No Treasury Bailout ... For Now

Now that House Republicans have thrown the Paulson bailout plan into total disarray, and Washington Mutual marks the largest bank failure in US History, and global credit markets are basically offline -- should we brace for Great Depression 2.0?

While I can't say 'no' with any authority, I tend to think not.  Certainly bank failures and the mother of all credit crunches does no good for the economy.  And by economy I mean both Wall Street and Main Street.  But just because this particular $700bn (really estimated to be more on the order of closer to $2,000bn all told) bailout of primarily Wall Street investment bankers and their compatriots has stalled does't automatically spell the end of capital markets as we know them.

A few points:

• I think there still will be a deal.  Realpolitik trumps all when it comes to D.C.  All it takes a bit more pain, fear and panic to break even the most ideological opponents of the Paulson bailout plan.
• I think the Paulson bailout plan sucks.  I outlined a lot of reasoning around that on another site until they saw fit to delete most of my comments, apparently because they might scare away naive prospective homebuyers.  (I'll retrace those comments if any discussion arises here.)
• I think the Republican alternative plan sucks (but not as bad as Paulson's).  Insurance is a good idea.  More deregulation is a bad idea.  Tax cuts are a great idea, but not practical right now and everyone but ideologues realizes that.
• Capital markets are more resilient than anyone seems to be giving them credit for.
• Speaking of "credit", it is increasingly obvious that "dumb money" is mostly counted with the stock market and related derivatives, and "smart money" is mostly counted with the bond & treasury markets.
• Ron Paul is an idiot.  For all his good ideas "abolishing the Federal Reserve" is the stupidest idea I've heard in all this.  I know he's been saying it for years.  So, he's been an idiot for years, just no one took it seriously before.  You cannot abolish the US Central Bank.  You cannot disarm US nuclear weapons either.  Both are necessary simply because other countries have them.  Until Paul can magically dissolve all central banks world wide, I'm not listening.  While he's at it, please make all the nuclear weapons disappear.
• Many of the otherwise credible "rogue blog economists" like Mish, etc. who have contributed so much to this debate the past 5 years need to quit listening to Paul and supporting him so openly.  Now is a time where credibility is gold.  Who you ally with and support determines your credibility.

Think.  Read.  Discuss.  Then think some more.  Now is not the time to panic.  It is the time for concern and determination.  Not despair.

Some form of bailout package will be passed anyway.  It just might not be the Paulson Bailout Plan.  It could be better, it could easily be worse, but Congress will pass something.  Don't bet they'll just go home.

--Randy H

Comments

[randolfe]

What does this mean for the price of your home? I did a curve-fit extrapolation of the famous Shiller graph almost 2 years ago in this blog post. You decide if it's holding up as accurate.

Here's the link to the full sized graph. (You have to click on the graphs to pop up a window showing them in full-size; the one of interest is the second in the article.)

[JimSulli]

Hopefully this spurs some good discussion. This post is exactly why I followed you here.

The only question that I have:

Bearing in mind the fact that the U.S. Economy is a consumer driven force, and credit has certainly spurred the U.S. economy for many years, will we come out of this with the same economic standing we've always enjoyed?

My personal opinion, if we can somehow manage to spur along responsible borrowing, and hold our position as a self sustainable country, we can come out in great shape, however, the economic landscape will be different than it has in the recent past.

[randolfe]

That's the quadrillion dollar question. I'm not sure I have any more insight into that than anyone else. For what it's worth, here is my current thinking:

* The end is not neigh. I get very annoyed with the end-world prognostication that goes on in the blogosphere.

* The US as it has existed for the past 25-30 years is not sustainable. This isn't rocket science. Dissavings rates exceeds real growth. That is, spending of our wealth plus spending on servicing our growing debts exceeds our ability to grow our way out of it.

* The above goes for both individuals and the government.

* US corporations still rule the world. They aren't really "US corporations" anymore, but trans-national entities that are almost nations until themselves in many ways. We can argue about the merits of that itself, but it is apparent these entities enjoy great success and wield great power.

* US innovation, scientific discovery, and productivity still rule the world. We're doing our best to piss it away, but we've got quite a culture of success to carry us through hard times.

* Energy, energy, energy. We have to solve that problem, and it will be hard.

* Infrastructure, which is requisite for the energy problem, must be addressed. We've relied on our incredible infrastructure for so long now that it's neglected, obsolete and inadequate.

* New frontiers. Capitalism requires perpetual growth. I believe that isn't as silly as it sounds. We need to open new frontiers for development. No, not Alaska, lol. I'm talking _big_. As in, not on terra firma big. Orbital, off-world, oceanic, etc.

--

Those are big thoughts, but it's a big question. More immediately, we're going to suffer a lot of pain. The real issue is whether we suffer the pain continuing to treat the symptoms, or whether we grit our teeth and take the medicine required to actually solve the illness.

[astrid]

The problems on Wall Street are not end of the world problems, but it does illustrate how sick America has become. I'm not quite a Chicken Little, but I don't completely share your optimism about America's ability to dig itself out of this one, bailout or no. When I look at the electorate and the political bodies, I see them dominated by demagoguery and fear tactics. Most corporations have also abandoned any ability to see beyond the very short term and are actively poisoning the commons with lobbying, accounting gimmicks, and indifference to employees and shareholders. This country is very much veering off course.

I think pain, prolonged and memorable pain, is this country's last and best chance for redemption. It's a high risk strategy that could lead to a dictatorship or a malfunctioning Banana Republic, but we're already zooming there on US's current trajectory. Banking and financing regulations need to be tightened, financial "innovation" needs to be carefully watched over and checked, to prevent more of the "too big to fail, too big to bail out" situation.

The House Republican plan is absurd -- how does cutting capital gains taxes do anything for a Wall Street saddled with highly depreciated mortgage backed securities? If anything, taxes need to go up to pay for the social welfare programs and debts that inevitably accumulate in economic hard times.

What do you think of the Democrats' plan. I think it's enabling behavior, but far more reasonable sounding than anything put forth by anyone else.

[astrid]

PS - I wouldn't call what happens in DC RealPolitik - that would imply a certain amount of foresight and toughness. It's more like an abusive marriage, where the Republicans are the thuggish dad, the Democrats are the enabling mom, and the taxpaying public are the kids.

I also come to believe that too much technological innovation is quite possibly the biggest problem of modern society. Human society need a lot of time to digest innovation and work out ways to deal with the negatives of innovation (see gin in 18th Century England or Mainstream media today or the paradox of the social welfare state apparently heading towards idiocracy).

[randolfe]

Technology and innovation is where we probably disagree the most Astrid. I am obviously a very strong advocate of ever more rapid scientific and technological advancement. I'd point out that the base level of education has risen dramatically within the developed world with arguably only the past couple decades being flat. I'm no education expert, but it could be that requisite societal skills are changing and therefore it appears people are getting dumber when they're just becoming differently educated.

An example: driving. Yes, I know people are terrible drivers. But think how complex driving is. The machines are incredibly complex. The controls are complex. The rules are complex. The unwritten culture not codified in the rules is complex. Yet we do it like it's natural. A tremendous amount of learning is wrapped up somewhere in all that. Same with modern communication, information parsing, etc.

I guess my point is that I eschew any notion of regression or otherwise Luddite philosophy.

[randolfe]

But I take your point on DC Realpolitik. I'm giving them too much credit.

[astrid]

I'm not denying the benefits of innovation. Our living standards and access to information far exceed our ancestors. I'm just worried about humanity's ability to deal with the downsides to innovation. One such innovation - nuclear weapons, means rapid extinction of the human species is a real possibility. And while the modern man is more capable than his ancestors in an absolute sense, I think they're less capable in a relative sense - in that modern society's growth in complexity has out paced modern man's growth in sophistication.

I'm not quite a neo-luddeite, in the sense that I don't want innovation to stop. If anything, I see breakthrough innovation (cheap electricity/global warming reversal/space colonization) as humanity's only chance of saving itself from its current predicament.

So I guess what I'm trying to say is...I worry a lot.

[astrid]

Also, funny that nobody seems to have noticed this: http://www.mcclatchydc.com/251/story/53117.html

What a day!

[TunaFish]

Randy,
I wonder when you say that abolishing the Fed Reserve is a bad idea. Do you mean in the sense that doing so is nearly impossible and therefore a waste of time? Or rather, do you mean that the Fed should not be dissolved? I would agree with the 1st in that, the President alone could not accomplish this, and Congress wouldn't go along. But if you mean the 2nd, then I ask how could a private for profit bank with international ties be good for managing our money supply? Ideally, I would imagine the best thing would be for a Fed or Fed like entity controlled by congress with public meetings (on C-SPAN?).

[randolfe]

Refining my comment on the Fed:

The United States _must_ have a *central bank*. I agree wholeheartedly that the current Federal Reserve structure is lacking. But we cannot simply dissolve the Fed and operate without any central bank. That is what Ron Paul has advocated, and so far as I know, continues to advocate. He appeals to real (read, market dictated) interest rates.

That is folly. Since other countries/economic blocks do, and will continue to, operate a central bank, then so must we.

The Bank of Japan, European Central Bank, and US Federal Reserve in particular enjoy very broad nominal interest rate power. That means they are interest rate setters, not takers. Globalization weakens this, but still those big three can set effective rates within their own economies regardless of what the world market tries to dictate in terms of real rates. Or, in other words, they can export (or avoid the import of) inflation.

If you eliminate the US central banking feature then suddenly you empower China, India, South Korea, etc. with incredible power to force the US to accept interest rates they manipulate vis-a-vis their own central banking interventions. In the case of these particular countries: currency manipulation by way of their dollar pegs.

The bottom line is we absolutely must maintain the credible ability to drive our own interest rates to offset the interventions of potentially non-cooperative foreign central banks. For the life of me, I cannot understand why Ron Paul or his otherwise very smart supporters don't get this.

[randolfe]

One further thought: I have heard the argument put forth that we should still eliminate our Fed, and *not* replace it with any sort of central bank. Those advocates are usually extremist free market fundamentalists. Generally their solution to my above concerns are summarized as mercantilism.

They focus on the unfairness of global trade (ironic as that is) and advocate engaging in trade only with countries willing to engage strictly according to the rules we dictate: namely, free market trade as we decide to define it. If trade partners refuse to abide by our rules of engagement, then they advocate draconian trade tariffs or outright trade prohibitions.

The problem with that argument is it risks between 1/5 and 1/4 of US GDP. That is, such a policy could well result in an outright shrinkage of the US economy by 25% -- that is how much we derive from trade.

The good news is the US could survive a 25% deflation. We have before. I highly doubt the people advocating this policy want to see this anymore than I do, however.

The bad news is it implies a US hegemony that is unlikely without something else. That something else is equally as unpleasant to think about, at least for those willing to think the entire scenario through to the logical end.

[Alpine]

Sorry Randy, but I do not think the bailout is dead. THey are likely going to vote on it either tomorrow or Monday. Word on the street is that during Thursday's White House meeting with Bush, Pelosi, McCain, and Obama, Paulson got one one knee in front of Pelosi and said "Please don't kill it." Pelosi then told Paulson "I didn't know you were Catholic."

[randolfe]

Alpine,

That's why I said "for now", and my first bullet point says "I think there will still be a deal".

But we're not going to get the deal Paulson thought he was going to get passed. I'm pretty sure Paulson and Bernanke, and Wall Street, really thought they'd get a bill through in 1-2 days.

[NTETS]

and randy, what % of GDP is banking, financials, construction, RE and "related industries" and what % of that GDP is lost already?

any thoughts?

[randolfe]

As of 2005, GDP sector components:

Finance + insurance + real estate + leasing = 20.4%

Construction = 4.5% (but includes non real estate constr. such as transportation-related)

So let's say that's 30% of GDP that's at risk. Not all of that would disappear due to this financial crisis. Let's bet real doomers and say that half is vulnerable. That's 10% of GDP.

The other problem with your question is a good portion of that heavy financial footprint is related to trade. Capital financing of trade related activity is tremendous: transit, business ops, transactional.

Directly answering your question about how much has been lost already? I don't think anybody is sure. That's the problem. We don't know the true market price/value of all those non-liquid assets. The best figures I've heard are that total US real estate is overstated by approximately $1.5tr to $2.0tr. So what? Potentially between 1-3% of GDP? It depends upon how long it takes to devalue, and what effect that has on growth.

[randolfe]

Also note that the 4 fastest growing sectors since the 70s have been:

(1) Professional business services
(2) Education, health care
(3) Finance + Real estate
(4) Info tech

One of those will continue to grow regardless. The other two will almost certainly grow, just perhaps slower, even with a dramatic deflation of real estate and cutting in half of finance.

[Brand]

Nice to see this blog up and operating again! I've been keeping on top of CR's articles, and thus far his coverage has been excellent. I've also been poking around patrick.net since the meltdown kicked into high gear, but that blog is (again) in dire need of thread police. I'm glad that we'll be able to discuss hard times for America sans the tin foil hats and high caliber weapons.

I'm horribly offended by the Paulson plan. I've read the latest bill as well, but it doesn't seem much better. They've left far too much to the Treasury secretary's discretion, especially in the area of securities valuation and executive compensation. There is some fantasy that Congress is going to be able to control the Treasury, but the bill's language is very weak. I see a lot of "advise", "review" and "report" sections.

[Brand]

astrid, I tend to agree that mankind's technological capability is slowly outstripping our social maturity. But that has been happening for hundreds, if not thousands of years. There will unquestionably be some bumps along the road.

And yes, please post some more pictures from Iceland! :) I've been looking at a round the world tour, and that is definitely on my list of stops.

Randy, I've been reading Tom Friedman's articles and listening to his lectures. We have to make a huge change in energy policy in the next century. Even ignoring global warming and petro-dictatorships, the demand for energy is rapidly outstripping supply. World population growth and industrialization pretty much guarantees that. If we don't make a technological shift, I do believe that we'll eventually reach Peak Oil, if not in productivity of available reserves than in the expense of tapping increasingly difficult reserves.

I would love to hear how you think we're going to grow beyond the landmass. It sounds more like sci fi than a plausible occurence in the next 200 years.

[randolfe]

Brand, good to see you again. I hope this blog picks up. I'm also looking into starting a threaded forum linked to here, at least as an experiment to see if people like that better than serial-comments.

Some optimists estimate that a space elevator could cost as little as $10bn to build. Assume it costs 20x that to build the first one, then each subsequent one costs less approaching the twice the optimistic number. That still means we could build at least four (4), if not more like ten (10) or some equivalent cost complimentary technology -- all for the _optimistic_ costs of this bailout bill.

I bring this up because, (a) while ambitious and risky, it is feasible; (b) it would unleash massive real economic growth which would be reaped over many generations; (c) it would provide near-term access to large sources of energy via massive scale orbital solar arrays. Very surely the nation which builds, operates, and controls the first space elevators will also enjoy incredible strategic and military advantage over the rest of the world.

Relative to the technology we have now, this sort of undertaking is no harder than leaps we've made in the past. I bring this up not because it's some wacky sci fi dream given current science & tech like terraforming Mars, or something currently impractical like establishing self-sufficient, permanent off world colonies.

But we certainly could begin to develop and exploit our orbital resources. This is a necessary step before any of those sci-fiey things become thinkable.

...but no. Let's just throw a couple trillion dollars at investment bankers and irresponsible home buyers. That'll move things forward.

[Brand]

Yes, it has been notably painful that the anger is directed only towards the I-banks (which obviously deserve it), with the careful positioning of "distressed" homebuyers as the true victims (which IMO also deserve it).

I have been particularly irked that certain Congressmen and Congresswomen keep pointing the finger at declining house prices as the root cause of foreclosures. Several have gone so far as to suggest that stopping further price declines would solve the problem. The CDOs would halt and foreclosures would stop. Apparently they don't teach you what "root cause" means in the course of Congressional education. The cause of declining house prices is an artificial spike caused by market manipulation. The root cause is simply "what goes up, must come down", phrased that way because I doubt anyone in Congress truly understands regression to mean and the concept of overshoot.

I am seriously dreading what will happen if we keep trying to manipulate the market further. Simple logic implies that when people took out loans against assets with fluctuating values, that regardless of the asset price those loans would eventually have to be repaid. I re-read a great article by Warren Buffet about the dangers of trade imbalances and artificial methods of maintaining them. Effectively he warns about the problem of negative compounding, where eventually your GDP is accelerating towards maintaining your debt, while your payments are providing additional fuel to your creditors to purchase your assets out from underneath you. As your productive assets erode, you rely increasingly on printing money instead of producing assets, which diminishes your economic value, and so on.

So where am I going with this? I'd vote for a space elevator if I thought that our problem was inadequate consumables to meet demand. Our problem is that we have a Roman-esque artificial demand. I don't really believe that the market can be fixed via more manipulation, especially on the supply side, because it genuinely needs to fall to an equilibrium. Our energy situation can't be repaired by new sources of power. Our bizarre personal DTI levels can't be resolved by additional credit facilities or longer repayment terms. I continue to maintain that the problem is our inane demand for "luxury" instead of knowledge and productive assets. I'm against fresh sources of wheat and elephants as long as we remain obsessed with bread and circuses.

I guess I'm rooting for a Great Depression 2.0, at least on a social level. People need to feel the consequences of all this frivolous greed, or they're never going to question the current status quo.

[randolfe]

I guess I look at it differently. One of the greatest attributes of the economic history of the US is our ability to change the game. We have been the source of disruptive technology a number of times which have literally shifted paradigms. Not just economically, but militarily and sociologically. We are, and have always been, a culture of hyper progression -- a perpetual revolution. What I fear more than anything is stagnation. The US is not really a viable culture nor does it have a viable political governance structure suitable for describing a long-term, stable society.

I guess what I'm saying is that is ok with me. I'm not interested in living in a long-term, stable society. I see those as increasingly rigid, uninspiring, self-justifying societies. Not that it may not be comfortable and fulfilling for many to live in such a society. But those societies are ultimately doomed. They will eventually either see themselves driven into some dystopian tragedy, or more likely they'll simply be usurped by another rising, ambitious society fashioned around hyper-progressive, risky advancement -- the role the US now fills.

A space elevator is simply one route by which the US could conceivably change all the rules again. It's really sort of simple: anything which injects massive new real growth into the economy changes the game.

[Brand]

Randy, I think we are largely in agreement, except over one sticking point. I believe (and correct me if I'm wrong), that you see these disruptive changes as a result of technological innovation.

However, I perceive that we had a great incubator for technological innovation precisely because of the way capital flows so freely within our society. Money was available and strong laws provided a level playing field. Also, Americans have had a fanatical pursuit of high quality education. They have always been obsessed with means of production, notably farms and factories, and with the technologies that increase productivity.

In the recent decades, it feels like we've directed our middle-class capital into competing with the Joneses. Perhaps that is simply a result of developing a middle class, but I don't believe that is a complete explanation. Increasingly our capital is locked into unproductive and/or consumable assets like homes, cars, vacations, luxury goods and entertainment. People are leaning heavily on leverage into their homes under the assumption that inflation will eventually provide them with large paper gains, which can then be leveraged into additional consumables. Boomers seem prepared to depend completely on Social Security and Medicare for their retirement. But we see the same attitude with stimulus checks--blow some cash now, and pay more back later (with the added feature that people think someone else will pay it back, so it's "free money").

In other words, we're focusing a lot of capital towards consumables, and relying on entitlements to survive the inevitable effects of sending our capital elsewhere. Such an environment is hostile to growth, which in turn becomes hostile to capital, and eventually to technological innovation. Or rather, hostile to reaping the fruits of the technological innovation on American soil, because IP can now flow around the globe.

I believe that conservation would free up working capital. But it will take a big shock to the system for people to shift from an entertainment/luxury/entitlement mindset back to the traditional American philosophy of knowledge, industry and abundance.

[astrid]

Good to see you here Brand. I guess it's a matter of perspective. I'm pessimistic about humanity self destructive capabilities and think humanity has been walking on a knife's edge for the last 50 years. With nuclear weapons AND the current crop of religious zealots (both Xianists and Muslims) who are beyond logical persuasion, I'm just not going to be optimistic about humanity's survival odds.

Funny but I've been daydreaming about a round-the-world trip ever since Congress/Paulson indicated that they would do a bailout of some sort. I convinced myself that my savings are pretty much going down the drain anyways, so perhaps I should at least get a nice vacation out of it.

I have a gallery of some Iceland pictures here http://picasaweb.google.com/dazrulz/Iceland# and feel free to ask questions about it. It's actually a great time to go Iceland because the Krona has lost about 25% of its value against the USD in the past year.

[astrid]

I gave the bailout some more thought and I'm leaning towards a bailout after all. This society is just too entitled and powerful to let everything comes crashing down, we can end up with some ugly fat-tail events that will profoundly impact other countries.

I am tired of the Democrats' enabling behavior. After 2008, I'm voting Green (unless they're stupid enough to let Nader near their ticket...).

[randolfe]

Brand, we are largely in agreement. I don't disagree with any of your points. An underlying assumption of my argument is a return/restoration of investment. That's the same thing you're talking about vis-a-vis conservation. It's all about where capital flows.

I don't completely discount luxury, entertainment and real estate. Those things are basically the Horatio Alger spoils that drive the American meritocracy. The problem is we like to see upward mobility, but we cushion downward mobility too much. Not that people don't need forgiveness, a second chance, and some assistance. But your existence should not comfortable when you fail. I could go on, but I'm preaching to the choir. I think we all agree on moral hazard and incentives, regardless of our political (or apolitical) leanings.

[randolfe]

Astrid, I agree we simply cannot allow the US "empire" to come crashing down. If nothing else, we owe that much to history. The consequences of a fast and dramatic US decline would be terrible for all humanity. But I'm not worried that much. Many more likely risks at hand. Very unlikely you live to see the "end of the American Empire". You've been to the UK. Most of them haven't embraced the end of their empire yet.

About politics. I hate to comment, but I can't contain it any more. I'm very apolitical; pretty equally disgusted by both sides of the "false choice" parties. Disgusted by the puppet media. Disgusted by the gullibility and complicity of the electorate. Disgusted by the inability of a third party to gain any traction...

But this election hold special significance. We have now gone through 8 years of an incredibly inept presidency. Essentially, no one can make a pro-Bush argument without a partisan smirk. And this was no surprise. It was obvious beyond all suspension of belief that he was a duff way back in 2000.

But now...Palin? This is outrageous. Are we really to this level now? That's the best we can muster? People are so blindly afflicted with a partisan virus that they actually are willing to argue on her behalf? She is simply not qualified to be President, and therefore, not Vice President. That I even need to state this is so troubling that it drives me to the point of despair. Utter despair.

So here is where I'm personally at. I have consistently voted either my conscious (which most often meant throwing away my vote on a hopeless third party), or I've voted against my own immediate self interests -- meaning for a candidate who I know will raise my taxes. But, if the American people see fit to elect Palin/McCain, knowing full well that there is a reasonable chance Palin could assume the presidency, then I'm done. I will thereafter vote a simple ticket, from dog-catcher up to President: whichever promises to lower (or not raise) my taxes. And I'll feel fully justified in doing so.

[Brand]

Randy says: "I don't completely discount luxury, entertainment and real estate. Those things are basically the Horatio Alger spoils that drive the American meritocracy. The problem is we like to see upward mobility, but we cushion downward mobility too much."

Very well said.

In effect, the middle class is trying to freeze its standard of living in place via artificial means. By the definition of the working middle class, this effort must fail; all luxuries must be secured by hard work and pragmatism. The middle class must work, or else they are really noveau rich. The luxuries must be rare, or else they are no longer luxuries at all. In the last decade or two, Americans have come to believe that they deserve the granite countertops, the relaxing week in Cozumel, the two Volvos in the driveway--the external trappings of success. But they are attaining them through easy credit, not via true success.

Some would argue that Americans have lost discipline, and that's why they have turned to credit cards and raiding home equity. I tend to believe that people have an inherent weakness for easy luxury. That is why one generation's success via hard work becomes an entitlement for the next. These new instruments just allow banks to capitalize more efficiently on human weakness. Why should anyone be impressed by a Mercedes in their neighbor's driveway, when it could have easily been acquired by squandering home equity?

Randy also says: "An underlying assumption of my argument is a return/restoration of investment. That's the same thing you're talking about vis-a-vis conservation. It's all about where capital flows."

The problem is that we both assume the liberated capital will flow within the United States. Capital tends to flow where you get the most bang for your buck. Capital after all is represented by currency, which is fiat for the physical and intangible assets of your nation. Via cheap labor and friendly tax laws, other nations have deliberately become low points on the map, pooling our U.S. capital and then using it to acquire productive U.S. assets like corporations. Even as we inflate to cover our entitlements and debts, that capital is acquiring natural resources like real estate & timber (via REICs), mines, companies (via offshore headquarters) and technology (via the fungible nature of IP).

I feel like America is slowly selling off the goose that lays the golden eggs. We assume that our trading partners will keep taking our green paper in exchange for golden eggs. But at some point, they will own the goose and their own citizens will want the golden eggs.

In large part that's why I admire nations like Ireland and Singapore. Ireland realized that it has few physical resources, but it could be an educational and intellectual powerhouse. They're investing in the golden goose. Singapore is making it very easy for U.S. corporations to transfer HQ there and pay only 10% taxes for all their Asian profits. They protect that with very powerful laws. For technology firms, that's a huge benefit. They've made a great nest for our golden goose.

[Brand]

btw, how do I use italics and boldface in this format?

[Brand]

Problem solved. :o

[astrid]

Sounds like we more or less agree. Once again, I think our disagreements stem from our optimism/pessism about the strength of the American society. I'm more pessimistic, so I think Great Depression 2.0 (which might happen anyways) could trigger a resurgence in fascism and even more interest in militaristic imperialism.

I say this as someone who watched in dismay as the Bush administration preemptively invaded Iraq, tortured people, gave out no bid contracts and politicized the civil service, pushed through FISA, etc. with minimal Democratic opposition and high level of public support. This country is driven by the gut instincts of people who value truthiness over the truth. I'm not sure these people will quietly learn their lesson and trim their excesses. I think they will act out irrationally and hatefully in a very scary way.

But for the likelihood of that big fat-tailed event, I'd say it's better to let the dysfunctional banks/governments/citizens die off and be replaced with something hopefully better. But as it is, I think responsible people are just screwed either ways.

[astrid]

PS - I guess the anti-bailout letter writing rattled enough Democratic nerves...

We live in interesting times.

[NTETS]

a space elevator would inevitably become a symbol of some kind and then you have national security problems

[Brand]

Has anyone been tracking the House defeat of the bailout? Apparently not enough Republicans voted Yea, and that spooked the Democrats. Rumor has it that they're now hagging over how many Republicans from which states need to put up Yea votes because, if you can believe this, they all know the bill is deeply unpopular and the Yea seats will be at risk next election.

Possibly truthiness, and not quite truth?

[astrid]

It's shaping up to be a game of political chicken. I wouldn't be surprised if it passes on revote with a few more concessions to the Democratic holdouts and/or a few more Republican yeas.

[Brand]

Congress needs to cut out all the "At the discretion of the Treasury secretary..." clauses. Executive compensation needs to be cut, and the taxpayers need a preferred equity stake in exchange for the cash. The banks can recapitalize after their write-downs. This rubbish about buying toxic assets for higher than mark-to-model just leaves us holding a flaming bag of dog crap.

I'm shocked, and a little proud of Congress.

[randolfe]

Holy Schmoley.

I had a meeting with a client over lunch, and had to dive into the corporate bubble. I emerge to find out I was wrong. The bill didn't pass.

I think the odds it passes in anything resembling its current form has now dropped to nil. Either the Dems throw out bipartisanship and ram a giant New New Deal bill through, which Bush vetoes. Or the Reps get a bill of their own, which is even less likely.

These are very interesting times.

[randolfe]

For the first time in my adult life I have seen the will of the people (right or wrong) expressed through the national democratic process.

We'll see whether people just voted themselves Great Depression 2.0 or not. I tend to think not. But it's going to be rough going for a while now.

[Brand]

Amazing. Simply amazing.

I have to believe that trading curbs kicked in today. -777.7 for the Dow. That just about wiped out all the upside from blind hope and the financials short squeeze.

I think there's plenty of room for reason in Congress. The People have shot down Paulson's plan, even with 108 additional pages of (mostly empty) verbiage. All this fearmongering by Bush, Bernanke and Paulson has obviously caused a massive backlash... apparently America isn't as trusting or foolish as they had first believed.

[Pasadenan]

Big Technological Inovation:

I see two on the horizon (apart from the Biotech everyone keeps talking about); and think there are some real opportunities for venture capital:

1) Self sufficient power for house & automobiles; from methane gas fuel cells; the gas "grown" on house roof-tops in pre-manufactured standardized containers with all required connections, valves, floats, venting... The trick is selecting the correct bacteria and algees to grow quickly, breakdown efficiently, to be enviromentally friendly/safe, and to be in balance so that neither ends up dying off.

2) The neural network computing machines, based on multiple paths and signal travel time, similar to living brains. Though the clock rate is substantually slower than the linear logic machines, the pattern matching ability is substantually superior. A 50 thousand node artifical neural network has already been built by USC over 3 years ago. USC was trying to interface it in a living brain; but there is a market to interface it to a linear computing machine, and for programers to learn neural network programing. There is no reason these should not be mass produced. There may be some patent licensing issues.

[randolfe]

I'm very interested in ANN (artificial neural network) technology. As I understand it, the current thinking is not to duplicate biological neural structures, but to use them more as guiding principles. I already use ANN software in two systems I operate regularly to build capital market models. Many folks use them to do black-box technical analysis sort of trading strategy. Since I mostly think technical analysis is hogwash, I use the same software to find correlative patterns to time-series fundamental and macroeconomic data.

Since I'm still blogging and not retired to Mauritius, you can assume that I have not succeeded wildly yet. I had a false hit with FNM and FRE, which I had figured out a way to long-only achieve over 90% wins as they declined, with my rates and returns going up in the latter days of their existence. I thought I had figured out a powerful macro correlative model, but it hasn't proven to apply to anything else. So now I'm more inclined to think all I did was accidentally luck upon a behavioral/psychological oscillation in the market which was related to, driven by, or simply correlated with the macro variables I was observing.

[Pasadenan]

Though linear machines can simulate neural networks, they are very inefficient and very slow, even at extreme clock rates.

The Neural Network USC built does model the functions of actual brain neurons. They used a multi-discipline approach. They got one department to measure the inputs and outputs. Then they sent it to the math department to model some equasions that would produce the given output from the input. Then the sent it to the electrical engineering department and said "build me one". Then there was the networking; and laser communications, and then biomedical engineering for interfacing, then biotechnology for altering DNA to keep the living organism from rejecting the foreign item.

The guy responsible has made some major headway on fingerprint recognition using linear machines with programing modeled on the observations of the neural networks; but just thing how much more efficient if we actually build neural network machine that DON'T use linear logic?

It requires a paradym shift; but then all major technological advances do, which is why venture capitalists are able to see an opportunity and take a risk on an uncharted path.

[Pasadenan]

Consider also smell sensors...
Sure, we've got carbon monoxide detectors, and photo electric smoke detectors, and ionic smoke detectors; be in general we don't have anything to record, identify, and reproduce smells.

We have absolutely no way to re-produce the functions of a dog's nose and pattern recognition ability. Similarly we don't have a way to reproduce the function of an Ant's anteni.

A group at CalTech about 20 years ago used a small array of custom capacitors that would absorb material from the atmosphere changing the capacitance. They spun off a company shortly after their graduation. I believe the company still exists; but they are esentually providing product only for research, and no mass-marketed product has been developed.

Even with the ablity to document a unique pattern for given scents, it still needs to be looked up in a database. So far, neural networks are the best method for this, unless the database is very limited, or if one can order the database for "most frequent"

But just think; a "simple" product that could be designed into a refrigerator, or added later; with voice module; and when the milk has spoiled and you open the refrigerator or walk by it, the voice states "the milk has spoiled; please remove it and discard it". The module could easily have 2000 common refrigerator smells cataloged.

[randolfe]

Pasa,

I agree that sort of research is interesting. I'm not personally aware of any biologically-based neural networks that have found any applications close to commercial applicability yet. But I haven't been following the space as closely as you have.

I would be happy to start a thread specifically on this subject if you want to discuss in more depth. Perhaps I can help you to understand what venture capitalists might be interested in funding, and why they make the decisions they do. There is a lot of misunderstanding about what, why and when the typical VC will fund. For example, the projects you've described would likely be very difficult to fund from a traditional VC. They fall into the "science project" category, from the VC's perspective. Other sources of funding are probably more appropriate for what you described, such as strategic investors, angel investors, public & private grants, or friends & family.

If you want to discuss more let me know.

[Pasadenan]

It doesn't fall into the "science project" catagory if you already have a means and method of manufacturing a product, have an application, and have a potential market of 5 million units, to be sold at $300 each, produced and shipped for $30 each.

It is not "theoretical", it is "practical". But there is absolutely no way I'm going to do it on my own, nor I'm I going to seak out venture capital on my own.

The interesting thing about the neural network USC built is that it is typical semiconductor based, using existing doping technologies, and uses imbedded lazer diodes to not have to make the huge number of required connections. Though the artificial "neurons" function the same as a living neuron (same inputs and outputs), they are not carbon/DNA based, but rather Silicon or Galium Arcinide chrystal based.

I have absolutely no desire to do "research"; I much rather see a new product on the market. As far as I'm concerned, the research was already done. But I do need to check to see if they have patents on what they made, thus requiring licensing arrangements. The nice thing about patents is all the information is readily available on the U.S. Patent Office website.

[randolfe]

Pasa,

Is there a business plan already? If your claims about production costs and market are true, and if the margins are high enough and defendable, then a VC would be interested in looking. I or anyone else with contacts could easily get a half dozen firms to take a look at such a plan.

But the big caveat is in the details. IP is critical. Big-science sort of projects like you're describing always set off red flags with VCs because they general required a great deal of R&D to simply get to the prototype level. It is rare that such techs aren't accompanied by a host of ownership claims, often from research universities or ties to grant money.

I'm not criticizing your idea with ill intent. In fact, if you think I'm being critical then you really should prepare heavily before facing a VC. Again, a VC probably isn't right given what you're describing unless things are farther along than I'm reading from you.

[Brand]

Not to put too fine a point on it, but how could things have progressed to silicon implementation without significant capital outlay? Laser diodes and GaAs wafers don't come cheap. They certainly aren't in the same domain as open web-based products that can be largely produced on a workstation (although your SW hotshots still require equity, pay and a steady supply of Red Bull). Any university doing those experiments isn't going to release their technology into the public domain. If it involved manufacturing, then Randy is right, that was almost certainly grant money.

Interestingly, a $300 price tag and 5M units implies some kind of consumer product. Either that, or it's some kind of blades going into a larger system, which is entirely feasible for neural networks.

[Pasadenan]

No, the business plan has not been written yet; I would suggest it would make more sence to have the business team put together prior to finalizing the business plan.

Ok, I'm looking at several different potential products; but the easiest to put on the market the fastest esentually would be like a "co-processor" that would plug into a computer motherboard. There are several different options on this; one is to make the pin configuration the same as existing processors, thus allowing it to plug into existing boards that allow duel processors or multiple processors. Another is to "partner" with existing board manufacturers to allow them to sell boards with the feature already added.

Another question is how many nodes? I would like to see 100k, or maybe even 500k; but the working prototype is 50k, and it is much easier to produce and market something that has already been built. What is missing is the interface and operating system. The interface that exists was intended to interface to living tissue, not to existing micro-computers. And of course the masks for the production model of the LSI chips would need to be produced ---> a one time expense with some engineering time involved.

The idea is to provide a minimal open architecture opererating system, just enough to get it on the market and let people start writing their own applications. The intent of the interface is just to get it to plug into a motherboard, and have a means of setting the neural path data, and a means of getting test data in and results out, similar to the way co-processors used to be used for multiplication operations.

Yes, there would be patent licensing requirements. I tried to find the patents earlier today, and didn't see them; but I'm sure they are there. Slightly different field and application, so maybe not completely relivant, but one would be foolish not to negotiate an agreement for something of this magnitude. It would also be desireable to negotiate access and production rights to the existing prototype to get it on the market sooner. The cost would be negligible when spread over enough units.

Obviously one would want to have attempted the negotiations before finalizing the business plan and before approaching the venture capitalists.

[randolfe]

Ok. Now I have a better idea. There are serious issues any VC will raise about your sales channel. Technically, I'm fairly sure that you'll have to work for direct support from board manufacturers -- you can't just plug these into existing slots. The current (and future) gen of motherboards have only a single CPU slot since CPUs are multi-core, thus no need for multiple slots. Also, the CPU bus is heavily laden with caching hardware that is quite specifically designed for a specific vendor's chip; either Intel or AMD. You might be able to plug one of these as an expansion board, but you won't get enough bus speed unless it's PCI-E, which would be possible (and thereby ends the limits of my hw knowledge). I'm certain there are other constraints in your plan.

The bigger problem for a VC, assuming you can solve all the hardware issues, is sales channel. You will need cooperation of either OEMs or distributors. For reference, look at the problems the makers of the so-called "physics expansion boards" (Physx or AGEIA). What you run into in a tight channel with low margins such as are computers is that most of your margins will end up compensating your channel partners in order to get them to push your product. ie, whichever graphics card the various computer makers push into their gaming rig lines largely define the sales of Nvidia versus ATI. And Physx versus AGEIA is even worse because so few push them into their channel. Leading also to the fact most big computer sellers won't consider your tech unless there are at least 2 choices. They have to be very careful about how they load their channel.

Direct sales would be an option, but any VC will seriously question your ability to achieve any sort of critical sales levels with a direct to customer strategy for a product like you're describing.

[Brand]

So what's the hot consumer app? I must have missed it. Because average Joe isn't going to spend $300 to stick a "neural net" card into his $400 PC. My guess is that you're really targeting existing users of software-based neural nets, by providing a path to some kind of hardware acceleration.

Your physical product structure should be suited to your target market. Certain apps might tolerate an external box on USB2, others might require tight integration with a CPU (internal PCI-Express on a daughter board, for example). Some apps might even want a small processor on the chip, a la ARM. Financial and weather modelers might prefer a rack-style array of blades. How much data passes between them? How often is data exchanged, and is it a hold/wait scenario? Is the HW accelerator used for hours on end, or does the user interact with it in short bursts (or not at all)?