Is Silicon Valley a Systemic Risk?(online.wsj.com)
online.wsj.com
Is Silicon Valley a Systemic Risk?
http://online.wsj.com/article/SB123923644886203393.html
11 comments
My state can't manage to legalize alcohol purchases on Sunday, and it just banned stem cell research. Not sure giving us more power is a good thing.
I think the fastest way to put and end to garbage like this is to give states more power. Businesses will just move out of states with archaic legislatures like this one to a neighboring state that offers better incentives. Once the state treasury is empty, the legislature will come to their senses pretty quickly. On the other hand, if the government is handing out money to everyone, there is no incentive to move. Most countries have no opportunity to create internal competition. We do and we should take full advantage of it.
I think the big corporate money likes fundy law, because the same guys passing these laws support deregulation and tax cuts.
It's called "a majority coalition" (or at least, a potential one). Economic libertarians, business interests, and religious fundamentalists were forced together in the 60s and 70s to try to stop getting steamrolled by the unionists, city-dwellers, and progressives.
No major shift has occurred since then. Businessmen and rich people swung for Obama in '08, but I expect that was a temporary swing due to the unpopularity of Bush. Anyone concerned about fiscal responsibility can't like having an all-Democratic government.
Unfortunately, coalition politics means that you're seldom allowed to have a politician who can balance a budget and has no strong desire to enforce his religion by law. The democratic sausage, it is ugly.
No major shift has occurred since then. Businessmen and rich people swung for Obama in '08, but I expect that was a temporary swing due to the unpopularity of Bush. Anyone concerned about fiscal responsibility can't like having an all-Democratic government.
Unfortunately, coalition politics means that you're seldom allowed to have a politician who can balance a budget and has no strong desire to enforce his religion by law. The democratic sausage, it is ugly.
Good point. I haven't quite figured out how to address this problem yet. I would hope that the free market would just cancel this incentive out. If the fundy legislature in the next state over is offering low taxes, the progressive legislature will offer low taxes as well to compete. You're right though in that fundy law does seem to align with corporate interests quite often.
From my perspective, our local politics are hopeless because my state is controlled by religious fundamentalists. The feds exist to protect me from those around me by limiting their ability to change my state to Jesus Land by enforcing the constitution.
The same people who are religious fundamentalists are often literal constitutionalists too, tho'. To all intents and purposes it's the Book of Jefferson to them. That sort of dynamic tension is generally a good and creative thing (the dialectic, Marxists would call it), and of course you as an individual are free to practice regulatory arbitrage.
"Yup, bite the hand that feeds you. Excellent plan."
I recall that hand giving us the finger about nine years ago, and it hasn't done a whole lot to make up for it since.
Given the number of pensions, trusts, endowments and other "essential" institutions that invest in venture funds, I don't think it's unreasonable or onerous to expect that they might have to report the identities of their investors to the eventual regulators of systemic risk. It's not like there isn't precedent for the VC sector to depress the economy.
I recall that hand giving us the finger about nine years ago, and it hasn't done a whole lot to make up for it since.
Given the number of pensions, trusts, endowments and other "essential" institutions that invest in venture funds, I don't think it's unreasonable or onerous to expect that they might have to report the identities of their investors to the eventual regulators of systemic risk. It's not like there isn't precedent for the VC sector to depress the economy.
They invest in very limited amounts, and the amount they are allowed to invest in VC is quite limited by existing regulation, isn't it? If this crisis shows us anything, its that real estate and stocks/bonds are not safe investments, and diversification into VC is nothing if not prudent.
As far as I know, there's no law that prevents a private endowment or a pension from investing heavily in venture funds. The point is not to look at what they do today, but what they might do tomorrow if the system is left unregulated.
Five years ago, the regulators didn't think that housing was a high-risk sector of the economy, either. How'd that turn out?
Five years ago, the regulators didn't think that housing was a high-risk sector of the economy, either. How'd that turn out?
Five years ago, the regulators didn't think that housing was a high-risk sector of the economy, either.
Yes they did (here in the UK at least). That's why interest rates were kept artificially low, screwing savers (who outnumber borrowers 4:1 - you don't piss off that many voters unless you're worried).
Yes they did (here in the UK at least). That's why interest rates were kept artificially low, screwing savers (who outnumber borrowers 4:1 - you don't piss off that many voters unless you're worried).
If they didn't realize it was high risk, why were they printing money all along to keep it going?
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They weren't. This is a crisis caused by debt, not currency devaluation.
The causes of the crisis are complex, but home building was driven by cheap money from low interest rates. Had it not been, the bubble would have burst long ago. The fed put the petal to the metal for a long time, and kept it there because they knew housing was saving us from recession.
Funny, I always thought the expression was "pedal to the metal", guess I've never seen it written...
To be fair, low interest rates were meant to encourage investment across the board, not just in houses. Your point, of course, is still totally valid.
To be fair, low interest rates were meant to encourage investment across the board, not just in houses. Your point, of course, is still totally valid.
It is pedal to the metal. You got me grammar man! ;)
Honestly, it looks like it's a very small amount of work required on the part of VCs – and only the larger ones, at that.
But it's still stupid. I know we're not exactly an unbiased bunch when it comes to VC firms here on HN, but you don't have to spend too long thinking about it to figure out that VC is about as isolated a risk as one can make. If a firm managing a 401k is throwing money into startups, now that's a WTF scenario. But a VC firm putting money into startups? I'm pretty sure they know what they're getting into, and I haven't heard of VC firms repackaging investments into startups as default obligations to sell to other companies. I mean I guess they could? That seems quite a bit more insane than the already insane CDS stuff that was going on.
All of this knee-jerk legislation scares me. Both parties are guilty. Leave ALONE the sectors of the economy that aren't doing anything wrong.
But it's still stupid. I know we're not exactly an unbiased bunch when it comes to VC firms here on HN, but you don't have to spend too long thinking about it to figure out that VC is about as isolated a risk as one can make. If a firm managing a 401k is throwing money into startups, now that's a WTF scenario. But a VC firm putting money into startups? I'm pretty sure they know what they're getting into, and I haven't heard of VC firms repackaging investments into startups as default obligations to sell to other companies. I mean I guess they could? That seems quite a bit more insane than the already insane CDS stuff that was going on.
All of this knee-jerk legislation scares me. Both parties are guilty. Leave ALONE the sectors of the economy that aren't doing anything wrong.
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One can always stamp out risk by reducing return.
...what? That's nonsense.
You might be able to "stamp out" return by reducing risk, but the converse doesn't hold: there are plenty of ways to risk money without having any reasonable expectation of return.
You might be able to "stamp out" return by reducing risk, but the converse doesn't hold: there are plenty of ways to risk money without having any reasonable expectation of return.
In other phrasing, return often requires risky behaviors. One is able to reduce risk (by outlawing risky behaviors) if one is willing to except a permanently lower level of return.
At the extreme, outlawing private investment (which is inherently risky) would reduce bubbles. I know of no price bubbles or market panics in North Korea.
At the extreme, outlawing private investment (which is inherently risky) would reduce bubbles. I know of no price bubbles or market panics in North Korea.
This reads like an onion article in the beginning.
I wonder how much longer it is before the looters discover the angel investors and seed-stage investors.
Probably not: the .com crash didn't take the rest of the economy with it. Can we avoid politics now?
I actually sympathize with Geithner. You have to look at Geithner's approach from a system design point of view. All things being equal, financial instruments will prefer less regulation over more. As other areas of the financial system become more regulated, he has to be mindful of the money will just flow to unregulated areas.
An analogy would be like squeezing a circus balloon on one end, and unless there's equal pressure all around, the other sides will just expand.
An analogy would be like squeezing a circus balloon on one end, and unless there's equal pressure all around, the other sides will just expand.
> As other areas of the financial system become more regulated, he has to be mindful of the money will just flow to unregulated areas.
Presumably he believes that the sole justification of regulation is to produce more benefits than costs for some respectable definition of "benefits" and "costs". One of the costs is that money goes somewhere else.
If he's applying regulation to areas where the regulation does not produce more benefits than costs, where the "benefit" is "it reduces the costs of regulation in other areas", I think that we've wandered into no-respectable benefits and costs.
Presumably he believes that the sole justification of regulation is to produce more benefits than costs for some respectable definition of "benefits" and "costs". One of the costs is that money goes somewhere else.
If he's applying regulation to areas where the regulation does not produce more benefits than costs, where the "benefit" is "it reduces the costs of regulation in other areas", I think that we've wandered into no-respectable benefits and costs.
Can't wait to see Web 2.0 be the next regulated industry. Imagine the government trying to pull off a definition of that!
Is the Wall St. Journal becoming the new Fox News? Seriously, there is a strong trend of articles against Silicon Valley and provoking animosity with the Democrats.
This opinion article has plenty of half-truths and fallacies. Don't let them play you.
This opinion article has plenty of half-truths and fallacies. Don't let them play you.
This article was certainly not "against Silicon Valley".
Do bananas need airbags? And other hastily thrown together concepts for scary sounding headlines.
Read the article.
I did but I thought that it was focusing on a one-of remark in many, many hours of congressional testimony designed to prevent a mob with pitchforks and torches storming wall street.
I just don't see this as something that will be policy, but I guess I could be wrong and too trusting of the Obama administration.
I just don't see this as something that will be policy, but I guess I could be wrong and too trusting of the Obama administration.
> congressional testimony designed to prevent a mob with pitchforks and torches storming wall street.
The job of a community activist is to rile up a mob, or threaten same, and use that threat to extract concessions.
Remember the AIG bonus scandal? The bonuses that Congress approved, the approval that Obama specifically approved for folks who were cleaning up AIG? (Wall-street often uses back-loaded contracts, so they're not really bonuses, but I digress.) The bonuses that Congress and the president then used to bash AIG and wall street?
The job of a community activist is to rile up a mob, or threaten same, and use that threat to extract concessions.
Remember the AIG bonus scandal? The bonuses that Congress approved, the approval that Obama specifically approved for folks who were cleaning up AIG? (Wall-street often uses back-loaded contracts, so they're not really bonuses, but I digress.) The bonuses that Congress and the president then used to bash AIG and wall street?
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On a related note, our financial system is so convoluted that our Treasury Secretary doesn't even understand it. His knee jerk reaction is to regulate everything. The complexity of our economy on a national scale has grown beyond the reasoning ability of most people.
I have an idea. How about we simplify things. Reduce the role of the government and give states more control over the situation. Competition between states would produce a far more optimal result than the behemoth that is the government can produce. It's what we would (read: should) do with a large failing company, why not with this?