandjoe | Report as abusive

The zombie apocalypse has arrived

Felix Salmon
Oct 1, 2013 13:39 UTC

Have you been involuntarily furloughed today? Are you looking for a good way to spend some of your newly freed-up time? And do you want to understand what’s really going on in Washington? In that case, I can highly recommend that you read John Powers’s brilliant article, The Political Economy of Zombies, over at The Airship.

In Powers’s view, the zombie apocalypse is less horrific than it is utopian: it’s a way to cleanse the world of its otherwise ineradicable neoliberal capitalism, and to pave the way for a much more equal post-capitalist (and post-Zombie) society. “The zombie apocalypse,” he writes, “is as close as we have come in the past 30-odd years to producing a convincing utopian vision for the future that grows out of our present circumstances.”

It was easy to see a lot of people dressed up as zombies during the Occupy protests, and Powers explains what was going on: “Zombies were not being equated with corporate capitalism – they had become the revolution itself. Zombies had become the alternative to the system with no alternative.” Powers quotes anarchist economist David Graeber as saying that neoliberalism has “succeeded magnificently in convincing the world that capitalism – and not just capitalism, but exactly the financialized, semi-feudal capitalism we happen to have right now – is the only viable economic system.”

And he also quotes (of course) Slavoj Zizek:

Look at the movies that we see all the time. It’s easy to imagine the end of the world – an asteroid destroying all of life and so on – but we cannot imagine the end of capitalism.

And then he explains why zombies have become such a common theme in popular culture:

For movie audiences, the mainstream, the 99%, catastrophes aren’t something to dread; they are something to look forward to. They are a catharsis, a conceptual clearing of the deck. They are the implosion of the banking towers at the end of Fight Club, they are the destruction of the White House in Independence Day, they are the wholesale destruction of the entire global map in 2012.

Powers dates the era of utopian zombiedom to the release of 28 Days Later in 2002, a film which opens after the zombie apocalypse, with a scene of Cillian Murphy exploring the now-empty streets of what was formerly the capital of capitalism:

I remember seeing Boyle’s film when it came out in theaters. I went to see it, not because it was a zombie movie, but despite that. Everyone I knew was buzzing about the opening scene in London. It was that image that got me and a lot of other “not into zombies” guys and gals to go see 28 Days Later. It was that same image that got people excited to see I am Legend: It was Manhattan emptied. It was the end of buying and selling. For the majority of us who live within the capitalist system but aren’t of the neoliberal breed of capitalist, catastrophe means no more mortgage payments, no cell phone surveillance, never again having to bicker over what is or isn’t a preexisting condition. Catastrophe voids all obligation, makes the world anew.

Go read Powers’s essay for the, er, fleshed-out version of this argument: it’s well worth it. Or, just watch what Powers calls “the finest moment of all ecstatic wealth destruction in the zombie movie canon”, from Zombieland. My point is that Ted Cruz, and the Tea Party generally, are basically doing their best to play out this exact fantasy. By shutting down the government, they are destroying not a desert gift shop, but rather billions of dollars of real-world economic activity.

In doing so, the Tea Party is proving that it, truly, is the party of the 99% — of the masses who thrill to zombie movies, who fantasize about living in a post-zombie utopia, who understand that you can’t make an omelette without breaking some eggs. We live in a country where the best way to ensure blockbuster status for your summer movie is to blow up as much stuff as possible — a building, a city, the entire world. Highbrow film critics might find such wanton destruction horrific, but the typical moviegoer just finds it thrilling. And when you look at the grass roots of today’s Republican party, it’s easy to see a bunch of heavily-armed zombie hunters: today’s downtrodden masses, perfectly positioned to become tomorrow’s post-apocalyptic elite.

The Tea Party’s “tear it all down” mentality — the worldview which has shut down the government today and which could conceivably even end in debt default, if the debt ceiling isn’t raised — is not, then, the result of any particular political philosophy. I doubt that Ted Cruz spends overmuch time reading Graeber or Zizek. But it’s real, all the same. And if you think that a government shutdown somehow decreases the probability of a debt-ceiling catastrophe, it might be worth thinking again. I fear that instead it might just whet the Republicans’ appetite for more.


Hi Felix

You and Powers make an interesting point about the sense of catharsis people get from watching some apocalypse movies – particularly the frisson of excitement when a landmark building representing authority is destroyed.

I remember one of my old English teachers (the wonderful Peter Mackintosh – who looked like Count Dracula in his academic robes) back in 1977 getting us school children to explore similar feelings when we read Day of the Triffids (particularly the section describing shops crumbling into the streets of London) and Lord of the Flies – the sense of dread counterbalanced by a sense of wild release.

Stephen King evokes a similar fascination at the start of his epic horror novel The Stand, when he describes the rapid spread of the plague and equally rapid breakdown in civilised society. Part of us hopes it never happens and part of us takes a guilty pleasure in wondering just how (heroically) we would cope.



Posted by HuwSayer | Report as abusive

The evolution of Lending Club

Felix Salmon
Sep 30, 2013 13:37 UTC

I have a piece in this week’s NY Mag about Lending Club, part of a series of profiles of what the magazine calls “boom brands“. I’ve been a fan of the Lending Club model since April 2009, and have watched its steady, disciplined growth with admiration since then. As I explain in my article, the company has changed over the years: at this point, it’s much more about the Lending than it is about the Club, and the peer-to-peer nature of the site is much less important than it was at the beginning.

But Renaud Laplanche, Lending Club’s founder, tells me that there are interesting developments ahead on that front, too: he has started talking to companies in Silicon Valley about the idea of providing low-cost loans to employees. As in, very low cost: you could borrow at a rate of as little as 3% from your employer, which in turn would still be making a higher return on its money than anything easily available to its Treasury operation. And because you’re an employee, you’re much more likely to be accepted into the program than a random applicant to Lending Club — and you’re also much less likely to default on your loan.

This kind of program wouldn’t make sense for, say, McDonald’s — but it does make sense for places like Apple or Intel. Again, it’s not an expansion of credit to places where it was formerly unavailable, but it is a way of disintermediating banks and strengthening bonds — in this case, between employer and employee.

And Laplanche thinks that there are areas where he might even be able to expand the size of the borrower pool — specifically, small businesses, which always have a devil of a time borrowing money, and which banks find very difficult to lend to. Lending Club will probably use its own money to start lending in a small way to small businesses in the first instance, rather than putting any peer money at risk. This is a whole new underwriting nut to crack, and there are too many things which could go wrong at the start. But if it works, then Lending Club could really become an engine of economic growth.

Lending Club will go public next year in what will surely be one of the easiest IPOs in memory. The company’s financials and quarterly reports have been publicly available for years, in fully SEC-approved form. In fact, thanks to something called blue sky laws, going public will actually reduce Lending Club’s regulatory burden, by putting the whole company under the aegis of federal regulators. No longer will it need to laboriously work with regulators in 50 different states. But there will be a short burst of publicity, much of which will concentrate on the company’s growth rate.

And the thing to note here is that although Lending Club is by far the world’s biggest peer-to-peer lender, it isn’t following the standard Silicon Valley model of growing as fast as possible. Loan quality changes over time, and it doesn’t want too much of its investors’ money to be tied up in a single cohort of borrowers, as would be the case if it expanded at a too-rapid clip.

Once Lending Club started being able to attract Wall Street money, a lot of things changed, including the fact that all accepted borrowers started getting funded, sometimes within minutes and always within a couple of days. In that sense, the growth constraint at Lending Club is the number of borrowers it accepts, rather than the amount of money available to be lent. But the pool of possible borrowers is still much larger than the one from which Lending Club is currently fishing — it doesn’t even need to expand its product line to be able to grow, at current rates of growth, for many years to come. There are lots of Americans out there who want to borrow money, or refinance. And over time, we’ll surely see a substantial proportion of the best credits among them moving online for their funding needs.


P2P lending has changed drastically over the last 3-4 years mainly due to the deployment of institutional capital. As a result, the bottleneck has become borrowers rather than lenders as Felix aptly notes.

P2P lending has also paved the way for accredited investor crowdfunding. Platforms like RealtyShares (www.realtyshares.com) and Circleup (www.circleup.com) are creating ways for investors to invest as little as $5,000 into real estate and small businesses and earn yields similar to what they earning with platforms like lending club and prosper.

Exciting times for the fintech space and I commend LendingClub and Prosper for being pioneers.

Posted by NavAthwal | Report as abusive