A Plan to Save the Country

During the much-anticipated (and, I'm guessing, soon forgotten) debate between Joe Biden and Sarah Palin last week, there was a small kerfuffle after Palin accused Biden of saying that raising taxes is patriotic. Turned out that what Biden really said was that paying taxes is patriotic, a view so heavily endorsed by all parties that it's actually illegal not to pay them - unless you maintain a post-office box in the Cayman Islands or find write-offs that offset what you owe.

That's probably not you, though, so it would be a good idea for you to keep paying your taxes unless you want to pay lawyers later. I understand that's something of a bummer, but then so is an irregularly shaped mole on your neck.

But the thing is, see, if Biden had said what Palin said he said (which he didn't), he would have been right. Raising taxes is patriotic. Raising taxes is what we can do to make our country, our patria, stronger.

It is amazing to watch the political discourse. Here we are about $10 trillion in debt, not counting whatever this latest bailout is going to cost; social services are being cut all over the place; entitlements are rising with no plan about how to cap them or pay for them; veterans services, national parks, NASA, the EPA, pick your own favorite - underfunded, decaying, not doing whatever it is we want them to do.

Oh, and where are we going to get the money? Oh, we will cut wasteful spending, that's what we'll do. Even better, we'll give people a tax break, so that will stimulate spending and we will grow the economy and then finally people will owe taxes and the government will get more money. Like that worked.

There is a different way that doesn't depend on some elaborate and discredited triple flip off the high board of economic theory - raise taxes. The American people have a whole lot of wealth. Is it excess wealth? That depends. When the fire truck that is paid for by the government comes and puts out a fire in your house, were the higher municipal taxes you paid extra wealth? Or were they a sound investment?

Oh, but suppose it's your neighbor's house that is burning down. You don't get anything from a rapid response, do you? No, but see, we are social creatures and we live in a society, and that means we help each other. I help you for selfish reasons, because I believe you will help me when the tables are turned. That's why, say, we help out the indigent, because one day we (or, say, our mothers) might be indigent; we help sick people because one day we might be sick, and so forth. It's almost like a contract, a social contract.

I wish once, just once, a politician would say, "You know, given how messed up everything is, probably we should raise taxes." Of course, all the other politicians would make little o's with their mouths, because the unspeakable had been spoken, but maybe a few people who've actually been paying attention would say, yeah, OK, I could kick in an extra $5 a month if my brother is suffering, if my sister is jobless, if my water is dirty and my son is dying on a desert far from home - yes, I could do that.

Then that politician would get demagogued to death by the power-drunk plutocrats, but it would be a nice effort.

So here's my plan: Instead of cutting taxes for the rich or for the middle class, how about we raise them for everybody? Why? Because we need the money!

Source: Jon Carrol - A Modest Like Proposal

Bailout Bill Stuffed With Pork Apparently More Palatable

TechDirt says it better than I can, so here you go:

In my post about the financial crisis earlier this week, I explained the rationales both for and against the so-called "bailout bill." With some of the important indicators getting seriously scary, it was becoming increasingly important that something be done to keep money flowing, but this bill isn't it. Who would have thought that after the House rejected the bill earlier this week, that they would come back and approve something much worse. Rather than address the fundamental problems of the bill (and, well, the economy), what Congress did was stuff the bill full of pork, adding in every little personal favor to local industries they could dig up. Basically, all of the politicians added in little "gifts" to local industries, as a way of calming public dissent against the bill. And, of course, apparently that was all it took to get the House to approve the bill. Now they can go back home and say that they fought to "protect" their local constituents in the bill, when all they really did was put some pork in to bribe them. While there's still a chance that this plan works out -- and, at this point, it's entirely based on who will control the fund -- the bill has done little, if anything to actually address the real issues that created this economic mess, and uses a sledge hammer where a scalpel would have made more sense. If it ends up succeeding, it will be in spite of the bill, rather than because of it.

So How Will The Financial Crisis Impact The Wider Economy?

Once again, TechDirt has a very lengthy article discussing how the current financial crisis affects the wider economy. I encourage you to read the full article, as it is very well written and thought out. An abridged reprint is below: Getting beyond Wall Street I discussed some of that in the original post, but many people are still having trouble seeing how this crisis spreads beyond Wall Street financial firms (or, in some cases, their own stock portfolios). There are still plenty of people screaming out that these financial firms need to be punished or done away with completely, without any recognition of how that might flow through the rest of the economy. The New York Times has an excellent writeup, noting that people said the same thing as the Great Depression was happening, as well -- again, not realizing that destruction on Wall Street can flow through the rest of the economy. The basic problem is the fear that the credit markets will simply dry up. If no one will lend money (or it simply becomes ridiculously expensive to borrow money), then some very basic economic functions cease to work. This may start out at a high level with bank to bank loans and bank to business loans, but it can also filter down to things like your mortgage (if you thought things were bad before, wait until adjustable rate mortgages reset with even higher interest rates, contributing to this spiral), car loans and even credit card payments. At the top of the chain, banks are increasingly afraid to lend to each other fearing that whoever they lend to (even for very short term loans) may default before the money can be paid back. Already, some companies are seeing the direct impact. For example, Caterpillar, the maker of construction equipment is a company you would think would be separate from the financial mess on Wall Street. It has great credit and a long history of being good for paying up any debt. Yet, in a matter of days, the interest that Caterpillar has to pay to borrow has shot up. Debt isn't a bad thing Now, there are those who will say that any "borrowing" or "debt" is somehow bad (we had a few such comments on the first post), but that shows a fundamental (and, somewhat dangerous) misunderstanding of basic economics. Borrowing money and taking on debt is not, by itself, a bad thing. In fact, it's a very, very good thing. If you can borrow money at one rate, and invest it more profitably, you can contribute to economic growth and provide important goods and services. It's at the very core of a functioning economy. Money moves around so that it can be invested in more profitable endeavors, and that benefits all of society, by making sure that the money is more efficiently put to work. However, the fear of various banks defaulting at the top of the pyramid is increasing the risk down the entire chain, even to the point that relatively "safe" investments are suddenly being seen as risky. Part of that is due to uncertainty about how the crisis will impact others (sort of a self-fulfilling fear) and part of it is due to a still murky understanding of the risk involved in the assets at the heart of all of this mess: the various mortgage backed securities you keep hearing about. So what happens if things get worse? Well, it won't be pretty. Credit is such an important part of the entire economy that it's almost impossible to figure out all of the ramifications of a near total credit crunch. Plenty of companies rely on commercial paper and short-term, low risk loans to finance certain operations, while others use it to get a small, but safe, return themselves. If that were to completely collapse, money would have a lot of trouble moving from where it is to where it would be most efficiently put to work for the economy. Effectively, important projects would get starved of necessary cash and die. That may happen to some projects all the time -- and it's a natural part of the market -- but if it happens across the board, a lot of companies could go bankrupt. A lot of useful investments would go to waste, and (more importantly) the next set of important projects that require investment wouldn't be able to get the necessary money. It would shrink the economy and harm pretty much everyone. So, what does it all mean for a small business operator? Well, that really depends on what sort of business you're in. If you're a venture-backed startup, it's probably not as big a problem, immediately. As we originally noted, top tier VCs are pretty secure with the funds they have, and as we saw after the dot com bubble, the big institutional investors still can't resist allocating a segment of their cash to VC funds. That money is pretty safe. A good venture capitalist should help its portfolio weather the storm. By the way, that doesn't mean showering them with too much cash. Companies that have raised a ton of cash aren't necessarily better off, contrary to popular opinion. A lot depends on what business they're in, how focused they are on an actual business model and how much they're actually burning. As we saw after the last dot com bubble burst, it was some of the most heavily funded companies that went belly up first -- because they had focused too much on raising money and not on building a business. But, of course, venture backed high growth companies are a tiny, tiny segment of the small business arena. Most small businesses will face a different set of challenges. While they may not rely so heavily on regularly tapping into borrowed money, that doesn't mean they're not exposed in many ways. Any sort of expansion capital will be much harder and much more expensive to get. That will make it more difficult for some of those small businesses to make the investments necessary to become big businesses. More importantly, their own customers may be exposed as well. Many small businesses effectively provide "loans" to their customers, in giving terms of payment, such as net 30 or net 60 (allowing the customer to pay within 30 or 60 days, rather than upfront). Unlike constantly fluctuating interest rates, small businesses generally don't change those sorts of terms with any regularity. So, many small businesses actually become a lot more exposed: they're "lending" money at the same rates as before, while the rest of the money flowing around the economy has become more expensive. With that happening, more customers can be expected to default, putting more pressure on the cash flow of the business. And hiccups in the cash flow will be harder to overcome in the usual way: it will be more difficult and expensive to get a small business loan or a line of credit. Thus, it becomes more difficult to meet payroll and could result in layoffs. Companies may also try to tighten up their payment terms, but that effective "raising" of the interest rate can scare off customers, as well. Already, we're seeing small businesses being advised to push for early payment and change the terms of payment they offer customers. Most of this won't happen immediately for most businesses. It certainly will impact some in the very near future (and a few companies are already experiencing problems). The real worry is the cascade effect of this happening to more and more small businesses, putting even more pressure on the overall economy. More companies having cash flow problems means fewer customers for other companies, as well, accelerating the whole cycle. So what do you do? If you're a small business: focusing on cash becomes king (it should always be, but even more so at this point). Companies won't be able to rely on lines of credit as much as they have in the past, and should see what can be done to lock in any kind of line of credit or opportunity for a decent loan if they can get it. Basically, companies need to prepare themselves for the possibility of money not flowing, customers not paying and additional economic hardship.

Take A Deep Breath: Some Perspective On The Financial Crisis

TechDirt has a very long article on the current financial crisis, explaining how we got into this financial mess in the first place. The article is worth a read, and I encourage you to read the entire article on their site - TechDirt. First off: this situation is complicated. The deeper you dig into it, the more you can begin to sketch out a picture of what's really happening, but no one (no one!) can accurately understand all the different variables at play here. Anyone claiming to have all the answers is wrong. They're either ignorant or lying. Also, the blame game isn't just pointless, wrong and silly, it's dangerous. I've been seeing too many folks on both sides of the political aisle trying to use this crisis as a political football, and all that's doing is making it that much more difficult to come up with real solutions. If you see anyone focus on playing the "blame game," ignore them. They're not worth listening to and they'll only be misleading. Finally, any explanation you read that isn't multiple-book-length will probably be greatly simplified -- including this one. But I'm hoping that it at least kicks off an interesting discussion. So, what happened? The basic summary is that a chain of events all resulted in more and more money being put into riskier and riskier mortgages, where much of the risk was hidden away by computer models and the repackaging of those risky mortgages in bulk. Normally speaking, the idea of bundling up a bunch of risky projects into one actually does make some sense -- because you're figuring that while some will fail, the successes will greatly outweigh the failures. And, in many cases, that's true (it's basic diversification). But the problem was that very few, if any, of the models seemed to take into account the fact that these weren't independently risky items, but that many were very dependent on each other. Thus, rather than a small group of risky deals going south, outweighed by the success stories, people started to realize that you could have a domino effect, where a large portion of the risky stuff going bad could actually lead to even more of it going bad. That's just what you get for creating bad models that don't take dependencies into account. What made this even worse, however, is that a bunch of the risk was eventually pawned off to the least knowledgeable investor: the public markets. We had a long chain of players, who effectively kept "laundering" the risk through various ways until it ended up being held by people who simply had no clue how risky the products were that they owned. Then, once stuff started to go bad, the dependencies started to snowball and make everything worse -- and the confusion over how bad and how risky things were made those who actually had money on hand reasonably afraid to keep lending it to those who couldn't accurately express the risk. That resulted in a lack of liquidity -- effectively the oil in the economy's engine. Without liquidity, a lot of stuff freezes up pretty quickly and dangerously. That's what caused Treasury boss Paulson and Fed chair Bernanke to ask for the "bailout" plan. Why are we "bailing out" those who created this mess? Actually, while almost everyone is calling it a "bailout," it's not quite a true bailout, and it's not clear that it really "rewards" those who created the mess. Like everything else, it's quite complicated. Personally, I like Fred Wilson's use of the phrase "The Splurge" to describe it, because in many ways it's more accurate than a bailout. Basically, the government is asking for $700 billion to try to buy up distressed assets. The details suggest that it's starting out with $350 billion, with another $350 billion to be handed out later, if necessary. There are plenty who believe that $700 billion is just the tip of the iceberg, and eventually that number will grow to be much higher. So, why isn't this a full "bailout"? Well, because the government would be getting equity back as well, and there are plenty of smart folks who believe that this could lead to the government making a profit. Indeed, buying up distressed assets historically isn't a bad way to make a profit -- if you know what you're doing. Lots of folks tend to shy away from distressed assets, and a good fund manager can buy up distressed assets for pennies on the dollar and figure out ways to sell them down the road for nickels or dimes on the dollar. It's a perfectly reasonable business proposition, and historically, there are plenty of stories of folks who made out like bandits buying distressed assets following bursting bubbles. So, if the government can drive a hard bargain and buy up these assets at a reasonable price, it could work. So, the good news is that there's a chance that the "splurge" could result in a best case scenario: it pumps liquidity into the market, stabilizes things, gets the economy moving again and lets the government profit. But that's the best case scenario. Others are a lot less sure, noting that the upside pales compared to the downside risk, and even if an upside scenario may seem a lot more likely, the cost of the downside is much, much bigger (at least $700 billion at this point, and perhaps more). In fact, there are those who suggest that a poorly done splurge will almost certainly make things even worse. And, plenty are pointing out that the smart money seems to be betting that the government is entering the game as the "last sucker" we were discussing earlier. Given that there's still confusion over how the gov't will value these assets, it seems reasonable to worry. But isn't this just about Wall Street? There's a common refrain among many, many people, that this is just the result of greedy Wall Street bankers, and the proper thing to do here is to just let them all fail. It's not that easy. The ripple effects here would be pretty serious -- and while I don't think the economy would fully seize up, it would be really painful across the board. The lack of liquidity in the commercial paper world (short term lending, mostly) would impact a lot of businesses that you might not think have such exposure to Wall Street. And that, in turn, could create an ongoing spiral. It would stop somewhere, but where is anybody's guess at this point, and it may be pretty far down a hole, with a pretty massive destruction of wealth in the meantime. Some may believe this is the best way to get through things (the rip the band-aid off quickly belief), but the overall damage could be significant, and not so easy to come back from. Ripping the band-aid off quickly doesn't always yield the best result if it rips the scab with it, causing more damage. So, simply letting everything fail, while an option, could have serious long term consequences. To sum it all up It is a huge mess, no doubt. The splurge is quite risky -- and while I can appreciate the upside potential, if done right, that "if" scares me a lot. I'd be much more comfortable with it if it wasn't being pushed through in its entirely in such a quick manner, with partisan players on both sides going on the news yelling at the other side each night. Instead, focus on a smaller initial package and spend a bit more time working out the bigger deal later, with a lot more input. In the short term, there's still going to be a fair amount of bloodshed, and the downside will impact companies outside of the financial sector, but for those in tech, the good news is that we're probably more isolated than other industries, though certainly not completely isolated. And, since everything is changing so rapidly, you never know what shoe might drop next.

The End of Commercial Aviation?

The New Republic has an interesting article discussing the possible demise of the commercial aviation industry.

Early signs of an aviation apocalypse are already upon us. As oil prices flirt with $130 per barrel and the dollar struggles, airlines are paying nearly 80 percent more for fuel than they did a year ago. Twenty-five airlines have gone belly-up this year--three to four times the usual yearly rate. Major carriers like American, Northwest, and United, still reeling from the industry downturn after September 11, go barely a month without announcing layoffs and capacity cuts.

I've always been of the opinion that the market will force someone to create a better product. In this case, I'm expecting to see all electric airplanes (in 10 years?), biodiesel fuled planes, or maybe even solar powered planes.