Fractals of Change

Buffett’s Bailout Blackmail

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From the Wall Street Journal:

"If Congress fails to approve the bailout, Mr. Buffett says, all bets are off. His investment in Goldman will "get killed, and so will all our other investments.""

This article and others explain how Buffett stands to make a large profit if his deal to buy Goldman goes through. Fine for Buffett to make a profit; he does that well. Not fine for that profit to be created by an expenditure of government funds. It's too bad about his other investments, but we don't need to bail them out either.

Apparently the bailout deal is not yet done; the people's House of Representatives may stand firm against the mandarins of the Senate. Actually it's the way the system was supposed to work – good job, Founders. All those representatives are up for reelection this Fall; their mail is almost unanimous against the bailout and it's real mail and email and phone call from real angry people – not something generated by pressure group bots. For someone up for reelection the public outcry may be drowning the din of the big contributors calling to they may not be able to pay the next installment on their contributions if they don't get bailed out.

Letters and calls today will make a difference.

But what about the claim that we'll have a depression if this bailout doesn't pass? I'm sure some of the people making the claim believe it; even the fact that the claim has been made will intensify a short-term negative reaction in markets if the bailout bill fails. I can't disprove this. I also can't disprove the theory that, if all say "OM" at the same time, markets will miraculously recover.

It's up to those who make such scary statements and propose such expensive solutions and advance the proposition that we have to bail out the super rich to save ourselves to prove these statements and propositions. That hasn't happened. The excuse for not "proving" that there were weapons of mass destruction in Iraq was that we couldn't compromise intelligence sources – pretty good excuse. Now we're being asked to risk as much as we spent directly on the Iraq war but all we're getting to justify both the expenditure of cash and the enormous damage that a bailout'll do to the principles of free enterprise and fairness is inchoate fear and threats by banks to shoot themselves if we don't pay ransom.

What should the government do?

Build up the Main Street defenses. We've already re-nationalized Freddie Mac and Fannie Mae to keep mortgages flowing. The quick move taken to stop a panic in money market funds was a good one. Make sure there is a standby appropriation for Federal Deposit Insurance. Get some massive public investment underway in thing there ought to be public investment in: the electric grid, maybe broadband, government energy efficiency, bridges and roads. Banks are not public infrastructure; they're not where we ought to be investing public money.

Meanwhile, the real economy is working towards its own cure. People are breaking up their big deposits and CDs into $100,000 chunks covered by the FDIC. The big deposits tended to be in big banks; the chunks get distributed to local and regional banks (because there are more of them). Money is flowing but not the way Wall Street wants it to. The proposed bailout reverses the flow and pumps money back uphill to Wall Street.

Housing prices were down again last month; but lower prices are bringing buyers back into the market (surprise). The inventory of unsold homes was also down significantly for the month. Artificially keeping prices high doesn't end the pain from a burst bubble; it prolongs it.

Oil imports are down and gasoline prices still falling. Sure, we cut back out of pain but we cut back.

Now Mr. Buffett may need to cut back a bit, too. We shouldn't bail him or the rest of Wall Street out; we shouldn't let ourselves be panicked into a bailout. The stock market's going to try to scare us this morning with a swoon; we shouldn't buy the histrionics. The real buying opportunity is if the bailout fails; we can benefit from Wall Street's panic and buy into an economy and a country strong enough to withstand the anguish of its superrich.

It's time to just say NO.

Two other differing views from people I respect:

Fred Wilson is persuaded that we do need some form of a bailout but wants to see real upside for us, the investors in the bailout.

Andy Kessler who is a cynic and knows a lot about financial markets thinks that we the people will make a killing on all this bad debt, that "Paulson's Folly" will be a bonanza.

Just Say No

I've been wrong to advocate hedging the bailout bill with conditions; we should just say "NO".

We can take a fraction of the $700 billion dollars we save and use it for specific anti-recession measures. Let's start rebuilding our power grid; fix some bridges; maybe even help some homeowners with their mortgages where warranted. But no bailout for Wall Street; none.

If we say "yes" to the bailout bill, the Dow will go up. Great time to sell your stocks because we will have damaged the economy and our competitiveness for a long time to come.

If we say "no" to the bailout bill, the Dow will plummet – for a while. Big deal; that's what the Dow does; it'll create a buying opportunity.

If we say "yes" to the bailout bill, the dollar will plummet. That $700 billion to bailout the world's financial institutions comes from printing more dollars and devaluing every dollar already in existence. A plummeting dollar means higher imported energy costs. That really hurts Main Street, the real economy, and national security.

If we say "no" to the bailout bill, investors like Warren Buffet and Bank of America will continue to pick up assets from distressed banks cheaply. More power to them; they can deal with the problem of overpaid executives. They are showing us the right way out of this mess.

Normally The Wall Street Journal would have been against the bailout on economic terms and The New York Times against it on populist terms. Apparently our two great national newspapers are too much the hometown newspapers of New York City to see straight. When you look out the windows of their editorial offices, you're more likely to see out-of-work bankers and empty restaurants than people struggling to pay for gas and home heating oil – or to keep their small businesses running or stay in their homes. So we have to do without their leadership on this issue.

Fortunately three out of the four candidates in the Presidential sweepstakes are senators; they have to vote on the bill (unless it dies in committee). My vote for President is up for grabs. If there were contested house or senate races in Vermont, my vote for them would be up for grabs as well.

The upcoming election gives us a chance to save ourselves from the horrendous mistake this bailout bill would be. Don't wait for the pollsters to call; write your senators and congressperson today.

 

Capping Executive Salaries in the Bailout

Update: I was wrong to try to hedge the bailout with conditions. We should just say "no". see http://blog.tomevslin.com/2008/09/just-say-no.html

Treasury Secretary Henry Paulson believes that his ex-colleagues on Wall Street would let their companies and the economy go belly-up if their compensation is reduced. Here he is quoted in The Wall Street Journal:

"Mr. Paulson is resisting efforts to limit the pay of executives whose firms participate in the program and plans to fight it "hard," according to a person familiar with the matter. He fears that provision would render the program moot, since many firms might choose not to participate."

This is very helpful because it tells us that Paulson will NOT limit executive pay if granted the hugh powers proposed in the administration draft of the bailout bill. That makes it essential that such limits ARE written into the law. It also makes me doubt whether his judgment is good enough for anywhere near such broad powers.

It is a good thing, of course, if strong companies do NOT participate in the bailout; they don't need the help and the cost to taxpayers is reduced. So that's not a problem.

If the weak firms are really going to go bankrupt, their executives will get neither their salaries nor their outsized pensions; so certainly they'll take the bailout even with salary caps. In case they won't, regulators will be able, in most cases, to force their dismissal as will the pension funds and other big shareholders – or even little shareholders who can sue. Henry, what are you thinking?

Some commenters on yesterday's post have said that we don't want the best and brightest to leave the firms that need help. That's more rational than Paulson's argument but doesn't convince me. We DO want the leaders who got the firms into the mess to go. We don't leave losing managers in charge of sports teams and they shouldn't be allowed to stay in charge of companies either. They'd be gone in bankruptcy and they ought to be gone in bailout.

Could we get good new leaders for these firms for "only" a million dollars/year? That's the most important question. The answer is "yes, of course". There are many less jobs for bankers than there were a year ago – not altogether a bad thing. Where are the bankers who want higher compensation going to go? Are they going to become rock stars or athletes? The strong banks have also had layoffs; they don't need many more high-priced executives. For the confident and ambitious, the resume opportunity in saving moribund enterprises will be priceless. For those whose life styles can't be supported at this level, too bad.

In fact the bailed-out banks will do better without the drain of excessive executive compensation. That may even put pressure on their stronger competitors to reduce their overpayments. But maybe that's wishful thinking.

The most important favor Paulson has done us with this position is to make it clear that a blank check bailout will be worse than no bailout at all – it'll turn into an executive relief bill. I appreciate him being so frank; he coulda said he'd study executive compensation later.

Just in case we don't have a bailout, Jeff Jarvis has suggested some other uses for $700 billion here.

Comments on yesterday's post were particularly lively thanks to Fred Wilson's courtesy; he quoted part of the post BUT asked his readers to do their commenting over here on Fractals of Change.

Bailout equals Bankruptcy

Update: I was wrong to try to hedge the bailout with conditions. We should just say "no". see http://blog.tomevslin.com/2008/09/just-say-no.html.

Let's assume there really are toxic weapons of mass economic destruction in the portfolios of the world's banks which need to be seized before they destroy us all. I'm not there, BTW, but there's gonna be a bailout so let's think about the rules. They ought to be similar in pain to what bankruptcy would entail.

Rule #1: Cut salaries now

Part of the bailout bill ought to be that any organization which proffers securities for government purchase must agree not to pay any employee or contactor more than $1 million per year for the next four years. No cheating with trips to events on the corporate jet or other perks with draconian penalties TO THE RECIPIENT for violations.

Rule #2: No new golden parachutes

Some executives have contracts which entitle them to huge golden parachutes – especially if their pay is cut. These need to be annulled.

Rule #3: End payment on old golden parachutes

Payments on existing golden parachutes should be stopped.

But wait a minute…

How can we invalidate existing contracts? What about the rule of law? Well, let's think about it. We're told that these institutions'll go bankrupt if we don't bail them out. If they weren't – individually or in the aggregate – too big to fail, we'd let'em go bankrupt. If they went bankrupt all these employment contracts and golden parachute payments would be subject to the bankruptcy court. Golden parachuters aren't very high on the pecking order of creditors in a bankruptcy. They shouldn't be in a bailout either. Maybe the bailout needs to be accomplished under an amendment to the bankruptcy act: chapter 11A.

No company has to apply for bailouts. But it'll be interesting to see the stockholder suits against a company which refuses to get bailed out to protect executive salaries.

Speaking of shareholders:

Rule #4: No dividends for a year

This seems harsh to us shareholders who may have bank securities in our portfolio, but it's not. Clearly an organization which is being bailed out needs to conserve cash to survive.

Advantages of this plan

1. Taxpayer money not spent on absurd salaries, preserving golden parachutes, or dividends to shareholders.
2. Strong institutions which don't need a bailout will decide they can handle the disposal of their own toxic securities just as strong companies don't seek the protection of the bankruptcy court.

And BTW

Same rules for auto companies or anyone else with their hand out for a hand out.

More on executive compensation and especially Treasury Secretary Paulson's stand AGAINST reducing it here.

Now For the Good News…

It's tempting not to put any content into a post with this title today. Even a perpetual optimist like me finds his irrational exuberance dampened by what's happening in the world's financial markets. But there is good news and it's more fun to write about than doom and gloom.

Inflation was down last month

The consumer price index DECLINED 1% month-over-month in August as energy, housing, and food prices fell. This trend will continue at least another month based on what's been happening in September to those same three components. Obviously good news for people on a fixed income. Also good news because the Fed can concentrate better on recession-fighting when it doesn't have to also worry about inflation and the possible misery of stagflation. Needless to say, the Fed is grateful for all the help it can get.

Oil prices are down

Oil prices are below the $100/barrel price they were at last winter (although have moved up in the last few days). This means it may NOT cost significantly more to heat our homes this winter than last. I put my money where my mouth is and didn't sign a fixed price agreement for heating fuel but I'm nervous about this bet. It also means, for now, pressure has lightened on consumer wallets.

Oil consumption is down

Low prices together with low consumption mean that a lot less money is flowing out of the country to pay for oil – even less than was last winter. Bad for the bad guys that sell us oil; good for us because we need the money here at home. Note that the markets are punishing Putin more for the invasion of Georgia than Europeans dare to; When oil process are falling and you're wondering which oil producing country not to invest in, one which doesn't respect either international law or property rights (markets care a lot more about the latter than the former) is a good target. Guess where that investment'll end up if we allow offshore drilling?

The government is having an easy time borrowing money

People are flocking to the safety of federal debt lowering the cost of financing our deficit and making cash available to the feds; good thing when the feds have so many bailouts on their plate. Long term it's very bad to see money only available when it flows through the government.

Housing Prices are down

Huh? Good news? Yeah, it really is. Housing prices were inflated. Many people couldn't afford houses at those inflated prices. Even worse, people who couldn't afford houses at those inflated prices bought them anyway with the help of loans they shouldn't have gotten. Now prudent people – if they have a down payment and an income – can afford to buy houses again. Mortgage rates are still low. Mortgages based on t-bill rates will stay low as people flock to t-bills. This bubble had to burst so recovery could begin and the distortion of a tulip market in real estate could be cured. Not that the bubble-burst isn't very painful, particularly for those of us who overpaid and/or paid more than we could afford. But continued house price inflation would have been even worse than the cure because the eventual collapse would have been even worse.

Lehman wasn't bailed out

Hard for me to say because I have both friends and an account there. But the bailouts had to stop to make companies sell to stronger entities while they still can – as Merrill promptly did. I still don't think the bailout of Bear Stearns should have happened and think that Lehman might have avoided failure or sold itself earlier in that case. I'm not at all sure about the bailout of AIG or the form of the bailout of Fannie Mae and Freddie Mac – but there's a lot I don't know (and hope central bankers do).

The Fed didn't lower interest rates

Making money cheaper isn't the cure for every ill. There's a pretty good argument that Greenspan screwed up badly and helped ignite the housing bubble by lowering interest rates too far to deal with the aftermaths of the dotcom implosion and 9/11. When cash is trash, we're all likely to get trashed in a pursuit of higher returns.

That's probably all the good news you can stand in one day.

Invent, Baby, Invent

Tom Friedman says we ought to be chanting "Invent, Baby, Invent" rather than "Drill, Baby, Drill". Forget that this is a false dichotomy (or read this post), invention IS a good idea. I've spent most of my career inventing both technology and business models - successfully and unsuccessfully, have a handful of patents, better stuff I was too dumb to patent, and an interesting career and comfortable life to show for it so am all in favor of innovation. Unfortunately neither cheerleading nor government subsidies are very effective in stimulating invention.

Inventor invent because they can't help it – just like writers write even when no publishers'll publish. What matters to society is how many good inventions actually can be deployed. The deployment rate of invention has a lot to do with capital (and a lot to do with marketing – I've been lucky to have Mary to promote my inventions). Government capital, however, is usually harmful to the innovation process (some exceptions below). Let's take a look at energy which is what Tom Friedman is talking about.

Corny ethanol is the greatest achievement of the latest round of government-stoked energy innovation; it's a bipartisan boondoggle made inevitable by the position of Iowa in the primary calendar. It has succeeded in adding a great deal of ethanol to our fuel mix. It's dubious whether it's led to a significant reduction in either oil imports or CO2 emissions since so much energy is required to grow, transport, and process the corn and much of that energy comes from oil. It certainly has added to commodity inflation (I have no idea how much). The subsidies paid to ethanol producers tilt the scales AGAINST other less-favored forms of energy innovation. Private capital likes to bid with and not against government capital so bad choices made by government are followed and then encouraged by private capitalists who benefit from them. VCs who bet on corny ethanol and were rewarded with subsidies like to picture themselves as green – it's only become recently clear that this particular shade of green is the color of money.

The next round of private investment in solar and wind generating capacity is waiting breathlessly to see when and whether Congress gets around to passing some subsides and what those subsidies are for. If there weren't a prospect of subsidies, more of that private investment would have already been deployed. Moreover, without subsidies the capital gets deployed better because the return is determined by base economics and good execution, not whose lobbyists do the best job writing the rules for subsidy. Let's do a thought experiment: do you think Congress is hesitating on the next round of alternative energy subsidies because our representatives are diligently trying to understand the science and economics involved?  I didn't think so.

BTW, it's not that private investors are prescient or infallible. Most private investment in innovation is in dead ends. But, when the government isn't tipping the scales, private investment fans out across the landscape and the good stuff inevitably gets funded along with a lot of what turns out to be junk. Government as an investor concentrates on what'll pay the highest political dividend and, even worse, drags the private investment in the same direction and discourages diversity of investment.

Let's talk about cars. Both major Presidential candidates are in favor of $25 billion of subsidized loans to American car manufacturers; have you noticed that Michigan is a critical swing state? Is innovation, especially radical innovation likely to come from the major manufacturers? Of course not. Are innovators who aren't major manufacturers going to be able to raise the capital they need to bring their innovations to market; very difficult seeing that their competitors are getting these big gobs of taxpayer subsidy. The result of these loan guarantees will be to decrease the likelihood that America will turn the energy "crisis" to the energy "opportunity".

There is a role for government capital in enabling infrastructure – the power grid which creates a way for even yet-uninvented energy sources to distribute is, perhaps a good example. Keeping taxes low doesn't make inventers invent – they'll do that anyway – but it does help convince the investors the inventers need to invest. Taxing capital out of the private market and having government "invest" it is pretty much the worst way to encourage innovation.

Tom Friedman Being Stupid

"America Being Stupid" is the headline on Thomas Friedman's latest column in the New York Times. It's a rant against the possibility of offshore drilling.

"Why would Republicans, the party of business, want to focus our country on breathing life into a 19th-century technology — fossil fuels — rather than giving birth to a 21st-century technology — renewable energy? …

"Of course, we're going to need oil for many years, but instead of exalting that — with "drill, baby, drill" — why not throw all our energy into innovating a whole new industry of clean power with the mantra 'invent, baby, invent?'"

Forget the politics; that's not what this post is about.  Almost the whole political crew is way behind the public in the logic of this situation. McCain was against offshore drilling before he was for it (although changing your mind isn't always bad); he's still against more drilling in Alaska. Obama was against offshore drilling until he said he'd think about it (thinking isn't always bad but he ought to learn to change his mind more decisively). Nancy Pelosi wouldn't even allow a vote on offshore drilling until she saw the polls and heard from anguished House members up for reelection. Now she's hoping to uh.. put lipstick on a pig with a compromise which probably would mean no or very little drilling. But forget the politics.

Thomas Friedman wrote The Flattening of Almost Everything which was brilliant explanation of globalization. Sad to see him forgetting everything he seemed to know about economics and resorting to the rhetorical device of the false dichotomy.

Friedman writes as if we have to make a choice between drilling for more oil and innovating in energy creation and use. That might be true if there were a proposal to spend public money on drilling instead of, say, upgrading the power grid or doing basic research. But no one is proposing that we spend public money on drilling! We get public money from drilling twice, once when oil companies pay for the initial leases and once more when they pay royalties on the oil and gas they extract. Having more public money gives us more choices, not less.

What's more, American will pay less for oil products – no one knows how much less and when – if we have more domestic supplies. We will certainly send much less of our money to bad places abroad. If more of our money stays home, more money is available to spend on alternative energy without the government even guiding the investment into boondoggles like corny ethanol or bailouts for auto companies.

We don't even know how much offshore oil we have since we have forbidden ourselves to explore. A conservative estimate is 16 billion recoverable barrels – not counting Alaska. At $100/barrel that's $1.6 trillion dollars. Now here are some real dichotomies: do we want to keep that money here or do we want to send it away? Do we want the extraction jobs to be mainly American or do we want them somewhere else? Do we want to get this oil from an area we can relatively easily secure or would we rather get it from Iraq and Iran? Do we want the oil companies to invest their profits here or in Russia, for example?

Opponents of offshore drilling say that oil prices will soar even if we drill. They're probably right despite the current interruption in commodity inflation. Let's suppose oil is $400/barrel by the time any offshore wells can come online. Then that oil is worth $6.4 trillion dollars – probably half of which goes to the government and much of which stays in the US. Do we want $6.4 trillion dollars less than we want $1.6 trillion. The more we think prices'll go up, the more we should want to drill.

What's frightened an intelligent man like Friedman into false dichotomies and economic illiteracy? We're forgetting politics so I'll assume it's not that. What Friedman and other anti-drillers are really afraid of us is that, if we drill offshore, the price of oil and gasoline will continue to fall and therefore we won't invest in getting independent from it. History does show that, if prices are low enough, we (including me) buy SUVs and, if prices rise fast enough, we do cut back; so they have a point there.

If the price of oil falls far enough (unlikely given new demand but possible), then we should tax it back up and rebate the tax in reduced social security payments for low-income wage earners. Raising prices by reducing domestic supply (as we do by restricting drilling), give a windfall to foreign producers – many of whom are not our friends. Raising prices through taxation arguably reduces the take of the suppliers AND reduces demand. BTW, this is not an argument politicians are likely to make during the election season.

Related posts:

If I Can't Have a Magic Bullet, I Won't Shoot

The Price of Gasoline SHOULD Go Up (written before it DID go up)

 

 

 

Spam Filter: Debt More Important Than Sex

 

Mary was actually the first to spot this trend. Used to be that my spam filter was full of offers to enlarge my body parts, even those I'd rather not enlarge. Second hottest category was offers of medicine to help me make the best of the body parts I have. Then some opportunities to meet girls.

Assuming that spammers have their finger on the pulse of America, we seem now to be much more worried about debt than sex.

 

9/11/2001

From a New York Times article with more pictures.

Satellite Internet Access That Could be Good

According to The Wall Street Journal, A company called O3b Networks LTD Traditional is planning to launch up to 16 satellites by the end of 2010 to provide Internet access in Africa, the Middle East, and parts of Latin America. This satellite plan, unlike many others, could be good. These are low earth orbit satellites or LEOs so they will be able to avoid the latency problems which are unavoidable with the geostationary satellites used by companies like WildBlue and Hughes to provide "last resort" Internet access in the US.

O3b stands for "other 3 billion" – the people in the developing world. No one should ever underestimate a developing market. O3b's backers for $60 million of the estimated $650 million they'll need include Google, HSBC Holdings PLC, Allen & Company, and Liberty Global Inc.

The trouble with geostationary satellites is that they have to be 22,000 miles above the equator in order to appear stationary from earth (law of physics). Even at 186,000 miles/sec (another law of physics), radio signals take so long to get up and down that noticeable latency is introduced. Typically these services are useless for gaming, near useless for VoIP, and increasingly useless for web surfing as web sites get more and more interactive. They can be OK for file downloading, email, and relatively small uploads.

The advantages of geostationary satellites are that very few of them cover lots of the earth, they are high so they stay up and useful for a long time, and, because they appear stationary from earth, an antenna can be pointed precisely at them to save on transmit power.

LEOs are used by services like Iridium and GlobalStar primarily for voice use in remote locations or at sea where cellular networks don't reach. The services are expensive – partly because of how many LEOs are required to cover the earth and partly because friction with the atmosphere makes low satellites fall relatively soon after they're launched. So it's economics and not physics that'll be a problem for O3b. To succeed, they'll have to get good penetration (but they do have greenfield markets) and offer high data rates at prices much lower than the primitive data offered by Iridium and GlobalStar. Unlike these companies, which offer service directly, O3b plans to be a wholesaler and leave distribution of Internet access to local providers. This strategy means that they can rely on high bandwidth smart head end antennas which can track satellites as the move across the sky and that the satellite radios don't have to worry about numerous relatively lowspeed connections.

Sounds like it might work

e-Sitting in Nerdville

We never did see Baby Jack during our early morning stint of e-sitting.

Son-in-law Hugh had to catch the 6AM flight from Burlington to get to a conference (been there, done that). He, Kate, and Jack stayed at Nerdville summer headquarters because it's relatively near the airport. Kate had to drive Hugh there early enough for security etc. "Don't wake Jack up," we (Mary) said. "We'll watch him."

"OK," Kate said after just a little persuasion. "Should I install the monitor in your room?" The monitor is the device on the left. The device on the right is the transmitter and it stays near Jack's crib. We hear everything Jack says or doesn't say from our room above his.

"One problem," Kate said, "you'll have to wake up to turn the monitor on when I leave."

"Why don't we just turn it on now?" I asked.

"You don't want to listen to us snore," Hugh explained tactfully. Just to test, I turned the monitor on when we went to bed. It gave the roaring sound that indicates that the transmitter is off.

At 4:15 our alarm went off and I turned the monitor on. Its green light told us that the transmitter was now active.

Jack burbled a few times and we woke up – even me. Nothing serious enough to require a trip downstairs. Next sound we heard was Kate coming back from the airport.

BTW, under Jack's mattress is a breathing alarm. We would have heard it go off through the monitor if he'd held his breath. He didn't.

Glad to learn about all the latest technology.

The New Religion - Discussion

In response to my post claiming that the NY Times is surprisingly criticizing Sarah Palin for lack of faith in its editorial which complains "She has questioned whether humans are responsible for climate change," reader Tim O'Reilly posted this comment which deserves at least a post to reply to:

"Tom, I think you're misrepresenting the facts here. Global cooling and nuclear winter were never the subject of a serious scientific consensus in the way that global warming is today. This is more like tobacco companies questioning the link between smoking and cancer. I'd also point out that Sarah Palin didn't say she questioned the science. She said she didn't believe the science. She also thinks that creationism should be taught in high school biology as an alternative to evolution. Is that also appropriate "questioning" in your opinion?"

So, point-by-point:

Tim is right that there was no UN-sponsored consensus on nuclear winter nor did the concept enjoy either as much popular attention or scientific support as "global warming" has today. Maybe I should have used the preCopernican "scientific consensus" that the sun and stars go around the earth as an example but I wasn't around for that. However, even if there were unanimity on every point of anthropogenic global warming theory (which there certainly isn't), the importance of the issue make relentless questioning, testing of hypothesis, rewriting of models etc. essential. Since the predicted consequences of global warming (according to some credible predictors and some not-so-credible) are catastrophic and the expense of all known remedies is also immense and the effect of each proposed remedy unknown, the more likely you think continued global warming is (man-made or not), the more you should want to question and study (as well as act). Today, for example, there is a CNN story on a report "written by scientists with NASA and the National Oceanic and Atmospheric Administration" that short-lived particulate pollution from burning – among other things – biofuels like wood and cow dung may be a more significant cause of warming than previously thought. Should we ignore that because we already "know" what causes global warming and shouldn't question this wisdom?

I was quoting the NY Times article in saying that Sarah Palin questioned anthropogenic global warming, not quoting Sarah herself. My post was about what the editorial revealed about the NY Times, not about the Vice Presidential candidate. But perhaps that wasn't clear.

I don't think creationism should be taught as an alternative to evolution because evolution is a scientific theory and creationism is not; creationism is an article of faith and not subject to disproof so isn't science. I do think students should be taught to question all theories. Ever since Darwin (and a few others) introduced this brilliant explanation of speciation, the theory has been constantly improved by those who questioned it, not by those who treated every word that Darwin wrote as gospel.

The New Religion

Many people, including me, are made uncomfortable by Sarah Palin's evangelical faith. So it was surprising to see Palin attacked this morning in a New York Times editorial for her lack of faith.

"She has questioned whether humans are responsible for climate change," huffs the Times editorialist as part of a litany of her sins.

Questioning is a good thing. Questioning is what scientists do. Questioning is what I hope our leaders will do – of all orthodoxies. It is religions that insist on faith instead of questioning; anthropogenic (man-made) global warming is apparently our new religion – not to be questioned.

Way back when I was in college the accepted dogma pushed by Carl Sagan and other leading scientists was that we were headed for a "nuclear winter" – catastrophic global cooling caused by dust in the atmosphere from nuclear testing and other "civilized" activities. Questioning that theory was as disreputable then as questioning carbon-caused global warming is today.

The Putin Test

Flash forward to early next year. A new president of the United States is about to be sworn in. Vladimir Putin is planning an inauguration day test for him – perhaps another foray into Georgia, seizing all or part of the Ukraine, or just flying dangerously close to US ships at sea. There will be a test; count on it.

Western Europe will be worried about its winter gas supplies and continuing to practice historical amnesia. Eastern Europe will be braver because they remember better, but Eastern Europe is too weak to confront a resurgent Russia. China gains by staying on the sidelines.

What will the test be? It probably depends on who the next president is.

A danger in electing Barack Obama is that, even if he is steelier than he appears, even if he won't wait forever to build a coalition of weak partners, Putin is likely to proceed on the basis of PERCEIVED weakness. He is likely to test Obama much more severely than he is likely to test McCain. Then, even if Obama does react with proper speed and swiftness, Putin may have gone a step too far and the situation'll be more dangerous than if McCain had been elected.

Sure, Vlad shouldn't be picking our new president for us. But he's a huge factor in the world the next president will have to face. McCain's resume is good here. If he ever looked into Putin's eye, he didn't see the same thing George Bush did. He's been warning about a resurgent Russia and its ambitions for a long time. He didn't have to think about the proper reaction when Russia invaded Georgia; he wasn't dangerously nuanced in his response.

Now, some will say, what about Sarah Palin? Wouldn't Putin test her as dangerously as he'd test Obama? Probably, he would out of chauvinism if nothing else. But Palin's not at the top of the ticket. If something happens to McCain after an administration has been put together and begun to function, the temptations for mischief-making won't be as great as on inauguration day. Put another way, Putin won't shy away from testing Obama because Joe Biden is the understudy.

McCain told Bush we needed more force in Iraq almost from the beginning of the war; he didn't support Rumsfeld's attempt to win without inhaling too often. McCain was influential in convincing Bush, belatedly, that a surge was needed and would be effective. He supported the surge when it looked like political suicide to do so. Most importantly, it appears he was right. BTW, Biden and I made the same mistake: we thought Iraq couldn't be put together so it was time to partition it; he voted against the surge. Joe and I were wrong; McCain was right; that's what I want in a president.

 

Chrome - Getting Microsoft’s Goat

Historically there has been nothing which gets Microsoft's attention as fast as a platform for applications which threatens Windows dominance. Google's Chrome is obviously such a platform; Google can afford to challenge Microsoft; it's healthy for innovation that it does. Can Microsoft still rise to the challenge?

Way back when I was at Microsoft – 1991 to 1994, Lotus Notes was the threat du jour. Developers WERE developing Notes apps instead of Windows apps; analysts and Lotus CEO Jim Manzi were predicting that Windows would fade in importance and that Microsoft apps like Word and Excel would than wither as well. Bill Gates respected Manzi as a tactician and really respected Notes creator Ray Ozzie (now chief software architect at Microsoft) as a technician. We were at war.

Since I was responsible for the development of what was to become Microsoft Exchange, I was in charge of that war for a while although I was never as aggressive against Notes as Bill would have liked. I was an email guy; I thought the real battle was over email (and that email was the platform of the future – wrong). I knew Lotus cc:Mail had more users than either Notes or Microsoft Mail (the then current DOS-based version). I knew mail was on or about to be on every desktop. I believed that Notes, powerful as it was for collaboration, was too complex for most people to want to use as an email client. But, every time Bill insisted that we add more Notes-killing functionality to Exchange, the further behind schedule we got (this is partly excuse; we were behind schedule anyway). The further behind Exchange got, the more seats cc:Mail and, to a lesser extent, Notes added.

In the end, we (Microsoft) won the email battle, partly because MAPI (Messaging APIs) made Exchange and Outlook better platforms than cc:Mail for ISVs and 3d party vendors and partly because Lotus didn't upgrade cc:Mail on a timely basis since they, too, were focused on Notes so we really had a better email system. Our collaboration battle faded into irrelevance as the link-based Web proved more useful than the mainly hierarchical data storage models used by both Lotus and Microsoft.

The next serious platform challenge to Microsoft was a browser: Netscape Navigator. The applications you could write in a browser back then were very limited; but that didn't stop Marc Andreessen, the chief inventor of the Web browser, from proclaiming (perhaps unwisely) that the browser was a platform which would challenge Microsoft. Bill Gates apparently believed him. Netscape wasn't really strong enough to stand up to Microsoft despite a soaring stock price; its middle managers had prematurely become as arrogant as Microsoft middle managers. Microsoft courted ISPs (I was running AT&T WorldNet then so was courted) and won distribution for Explorer at least equal to that for Navigator. And, of course, Microsoft bundled Explorer with Windows. Eventually Netscape was acquired by AOL, which didn't do much with it, and that threat was gone.

Chrome could be the most serious threat yet. Browsers have come a long way since Navigator and the early Explorer. JavaScript and a host of server-based tools make it much easier to write applications in a browser – and gain at least partial platform and operating system independence. Amazon, and to a lesser extent Google, have made it extremely practical to deploy Web apps professionally at very low cost. Most importantly, we're online with access to web servers more and more of the time – even when we're moving.

Google has googles of cash; it can't be starved out by Microsoft. It has "distribution" as the search engine of choice; it dominates search and keyword advertising the way Microsoft dominates desktop software. THIS is a battle of the titans.

Related posts:

How MAPI Beat VIM (an historical footnote)

The Flattening of Almost Everything #2 – Information Retrieval

 

Microsoft Memories

 

 

 

Words Matter

"Gustav Sends Oil Prices Surging" read the headline on the front page of cnn.com yesterday.

"Crude rises slightly in 'muted response' during a special electronic trading session. Hurricane bears down on region that controls 25% of U.S. crude production," read the subhead of the story itself if you bothered to click through to it. It went on to say:

"This is a very, very muted response," said Peter Beutel, an oil analyst with Cameron Hanover. "The fact that it's trading this low shows how powerful the dollar is and how bearish this market has become; had this happened in early July, oil would have been up $10 now."

So the headline about surging oil prices is really a story about a weak (at least right now) oil market.

We've got important decisions to make. The Russian empire would like to be resurgent; we're damned near hostage to oil imported from unfriendly and/or unstable places; the globe is probably warming (but may start cooling) and we may have caused it and we may be able to do something about it and/or may have to live with the consequences. We need to elect a president for the next four years and decide whether Democrats should have a veto-proof and filibuster-resistant majority in Congress. This stuff matters.

So the words in headlines and news stories matter as well. Subtleties of wording get right to our emotions bypassing our logic as in the first two lines from a front page story in yesterday's NY Times:

"The White House has long touted the "surge" of forces in Iraq as one of President Bush's proudest achievements. But that decision, one of Mr. Bush's most consequential as commander in chief, was made only after months of tumultuous debate within the administration, according to still-secret memorandums and interviews with a broad range of current and former officials."

It's the "But" at the beginning of the sentence which should've caught the editor's eye. Why "But"? Is a decision a bad (or good) decision because it was proceeded by debate? Is the "White House" misleading people by claiming this as an achievement BECAUSE there was debate before it happened. Quite possibly unintentionally, writer Michael R. Gordon is betraying his bias against either the President or the surge with the insidious "But". BTW, the "touted" in the lead sentence is also a bit prejudicial. The rest of the story is interesting detail over how the debate took place (in an administration not known for debate) and who said what (without much attribution to named sources). The point isn't whether the surge is right or wrong; the point is that even the editors of a usually great newspaper don't recognize bias even in the lede for a front page story. We have to look out for ourselves and keep our debunkers on.

It's hard to blame reporters for bias when seemingly-qualified sources exhibit it as well. On August 26 an organization called National Snow and Ice Data Center (NSIDC), which is part of the Cooperative Institute for Research in Environmental Sciences at the University of Colorado at Boulder, put out a press release with the title "Arctic sea ice now second-lowest on record". This headline was duly picked up by various news organizations.

Now that might be alarming unless you read around the site and find that the record was set last year and that most of the experts they poll expected the Arctic ice to retreat even further, if only because it started from last summer's low extent. An article on June 11, 2008 on the NY Times' Dot Earth site said "Most Experts Foresee a Repeat, at Least, of 2007 Arctic Ice Loss".

So the headline on the NSIDC release would have been more informative if it said "Arctic Ice Cap Grows from Record Lows Contradicting Expert Predictions".

One year's observations hardly a trend make; that's not the point. In fact the whole record of these observations only go back to the beginning of the satellite era. What is important is that we are fed a surfeit of "information" highly laced with bias towards the conclusions the writers would like us to draw. We need to be diligent in sifting the information out of this mix before we feed it into our own decision-making algorithms.

Friendly Hackin at Nerdville

Daughter Kate, son-in-law Hugh, and first grandchild Jack have moved back to the US. Enroute to their new lives, they're staying with us in Vermont. Only problem is that they got to our house before we did.

Should have been no problem: the lock is electronic; Kate had the code for both it and the alarm. But the door wouldn't open. Jack is patient but not infinitely so.

They couldn't call us on their cellphones because they hadn't yet gotten US versions and there is no GSM roaming (even though there's GSM service) in Nerdville. Nerdville isn't exactly near any phone booths even if there were any that still work.

But Kate's not a hacker's daughter for nothing. She had her laptop and WiFi; it didn't take long to determine that there was a usable signal on the porch. She knows how to get through my security. Voila.

Well, not quite. We were offline on the road; didn't respond to email. Hmmm….

Kate downloaded Skype; created an account; bought some SkypeOut minutes, and called me. We gave her an alternate path in.

Turns out the door had a mechanical problem; bummer. But fortunately there was a software fix.

Going Without Revenue

Starting a business with no plan for revenue is always a risky approach; it's especially so these days with no quick exits through either going public or being acquired and not much VC money available – especially for businesses with no revenue in the P&L.

Some people would argue that a "business without a revenue plan" is an oxymoron. That's NOT true; you can build spec houses for a business and know you won't get a cent back until you sell them; that's a business. In the Internet world you can build a service on spec hoping that it will be purchased and become a feature of another business (which probably does have revenue); nothing wrong with that except the risk. You can also speculate that, if you can only attract enough users, many revenue models will be possible; you may be right; Google was.

More on reasons why starting without revenue may be a good idea here. If you're convinced that's what you want to do, here's what you need to have any chance of success (and even with the items below, you will probably fail; but so will most new businesses WITH a revenue model):

Hugely deep pockets of your own. If you've got that, you've got lots of runway – but no verification that anyone besides you believes in your idea.

OR

Enough starting capital to survive at least twice as long as you think you're going to need to survive before you either sell out or raise more capital.

AND

A very low burn rate for personnel costs. If anyone you depend on (especially you) is taking out what they could earn in a "regular" job, you run a good chance of having to fold because they or you have to quit and earn a living.

AND

A business which can grow to scale without consuming large amounts of capital either for equipment or for hosting costs. This requirement can be met by offloading most of the cost of growth to your users' machines and Internet connections (as in a P2P service) or by frugal use of cheap hosting from the likes of Amazon.

AND

A source of follow on funding willing to raise the ante purely because you have met internal goals even if you haven't achieved the growth you hoped for and are still far from revenue. See Fred Wilson's post on why VCs DO like to do follow on funding; but remember that VCs also can and often will pull the plug (Fred again here).

The point is that many things will go wrong and, without revenue, you are walking a tightrope without a net. Revenue gets you both additional runway – infinite if you're breakeven and patient; revenue opens doors to new funding and/or acquisition from many more sources that will look at a non-revenue operation. That's why you need either a huge fortune of your own or an excellent combination of funding and low cost growth before swinging for the no-revenue fence.

 

We’re Madder Than Hell And…

We did it because we were mad. We did it ourselves with precious little help from our leaders. The average US price of regular gasoline is down 11% to $3.70 since the Independence Day peak of $4.14. That's still a lot higher than $2.76 a year ago; but we're also still mad. By coincidence, BTW, the price of gas has come down by just about the full amount of the 45.8 cents/gallon federal gas tax that didn't get suspended (good).

The price of crude oil has fallen even further from its peak. At $114.78/barrel it's down 22% from its high – and we didn't draw a single barrel from the strategic petroleum reserve (good) or increase drilling (even though I think we should). The smart money on $200/barrel is now forecasting we'll see $100 again first.

Somehow speculation didn't get outlawed (good) and speculators are apparently driving the price of oil down and the dollar up just as they were doing the opposite last month. They don't really care; they just try to get where we're going before we get there. Probably some lost their shirts (or their investors' shirts) when we got mad and started a buyers strike.

We slowed down without government lowering the speed limit. Good for us.

We are increasing the mileage of our fleet as fast as manufacturers can switch their production to gas-sippers and much faster than any government mandate could or would have dared to make us do that. The car makers can't lobby us out of self-control; we made them change their product line.

We're driving less – not happily but we're doing it. We're mad.

Meanwhile we're getting ready for winter by insulating, buying wood pellet stoves (or even electric heaters), installing better thermostats. If nature cooperates, a lot less oil and gas will go up our chimneys this winter than last. That stuff costs real money.

Our anger has scared anti-drilling politicians into "considering a compromise". A little more anger and they may do something real.

We won't stay mad forever. Already $3.70/gallon seems a lot lower on the way down than it did on the way up. Even our anger won't stop developing countries from developing into nations of drivers and home-heaters (although their development may slow a little because there's lots of stuff we're still not buying while we pay for oil).

Anger's great for short term stuff; so is fear. Without leadership, the energy of anger is dissipated on short-term measures. With great leadership, anger and fear become the launch pad for long term change. Remember Pearl Harbor (at least from the movies)? Remember Sputnik (trite but true)?

For all the assurance we have about whatever candidate we support, it'll be well into 2009 before we know if we have a leader. The opportunities (and the anger) are there.

 

 

Blogging 101 – Comment Spam

Sometimes you will find comments on your blog which link back to commercial sites and are there to promote a product or boost the google-juice of the linked to site. Are these spam? Should you remove them all?

Here are two comments which were recently posted on Fractals of Change. IMHO, one is legit and one's not:

"what a nice post Good luck!!!!!!!!!!!!***[commercial name removed] Challenge"

"We have recently created a free link exchange directory http://www.link-exchange-submit.com. Providing people use it fairly, it should help you with your SEO link building. It is automatic in terms of your link and suggested category being added. But it is also moderated daily in terms of spam removal."

The first comment is clearly spam in that it contains no internal reference to the content of the post. For some reason, the people or bots that post these almost always stick in a generic compliment thinking, perhaps, that you are starved for praise and will leave the comment posted. This one was deleted and reported to Typepad.

Since the post that the second comment was attached to WAS about links, the comment is right on target (although it could have been posted by a smart bot). My post was against link exchanges and this is clearly a contrary view; but that's fine – good, in fact. The service which is being promoted is something a blogger thinking about link exchanges would want to look at. So the comment is likely to be useful to readers of the post. It gets to stay.

Similarly, a post of how to make cheaper cellphone calls abroad is festooned with comments containing links to SIM providers and cheap or free calling services. Again, anyone interested in the post is likely to be interested in the links. Sure, they serve a commercial purpose and I don't get paid for them as would get paid for ads. But the comments expand on the post and make it more useful to readers. On FOC, that's the spam/no spam criterion.