Mar 30, 2009

It’s the leverage, stupid!

Quality is a niche concept in this age of mass consumption and production. Cheap shit rules -- in both physical and intangible forms.

Musical performances by Britney, Rhianna, Yanni and Billy & Elton (cheap shit) sell out the Times Union Center, while any dozens of under-the radar (quality) acts come through town in any given month to play before empty seats in small rooms. The drive-thru lines are ten-deep at fast food joints (cheap), while family–owned neighborhood restaurants (quality) are disappearing faster than Greenland ice fields. Mass produced posters of romantic notions of home by some guy who bills himself as The Painter of Light (cheap) likely hang on more living rooms walls than all (quality) artists combined. On and on it goes…

The same holds true for information. Oprah and The View (cheap shit) draw millions more eyeballs than a Charlie Rose or a Front Line segment (quality). Talking heads delivering their peppy and perky twenty-second sound bites (cheap) are framed as journalists, while real examples of investigative reporters (quality) are few and far between. After all, who would publish their work, anyways? Then, of course, we have the Einsteins of the new political commentary order – the Hannitys, Limbaughs, Coulters and O’Reillys of the airwaves - playing to the cheap seats with their calls for a Redneck Uprising; all via a supposedly liberally biased infrastructure, remember. So the hunt for quality becomes an effort --- but maybe that’ how it should be; who knows.

Steve Forbes is a good American. When I hear him speak, I’m reminded of Newt Gingrich: I’m right there with both of them on the first 80% of what they have to say, but it’s that final 20% that goes off the deep end and makes me shudder. But they’re both presenting an intellectual argument backing up their conclusions (quality); and hey, 80% is a pretty good start, right? Besides, Mr Forbes is good enough to invite me to his bash up at The Sagamore each autumn, and that’s always a sure bet for getting on my good side.

Part of the Forbes media empire (if those things still exist anymore) is a series of newsletters on a variety of subjects revolving around a centralized ‘money’ theme. Of interest to the typical reader of this blog is one put out by Josh Wolfe called the Forbes/Wolfe Emerging Tech Report. With an emphasis on nanotech and cleantech trends and developments, it is a pricy paid product. But a free weekly summary version – which goes a bit wider into pressing issues of the day -- called The Weekly Insider can be had by emailing . I recommend it.

A recent issue offered insight into the housing crisis, with a look at the thinking of Yale economist John Geanakoplos. His recent publication, called “End the Obsession with Interest” contends that the real problem is leverage (the down payment requirement), not interest rates, when it comes to the problem of housing boom and bust cycles. To wit:

“In standard economic theory, the interest rate has long been regarded as the most important variable. Whenever the economy slows, and asset prices fall, economists clamor for lower interest rates to encourage more spending, and the U.S. Federal Reserve usually obliges. It has recently obliged again, lowering the bank rate to nearly zero. But sometimes, especially in times of crisis, it's the collateral a borrower needs to post (or what economists call leverage) that is far more important.

Yet variation in leverage has a huge impact on the price of assets, contributing to economic bubbles and busts …… in the absence of intervention, leverage becomes too high in boom times, and too low in bad times. As a result, in boom times asset prices are too high, and in crisis times they are too low. This is the leverage cycle.”

His takeaway point:

“What the Federal Reserve should do is manage leverage, curtailing it in ebullient times and propping it up in anxious times — especially in a crisis like now. Instead, it remains obsessed with managing the economy by lending money to banks at lower and lower interest rates, hoping, for no good reason, that the banks will turn around and lower the collateral requirements they impose on borrowers.”

Good stuff, and typical of what you’ll find in Mr Wolfe’s work. Sign up, if so inclined.


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