Alan Greenspan's nirvana

I wrote a post a while back exploring some of the silliest things economists were saying before the crisis about how financial engineering was making our economy more robust, stable, efficient, wonderful, beautiful, intelligent, self-regulating, and so on. The markets were, R. Glenn Hubbard and William Dudley were convinced, even leading to better governance by punishing bad governmental decisions. [How that could be the case when markets have a relentless focus on the very short term is hard to fathom, but they indeed did assert this]..

Paul Krugman has recently undertaken a similar exercise in silliness mining -- in this case going through the hallucinations of Alan Greenspan. The Chairman of the Fed was evidently drinking the very same Kool-Aid:

Deregulation and the newer information technologies have joined, in the United States and elsewhere, to advance flexibility in the financial sector. Financial stability may turn out to have been the most important contributor to the evident significant gains in economic stability over the past two decades.

Historically, banks have been at the forefront of financial intermediation, in part because their ability to leverage offers an efficient source of funding. But in periods of severe financial stress, such leverage too often brought down banking institutions and, in some cases, precipitated financial crises that led to recession or worse. But recent regulatory reform, coupled with innovative technologies, has stimulated the development of financial products, such as asset-backed securities, collateral loan obligations, and credit default swaps, that facilitate the dispersion of risk.

Conceptual advances in pricing options and other complex financial products, along with improvements in computer and telecommunications technologies, have significantly lowered the costs of, and expanded the opportunities for, hedging risks that were not readily deflected in earlier decades. The new instruments of risk dispersal have enabled the largest and most sophisticated banks, in their credit-granting role, to divest themselves of much credit risk by passing it to institutions with far less leverage. Insurance companies, especially those in reinsurance, pension funds, and hedge funds continue to be willing, at a price, to supply credit protection.

These increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago.

As Krugman notes, this can all be translated into ordinary language: "Thanks to securitization, CDOs, and AIG, nothing bad can happen!"

Bail out everyone

I had wondered about this idea a couple years ago -- but that's all I did, wondered about it. The idea is that when banks need bailing out -- and sadly, we seem stuck with that problem for the moment -- we shouldn't bail them out directly, but indirectly. For example, just give every single person in the US $1,000. Or maybe a voucher for $1,000 that they have to spend somewhere, or put in a bank. This quickly amounts to $300 billion infused into the economy, a large portion of which would end up in banks. So cash would be pumped into the banks too, but only through people first.

You can imagine all kinds of ways to play around with such a scheme. Paying off some of peoples' mortgages. The amount injected could be much larger. Perhaps similar funds would be injected directly into banks and other businesses as well. Mark Thoma has thought through some of the details. But I'm quite surprised this is the first I've heard about any idea even remotely like this. It seems like a much better idea than just giving money to the bankers who created the problem in the first place. Why don't we hear more about such possibilities?

Modern European Tragedy

The endgame playing out in Europe is a tragedy in the usual sense, but also in the sense of Greek tragedy -- downfall brought about ironically through the very efforts, perhaps even well intentioned, of those ultimately afflicted. It's terrible to see Europe looming toward disaster, but also utterly fascinating that everyone involved -- Greeks, Germans, French, the European Central Bank -- has acted in what they thought was their own interest, yet those very actions have led the collective to a likely outcome much worse for all. A tragedy of the commons.

Philosopher Simon Critchley has written a brilliant essay exploring this theme more generally. Among the most poetic analyses of the situation I have seen:

The euro was the very project that was meant to unify Europe and turn a rough amalgam of states in a free market arrangement into a genuine social, cultural and economic unity. But it has ended up disunifying the region and creating perverse effects, such as the spectacular rise of the populist right in countries like the Netherlands, for just about every member state, even dear old Finland.

What makes this a tragedy is that we knew some of this all along — economic seers of various stripes had so prophesied — and still we conspired with it out of arrogance, dogma and complacency.  European leaders — technocrats whom Paul Krugman dubbed this week “boring cruel romantics” — ignored warnings that the euro was a politically motivated project that would simply not work given the diversity of economies that the system was meant to cover. The seers, indeed, said it would fail; politicians across Europe ignored the warnings because it didn’t fit their version of the fantasy of Europe as a counterweight to United States’ hegemony. Bad deals were made, some lies were told, the peoples of the various member countries were bludgeoned into compliance often without being consulted, and now the proverbial chickens are coming home to roost.

But we heard nothing and saw nothing, for shame. The tragic truth that we see unspooling in the desperate attempts to shore up the European Union while accepting no responsibility for the unfolding disaster is something that we both willed and that threatens to now destroy the union in its present form.

The euro is a vast boomerang that is busy knocking over millions of people. European leaders, in their blindness, continue to act as if that were not the case.

The end of the Euro?

Three interesting articles on what now seems to be considered an increasingly likely event -- the end of the Euro (in its current form, although some version might arise from the ashes).

First, Gavyn Davies speculates on several possible scenarios for the collapse of the Euro. It might persist as the new currency of a smaller union including Germany and The Netherlands (in which case the value of the Euro would rise significantly), or it might persist as the new currency of the periphery countries after Germany bolts (in which case the value of the Euro would fall significantly). Or the Europeans might finally find a way through the ongoing nightmare. Not betting on that one.

Second, Satyajit Das goes into a little more detail, and I think rightly sees some cultural issues as ultimately being most important. The three logical possibilities are easy to list:

The latest plan has bought time, though far less than generally assumed. The European debt endgame remains the same: fiscal union (greater integration of finances where Germany and the stronger economies subsidise the weaker economies); debt monetisation (the ECB prints money); or sovereign defaults. 

 Germany may be largely in favour of solution number 1. But the smaller periphery countries, and perhaps France as well, will favour solution number 2. Hence, we may by default find Europe hurtling inexorably into "solution" number 3 -- sovereign defaults:

The accepted view is that, in the final analysis, Germany will embrace fiscal integration or allow printing money. This assumes that a cost-benefit analysis indicate that this would be less costly than a disorderly break-up of the Euro-zone and an integrated European monetary system. This ignores a deep-seated German mistrust of modern finance as well as a strong belief in a hard currency and stable money. Based on their own history, Germans believe that this is essential to economic and social stability. It would be unsurprising to see Germany refuse the type of monetary accommodation and open-ended commitment necessary to resolve the crisis by either fiscal union or debt monetisation.

Unless restructuring of the Euro, fiscal union or debt monetisation can be considered, sovereign defaults may be the only option available.

Perhaps it betrays a little bit of anarchy in my own soul, but I'm rooting quite hard for sovereign defaults. I wish the Greeks had gone ahead with their referendum. For all the complaining about the slack morals of the Greek taxpayer, every debt-creating transaction has two sides -- and the creditors (French and German banks) bear as much responsibility as the debtors.

Then again, the end is likely to bring some severe social misery, not to mention riots (the UK is already advising its European embassies on the likelihood). A third article by Simon Johnson and Peter Boone points ominously in this direction, essentially echoing Davies' analysis in bleaker language:

The path of the euro zone is becoming clear. As conditions in Europe worsen, there will be fewer euro-denominated assets that investors can safely buy. Bank runs and large-scale capital flight out of Europe are likely.

Devaluation can help growth but the associated inflation hurts many people and the debt restructurings, if not handled properly, could be immensely disruptive. Some nations will need to leave the euro zone. There is no painless solution.

Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.

Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.

FRAND terms from a competition authority's approach: a new essay

The issue of FRAND licensing terms is critical for all IT companies involved in a standardization process but it is also a headache for competition authorities. As Mario Mariniello, Chief Competition Economist team member of EC's Directorate General for Competition, recently highlighted in an article published in OUP's Journal of Competition Law and Economics (JCLE) entitled "Fair, Reasonable and Non-discriminatory (FRAND) Terms: A Challenge for Competition Authorities", the adoption of a technology standard can raise competition concerns when the owner of the chosen technology abuses of the additional market power gained through standardization. FRAND terms can therefore be seen as a corrective device seeking a balance of interests between the licensor, who is entitled to the incremental rent "that arises from standardization with respect to the next best alternative", and the licensees, who can be considered as "locked-in" (that is forced to adopt the chosen standard).

In this article, Mario Mariniello highlights the fact that "FRAND commitments involve an incomplete contract between licensors and licensees", their implementation will therefore be necessarily controversial. From an antitrust perspective FRAND commitments are very ambiguous because there is no commonly accepted method to assess their violation. The author therefore proposes a four-pronged screening-test to assess if such a violation has occured:

If the four following conditions criteria are met:

(1) ex-ante, a credible alternative to the adopted technology exists;
(2) ex-ante, prospective licensees cannot reasonably anticipate the licensor’s ex-post requests;
(3) ex-post, the licensor requests worse licensing conditions than ex-ante; and
(4) ex-post, the licensee is locked into the technology,

then a FRAND violation could have occurred and a competition authority needs to investigate and decide whether the terms and conditions of the defendant are fair, reasonable and non-discriminatory, which involves "an objective valuation of the royalty rate that patent holder would have been to charge if the standard did not increase its market power, subject to the broader context of the license contract."

An access to this very interesting analysis can be found here.

While on the subject of INTIPSA ...

Finding a new CIPO
is the nearest thing
many people get to
big game hunting ...

Yesterday's IP Finance post mentioned INTIPSA, the International IP Strategists Association. By sheer coincidence, the blog has received news that the organisation has a webinar coming up next week on the topic "Where Will Your Next CIPO Come From?"  According to the synopsis:

"Peter Spours from Tom Tom and Andrew Sant from Crown Holdings will be reflecting on their experiences and career paths in IP and discussing the future of the Chief Intellectual Property Officer role".

This webinar takes place next Wednesday, 30 November, at 15:00 GMT. Further details and registration are available via the INTIPSA website at www.intipsa.com

INTIPSA: one year on

IP Finance is seeing an increasing degree of interest in INTIPSA -- the International IP Strategists Association. Indeed, in the past few weeks I have received a number of emails asking whether this weblog will be mentioning the organisation's existence.

To put the record straight, IP Finance has written about INTIPSA. Almost exactly one year ago we published this post which alerted to readers to the intended formation of INTIPSA and to the LinkedIn group which preceded it.

INTIPSA now has a busy website, a handsome logo and great prospects for the future. This weblog wishes it the best of luck and looks forward to its contributions to the well-being of IP business strategy.