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Fractals of Change

nothing great has ever been accomplished without irrational exuberance

Treasury Trashes Housing MarketYesterday

The Treasury Department has just executed one of the few maneuvers possible to make the housing problem worse than it is: a preannouncement of possible subsidized rates for new mortgages to take effect sometimes in the future. (story here in the Wall Street Journal which just reports the plan and doesn't predict the consequences).

Suppose you were planning to take advantage of lower prices and buy a home now. You wouldn't if you could possibly help it. You'd wait for the new rates since they won't be retroactive; wouldn't you?

Here's how long you'll wait according to the WSJ: "The plan remains in discussion and may not be made final before the Bush administration's term ends in January." Good way to make sure we don't have any recovery in the housing market on W's watch.

Any product manager or store owner knows you don't preannounce future discounts on products you're trying to sell today. But the Treasury guys come from Wall Street where they may not know that.

So now for sure people will continue to hold off buying houses. That will, of course, be interpreted as evidence that the mortgage subsidy is needed. In fact, when the subsidy is finally applied, there will probably be a turnaround because the preannouncement will have squelched any demand that was building in response to lower prices. The tragedy is that turnaround might have happened sooner and

Boycott Iranian OilYesterday

Gasoline under $2.00/gallon gives us a unique opportunity to put a peaceful end to Iranian nuclear weapon ambitions.

Previous UN attempts at economic pressure on Iran failed to end the nuclear program because, until very recently, sellers had the upper hand. With oil revenues rolling in at over $150/barrel and seemingly headed ever-higher, tampering around the economic edges didn't scare Mahmoud Ahmadinejad even a little. There would have been no support in the US for anything which increased energy process even further; any oil the US didn't buy from Iran (and we don't buy much directly anyway) would have just gone to another buyer.

But this is now a buyer's market and the shoe is on the other foot.

We can afford to take a chance that oil prices climb a bit; some people think that might even be good for us. More importantly, new Secretary of State Clinton will have a unique opportunity to put together an effective coalition for boycott before which Iran will graciously fold.

Here's the rundown:

OPEC. They're looking desperately for ways to cut production to stop prices from plummeting even further. If the world takes Iranian oil off the plate; we make it that much easier for the rest of them. Countries like Venezuela will bluster and fear (with good reason) that they may be the next boycott target, but Chavez is toast if oil revenue doesn't recover. He'll sell what he can.

Russia. Normally they would block any effective action in

Lesson for Next Time: Small is BeautifulDecember 2

Antitrust law needs to be updated to include "too big to fail" as a criterion for dismemberment. The alternative is pervasive regulation and/or government ownership of institutions which control huge swathes of the economy.

Financial regulation as we've seen is, a chimera: whether or not you blame Fannie Mae and Freddie Mac for being a partial cause of the current collapse, there's no question that they WERE regulated – as is Citibank – and that they collapsed. All public companies in the US are regulated to some extent by the SEC and have draconian external audit requirements. Neither the regulation nor the auditing warmed stockholders of the potential collapse of AIG, Lehman Brothers, and now GM. Why? It's not that all the auditors and regulators are corrupt or even incompetent even though some are surely both. The problem is black swans as Nassim Taleb elegantly pointed out in his book of the same name: you are in more danger from the unknowable than the knowable risk; the past is an extremely misleading guide to the future. Put less elegantly, shit happens and all the regulation in the world can't prevent or predict it. The appearance of regulation is dangerous because it gives us a false sense of confidence – we even start believing financial statements.

Government ownership of finance and manufacturing is even worse. Witness the late not-lamented Soviet empire or China or India

Free, Slow, Censored Internet – A Bad IdeaDecember 1

The FCC is looking for an organization to provide free, slow, and censored Internet access. The censorship apparently would include email as well as websites.  According to an article in today's Wall Street Journal:  "Outgoing Federal Communications Commission Chairman Kevin Martin is pushing for action in December on a plan to offer free, pornography-free wireless Internet service to all Americans, despite objections from the wireless industry and some consumer groups [nb. and from me]… The winning bidder would be required to set aside a quarter of the airwaves for a free Internet service[ nb. the WSJ hasn't got that part quite right. More below]."

Here's what the FCC's NPRM (Notice of Proposed Rule Making) says:

"(a)  The licensee of the 2155-2188 MH band (AWS-3 licensee) must provide as part of its free broadband service a network-based mechanism:

"(1) That filters or blocks images and text that constitute obscenity or pornography and, in context, as measured by contemporary community standards and existing law,  any images or text that otherwise would be harmful to teens and adolescents.  For purposes of this rule, teens and adolescents are children 5 through 17 years of age;

"(2) That must be active at all times on any ty

Time for the Citi to SleepNovember 30

It's easy to believe that Citibank is a tottering tower whose collapse would endanger us all in the canyons below. However, keeping a financial corpse walking further endangers every other financial institution.

When Citi is declared too big to fail, it becomes a more attractive bank to do business with than its competitors who are either not failing or are not too big to fail. Arguably, the competitors who are not failing are better run than Citibank; but now they will lose when they compete with Citi. Some of them, in turn, will fail even though they might have survived if Citi were not in the federal protection program. If they're real big, they'll be bailed out, too. That increases the pressure on the good banks whose only sin is not being too big to fail. Soon we'll be left with only the large losers for banks… or car manufacturers… or insurance companies.

Q: Is this good public policy?

A: The answer's obvious so,

Q: For extra credit, what's the alternative? We don't want the ruins of Citi and AIG and GM crashing down around our heads.

A: If controlled implosions won't take them down, they ought to be carefully demolished.

In general, that's what bankruptcy does. It may be true that the bankruptcy law is inadequate to protect the public interest from the collapse of a giant institution. In that case we need a managed bankruptcy by the Fed or someone else with certain creditors protected more than they would have been in