Tuesday, 24 March 2009

Beware Pleas Based on Moral Panic

William Patry made this excellent point in tonight's SCL Annual Lecture, specifically in connection with proposals to extend further the term of copyright: political appeals based on  moral panic are most often made where there is asymmetry in the information available: criminal law and copyright law being key examples. There is no evidence from the other side - the alleged perpetrator - unlike in cases where two sets of industry players are pitted against one another, which usually produces hard evidence pointing in each direction (e.g. competition law disputes). So the way is clear for, say, the security agencies or copyright owners to appeal for protection merely because it is "right and just" rather than to protect against any proven harm.

Such pleas may ultimately be futile, of course. Attempts by the music industry to deny access to music downloads neither prevented the rise of Napster and iTunes, nor prevented the steady demise of EMI. As I've also mentioned before, the root cause of music industry disruption is consumer dissatisfaction, not copyright violation.

William Patry's suggestion is to insist on an empirical approach to the issue of whether or not the copyright regime works, rather than a continued assumption that it's a property right that deserves protection at any cost. Only then will a proportionate response emerge. I share the view that in all regulatory matters - like business process issues - one must first define the problem and ascertain its scale before deciding whether or not to devote precious state resources to resolving it. At that point, legislators should insist on finding the root causes and implementing the best solutions to tackle them.

Attempts at providing empirical evidence on these issues in the file-sharing context, for example, have been pathetic. Claims that music providers will lose £1bn in CD sales over the next 5 years are disingenuous when their digital sales are increasing at the rate of 28% a year. And where is the evidence that extending the term of copyright will result in more copyright works that will yield satisfactory incomes for creators? Is it not possible that shortening the copyright term would result in a far greater volume of sales for more artists at lower prices to consumers?

The people should be told before any further extension to copyright is granted.

Tuesday, 17 March 2009

The Danger of Over-Inflating While Underwater

A scuba instructor once told me the tragic story of a diver who tried to salvage an outboard motor at the bottom of a lake. Struggling to raise the motor, our man decided to fully inflate his buoyancy jacket for extra lift. All went well until he lost his grip on the motor, transforming himself into the human version of a Polaris missile. A fatal case of the bends ensued.

Of course, Messrs Bernanke, King et al. are also struggling manfully to lift something heavy that is deep underwater. For extra lift, they are also pumping lots and lots of air into the economic buoyancy control devices, and even appearing on TV to talk things up. The obvious concerns are (a) the amount of air being pumped in, (b) when to stop pumping and (c) how fast they can get the air out again when the economy turns to prevent it going ballistic.

The AIG saga seems instructive on this last concern. The $170bn in government aid is said to have been used to boost the "collateral" (or reserves) that secured AIG's insurance obligations on dodgy credit-default swaps (CDS's). And about $105bn has since been paid out to insured banks (on the full face value of the CDS's - hey presto, no loss!). In turn, the banks have used the money to shore up their own "reserves" rather than lend it - much as they're doing with the bailout money they receive directly, more of which is being printed as we speak.

There is no single definition of the term "reserves". To a large extent, what's prudent or required today may be deemed overkill next quarter and released to revenue and used in the ordinary course again. Given the care they took on the way into this mess, my bet is that as the economy turns the banks and insurers will release the reserves and provisions they made in a panic over the lack of liquidity way too quickly for central bankers to get the surplus air out of the economic buoyancy jacket. See picture for the consequences...

That's not to say there's any practicable solution at the global level, or that individually any of those banks or insurers will be wrong to release the reserves in question. It's just the system we have. It ain't perfect, as Lord Turner has just explained [stable door creaks and slams shut].

So, on a personal basis, one might at least consider that a tracker mortgage with an interest rate cap, or even a fixed rate mortgage, is a prudent option right now.

PS: Earlier in May, I went with a fixed rate mortgage, as the tracker with cap options started getting too expensive at the level of the cap.

PS: 28 May '09, FT Alphaville notes: "Wednesday saw a frantic steepening of the Treasuries curve... The fact is there is a growing perception in the market that further down the line, a messy quantitative easing-exit strategy might see the Fed forced to raise rates quite fiercely." I guess John Kay would say there is an opportunity to bet against the market, here. However, perception seems to be everything, so if the Fed is persuaded the market is looking for a rate hike, it may well deliver, and other central banks may have no alternative but to follow.

PPS: 10 June 09: Interactive Investor summarises the "flamewar" between Keynesian and Monetarist economists over the implications of rising bond yields.

Let's hear this post from Merv King himself:

Friday, 13 March 2009

Sending Money Home More Easily

Hardly a month of the 21st century has passed without some breathless announcement of soaring growth projections in the mobile space.

Two of the more compelling financial use-cases for mobile phones are remittance (domestic and cross-border) and retail purchase. Everything else is nice-to-have if your phone will do either of those things.

Some would add "mobile banking" as a primary use-case, but it only seems to involve accessing the same old banking services via a different device/network. That's about as compelling as filling your socks with custard before putting them on each morning. You may as well use telephone banking. At any rate, "banking" isn't really part of any other activity we engage in, unlike "sending money home" or "shopping". "Banking" is an admin task, like sorting your paper clips or arranging your pens in order of length. Investing is much more fun, but doesn't seem to be sufficiently frequent to design mobile apps around it.

Of course, the retail use-case is fascinating, but it has to be so tightly integrated with the overall product location and purchasing experience that it's almost impossible to talk about except on a retailer by retailer basis.

So that leaves remittance as the use-case with general significance. I've followed it since 1999, when I left the comfort of a City law firm to join the board of earthport plc. I left in June 2001, 5 months after it floated on AIM, by which time the dotcom bust had reduced the pace of e-commerce integration efforts to a crawl and it didn't need an inhouse legal team. But it's a tribute to human nature that subsequent management teams have been able to keep earthport alive to take advantage of the current wave of development.

To give you an idea of why persistence is worthwhile, the GSMA has concluded that the remittance market in 2006 comprised some 200 million migrant workers in EU, US, UAE etc, who each sent home US$2k-5k a year in $200 increments to about 800m recipients. Some 32 countries accounted for only $100bn of an estimated $270bn of traceable funds (add to that about $185bn non-traceable). And that market was served mainly by Banks, post offices, niche MSBs (55%), Western Union (25%), Eurogiro (11%), MoneyGram(6%) and Vigo (3%).

But migrant workers queue up, debit card or cash in hand, to pay giant fees to send money home.

I'll spare you a discussion of the hype and plight of the 30+ providers out there, and merely point to three news items that suggest real progress towards more useful remittance services:
Of course, several years back, the GSMA also allied itself with Western Union "to ensure faster development of Mobile Wallets suitable for implementation by Mobile Network Operators. ... initially targeting 30-40 Mobile Network Operators in markets where there is a high demand for remittances services to become early adopters of mobile wallets.” Indeed, I took the picture for this post from the announcement of Western Union's deal with Orascom, an emerging markets telco, in October 2008.

This news flow reveals that the incumbents in the remittance market have finally admitted they need new payment processing platforms to service the market effectively. And (alas, too late for my lapsed earthport options) m-wallets, or server-based solutions are the weapons of choice, rather than device-based solutions. The announcements also underline the importance of having a trusted local brand at each end of the remittance. In fact, it's easy to see that the trust level may be more important at the recipient end - where users may be less confident with technology. Finally, both ends of the remittance are highly fragmented and often based remotely, making the mobile phone the ideal touch point for payer and payee.

Hopefully we'll see M-PESA's "infuriating" success repeated by others across borders before too long.

Sunday, 8 March 2009

What Does "Sustainable Capitalism" Mean To You?

The latest series of stock market plunges has signalled capitulation by the last of the diehard, old-school capitalists. We've seen significant dividend cuts amongst old faithfuls. The chairman of a major bank has finally conceded that he can't also feasibly chair a major reinsurer, and the Financial Times has launched "Capitalismblog", the first post of which is "A Survival Plan for Capitalism".

This suggests we're moving through the 'acceptance' phase of the Credit Crunch "change curve", and starting to figure out how to adapt to a changed economy.

So what is the new reality, and how can each of us adapt to it?

Clues emerge from a number of converging trends:
  • Politically, we still buy New Labour's twist on Thatcherite capitalism - it's okay for everyone (not just a some people, Madge) to make money, so long as it's not at the expense of people on lower incomes. But we've now learned that this too can be overdone. Mightily. So, we're hastily adding the words "within reason" and trying to figure out what that really means. But we are far from entering a new age of conservatism, or attempting to maintain the status quo (we're in a hole!). And we are certainly not keen on the ugly notion of a "no-growth economy". Nor should the desire to steady the financial system, by nationalising the banks if necessary, be seen as a vote for a centrally-planned economy or the mass redistribution of wealth from rich to poor. If anything, the rhetoric is for a return to consumerism in an effort to get people to at least buy something. But what? And for how much?
  • As previously noted, this political process has coincided with a plunge in faith in society's institutions during the past 30 years, yet an increase in our political awareness and informal political action. The recent Eurobarometer poll on the subject found that only "50% of EU citizens trust their local and regional authorities, a level slightly higher than for the European Union (47%). This level of trust in the local and regional authorities is considerably higher than the level of trust in national governments or parliaments (34%)." With trust levels so low we aren't likely to look to have much faith in the authorties' efforts to sort all this out, and Gordon hasn't helped in the UK by prematurely claiming he'd saved the world.
  • Similarly, we've seen the rise of lean, technology-based facilitators who've enabled us to wrest control of our own personal affairs from the one-size fits all experience offered by the likes of music labels, book publishers, retailers, package holiday operators, banks and political parties. Such platforms and marketplaces are based on rules that promote openness, fairness, and transparency, and these principles could extend to the democratisation of the financial markets, now that the individual taxpayer has a seat at the table.
  • Two corollaries of the last two trends are that leadership in the new economy is a bottom-up dynamic and brands need to facilitate rather than dictate to their customers.
  • I've also previously suggested that we've entered the Age of Conspicuous Thrift, in which our preferences for certain goods will increase as their price falls, over and above the traditional supply and demand effect. This partly stems from financial necessity, but also from a desire to demonstrate that we are savvy, pragmatic, authentic and environmentally aware. As opposed to Madoff investors. In essence, this signals a commitment to sustainability rather than merely consumption, although chasing prices to zero might ultimately prove counter-productive.
  • Of course, I would love to point to low cost government as a trend, but ministers and officials seem incapable of either preventing structural waste (initiating stupid projects) or improving operational efficiency. We suffer from the same top-down thinking here, as we do in the financial services industry. Here, too, only bottom-up pressure from the participants will drive change - as it has done to some degree with MPs expenses.

The term "sustainable capitalism" itself encompasses many aspects of these trends.John Ikerd's book deserves a mention, and Al Gore and David Blood use the term in a global, macro-economic sense, backed by a sophisticated grass-roots programme. However, a Google search reveals that at least the debate over the meaning of the phrase is transcending the champagne and canapes at Davos - 'normal' people are really discussing and wrestling with the concept of living sustainably.

How all this looks and feel to you on a personal level is going to vary enormously. My own personal economic journey suggests that if you're in denial about any of these trends, you'll need a new mindset to get comfortable in the new economy.

For me, that change in mindset evolved in stages from one of a fairly integrated cog in the corporate wheel in 1996, to thorough disillusionment in early 2004, to a fairly confident "myself as a business" outlook from August 2005. Each of us is an entrepreneur, as Reid Hoffman recently pointed out - thanks, Wendy. This marked a transformation from pressing my nose against the glass of Jaguar and Mercedes showrooms, to taking some satisfaction in the plan to drive a lesser marque until the wheels fall off. I still enjoy a decent glass of wine and even the odd cigar, but I've also focused on the 7 lifestyle aspects identified by Green Thing as helpful to the environment.

As with most consumer choices, apparent inconsistencies from this perspective are actually driven by rational concerns from other standpoints. I won't be buying an electric sports car, because the core proposition is still "speed", which feels too self-indulgent today. In fact, the pragmatist in me feels okay with the notion that many UK speed limits will be reduced from 60 to 50 mph - the first such change since 1978. Speed doesn't matter so much in a world where we work longer and harder, communication is instantaneous, and the UK roads are basically parking lots. Similarly, I ride to work on a motorcycle not because it goes fast, but because I can squeeze past all the parked cars, eliminate variation from the trip and use my time more efficiently. My fast, "green", electric sports car would just sit around in the traffic.

But enough from me. What sort of journey does "sustainable capitalism" mean for you?

Monday, 2 March 2009

Clean Coal?

More genius from the Cohen brothers - giant hat tip to Do The Green Thing.

Duathlon Result

Well, the '09 fundraising campaign got off to a decent start at yesterday's DB Max Chilly Duathlon - a 2 mile run, 10 mile cycle, 2 mile run, orbiting a very windy Castle Combe Race Circuit.

My challenge was to take it steady on the first stage, which can be tough if you're feeling great and get carried away. Luckily I remembered my heart rate monitor this year, so I was able to rein myself in. That meant I finished the first stage fully 1 min 27 secs slower than last year, and I cost myself another 16 secs in transition. But it was all plain sailing from there. The bike leg was 2 mins 42 secs faster than last year - and I even had some jelly beans left to top last year's final stage by 31 secs. Overall, a 1 min 30 sec net improvement at 58:17.05.

Next stop: Mallory Park for a rowing triathlon on May 4.

Please take a moment to donate a fiver or so to Prostate UK if you can.
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