The end of American capitalism as we knew it?

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From Willem Buiter’s blog…

This is what I read this morning on FT.com: “The US Federal Reserve announced that it will lend AIG up to $85bn in emergency funds in return for a government stake of 79.9 per cent and effective control of the company – an extraordinary step meant to stave off a collapse of the giant insurer that plays a crucial role in the global financial system. Under the plan, the existing management of the company will be replaced and new executives will be appointed. It also gives the US government veto power over major decisions at the company.”

I almost decided to go back to bed, convinced I must be dreaming.The proximate cause of the demise of AIG as a private firm were its ‘monoline’ activities, its exposure to massive amounts of credit risk derivatives like CDS, many of them linked to the US real estate sector. The largest insurance supermarket in the world, with a balance sheet in excess of $1 trillion nationalised because it was deemed too big and too globally interconnected to fail! The fear that drove this extraordinary decision is that AIG’s failure would increase counterparty risk, actual and perceived, throughout the financial system of the US and the rest of the world, to such an extent that no financial institution would have been willing to extend credit to any other financial institution.Credit to households and non-financial enterprises would have been the next domino to fall, and voilà! , financial Armageddon.

Professor Buiter knows about this stuff. He used to be on the Bank of England”s Monetary Policy Committee and he has a Chair at LSE. Next to Paul Krugman, he’s the most astute economic commentator I know.

He goes on:

If financial behemoths like AIG are too large and/or too interconnected to fail but not too smart to get themselves into situations where they need to be bailed out, then what is the case for letting private firms engage in such kinds of activities in the first place?

Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the tax payer taking the risk and the losses?

If so, then why not keep these activities in permanent public ownership?There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.

I’ve often wondered what it was like to live through the (first) Wall Street Crash. Now I have some idea. What’s strange is the way, at each stage in the crisis, there’s a feeling that perhaps it has bottomed out. And then it gets worse again. Today we’ve seen the unthinkable happen — the US Treasury is running out of cash, and the markets are beginning to contemplate the possibility (still deemed extremely remote, but still…) of the US government defaulting on its loans.

And it’s coming closer to home. Most of my savings, and some of the money I hold in trust for the kids, is held in funds managed by Lloyds. What happens if it turns out that the proposed Lloyds-HBOS ‘superbank’ in turn becomes vulnerable? Should I be moving the money into something safer? And if so, what? Gold bars? Government bonds? If the latter, which government? China? Dubai?

Years ago, I decided that I didn’t want to have a mortgage from a bank and went to an old-fashioned well-managed Building Society instead. Boy am I glad that I made that decision.

Bloomsbury Academic

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Hooray! My friend Frances Pinter has launched her new publishing venture — Bloomsbury Academic — in conjunction with Bloomsbury.

Bloomsbury Academic is a radically new scholarly imprint launched in September 2008.

Bloomsbury Academic will begin publishing monographs in the areas of Humanities and Social Sciences. While respecting the traditional disciplines we will seek to build innovative lists on a thematic basis, on issues of particular relevance to the world today.

Publications will be available on the Web free of charge and will carry Creative Commons licences. Simultaneously physical books will be produced and sold around the world.

For the first time a major publishing company is opening up an entirely new imprint to be accessed easily and freely on the Internet. Supporting scholarly communications in this way our authors will be better served in the digital age…

I’m on the Advisory Board, along with Hal Abelson, Lynne Brindley, Robin Mansell, Reto Hilty, Winston Tabb and Shira Perimutter.

Horse sense

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From the first Leader in today’s Financial Times:

The world has not ended. The international economy has not yet collapsed. But one thing is now quite clear: the banking system as we know it has failed…The US government does not have limitless resources; even if it did, the challenge in a serious financial panic is for the government to choose the right place to draw the line. Allow a Fannie Mae to collapse, and the US economy might well collapse with it. Yet bailing out anyone who asks nicely is a recipe for promoting (even more) recklessness and yet another crisis in the future.

Right on, man, right on.

George Lakoff on Obama’s mistake

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George Lakoff is one of the most insightful writers on public discourse that I’ve read. Here’s an interesting post by him on why the Obama campaign has been wrong-footed recently by McCain.

I’ve been getting loads of email asking me to say something to the campaign. So with some hesitation and a great deal of respect, I will simply point out what I see.

Four years ago I wrote a book called, Don’t Think of an Elephant! The title made a basic point: Negating a frame activates that frame. If you activate the other side’s frame, you just help the other side, as Nixon found out when he said, “I am not a crook,” which made people think of him as a crook.

The Obama campaign just put out an ad called “No Maverick”. The basic idea was right. The Maverick Frame is central to the McCain campaign, and as the ad points out, it’s a lie. But negating the Maverick Frame just activates that frame and helps McCain. You have to substitute a different frame that characterizes McCain as he really is. There are various possibilities. Let’s consider one of them. Ninety percent of the time, McCain has been a Yes-Man for Bush. Think in terms of questions at a debate. If the question is, is McCain a maverick?, you are thinking about him as a maverick, even when you are trying to find ways in which he isn’t. McCain wins. If the question is whether McCain is a Yes-Man for Bush, you put McCain on the defensive. People think of him as a Yes-man 90 percent of the time, and try to think cases when he might not have been. This is not rocket science. It’s the first principle of framing.

The “No Maverick” ad also misses an opportunity. It correctly observes that McCain’s campaign is loaded with “lobbyists.” But most of the people the ad is trying to reach don’t know just what a “lobbyist” is. McCain is saying he is fighting against the Washington power structure. A lobbyist is a “member of the Washington power structure.” If you use such a phrase, you can point out that McCain campaign itself is part of the Washington power structure, the old-boy network…

A billion iPhone App Downloads?

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From TechCrunch…

There may only be over 12 million iPhones in the wild, but that hasn’t stopped iTunes users from downloading more than twice as many apps as songs during the store’s first two months of availability, according to a report.

Steve Jobs said at Apple’s press event last week that users have now downloaded over 100 million apps. Assuming it maintains the same rate of 70 million app downloads it witnessed in August alone, it could hit 1 billion apps by the end of the store’s first year of availability, sometime in 2009. iTunes song downloads didn’t hit the 1 billion mark until its second year of availability.

But in reality, 1 billion downloaded apps could happen much sooner than the middle of next year. As apps become a key selling point for Apple going forward and more iPhones and iPods get out into the wild, more users will find reason to download apps and in turn, increase the download rate…

Another confirmation of John Doerr’s investment acumen.

The benefits of assuming the worst

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From Technology Review. What should banks and other ‘secure’ services do when dealing with customers who are incapable of keeping their machines free of malware?

“Our premise,” Ledingham says, “is that, rather than trying to clean up the machines, assume the machine is already infected and focus on protecting the transaction that goes on between the consumer and the enterprise website.”

The problem of malware on users’ computers is “the number-one problem that the financial institutions are wrestling with today,” says Forrester Research senior analyst Geoffrey Turner, an expert on online fraud. Financial institutions can take steps to secure the connections between their servers and their customers’ PCs, Turner says; they can even ensure the security of the customer’s Web browser. But they’re stumped, he says, when it comes to the customer’s operating system. Most successful attempts to steal computer users’ identities, Turner says, involve using malware to capture their credentials or conduct transactions behind the scenes without their knowledge. “The challenge is, how do you secure the end-user computer?” he says. “Should you even, as a bank, be trying to do that?”

Needless to say, his answer is “yes”. But then he runs SiteTrust, a tool recently released by a data-security company, Verdasys, which aims to protect users from fraud, even when their computers have been compromised.

Social malware

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From Technology Review…

Ever since Facebook opened its doors to third-party applications a year and a half ago, millions of users have employed miniature applications to play games, share movie and song recommendations, and even “zombie-bite” their friends. But as the popularity of third-party applications has grown, computer-security researchers have also begun worrying about ways that social-networking applications could be misused. The same thing that makes social networking such an effective way to distribute applications–deep access to a user’s networks of friends and acquaintances–could perhaps make it an ideal way to distribute malicious code…

Interesting article. I’ve been wondering about this ever since Facebook apps arrived.

Genius? What genius?

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This morning’s Observer column…

In triumph of the Nerds, Robert Cringely’s 1996 TV documentary series about the rise of the personal computer industry, Steve Jobs was asked what made Apple such an unusual company. ‘It comes down,’ he said, ‘to trying to expose yourself to the best things that humans have done and then try to bring those things into what you’re doing. Picasso had a saying, “good artists copy, great artists steal”, and we have always been shameless about stealing great ideas.’

Before we get too sanctimonious about this, it’s worth remembering that Jobs’s adoption of Picasso’s mantra is what has made Apple such an innovative force in the computer business. Its unique selling proposition is that it takes good ideas and turns them into products that ordinary human beings can use…