Treasury Secretary Hank Paulson’s original proposal called for $700 billion to purchase toxic mortgage-backed assets from troubled banks. Other than quarterly reports to various Congressional committees, the proposal specifically allowed no oversight to any actions taken by the Secretary of the Treasury; he asked that the government hand over $700 billion and let him get on with the job of salvaging the U.S. economy before the financial system collapsed.
Not surprisingly, Paulson’s initial proposal was termed “unacceptable,” and Congress met to discuss alternatives. The next proposed solution, the Emergency Economic Stabilization Act of 2008 (EESA), was much more cautious, awarding the Secretary merely $250 billion, with the remainder of the requested funds withheld until it was proven they would be needed. The EESA prohibited golden parachutes for officers of troubled corporations, instead allowing clawbacks and lowering tax deduction limits on compensation above $500,000. It established a bipartisan oversight committee and options for recovering funds should it appear the program is losing money five years down the road.
The vote in the House of Representatives was tight, but the EESA failed 228–205. Despite being prepared by members of both parties, it proved much more acceptable to Democrats, who voted 140 to 95 in favor of the bill, than to Republicans, who voted 133 to 65 against it.
Undaunted, the Senate added two more provisions to the bill—to temporarily raise the FDIC insurance limit to $250,000 and to allow the SEC to suspend “fair value” accounting rules—and then attached it to several other bills: one for alternative energy production tax credits, one to give insurance parity to mental health disorders and one extending a series of tax reductions for various special interest groups. The Senate passed the swollen bill 74–25, with Democrats voting 40 to 10 in its favor and Republicans voting the same, 34 to 15.
Meanwhile, everybody else is asking, do we really need a bill?
As to the credit crunch’s effect on the U.S. business climate, the current evidence is mixed. The September results of the Institute for Supply Management’s monthly survey of Chicago’s purchasing managers indicated no disruption in their usual financial management. On the other hand, the Federal Reserve’s most recent (July 2008) survey of senior lending officers reported that more than 65% of domestic banks have raised their lending standards for personal and business loans in all categories, which isn’t necessarily a bad thing.
Meanwhile, the indications of the U.S. economy sliding into a true recession are mounting. Advance orders for durable goods by businesses fell 4.5% by $9.9 billion between July and August, while new orders of all manufactured goods fell 4.0% and new home sales fell 11.5% over the same time frame. Considering how far the real estate market has already fallen, this is not good news. Home prices in Phoenix and Las Vegas have fallen over 29% between July 2008 and July 2007, and do we really want to know what Friday’s September unemployment rate will be?
Here’s a bit of historical perspective. A financial crisis exploded in Scandinavian Europe in the early 1990s when the Soviet empire collapsed and, therefore, quit importing Finland’s and Sweden’s goods. The crash had been preceded by some years of deregulation leading to loose lending criteria and under-capitalization among banks, which sounds ominously familiar. During the four years in question, real GDP in Finland contracted by 12% and unemployment skyrocketed to 16%.
With the decoupling theory laid to rest, four similar years for the U.S. economy would lead to a worldwide recession.
Stock markets around the world are whipsawing, the yield on U.S. short-term government bonds fell so low it was briefly negative and commercial paper markets froze, with U.S. commercial debt falling by $94.9 billion in just the past week. The TED spread, the difference between what the U.S. Treasury pays to borrow money for three months and what everybody else pays, which is usually well below 100 basis points and which is a great indicator of financial market instability, rose to over 360 basis points in an historical first.
These are not merely the assets of Wall Street fat cats. Commercial paper represents short-term funding and working capital for more than 1,700 major U.S. corporations, which directly impacts unemployment across most industrial sectors, while stock market and bond losses hit many average Americans’ retirement accounts.
So who’s going to give first?
Piracy, it has been claimed, causes the loss of billions of dollars worldwide. I’m not about to launch into a discussion of whether or not that is true (perhaps another day?), but one thing has always bothered me: why doesn’t Microsoft (a good example) stop piracy of Windows, once and for all?
It’s easier than you might think. A company that has amazing technological and financial resources at its command should actually find it quite a trivial matter to simply enforce over the Internet the policy of a unique copy of Windows being installed on just one computer. I believe it can certainly be done. Why then has it not happened?
To answer this, we need to understand the facts about something called “network externalities.” In game theory, the term “network externalities” relates to the phenomenon of something becoming more valuable simply because more people use it. Since it’s more valuable, even more people use it, and it is, therefore, a self-propagating mechanism.
Image Credit: purprin
For example, the telephone is an amazingly useful piece of technology. But how would you like to be the only one having a telephone? I’m betting you wouldn’t. Who would you call? Who would call you? Without other people having a telephone, the instrument is worse than a paperweight! The more people who have a telephone, the more people you can call and who can call you back. The value of the telephone increases simply because more people use it.
This means that products that have network externalities associated with them and have a large user base might completely wipe out the competition even though their product is of a poor quality. Since the value of a product can increase due to the number of people using it and not because of its inherent quality, a dominant product can get away with having a worse product than the competition.
Let’s take the case of Windows. Most people install Windows on their PCs. Why? One major reason is that there is a lot more software that is written for Windows than for, say, Linux or the Mac OS. Why is there more software for Windows? Say I’m a developer and I’m just going to start writing code for my new software. Should I write it for the Windows platform or for another one? If I write it for, say, Linux, then no one using Windows can use my software. Since the overwhelming majority of people use Windows, I would get a better payoff if I wrote my software for Windows because there are more chances of people buying it.
So the more number of people who use Windows, the more software there is out there for it, and, therefore, when I purchase a new computer, I would choose one that has Windows running on it because of the larger amount of software available for it.
Windows has a dominant market leadership in the OS world simply because it has a dominant market leadership! Such is the self-propagating nature of network externalities. Now let’s assume that Microsoft stops piracy completely. Almost all of India, China, and other Asian countries would be forced to use another software simply because, in these countries, the price of Windows is too high for almost anyone to purchase. In India, people would maybe buy Windows if they could purchase a copy for Rs. 200. That means $5! You think Microsoft is ever going to sell Windows for $5? No way.
So now that half the world has stopped using Windows since there is no more piracy, Windows has lost the only advantage it ever had – a dominant market leadership. When half the world starts using Linux, for example, then more developers will write software for Linux, and so even more people would buy it. It might happen that Windows will never recover from this shock (since you cannot improve your position unless you improve your position – a catch-22 situation).
This is the real reason why Microsoft will never stop piracy. They know that if they do, then half the world will stop using Windows, and they figure that, if that happens, they’re doomed.
A friend recently asked me whether it matters if a physician is board certified in his or her specialty. For those of you who don’t know, the medical profession is governed by both a national and state medical board. In order to practice medicine, physicians must have a state license and a national certificate showing they have passed all the three steps of the United States Medical Licensing Examination. Once they are fully licensed general physicians, they typically obtain board certification in their specialty. Their specialty may be something broad, such as general family practice, internal medicine, or general surgery, or they may go on for further training to get subspecialty certification, such as in plastic surgery or cardiology. Essentially, at every step of their training, physicians need to pass an exam that says that they are competent according to national standards in that field. Board certification exists to ensure that there is a minimum standard practice among physicians in a specialty.
There are many physicians who do not have board certification in their specialty. This does not mean that they cannot practice medicine or their specialization. It may mean that they will have a difficult time gaining privileges at hospitals. It may also mean that the discerning patient may choose to go to someone who is more qualified. But, typically, it only matters if there is a complication or the patient is not satisfied with his or her outcome. If there is a lawsuit, it is likely that someone who practices a certain specialty without having the appropriate certification would be more exposed than someone who does have all the certifications.
One example of this is the notorious plastic surgeon on Dr. 90210, Dr. Robert Rey. I cannot confirm this, but I have read several articles that indicate he is not board certified, and he has been quoted as saying that he simply was too busy to get board certified. It does not surprise me that patients continue to flock to Dr. Rey for this services. Given his notoriety and fame from television, patients seeking a doctor to the stars will happily pay for his services.
From an economic point-of-view, this illustrates something very powerful in medicine – that reputation and business-savvy can trump qualifications. You do not have to be the best doctor or care provider in order to have a busy practice. It is well known in the medical community that, if you really want to find out whether a doctor or surgeon is good, you need to ask the key personnel who work with many doctors. For example, surgical scrub technicians know which surgeons have the best hands and the best intra-operative judgment. The average person watching Dr. 90210 does not know whether Dr. Rey is good or bad at what he does. He gains his reputation from the patients shown on television, his good looks, and the fact that he has his own TV show.
It makes me wonder why we have board certifications, after all, if the general public does not care much about it. Physicians in medicine seem to be chasing their tails getting more and more qualified, but perhaps this is all a futile endeavor.