in which my ignorance of finance is revealed

Not to me, anyway.  But I think that perhaps I could just use some further explanation from people smarter than myself about how the financial system works.  So consider this a plea for help — one that I would’ve issued over Twitter, if Twitter’s character limit was 2300% larger.

Anyway, the problem: this article makes the case that the Federal Reserve has been having a very profitable year:

The Fed will return about $45 billion to the U.S. Treasury for 2009, according to calculations by The Washington Post based on public documents. That reflects the highest earnings in the 96-year history of the central bank. The Fed, unlike most government agencies, funds itself from its own operations and returns its profits to the Treasury.

The numbers are good news for the federal budget and a sign that the Fed has been successful, at least so far, in protecting taxpayers as it intervenes in the economy — though there remains a risk of significant losses in the future if the Fed sells some of its investments or loses money on its stakes in bailed-out firms.


Much of the higher earnings came about because of the Fed’s aggressive program of buying bonds, aiming to push interest rates down across the economy and thus stimulate growth. By the end of 2009, the Fed owned $1.8 trillion in U.S. government debt and mortgage-related securities, up from $497 billion a year earlier. The interest income on those investments was a major source of Fed profits — though that income comes with risks, as the central bank could lose money if it later sells those securities to reduce the money supply.

The Fed also made money on its emergency loans to banks and other firms and on special programs to prop up lending, such as one that supports credit cards, auto loans, and other consumer and business lending. Those programs impose interest and fees on participants, with the aim of ensuring that the Fed does not lose money.

So, okay, some of this makes sense: the emergency loan programs involve third parties and can, in fact, produce profit via interest on the loans.

But two questions.  First: as the article states, these earnings will go back to the Treasury, which will be “good news for the federal budget” — except that much of the earnings are attributed to gains from purchased federal debt — bonds paid out by the Treasury.  So, uh, how is this “profit” not completely circular?  I suppose that perhaps it represents money that we thought we had spent but hadn’t.  Still, the Post’s presentation of the issue seems very strange.

Second: what is the article talking about, anyway? Not to toot my own project’s horn too much, but we’ve got this nifty visualization of fed holdings based on their weekly H.4.1 reports, and it’s just not the case that the fed has increased the amount of Treasury securities it holds.  There was a dip, but we’re basically back at 2007 levels.  The fed’s portfolio has gotten much larger thanks to the bailout, but the real story looks to be its still-expanding investment in mortgage-backed securities.

I’m just the tech guy, so I hesitate to go much further out on this limb.  But I think Neil Irwin could’ve done a lot more to distinguish between Treasuries and MBSes, and what they mean for the Fed’s holdings.  Help me Ryan Avent, you’re my only hope!

MORE: The first comment on Felix Salmon’s coverage of this article is helpful: basically, this is good news because it’s not bad news.  Perhaps it’s a bit silly to think of profit from Treasury securities as a windfall for the government, but at least the Fed managed to keep prices from collapsing, which could’ve easily happened.  I’m still confused by how the article presents its thesis, though.

let’s get specific

Tim points out that Vint Cerf’s advocacy for network neutrality doesn’t mean that every venerable internet expert agrees with it.  True!  Google for “Dave Farber” or “Bob Kahn” and “net neutrality” and you’ll find plenty of articles… from 2007.

I think this debate has stagnated.  People are continuing to act as if the FCC’s plan is a complete unknown. This enables the lazy “evil corporation/incompetent government” frame that we all know and love. At one point this was at least semi-appropriate.  People — including those like Cerf, Farber and Kahn — made guesses about what was likely to happen, largely based on their own position along the regulation/markets ideological spectrum. “The government is trying to outlaw QoS!” “The ISPs are going to charge for Google!”  Both of these positions were hyperbolic.

But look, there’s a difference now: the FCC has announced its NN principles, to thundering… well, there hasn’t been much reaction, actually.  Everyone’s just pretending that nothing happened and sticking to their guns.  “The principles are too vague!” they cry, even though those principles say that allowances will be made for necessary network management, that throttling heavy users will be okay, that malware can be filtered, that copyright law can be enforced, and that managed services can be developed and sold.  That wipes out a significant swath of the ISPs’ objections.

Yet no one seems to have noticed. Here’s Farber responding to the new principles — he doesn’t particularly object to them, he just thinks they’re too vague and that they might make ISPs wary of trying to innovate (as if the research costs to network management are so great that the potential for work product to be shot down makes it impractical; please, this is software).  He also says they’ll lead to a bunch of lawsuits, though he simultaneously says we should instead rely on the DOJ and FTC to handle this (in a rule-free environment!), which makes just about no sense to me.

I digress.  Look: the FCC has put some of its cards on the table.  Not all!  Rulemaking still needs to occur (if it didn’t, opponents would be even more outraged).  But the agency has signaled that it’s not actually going to do the incredibly idiotic things that neutrality opponents claimed it would. Those people need to acknowledge this fact, and come up with a clarified set of objections. What is it, exactly, that the FCC’s stated plans are going to stop you from doing? Right now I’m just seeing a bunch of now-irrelevant FUD; some talk about how great a monopolistic IPTV market would be; and some hand-waving about “new business models”, which I take to be a synonym for “rent-seeking”.  It’s time to admit that the FCC isn’t the one being vague.

after Twitter

Tim was nice enough to write a tweet endorsing my article about the potential downside of Twitter’s emerging political importance. But he noted that I didn’t say much about what the alternatives are — fair enough! As I said to him in response, I was only too happy to have word limits save me from having to propose a solution. Even though I think the situation is unfortunate, at this point I suspect that there isn’t much to be done about Twitter’s rising political relevance.

But, y’know, time heals all wounds. I am convinced that Twitter’s import as a cultural hub will decline. Twitter won’t go away entirely, mind you — it’s a genuine medium unto itself — but I think its true legacy is likely to be a frankly unbelievable extension, evolution and popularization of the capabilities represented by SMS. Multicast? Common use of symbolic delimiters like @ and #? Widespread institutional adoption? Two years ago, if you’d asked Verizon when SMS would be used this way, they’d have laughed in your face. Now the marketplace is going to demand this functionality — if not from Twitter, then from someone else.

But as I said, I think the conversations happening on Twitter will become less relevant, and the medium less vibrant. Actually, I’m beginning to think that this is an iron law of online mediums. This post (via Megan) helped focus my thinking a lot.

Here’s how it goes. First, a network achieves viability — enough people are using it to send non-“hello world” messages that the community can sustain itself. Next, users experiment, publishing and republishing content that they find compelling. The system amounts to a collaborative filter, and the quality and novelty of the results are surprisingly good. At this point people begin to notice and discuss the potential for the network to have greater relevance — and, inevitably, those who don’t understand that participation in the filtering activity is non-negotiable begin whining about taking the medium seriously when they see so much trivial content on it. Despite this carping, more users join the network and its value and potential importance begin to be more widely understood. At this point users change how they identify content worth publishing or republishing: rather than the first-order “how compelling is this?” they begin using the second-order “how compelling will other people find this?” Although they were excellent and determining what they thought was interesting and appropriate, they’re comparatively terrible at determining what other people will like. Quality declines (“I blogged: links for 2009-07-02″). Worse, as users continue to try to shirk their collaborative filtering responsibilities, experimental uses of the medium are discouraged or otherwise become less viable. The system ossifies, and soon enough everyone is sick of having to check Facebook. Time for a new no-pressure medium for goofing off with your early-adopter friends. Rinse, repeat.

I don’t want to oversell the preceding — I’m pretty sure that Clay Shirky accidentally scribbles more profound sociological observations about the internet during the course of searching for a working ballpoint pen at the bank. But this is my understanding of the situation, and by now I think we have enough data points to conclude that most, if not all online social networks achieve viability, blossom and stagnate (it may still be entirely possible to run a viable business during the stagnation phase, I should point out).

It’ll happen to Twitter, too — it is happening. So let’s start talking now about what conditions we should demand of the next medium-of-the-moment before we start moving our political institutions onto it. My suggestion for a place to start: open, free, and likely to remain so.

UPDATE: This is somewhat related — it’s an example of what I mean by people withdrawing from the collaborative filtering process.

two cheers for egalitarianism

ONE: The beginning of the end of the Registered Traveler program. I’ve always been uncomfortable with the idea behind this program — allowing the rich a means of escape from a vexing and arguably arbitrary set of collectively-self-imposed strictures has something of a history, and it’s not a noble one. Props to TSA, though, if the WSJ writeup really can be believed: the article cites the agency’s unwillingness to relax security standards as one of the things that made CLEAR/Registered Traveler not worth the price of admission for many would-be line skippers.

TWO: Via Caralyn, Christopher Weingarten on the present and future fortunes of the music critic. Points for his entirely appropriate level of occupational hopelessness; deductions for failing to make much of a case for the professional music critic’s necessity. With modern publishing and search technologies, the too-many-voices argument becomes a difficult one to make, and, I think, a basically incoherent one when talking about something as inessential and universally accessible as pop music.

This isn’t something I’m happy about. I have friends who are great music critics, and I’d love for them to be able to support themselves by writing record reviews. But this is sort of like saying that I’d love to see the market compensate my friends for playing Halo with me. It’s clear that the costs associated with producing music criticism have fallen to the point where it’s essentially a leisure activity. In a perfect world, this would be great: the resources expended to produce music criticism could be reallocated to more productive ends, and we could still be assured a steady stream of deep thinking about music (now with less market distortion!). In practice, those resources are likely to wind up allocated less efficiently — say, put toward debt service on a loan that financed the unnecessary sale of an alt-weekly to a clueless owner who will preside over its demise. (Woo markets!)

But we’ll still have plenty of music criticism, and plenty of other good writing. I won’t say something pretentious about writers writing because of some irresistible artistic compulsion. But writers will keep writing because they think writing is fun, so they’ll do it when they can. And that’ll be enough for the rest of us, because these days much of the writing they do will inevitably be free, our supply unrestricted. Just look at The Awl, a site run by people who perfected the blogosphere, then watched it blossom, pullulate, and choke itself to death. Now they’re doing it all over again, because hell, it was pretty fun for a while there, wasn’t it?

you can also write ‘yes please’ under ‘sex’

Okay, yes, Michele Bachmann refusing to participate in the census is a bit kooky. But I’m sympathetic. I started participating in the Census survey of household employment a few weeks ago (SPOILER ALERT: I still have a job). The very next day I began receiving unusually high numbers of calls from phone surveys. Pepco, private companies, and who knows how many other sample-seekers who I hung up on before identifying. It’s leveled off a bit since, but there was a pronounced effect.

I know, I know: they’re not allowed to sell my information. It’s probably just coincidence. I mean, malfeasance by the government or its agents? The very idea is ludicrous!

And yet I remain convinced by the experience. And so I understand where Michele is coming from. If they’re willing to sell my phone number, is it really so outlandish to think that the ACORN agents administering the census will be secretly sizing up respondent families’ fitness in order to facilitate the involuntary harvesting of organs (and their subsequent redistribution to welfare recipients) under the coming socialized medicine dystopia? Of course not. Stay strong, Michele.

more on Twitter and Iran

Yglesias links to Farrell; both are worth reading.

It’s still not clear to me the extent to which technology is enabling intramural communication among the protesters, as opposed to simply serving as a broadcast medium between a few of them and the west. I’m very curious to find out, though, and have a few emails out to people running proxies asking how much activity they’re seeing from plausibly Iranian IPs. At least one has committed to figuring this out; we’ll see if he follows through.

One thing is increasingly clear: the idea that you can change the world from your computer has a strong allure. From the various alleged DoS attacks underway* to the wrangling over hashtags and profile data (based on what seems to be pretty tenuous speculation about the regime’s filtering plans and abilities), a lot of narcissism is masquerading as activism. But then, this is the internet.

* These seem virtually certain to be counterproductive — how exactly does damaging digital communication empower the side without the TV stations in an information war? How are targets even being identified, except via the diktat of trusted-but-unverified Twitter users?

UPDATE: Austin Heap, who seems to be running the biggest clearinghouse for #iranelection proxies, has written an update sharing some stats. He’s apparently filtering source IP (seemingly using this list) and reports 2000 connections/second. Modern browsers reuse connections for multiple HTTP requests, so that’s nothing to sneeze at. I’ve asked him whether he’s comfortable generating some stats on where the outbound traffic is going.

WELL, HELL: If the professional diplomats at the State Department thinks that Twitter is vital resource for Iranian protesters, I suppose I can’t really argue otherwise. But it doesn’t make me any happier about a privately-owned technology becoming a vital part of the infrastructure supporting political activity. I should add that Twitter as a company has been nothing but praiseworthy, from how they rescheduled their downtime to the openness represented by their API. But there are limits to any for-profit enterprise’s goodwill. I would feel a lot more comfortable if #iranelection was occurring on a decentralized network (and yes, I realize there are immense technological hurdles to such a thing being practical).

I only favor internet triumphalism when it’s about non-proprietary tech

Look, I know I have a dog in this fight — as much as I like Twitter, I really, really bristle at the idea of a communication medium being coronated as essential while it’s still a proprietary product of a single company (which hasn’t yet set pricing!). I know I’m biased. But still, c’mon: you can’t tell me that people aren’t a bit overeager to write this story.

I think there’s reason for skepticism about Ambinder’s claims. My understanding is that cell service has been disrupted in Tehran since Saturday evening, and that net access to Twitter from Iran is blocked, making it only possible to access the site through a shifting set of proxy servers — a task that requires both technical expertise and which is typically impractical to do on a mobile device. Ambinder’s vision of furtive Twitter revolutionaries users collaboratively helping one another dodge #machinegunnests seems like wishful thinking.

It does seem unquestionable that Twitter has enabled the coverage of the events in Iran to proceed with an immediacy that’s novel to the medium. Partly this is simply because Twitter is currently enjoying a lot of excitement and attention from journalists; partly it’s because the medium really does enable the centralized distribution of information on a time scale that was previously impractical.

But when all is said and done, the centralization means it’s still relatively brittle when faced with a government keen on blocking it. Again: how are Iranians supposed to have been using the service? Yes, clearly some are. But how many, really? While it’s been a fascinating way for all of us to learn what’s going on in Iran, I still doubt that enough people in Iran have access to the site for it to be significantly enabling or shaping events there. Maybe I’m wrong. We’ll see.

the uncannily inefficient Valley

Yglesias is fond of suggesting Silicon Valley’s compensation model as a good alternative to the one that led the finance industry into distaster. The idea is that by using stock options to connect compensation to the long-term performance of a company rather than to its quarterly or yearly performance, we can make short-term risk-taking less lucrative than intelligent stewardship of a firm.

This sounds like a pretty good idea, and very well may be. But it’s worth pointing out a couple of things: first, this may just be an apples and oranges sort of situation. It may not be the case that the sort of compensation structures available to a penniless startup are practically applicable to an enormous financial behemoth. I’m admittedly no expert, but I can imagine there may be problems.

Second — and this I can say with somewhat more confidence — the performance of the software industry is not such an inspirational success story that emulating it should be assumed to be a good idea. Spend three months reading TechCrunch or its equivalent; if you can make it through that time without killing yourself, you’ll realize that Silicon Valley is incredibly inefficient, wasting vast sums of money on overhyped ideas that are stupid, unnecessary or just commercially impractical. There are very, very few firms that have created genuinely original technologies — technologies that Harry Turtledove would like to write about, technologies that may conceivably never have been invented if their creators’ parents hadn’t met. The bulk of the industry is made up of the proverbial million monkeys sitting at a million MacBooks; occasionally some Javascript comes out.

Some friends of mine have created a fake web startup. On their homepage (or twitter feed) you can find a simple mad-lib that changes every time you reload the page, and which goes like this: “[VAGUE, POSITIVE GERUND] [TECHNOLOGY A] with [TECHNOLOGY B].” This really is how the industry operates: through the mind-numbing combinatorial exhaustion of whatever technologies Google, Amazon, Adobe, Sun and a very few brilliant open-source developers can come up with. Some of this is valuable, even necessary economic activity. But a lot of it is just speculative activity which benefits no one other than the people directly involved — and which is ultimately a waste of resources. This should sound wearyingly familiar by now.

Now, it’s not all their fault. The real problem is that software development is really easy — you need almost no capital, and there’s an incredible wealth of existing technology that can be utilized. The bottlenecks to innovative commercial activity in the software realm are frequently external. These limits can be technological but not software-related (phone cameras needed to get good enough to read barcodes), cultural (Facebook couldn’t exist until college students were wired enough to adopt it) or political (only a firm of Google’s size and import could start scanning books and comfortably expect to find a way out of the orphan works problem without being sued into oblivion). And of course it’s just generally tough to start a successful business (I think I can confidently say that the average internet startup is based on a somewhat stupider idea than the average non-internet startup, but I have no idea which is actually more likely to fail). I’m sympathetic to these guys: certainly, I can understand the impulse to paint yourself a visionary who creates fundamentally new possibilities, rather than as mere skilled craftsman using tools handed down from others.

But still, it’s hard to look at the amount of investor money wasted on the web industry and conclude that its compensation practices are ones that should be emulated — particularly given that those practices are being abandoned now that the accounting gimmick that enabled them has been ended. Maybe it’s preferable to have a lot of middle-class programmers blowing through investor money instead of a relatively few upper class finance executives doing the same — I suppose it is a more progressive transfer — but that’s all that Silicon Valley’s recent history seems to promise. The way to neutralize the villains of this bubble may not be to make them more like the villains of the last bubble.