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EJ
10-25-11, 06:52 PM
American Kremlin Conference – Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession"


http://www.itulip.com/images2/Bernanke3wtmk.png
Photo Credit: Fed Chairman Ben Bernanke,
Boston, Massachusetts, October 20, 2011, Eric Janszen

There is not truth, only power, and facts are for little men.

I attended last week’s small, invitation-only conference "Long-Term Effects of the Great Recession" hosted by the Boston Federal Reserve on Atlantic Avenue to hear what a dozen influential economists like Martin Feldstein, Donald Kohn, and Simon Johnson have to say about the state of the economy two years after the so-called Great Recession, and meet members of the media.

The format of the two-day conference, a series of presentations and reviews of academic papers. Each presentation by authors was followed by two peer review presentations and a question and answer session.

Fed Chairman Ben Bernanke gave a 30-minute speech, duly covered by media in attendance. The TheStreet.com called it “The Most Important Ben Bernanke Speech That No One Heard.” His Fedspeak was interpreted by the attentive to mean that the Fed intended to set aside the Taylor Rule that ties interest rate decision rigidly to inflation and adopt a more "flexible" policy that takes unemployment into account. I call it the Burns Rule and investigate the implications in Part II.

On the other side of the street, Occupy Wall Street protesters quietly displayed their dissent. I asked a dozen Fed employees during the conference what they thought of the protests. All of them were sympathetic with the demonstrators who were protesting “Congress for Sale” but less so to the “Eat the Rich” contingent. After the event I walked across the street in suit and tie, still wearing my conference badge, to talk to the protesters. I’ll fill you in on those conversations later, too.


http://www.itulip.com/images2/bostonfedencampmentwtmk.png
Photo Credit: Occupy Wall Street, Boston, Massachusetts, October 20, 2011, Eric Janszen


Cognitive Dissonance: FIRE Economy economists versus American Kremlinologists

Conferences like this require disciplined mental preparation.

Before I walk into a roomful of FIRE Economy credentialed economists and journalists, I have to compartmentalize the knowledge I have gained over 13 years running iTulip.com; pack it in a box and store it in the attic of my consciousness, out of sight. Then I’m on the same wavelength as the presenters and audience, this one comprised of professional investment bank, pension fund, family practice, academic, and Federal Reserve economists, and the journalists from CNBC, Reuters, New York Times, Wall Street Journal there to cover them.

Those who have been reading along on iTulip.com since 1998 will feel my pain. iTulip.com chronicled two asset bubbles and their aftermath, the existence of which was denied by professional economists at the time.

To prep for such a conference, forget that you first became aware of the build-up to the financial crisis and Housing Bust Recession with this first warning about the housing bubble in 2002 (http://www.itulip.com/qc082002.htm). That was followed in January 2005 by a forecast of a housing market decline lasting 10 to 15 years (http://www.itulip.com/housingbubblecorrection.htm), depending on government interference in the market – a long and tortuous decline with it, a deep and short decline without. Forget that in April 2006 you learned about the risks facing the global financial system due to mis-rated asset-backed securities that had been sold to funds all over the planet, polluting the global financial system with credit risk (http://www.itulip.com/riskpollution.htm). Forget that in 2007 you became aware of the measures that the Fed planned to take (http://www.itulip.com/forums/showthread.php/5709-Still-no-deflation-Disinflation-then-lots-of-inflation) to prevent the approaching de-leveraging panic from devolving into a 1930s type deflation spiral. Forget that you knew the long-term impact of economic policy responses of the central bank and Congress in April 2008: persistent high unemployment and inflation initially exhibited as a decline on product and service quality (http://www.itulip.com/forums/showthread.php/3896-Inflation-in-America-Part-I-Five-signs-of-inflation?p=34140#poststop), later as rising nominal all-goods prices. Finally, forget that in 2008 you knew that once the public realized they’ve been had – again – that they’d take to the streets to express their First Amendment rights to try to get through to unaccountable political representatives whose campaigns were financed by the institutions that created the mess.


http://www.itulip.com/images2/creditriskaccumulationJan2000-Oct2011wtmk.png
Where was the media and the Federal Reserve from 2005 to 2007 when the credit risk was building up?


To enter the Kafkaesque milieu of a professional economics conference where obvious and predictable events are treated as mysterious and unknowable, and keep your sanity, requires not only that you forget what you knew ahead of events but that you also forget what you know about the events after they occurred.

An American economist at an economics conference in the Soviet Union in the 1930s would have experienced a similar split between knowledge of the workings of the economy and what he can say without offending the conference sponsors.

As a government sanctioned economist at a conference in Stalingrad in the early 20th century you couldn’t go wrong penning a paper like Preobrazhensky’s “The Decline of Capitalism.” But if you wandered off the reservation to propose theories that did not align with the ideology and interests of the regime, as Preobrazhensky did when he later published “The Crisis of Soviet Industrialization,” your prospects, both professional and personal, declined precipitously.

According to History of Economic Thought website:
“Preobrazhensky was largely responsible for rewriting Marxian theory for an agrarian economy, particularly emphasizing the possibility of ‘socialist accumulation’ to replace the capitalist phase (1926) by expanding industry at the expense of peasantry (via prices, not coercion) a proposition that went against the idea of the New Economic Policy. That work landed Preobrazhensky in Siberia for a period. Later he became a favorite of Joseph Stalin, who brought him back into public life. But he then predicted an economic crisis caused by Stalin's industrialization plans. Stalin had him arrested in 1936, and subsequently shot.”
Another Soviet economist, Nikolai Ivanovitch Bukharin, got into trouble when he emphasized small-scale peasant farming and the use of market incentives to rescue the economy from the devastation caused by the pursuit of Stalin’s favored economists’ madcap economic theories. For this he was purged by Stalin in the 1938 trials and shot.

In America today an economist who warns about the long-run economic consequences of FIRE Economy directed economic policies doesn’t face a firing squad, but discretion remains the better part of valor if he wants to get invited to future economics conferences put on by a key promoter of such policies.

To get through the conference, pretend that the financial crisis was not foreseeable and preventable, that the hosts of the event, the Federal Reserve, did not play a leading role in the build-up to the crisis by failing to execute its responsibility to oversee financial system stability, and that the Fed does not continue to oversee the re-growth of systemic risk by failing to dismantle too-big-to-fail financial institutions that continue to be engaged in inherently conflicted speculative and commercial banking, despite the Volcker Rule.

Also pretend that the Fourth Estate did its job by exposing mortgage and securities fraud, endemic and apparent throughout the mortgage lending and finance industry from 2002 to 2008, before the resulting credit risk had a chance to accumulate in the system to the point where a credit crisis could wreck the economy.

In short, you have to pretend that the FIRE Economy doesn’t exist, that economic policy is not geared to preserve and grow it, that these policies did not produce the current conditions of private and public over-indebtedness and are not driving the nation toward insolvency, and so on and so forth. Think: The Fed’s so-called Operation Twist is not a bid to ramp up the price of the collateral on mortgage-backed securities by driving down mortgage rates, instead it’s purpose is to stimulate “the economy.” Think: The Fed’s latest desperate plan to rescue the politically influential real estate industry, to buy mortgage-backed securities, is really about helping homeowners. And on and on.

Once all of these inoculations against the stresses of cognitive dissonance are completed, you are ready to join the group.

Here’s what happens if you understand the workings of the FIRE Economy but don’t manage your knowledge effectively.


<iframe src="http://www.youtube.com/embed/gIcqb9hHQ3E" allowfullscreen="" width="560" frameborder="0" height="315"></iframe>


If like Dylan Ratigan you mistakenly believe that there is anything to be immediately gained by speaking truth to power, you put your sanity at risk. Dylan's been at it for three years, he says. After 13 years I've learned that it's important to pace yourself.

American Kremlin Conference – Part II: A Play in Four Acts


http://www.itulip.com/images2/FedvsBostonOWSwtmk.png
Photo Credit: Federal Reserve Bank of Boston on the left and OWS protesters on the right side of
Atlantic Avenue, October 19, 2011, Eric Janszen


What, you ask, can one hope to learn from this game of make-believe?

The way to approach such as meeting is as an actor in a play. There is knowledge to be gained in observing and participating in the play itself.

The presenting economists play the role of independent analysts looking for answers to the question of how the economy got into the sorry state that it is in today and what to do about it. The economists in the audience play the role of disciples of the learned economists. The media play the role of unwitting propagandists. I will explain my minor role shortly.

Act I: The Most Important Ben Bernanke Speech That No One Heard

By coincidence Bernanke entered the meeting room as I walked out of to make a call. I extended my hand. The diminutive head of America’s central bank, a good six inches shorter than me, looked up, took my hand, and smiled with an expression that asked, Am I supposed to know you? After once having my hand pressed in Paul Volcker’s giant mitt I was momentarily taken aback by the soft, girlish paw that held mine. I said simply, “Nice to meet you,” and moved on to make my call.

Later that afternoon, as he gave his speech he stood not ten feet from where I sat. I was struck by his lack of presence. Unlike the master politician-for-hire Alan Greenspan or the physically imposing, politically adept albeit morally scrupulous Paul Volcker, Bernanke comes off in person like the bland, politically vacant academic that he is.

His many academic papers going back to the early 1980s about how to fight the abstract deflation dragon he saw looming were his bid for the Fed head job he got so many years later.

He has a deep, emotional connection to the events of the Great Depression. I imagine that growing up he heard so many stories of 1930s hardship over Thanksgiving and Christmas dinner with relatives that he internalized their plight and determined to make it his personal mission to see to it that it never happens again.

The management consultants of the FIRE Economy brain trust, who write the hiring specifications for the next Chairman of the Federal Reserve, read over his papers with delight -- they'd found their boy.

Bernanke has no apparent interest in the conditions of the political economy that gave rise to the debt deflation threat he foresaw and continues his battle to fight off deflation with every means available to him, except the only one that will work: writing off the credit bubble era debt, which solution is politically unacceptable to the commercial banking system to which the Fed is captive.

He hides behind the ideologically neutral jargon of neo-classical economics, using it as a shield to deflect criticism where Greenspan used it like a knife to slice and dice his critics or a smokescreen to send them away in confusion.

The crux of Bernanke’s speech, if it can be said to have one, is that if the Fed learned a lesson from the financial crisis it is that the Fed’s secondary mission to manage risk in the financial system has been elevated in importance to equal its primary mission to maintain the general price level. Simon Johnson later pointed out that the only way to prevent a repeat of the financial crisis is to break up too-big-to-fail financial institutions into small-enough-to-fail institutions that the Fed doesn’t have to bail out at all.

As everyone full well knows, that has not been done and won't be. There stands Bernanke like a man in charge of a city’s building inspectors after a recent 8.0 Richter scale earthquake that leveled half the city. He promises that his best people will see to it that henceforth building standards will be strictly enforced, as if another once-in-100-years earthquake is imminent, as if crap concrete and rebar are not being poured and stuffed into the foundations of every new structure built as he speaks because the concrete and rebar producers are funding the campaigns of the politicians that keep him in office.

Buried in his otherwise somnambulist soliloquy was a momentous phrase, seemingly innocuous: “With respect to monetary policy, the basic principles of flexible inflation targeting -- the commitment to a medium-term inflation objective, the flexibility to address deviations from full employment, and an emphasis on communication and transparency -- seem destined to survive.”

Several interpretations of this statement shortly appeared, but the interpretation in off-the-record conversations I had with a dozen economists at the conference converged on one. I keep all off-the-record conversations in confidence, but I can tell you in summary what they really think about the state of the U.S. economy, the prospects for a resolution of the euro crisis, and the future of China’s finance-based economy. (more... $ubscription (http://www.itulip.com/forums/showthread.php/20723-American-Kremlin-Conference-%C2%96-Part-II-A-Play-in-Four-Acts-Eric-Janszen?p=212798#post212798))


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dcarrigg
10-26-11, 10:48 AM
:o

I wonder: Does the Fed actually have any tools to address full employment?

Sure they could switch to NGDP as a primary target, but what would that do other than stoke inflation and raise nominal equity values as people flee treasuries? It will vindicate Bill Gross, but I don't think that it matters for Main Street.

Ultimately, this is not done in a vacuum. Labor has no teeth. Wages will not rise. Extending ZIRP for a decade or more will destroy what was left of savings and pensions.

They are missing this fact: GDP can increase and employment can drop. I don't think that they have internalized that macroeconomic truth yet.

Someone with no income or savings will never pay you back, no matter how cheap you make previous debts.

Chris Coles
10-26-11, 10:52 AM
EJ, more yet to read so this is an opening comment; putting up the Dylan Ratigan video as an example of what not to do is a masterstroke; losing your cool will not take the debate forward as they will only shun you and thus your opening remarks are right on the button.

we_are_toast
10-26-11, 12:29 PM
EJ, more yet to read so this is an opening comment; putting up the Dylan Ratigan video as an example of what not to do is a masterstroke; losing your cool will not take the debate forward as they will only shun you and thus your opening remarks are right on the button.

I doubt very much that Dylan Ratigan lost his cool in the video. He has been in front of the camera long enough to know what will play well for the audience he's trying to reach. The "performance" in the video went viral, and set up his image as the wall street reporter who gets it, which is precisely the image he wants to portray.

The Media isn't interested in calm, thoughtful, fact based discussions. They want emotionally charged statements that will wake up the audience.

metalman
10-26-11, 02:48 PM
I doubt very much that Dylan Ratigan lost his cool in the video. He has been in front of the camera long enough to know what will play well for the audience he's trying to reach. The "performance" in the video went viral, and set up his image as the wall street reporter who gets it, which is precisely the image he wants to portray.

The Media isn't interested in calm, thoughtful, fact based discussions. They want emotionally charged statements that will wake up the audience.

dylan 2008 before he lost his shit...

<iframe src="http://player.vimeo.com/video/1916494?title=0&byline=0&portrait=0" webkitallowfullscreen="" allowfullscreen="" width="400" frameborder="0" height="273"></iframe>Dylan Ratigan on Oprah (http://vimeo.com/1916494) from estebe 99 (http://vimeo.com/user646259) on Vimeo (http://vimeo.com).


yeh, the media turn the good guys into raving loons... attracts viewers... boosts ratings... kills rational debate.

what a system ;_FP

bart
10-26-11, 08:15 PM
...
Conferences like this require disciplined mental preparation.

Before I walk into a roomful of FIRE Economy credentialed economists and journalists, I have to compartmentalize the knowledge I have gained over 13 years running iTulip.com; pack it in a box and store it in the attic of my consciousness, out of sight. Then I’m on the same wavelength as the presenters and audience, this one comprised of professional investment bank, pension fund, family practice, academic, and Federal Reserve economists, and the journalists from CNBC, Reuters, New York Times, Wall Street Journal there to cover them.
...


Love the "mental preparation" label, such an understatement.

I imagine it was a performance worthy of an Oscar. :)

chene
10-27-11, 04:40 AM
There is not truth, only power, and facts are for little men.

I like this statement...
Is it from somebody ?

Who is in position so that his expression will be regarded by the majority as the truth... all others battles depend on this one... and indeed that has little to do with facts...

FRED
10-27-11, 07:54 AM
I like this statement...
Is it from somebody ?

Who is in position so that his expression will be regarded by the majority as the truth... all others battles depend on this one... and indeed that has little to do with facts...

EJ came up with that one as a short, modern version of Friedrich Nietzsche's phrase: "All things are subject to interpretation. Whichever interpretation prevails at a given time is a function of power and not truth."

*T*
10-27-11, 10:01 AM
EJ came up with that one as a short, modern version of Friedrich Nietzsche's phrase: "All things are subject to interpretation. Whichever interpretation prevails at a given time is a function of power and not truth."

In the longer term, Nietzsche was wrong. History is littered with powerful people railing against reality. Even King Knut could not command the tide to go back.

Of course, you know this.

EDIT: "The victor will always be the judge and the vanquished the accused." (Goering) and "History is written by the victor." could be considered siblings to this phrase.

chene
10-27-11, 11:15 AM
In the longer term, Nietzsche was wrong. History is littered with powerful people railing against reality. Even King Knut could not command the tide to go back.

Of course, you know this.

No, I don't ... :o

The important part is at a given time ... as long as someone is in position of power he sets the truth ...
It does not mean that because he sets the truth that give him some kind of invincibility or the ability to stay in power for ever...

The next in power will set the truth as well... and his interpretation will prevail.

...in the longer term Nietzsche is right ;_Y

EJ
10-27-11, 12:08 PM
In the longer term, Nietzsche was wrong. History is littered with powerful people railing against reality. Even King Knut could not command the tide to go back.

Of course, you know this.

Force is required to maintain a false reality in the public mind as needed to perpetuate those of the minority's vested interests that are not aligned with the majority's interests. The minority-majority interests gap is created by the changing conditions of the present as compared to the past. The majority's needs change, but the minority is not equipped to meet them. A new minority is needed. The greater the differences between the old minority's interests and the majority's interests, the more force is required to maintain the illusion to discount the new realities that increasingly define the experience of the majority. The protests we see today are the leading edge of the process of dissipation of the illusion. A disruptive social process occurs when the minority-majority interests gap closes and a new era of growth led by a new minority begins.

One of the secrets of the success of the United States is relatively rapid self-correction of the minority-majority interests gap through the electoral and informational processes, via an honest election process and a free press. The danger that I see today is that this self-correction mechanism is partially, although not completely, broken. Confidence in the election process has been undermined by our system of campaign finance and the communication channels that access the public mind nationally is concentrated and directed by minority interests. It is in the areas where the self-correction mechanism still operates that we will continue to focus our attention here.

pescamaaan
10-27-11, 06:17 PM
Force is required to maintain a false reality in the public mind as needed to perpetuate those of the minority's vested interests that are not aligned with the majority's interests.

i love this statement.

*T*
10-28-11, 04:59 AM
Force is required to maintain a false reality in the public mind as needed to perpetuate those of the minority's vested interests that are not aligned with the majority's interests. The minority-majority interests gap is created by the changing conditions of the present as compared to the past. The majority's needs change, but the minority is not equipped to meet them. A new minority is needed. The greater the differences between the old minority's interests and the majority's interests, the more force is required to maintain the illusion to discount the new realities that increasingly define the experience of the majority. The protests we see today are the leading edge of the process of dissipation of the illusion. A disruptive social process occurs when the minority-majority interests gap closes and a new era of growth led by a new minority begins.

One of the secrets of the success of the United States is relatively rapid self-correction of the minority-majority interests gap through the electoral and informational processes, via an honest election process and a free press. The danger that I see today is that this self-correction mechanism is partially, although not completely, broken. Confidence in the election process has been undermined by our system of campaign finance and the communication channels that access the public mind nationally is concentrated and directed by minority interests. It is in the areas where the self-correction mechanism still operates that we will continue to focus our attention here.

With this I quite agree.

There was a popular 90's comedian called Ben Elton who called this the reality gap, with reference particularly to the false reality created by advertising, and the creation of false needs which are offered to explain the reality gap. My King Knut point was merely that at some point, the force required to maintain the reality gap is too large to sustain, and the illusion collapses. I had in mind the process of doing the physical sciences, where reality intrudes a little more forcefully, via carefully designed, repeatable experiments. In his book, 'the structure of scientific revolutions,' Kuhn called this catastrophic process a paradigm shift (this was the original meaning of the term). I suppose might compare free elections, markets etc to well-designed scientific experiments. This is why openness and transparency is always a good thing.

In addition to the free press etc I would add academic freedom, which particularly in the case of economics has been badly eroded with the obvious consequences. Academia should be the free conscience of a nation, questioning everything, not the bastion of dogma. Indeed, this aspect is written into New Zealand's constitution.

I am surprised you call for a new minority. Would you not prefer a self-directed majority? Interestingly, if you substitute ruling/working class for minority/majority, your line of argument above looks rather like something Marx would say.

Typical iTulip. A throwaway sentence, once unpacked, reveals a long and interesting line of reasoning.

Chris Coles
10-28-11, 05:52 AM
In addition to the free press etc I would add academic freedom, which particularly in the case of economics has been badly eroded with the obvious consequences. Academia should be the free conscience of a nation, questioning everything, not the bastion of dogma. Indeed, this aspect is written into New Zealand's constitution.

I am surprised you call for a new minority. Would you not prefer a self-directed majority? Interestingly, if you substitute ruling/working class for minority/majority, your line of argument above looks rather like something Marx would say.

Typical iTulip. A throwaway sentence, once unpacked, reveals a long and interesting line of reasoning.

Wonderful! :)

For a long time now I have held the impression that EJ is caught between his past experience of working and friendships with venture capital, (what I describe as the core of the feudal mercantile economy), and his constant contact with the iTulip community that expresses a much wider viewpoint of the overall problems we face. Add that, as I see it, real old fashioned equity capital investment is as close to classic socialism as one can get, yet remain completely "onside" with free markets and free enterprise.

That the real interest of an investor MUST be to ensure ongoing freedom of the people of their nation.

Something not possible with a feudal mercantile economic model.

*T*
10-28-11, 06:40 AM
Add that, as I see it, real old fashioned equity capital investment is as close to classic socialism as one can get, yet remain completely "onside" with free markets and free enterprise.

I've come to the conclusion that you're correct. The nearest realisation of it I see, is in the co-operative company structure, or in Islamic finance.

The central problem is the distribution of the surplus value or value added. Both Marx and the classical capitalists agreed on this, and the idea of a society with wide ownership of equity was just one proposed solution. The problem we have faced, is that productive capital (and now, most heinously, debt) tends to accrue more capital, so we end up with an unsustainable concentration of ownership and peonage. Unfortunately, Marx's solution (at least as implemented) proved rather less useful than his analysis.

The horrible lie is the confusion in terms of what you call the "feudal mercantile economic model" or what is popularly called corporatism, and the capitalist model. The mirroring lie is the confusion between what is commonly called socialism and what is actually a statement about public good and the commons, which has nothing to do with centralisation. Once we see this usurping of language, we can ask who is perpetrating it.

DSpencer
10-28-11, 11:11 AM
real old fashioned equity capital investment is as close to classic socialism as one can get, yet remain completely "onside" with free markets and free enterprise.

What definitions of "classic socialism" and "real old fashioned equity capital investment" are you using to come to this bizarre conclusion?

From wikipedia:

Socialism http://upload.wikimedia.org/wikipedia/commons/thumb/8/8a/Loudspeaker.svg/11px-Loudspeaker.svg.png / (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English)ˈ (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)s (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)oʊ (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)ʃ (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)əl (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)ɪ (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)z (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)əm (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)/ (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English) is an economic system (http://en.wikipedia.org/wiki/Economic_system) in which the means of production (http://en.wikipedia.org/wiki/Means_of_production) are commonly owned (http://en.wikipedia.org/wiki/Common_ownership) and controlled cooperatively (http://en.wikipedia.org/wiki/Cooperative); or a political philosophy (http://en.wikipedia.org/wiki/Political_philosophy) advocating such a system.

What definition of equity capital investment is at all consistent with this?


That the real interest of an investor MUST be to ensure ongoing freedom of the people of their nation.
It MUST be? Or what?


The problem we have faced, is that productive capital (and now, most heinously, debt) tends to accrue more capital

The problem? More like one of the best things to ever happen to humanity.


so we end up with an unsustainable concentration of ownership and peonage.

I don't think this is because of the first statement as much as other factors.

*T*
10-28-11, 11:40 AM
What definitions of "classic socialism" and "real old fashioned equity capital investment" are you using to come to this bizarre conclusion?

From wikipedia:

Socialism http://upload.wikimedia.org/wikipedia/commons/thumb/8/8a/Loudspeaker.svg/11px-Loudspeaker.svg.png / (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English)ˈ (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)s (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)oʊ (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)ʃ (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)əl (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)ɪ (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)z (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)əm (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English#Key)/ (http://en.wikipedia.org/wiki/Wikipedia:IPA_for_English) is an economic system (http://en.wikipedia.org/wiki/Economic_system) in which the means of production (http://en.wikipedia.org/wiki/Means_of_production) are commonly owned (http://en.wikipedia.org/wiki/Common_ownership) and controlled cooperatively (http://en.wikipedia.org/wiki/Cooperative); or a political philosophy (http://en.wikipedia.org/wiki/Political_philosophy) advocating such a system.

What definition of equity capital investment is at all consistent with this?

It MUST be? Or what?



The problem? More like one of the best things to ever happen to humanity.



I don't think this is because of the first statement as much as other factors.

Good challenge.

Let me have a go at unpicking this. I think it's no coincidence that Chris Coles & I are British -- the definition of the same words seems different to their use on your side of the pond. For example, the word socialism. I would class a worker-owned company as a form of socialism, even though it is privately owned.

The point Chris and I arrived at (without wishing to speak for him) is that the benefits traditionally given by advocates of common ownership may well be achieved by widely disbursed equity ownership. The further point is that overly-concentrated ownership does not have those benefits.

I would guess Chris means 'old fashioned equity investment' to mean grass-roots, small-scale equity investment where there is a link between the productive labour, the investment capital and the benefits accruing due to the value created. For example, a small company of vegetable-market traders and producers who own their own stalls and patch of land to grow on. Or a consultancy partnership. An example of the opposite might be my purchase of a junk bond issued by a car manufacturer who outsources work abroad, on the speculation that it will get a government bail-out. In that case, the benefit scales with the capital invested, rather than the value created, and the value creation does not obviously relate to where the benefits end up.

My point is that, while I agree it is good that benefits should accrue to good investments and bad ones penalised, is that if that process goes too far, then ownership becomes too concentrated and society cannot sustain the wealth inequality.

To generalise, at the moment I would contend, benefits accrue to those who lend (wisely or unwisely) because of taxpayer guarantees. Wealth accrues to those who already have wealth, rather than those who create value. Even worse, wealth is accruing to those who get government subsidy and those who can borrow for free and lend at high rates with government guarantees. Most of us agree that is bad.

EJ
10-28-11, 12:24 PM
Wonderful! :)

For a long time now I have held the impression that EJ is caught between his past experience of working and friendships with venture capital, (what I describe as the core of the feudal mercantile economy), and his constant contact with the iTulip community that expresses a much wider viewpoint of the overall problems we face. Add that, as I see it, real old fashioned equity capital investment is as close to classic socialism as one can get, yet remain completely "onside" with free markets and free enterprise.

That the real interest of an investor MUST be to ensure ongoing freedom of the people of their nation.

Something not possible with a feudal mercantile economic model.

I disagree with you on venture capital (VC). It is not a feudal system.

The first thing to understand about VC is that it occupies a completely unique sector of the banking industry: VC funds losses.

In the early stages of the development of a capital-intensive technology company, the company loses money.

VC is the only source of financing that provides capital in meaningful quantities to fund such losses.

Only the United States has VC firms that fund losses on the scale that permit an Amazon, Google, Intel, or other world-class U.S. business to scale to a dominant, unbeatable global position.

Say what you want about U.S. VC, but it is the primary reason why these companies developed in the U.S. and not in the UK or elsewhere.

Next it's important to differentiate between old school and new school VC.

Old school VC was built from the early 1930s (Venrock was the first, and in pitched their partner meeting once) to approximately 1997 (the year before iTulip was founded). The founders were experienced and successful technology entrepreneurs who invested their capital in new start-ups with partners who were similarly experienced and successful. The judgement, intuition, and compassion they developed by walking the walk increased the chances that the new CEO of a new venture might succeed.

A VC industry composed of experienced former entrepreneurs is inherently non-scalable. It is limited by the total number of experienced and successful technology entrepreneurs who are willing to do the hard work of helping a new company succeed.

Along comes the technology bubble in 1998. By the year 2000, VC returns lept from an average annual 12% rate to 60%. One of our deals returned over 200 times our investment. We had seven liquidity events out of 20 investments.

VC starts to look like a lottery that you can't lose. Money pours in, rising from $17 billion in 1997 to $100 billion in 2000.


http://www.itulip.com/images2/USAVCdealnumberandsizeQ11995-Q22011wtmk.png

Money generated by IPOs was re-invested back into VC funds.

As it was the limited pool of experienced VC talent was quickly exhausted; there were not enough experienced entrepreneurs to invest all of the money that limited partners (investors in VC funds) wanted to throw at the latest dot com, optical switch, or photo sharing site.

The MBA VC investment manager enters the scene, dilution teams of experienced VCs but also founding new MBA-only VC firms.

There also weren't enough start-up founding CEOs with operational experience to meet demand. The most successful entrepreneurs before the bubble were former VP level engineering or sales executives out of large technology firms. By 2000, the VC industry started to scrape the bottom of the talent barrel for directors of business development to find founders for technology companies to chase the hot investment sector de jour.

Then the market crashed in 2000, as I warned here in March of that year.

Since then, the VC industry has continued to revert to the mean 12% rate from 60% in 1999 by overshooting to the downside. For the past decade, across the VC industry, returns have been negative as a weak economy reduced consumer and business demand for all but a narrow range of start-up industries and a lack of liquidity opportunities via M&A and IPOs depressed investment returns.

The formula of far more work for much lower returns motivated many of the general and managing partners with operational expertise to pocket their tech bubble gains and retire from venerable VC firms, leaving the MBA partners, who hadn't made any money yet, in charge.

In too many cases, they drove even the most venerable firms into the ground over the past ten years. Most of the VC horror stories you hear are about MBA VC partners on boards mis-managing unqualified start-up founders -- the blind leading the blind through a desert.

I learned from personal experience what kind of board members a start-up needs, but Dick Testa put it best.

Dick Testa was founding partner of Testa, Hurwitz & Thibeault LLP, a Boston law firm of approximately 400 attorneys at its peak in 2002 with revenues approaching $450 million.

He told me in 2000 that in his 20 years of experience, a technology start-up board should be "two VCs who are former start-up CEOs, two outside directors who are start-up CEOs, and the CEO. Everything else is a disaster."

Here's the picture today.


http://www.itulip.com/images2/USAVCdealstageQ11995-Q22011wtmk.png

As a percentage of total VC deals done, seed stage is in 2011 half what it was in 1995 when the tech boom began that was harvested over the following five years.

The U.S. needs a new generation of successful entrepreneurs to reform the VC industry.

The rest of the world needs to adopt the U.S. VC model.

We will publish a compete picture of which industries are getting VC money in our State of America article next month.

I remain active in the industry and invested in four companies over the past two years.

As part of the new iTulip, if there is sufficient demand, we may create a special forum where members can pitch their company ideas to other members.

Chris Coles
10-28-11, 03:42 PM
I am truly sorry about this EJ, but from my viewpoint, the U.S. VC model is entirely responsible for the current state of the Western economy; it's evolution into a feudal mercantile model, that has left much of the Western economies in near total collapse.

It is late evening here and I will reply in much detail when you produce your State of America article.

Jill Nephew
10-29-11, 01:10 PM
I would appreciate such a forum very much. I have spent the last two years developing an idea under my own capital (meaning, it is almost fully built, ready for alpha testing) and would only consider bringing external funds if I knew that the investors had the long term success of the company in mind and don't want to flip it for a quick profit. Otherwise, i will stick to self funded or angel funded extremely slow organic growth so that i can teach myself everything i need to know as i go (if i can...).

A friend of mine started a technology company 10 years ago decided to go this route when he failed to find any long term leadership in the VC community that approached him, it hasn't been easy for him to say the least and he, like me, is designed to invent and innovate, not run a company. I don't want to follow in his footsteps, and i also want my idea to live on beyond the vision of a bunch of 30 year old MBA's trying to make a quick buck.

Thanks for sharing this insight EJ. Invaluable.

dcarrigg
11-04-11, 02:27 PM
:o

I wonder: Does the Fed actually have any tools to address full employment?

Sure they could switch to NGDP as a primary target, but what would that do other than stoke inflation and raise nominal equity values as people flee treasuries? It will vindicate Bill Gross, but I don't think that it matters for Main Street.

Ultimately, this is not done in a vacuum. Labor has no teeth. Wages will not rise. Extending ZIRP for a decade or more will destroy what was left of savings and pensions.

They are missing this fact: GDP can increase and employment can drop. I don't think that they have internalized that macroeconomic truth yet.

Someone with no income or savings will never pay you back, no matter how cheap you make previous debts.

Any thoughts on the above? The thoughts there are steep conjectures, and I wouldn't mind hammering out the ramifications of a Fed target switch to NGDP if one were indeed to occur.

charliebrown
11-04-11, 02:58 PM
What tools does the fed use to do this? Buy every last treasury security, so the gvt gets to borrow all the money it wants at no interest? Then I suppose gvt spending would pump up GDP. With the gvt buying food and fuel and concrete etc, etc, either directly or indirectly, does not this add to inflation pressures? Infinite money
chasing finite goods.

With coporate intermediate and long rates very low, I don't see how lowering rates is going to get them to borrow, spend and expand. I don't think interest rates are the limiting factor.
It's a shortage of worthwhile projects.


If we need to increase GDP to say 4% y-o-y, we are running around 2% now, that means the gvt borrow another 300B a year and the fed monitizing it. This assumes a non gvt increas of 2% a year and not another slide back into recession.