The Fed is Killing Small Banks

Today, four years since the official bottom of the 2007-2009 recession and financial crisis, you can add a surprising voice to the list of those still waiting for a recovery: America’s small banks. As CNNMoney’s Stephen Gandel notes, the banking recovery has been uneven; small lenders are still in trouble, and some continue to fail even as loan quality at larger institutions has rebounded sharply. The U.S. banking sector is becoming a two-class system: big banks are getting bigger, and small local banks are dying. Large banks are driving a Wal-Martization of the banking sector. As with Wal-Mart, the implications for Americans’ standard of living are not good.

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Leave Self-Driving Cars Alone, NHTSA!

The National Highway Traffic Safety Administration has proposed new federal rules for autonomous (aka “self-driving”) vehicles, far in advance of any automaker’s plans to introduce even one of these vehicles into the market. It is a statement to the extent of the United States Government’s overgrowth that detailed regulation of unmarketed and unannounced products is not immediately rejected as an absurd waste of tax dollars. Such regulation should almost always be rejected on principle, and this case is a great example.

NHTSA’s proposed rules are likely to delay the arrival of promising technology that could eliminate or substantially reduce whole categories of traffic accidents and driving complexity. In the process, NHTSA will, ironically, make our roads less safe, rather than more. Residents of urban centers will be denied the promise of cheaper, more efficient car sharing, and people with disabilities will continue to be virtually denied access to the roadway in droves. Meanwhile, taxpayers will continue to flush billions of dollars down the drain to subsidize inefficient, money-losing, poorly-maintained mass transit systems.

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Aaron Swartz’ Tragedy and Thuggish Prosecutors

For those who didn’t know of Aaron Swartz, or haven’t heard this very sad story, the world lost an incredible talent this week. Sadly, Aaron committed suicide on January 11, at 26. Even in his brief life, Aaron’s accomplished such an incredible contribution to the world that no blog post could do it justice. Among other things, Aaron founded Demand Progress, an activist organization incredibly influential in bringing down awful legislation like SOPA/PIPA; he developed RSS, the syndication technology that eventually spurred services like Google Reader; and was active in Creative Commons, the widely used licensing framework known for its simple rules around redistribution and attribution. Cory Doctorow’s tribute is wonderful, and captures how truly unique Aaron was as a person.

This was a piece of news that felt like a punch to the gut. I didn’t know Aaron, but I know the wonderful things he created. Many of us see and use them every day, even if we don’t realize that we do. I also have a better understanding than most of exactly what we lost when Aaron’s life ended. At 26, Aaron was not even a year older than I, but he was many times more brilliant. Aaron accomplished such great things in his first 26 years, and I feel very cheated that we won’t we have him around for fifty or so more.

Aaron was steadfast and unwavering in his commitment to his principles and his high expectations of people (himself included). As Doctorow notes, that steadfastness got him into trouble from time to time. He faced criminal prosecution for one such effort: reposting public domain articles from the JSTOR academic database, making them available for anyone to read as the authors intended. Even as JSTOR declined to pursue legal action against Aaron, a Federal prosecutor made it his objective to make an example of Aaron. Larry Lessig’s blog post details the hyperbole and smears the government lobbed at Aaron. That smear campaign, combined with the possibility of imprisonment for following his beliefs, no doubt contributed to Aaron’s untimely end.

The question of what, if anything, we might have missed in Aaron’s behavior that could have helped us prevent his untimely death is a difficult one that I’m not in a position to answer.

Two conclusions about Aaron’s story are not difficult, however:

  1. Observing that this prosecutor’s behavior, whatever may have motivated it, was thuggish, ignorant and wrong.
  2. We cannot afford to have prosecutors quite literally destroying the lives and reputations of innocent Americans, in their (alleged) pursuit of justice.

Prosecutors (particularly federal prosecutors) start with a deck stacked heavily in their favor. They start with the resources of an entire nation-state behind them, and that same nation-state writes the laws they prosecute to. Often, the defendants are ordinary people of limited resources. Even when they aren’t, the government’s allegations are given significant airplay and inherent credibility. On top of that stacked deck, prosecutors as individuals are generally given broad immunity for questionable conduct; instead, it is the government as a whole (i.e., taxpayers) that are liable for prosecutors’ misconduct.

In today’s society, when the government can make any allegation about any person nationwide news in a matter of minutes, merely being accused of a crime is potentially ruinous to one’s reputation and livelihood. It’s time for our laws to reflect that, and force prosecutors to act with some discretion. Prosecutors are public servants, with an obligation to protect and serve the interests of the people in justice. Qualified immunity incentivizes prosecutors to act not as servants of justice and safety but as soulless machines with an eye toward their own conviction rates and political records.

I’ve created an open letter to my representative (Pelosi) and my senators (Boxer and Feinstein) asking them to set rules for prosecutors’ official statements, to discourage the brand of thuggish behavior the U.S. Attorney practiced in this case. I’d appreciate your help in distributing it (or something like it) to yours as well.

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CNNMoney’s Unemployment Lie

CNN Money has published a sensational piece titled “The 86 million invisible unemployed”. As is typical of media reporting on economic issues, the piece is deeply flawed and demonstrates a lack of understanding of the cited statistics.

CNN makes the claim that there are 86 million people not looking for work, and refers to these people as the “invisible unemployed”.  CNN’s chosen statistic is the Bureau of Labor Statistics’ “Labor Force Participation Rate“.  The participation rate is the percentage of people who are 16 or older and are either employed or looking for a job.

The participation rate currently sits at 63.8%, meaning that about 86 million people aren’t actively looking for work.  However, it’s completely wrong to refer to these people as “the invisible unemployed”.  People not participating in the labor force include: retirees, stay-at-home parents, full-time high school and college students.

In fact, the participation rate of 67.3% in 2000 was the highest since the BLS began recording the data in 1948.  A participation rate of 100% would be undesirable; it would mean that our old were working themselves to death, and our young were doing menial work and not pursuing an education.  A low labor participation rate can have a variety of causes and meanings: in a well-off society, laborers will retire young and families may sustain themselves with only a single income.  I’m not suggesting that’s what happened here, rather pointing out the uselessness of this statistic.  Even in hypothetical zero unemployment, the labor force participation rate would not be 100%.

The participation rate is only 3.5% off of its 2000 peak.  That means the labor force has shrunk by 8.6m.  That’s a non-trivial number, but it’s also an order of magnitude smaller than what CNN’s report claims.

Moral of the story: don’t believe everything you read, even from so-called reputable news organizations.

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Oikos: Terrible Example of “Gun-Free” Limits

The shooting at Oikos University in Oakland is a tragic theme that’s unfolded too often recently. A disgruntled student or former student shoots several classmates. My generation has seen far too much of this: we were only middle-schoolers when Harris and Klebold massacred classmates and teachers at Columbine.

Oikos, like Columbine, Virginia Tech, and other incidents of classroom violence, will prompt soul-searching. We’ll seek any rationale to explain such violence. We’ll find warning signs, but not the “smoking gun” — an expression that seems particularly awful in this context. We’ll generalize: media violence; ineffectual parenting; and mental illness will, once again, bear the blame. Token changes will be made around rules for the mentally ill to access firearms, and the carnage will drift from our memories. This is predictable, sad and useless. Innocent lives were lost at Oikos on Monday. However, we must accept that laws the people we voted for wrote are a large part of why these students lost their lives.

It is not merely a tragic coincidence that innocent, defenseless people were lined up against a wall and shot to death, or that this scene has happened numerous times at schools around the world. These students were rendered defenseless not by chance, but by law: a so-called “gun-free zone”.

The idea of GFZs is that they keep the public safe; the concept is flawed from the outset. Security systems suffer a flaw known as “defender’s dilemma”: a successful security mechanism must repel all attackers, but a lone attacker can cause great loss. The students at Columbine, VT, and now Oikos, know defender’s dilemma more personally than anyone should.

In many cases, law enforcement does a commendable job. Police responded to Oikos in three minutes; and Virginia Tech in six, due to a barricaded door. At Virginia Tech, every twelve seconds police were unable to enter that building cost someone his/her life. Try as we may to keep guns out of the hands of criminals or the mentally ill, we will sometimes fail. In an environment with numerous, disarmed targets, lives may be lost nearly every time we do. Such bloodletting is no more acceptable as an annual or once-a-decade event; students dying by violence in their place of learning is anathema to a civilized society.

Any enterprise that perpetrated the injustice we have on these students would be financially destroyed, its executives hauled before juries. It is only ignorance and denial that prevent us from demanding similar treatment of our lawmakers. It is the height of malarkey that we insist on disarming trained, permitted citizens in precisely the environment where that equalizer is needed most. One armed student or faculty member at Virginia Tech could’ve disrupted Seung-Hui Cho’s slaughter, or possibly averted it altogether. An armed target base turns defender’s dilemma on its head, forcing the next Cho, Harris or Klebold to consider that his target may kill him. If I had a potential killer at my institution, I’d want that thought in his/her mind. Wouldn’t you?

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Spotting the Next Bubble, Part Two

In the previous post, I talked about the methodologies I use to spot a bubble in progress and (hopefully) profit from it.  I left a spoiler of sorts, that I think we have a bubble in progress right now and are on our way to yet another recession.  In this post, I’ll expand on why I think we’ll be facing another recession, and why I’m so convinced of it.

The Fed gets a great deal of credit in some circles for reducing the severity of the 2007-2009 recession.  The Fed printed and loaned trillions of new dollars to institutions with bad assets on their books (AIG, Bear Stearns, Citi, Fannie Mae, etc.), preventing those institutions’ outright failure.  Austrian economic theory says the Fed will ‘pay’ for printing that extra money with price inflation or another major bubble.  The gist of the Austrian theory is simple: there’s no such thing as a free lunch; the Fed’s actions guarantee another, more painful recession down the line.  We now have the initial data points on the path to proving the Austrians right (once again).

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Spotting the Next Bubble, Part One

Two troubling effects of government intervention gone awry are broad, economy-wide price increases and severe bubbles.  Bubbles are short bursts of exuberant spending, followed by deep contractions and rising unemployment.  When a bubble bursts, we find little or no sustainable wealth was generated, and losses are spread throughout the economy.  Bubbles happen in a free market, but are generally smaller, because they’re driven by demand for a particular commodity (houses, oil, gold, tea, diamonds, tulips, etc.), rather than a significant increase in the supply of money throughout the economy.

In our economic system, these bubbles are very destructive events: the Great Depression was fueled by such a bubble.  However, you can make a wicked profit when a bubble “pops” if you catch it in progress and have money to spare.

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