Peace in the Middle East

Almost as reliable as the turning of pages on a calendar is the cycle of violence in the Israeli-Palestinian conflict. Here’s to ’09 being a peaceful year in the Middle East, but it’s looking all too predictable. Let’s be clear – the rockets being launched out of Palestinian territory that perennially kill innocent Israelis is completely unacceptable. It is tragic, it is wrong, and it is terrorism. The international community is in agreement that the goal is to stop this scourge (and I would add there are many other goals, but this is the most immediate). The debate among reasonable people seems to be what the best mechanism to achieve this end is. I would argue that there needs to be considerably more effort placed in pulling the rug out from under extremists by drying up their recruitment base and trying to fill the vacuum that is left by poverty and deprivation. The June '07 illiberal democratic election of Hamas is entirely predictable given the extreme living conditions in the West Bank and Gaza. Crippling poverty, hugely underproductive land, overpopulation, disease and little prospect for the future, not to mention connections to many family and friends who have died in previous violence, makes for the perfect platform for extreme ideologies to flourish. Reverse these conditions and you will almost certainly see a considerably more liberal democracy emerge and Israel achieve its objective of not having a terrorist organization ruling across its border. I think we have seen for decades that the current approach (heads of state signing pieces of paper and militaries launching offensives) has not produced a lasting solution. Decrees, promises, foreign observers, summits, envoys, seem to be trying to force a solution in many respects, rather than trying to actually build one . So long as the fundamentals on the ground remain the same for millions of people in Gaza and the West Bank, these top down solutions will likely continue to lack a mechanism capable of enduring stability and peace. It is imperative that sovereign countries protect themselves, yet so long as innocent blood is spilled on both sides, and so long as there is extreme poverty and deprivation (particularly in Gaza and especially under the current blockade) there will be no scarcity of people willing to give their lives for tragically backwards causes. This is exactly why Defense Secretary Gates, in an unprecedented move, lobbied last summer for a doubling of the foreign assistance budget for the State Department, because he knew it would translate into direct security benefits.

The best long-term approach to weakening radical extremists (like elements of Hamas) is to eliminate their resource base. Yes this means more traditional approaches like cutting off supply lines and raiding weapons caches, but even more it means providing an alternative of hope in the face of despair (and just as importantly, being seen as providing an alternative). Extreme poverty and deprivation is a surefire accelerant of extremism. Over a period of years if the international community, perhaps led by Israel, were to step up humanitarian relief and development assistance for its impoverished Palestinian neighbors, I think it is very likely that a vast majority of the extremist recruitment base could be dried up. Clothes, food, medicine, fertilizer, seeds, generators, schools, community centers, hospitals - basics - would help ensure another generation of youth is not caught up in the cycle of a false but often too attractive violent ideology. Extreme ideology feasts on the kind of fatalism brought upon by miserable conditions. Such assistance would literally be the physical embodiment of a neighbor’s compassion and would win hearts and minds from ideological zealots. Building an economy and investing in a viable alternative and moderate political coaltions will engender stability and a 2-state solution infinitely better than a team of pro negotiators and yet another rounds of furious document signing. One approach leverages a concrete mechanism to drive moderation, the other merely ordains it. Political parties are more an appendage of the prevailing situation and desires of the people than an apparatus capable of executing whatever U.S. statesmen broker. In other words, invest in a viable alternative, not simply agreeable language.

Ad hoc security crackdowns or another round of well-branded Summits will unfortunately fall short without treating the situation on the ground. Let's also be clear here - there will always be evil people for whom a military response is the only appropriate solution, and here Israel and the West must remain vigilant. Yet so to must the West realize that there are inherent risk factors that make it relatively much harder or much easier for extremists to operate. Opportunity and hope remains a vastly underutilized weapon in the war against extremism.

The Top 10 Technology Trends of 2009: I Pick them!

10) Mobile. It’s the future. Mobile cars, mobile cigarettes, mobile gummy bears. Mobile is the buzz word out there and it’s here to stay. If it’s mobile, invest in it. In 2009 your i-phone will become the j-phone, it will become not just a restaurant locator, credit card and way to ignore other people in awkward social circumstances and seem busy, but also become truly mobile based, leveraging mobility, perhaps even becoming a vehicle, much like the segway.

9) Breakthrough in the toilet industry. This is an often overlooked piece of technology, literally! But can you imagine the market size here, I estimated it at over $19 million annually, in toilets alone! I actually predict a facebook app that will predict when you have to use the restroom, and then just go for you! I’m thinking it will work via some kind of anal catheter maybe directly connected to your i-phone that will be RSS based with your profile. Can you imagine that shit?

8) Green. Again, just one of those buzz words people keep talking about, just over and over again, everywhere, just constantly yapping about it non-stop. So it must be good. It’s right up there with mobile for slick little web 2.0 mini-segments on the Today show and faddish editorials in the WSJ. I think the biggest green technology in ’09 will almost assuredly be tote bags. Think purses, but bigger. People will not want to use things or purchase things anymore, waste not want not! So they will have to carry everything that they could possibly have to use during the day with them at all times. Car oil, knives, cat nip, Kleenex, Styrofoam, all in the new green tote bag. It’ll get heavy, so I’m thinking the deluxe models could be on wheels with smallish gasoline engines to propel them. BIG $.

7) 2012 Presidential election. We just got through one of the quietest political seasons ever, with very limited citizen involvement, and people will look to finally get back off the sidelines and there could be real excitement for the upcoming 2012 election in ’09. To tell you the details I would need you to sign a non-disclosure, but I am heavily invested in a new web-based news platform that will basically focus exclusively on politics, providing a sort of insiders look at the campaigns and key players and general political intrigue. Huge untapped market with absolutely no competition here. I’m still looking for that breakthrough once in a generation candidate, but ’09 could be the year we finally get one.

6) Robotics. Ever since most of us were kids we knew this was just going to be a money factory some day. It has already been 8 long frustrating years since Stanley Kubrick set our expectations so high with his masterful space drama 2001 a Space Odyssey. It’s bound to happen in ’09 baby, I mean it is two-thousand –and-nine. Come on already Honda! Figure it out!

5) Professional sports franchises. If you find yourself in a position to become the owner of a major league sports team in ‘09 I highly recommend pulling the trigger. You will not regret it. I am currently exploring turning my fantasy NFL, NBA, NHL and MLS teams into actual franchises. It’s legally complicated, but I think the courts have left some wiggle room here. If I pull it off I will pretty much be living in one of those sweet luxury boxes full-time! And with several owners out there clearly senile, I’m talking to you Al Davies and Steinbrener, it is a wide open competitive landscape.

4) Anti-counting movement. Counting will really lose momentum after being the mainstay of societal organization for over 15,000 years (15,000 is now so whatever!) The world is all 0s and 1s anyway. So yeah, 10 is way bigger than I thought so I’m skipping to number 1.

1) Credit default swaps. I am up to my eyeballs in these things. I swap agreements on e-trade on an hourly basis, betting on everything from daily rainfall totals in the Amazon basin to municipal tobacco ordinances to John Mayer’s relationship status to pooled toxic-ass mortgages and I just keep going in deeper and deeper. I am clinically addicted to credit default swaps. Anything that sounds as pro as “credit motherfuckin’ default swaps” has got to be just sick. In 2009 AIG will emerge from this little bumpy patch unscathed, and look for Lehman Brothers to rebrand with a sexier Lehman Sisters and as Kanye says, watch the money pile up.

A Housecall for Incoming Health and Human Services Secretary Daschle

HHS Secretary-designate Daschle will have a lot on his plate. He will oversee the largest federal agency, administering everything from Medicare to the FDA to global health initiatives, at a time when his boss has promised massive reforms in healthcare. It’s going to be a tough job. To kick things off, Daschle has said he plans to embark on a discussion of healthcare reform with households all across America, a sort of big-tent experiment in brainstorming. This is a genuine and admirable goal, if not hard to understand coming from a man who has spent the last 30 years visiting people as a professional politician. Both Obama and Daschle have literally been on the road for years, and they are not short on (often very personal) stories about healthcare in America. But how could a couple more months of it hurt? I think Secretary Daschle should focus on three key areas if he hopes to simultaneously improve the quality of care Americans receive, and the number who receive it.

One, he needs to contain costs. Healthcare expenses are growing far faster than the revenue base is expanding and at the current trajectory, non-discretionary spending will eat up the entire federal budget in about 25 years. A good model of controlling prices can be found in Japan, where they have half the per capita healthcare costs and twice the per capita utilization rates as Americans. That sounds good. In Japan the government has sole purchasing power of pharmaceuticals and healthcare procedures. They use their massive negotiating power to exert downward price pressure on everything from the cost of antibiotics to the cost of an EKG. Private insurance providers can still design their own policies and set their own prices, but the basic inputs that go into those plans are purchased in bulk by the entire government. The same concept is already pervasive in the private sector, where a few key buyers negotiate entire supply chains. Secretary Daschle’s HHS would be a great place to house the Office of Negotiation, where they set up 5-year forward purchase agreements on the largest and most common drugs and procedures.

Second, just like decoupling in the electric utilities sector, there needs to be decoupling in the medical sector. Utilities over the last decade or so have realized that electric providers in a normal market have no incentive to be efficient; in fact they have an incentive for their customers to use as much energy as possible because it translates into larger profits. This results in excess energy usage and general inefficiency. This has been more or less solved via utilities taking a percent or two out of monthly electric bills and redistributing it based on a formulaic measure of a company’s energy efficiency. Suddenly energy efficiency is monetized and energy providers start paying attention. The same basic idea should be established in the medical industry, where doctors, particularly specialists, have an incentive to carry out, and charge for, expensive procedures. Daschle’s HHS should charge a small fee to existing healthcare providers (maybe .5%) and reward medical providers who are particularly efficient in their utilization. This does not mean doctors will be rewarded for not doing expensive procedures for sick patients who need them; it means they will have an incentive not to do procedures just because they are profitable (which is perfectly rationale). HHS could measure certain key and widely available statistics, like referral and utilization rates and costs per treatment at the institutional level, and then reward those institutions accordingly, decoupling profit from wasteful overutilization.

And three, if Obama and Daschle really want universal coverage they will have to subsidize about the lowest quintile of American households. This is a decision Americans will ultimately have to make, but controlling prices and rewarding efficiency will still not be enough to provide universal coverage. Obama proposes instituting a healthcare tax on employers who do not contribute to their employees’ coverage as a means to fund subsidy programs. This seems like a good idea, as it preserves price parity across the market, as every firm will have to meet the same basic operating costs (chipping in to provide basic healthcare and not free-riding on firms that already do). Revenues here could be distributed by Daschle’s HHS based on a family’s combined income level to provide basic coverage for the uninsured.

I don’t think Secretary Daschle will be knocking on my door anytime soon, but I hope that once he hears from all these households that he starts getting specific soon. Generic goals or hollow bromides have gotten us nowhere with healthcare reform in the past, and today’s no different. Healthcare reform will be a long difficult debate, and policymakers should start working on the nuts and bolts now. None of these ideas is easy or particularly desirable, but neither are higher taxes in the future for worse benefits.

A special recipe for the holidays and one of my personal faves, just prepare and enjoy!

"You take some chocolate ... and you take two pieces of bread ... and you put the candy in the middle and you make a sandwich of it. And that would be a cake." -Andy Warhol

Oh, and he left out the oven part, be sure to put it in one of those

MLS to Portland and Some Econ

After Adrian Hanauer’s brilliant orchestration of bringing MLS to Seattle (in ’09 baby!) I think it’s Portland’s turn. Check it out - http://www.mlstoportland.com/ With an estimated cost to the city of $85m and annual benefit of $30m it would be a big win all around. Bring MLS to Ptown baby!!

And here are 10 macroeconomic prescriptions that might be good now that everyone’s talking about economic policy in DC.

10) Independent World Class Regulators for all Large Financial Firms – Independent Meaning they set their budget and world class meaning they follow GAAP, this wasn’t the case for GSEs or I-banks – this includes 10% reserve ratios, not 2.5% say like Fannie and Freddie, e.g. better leveraging

9) Housing PITI – Principal Interest Taxes Insurance – Documented and verified. This only became a rule in July 2008 when Bernanke pushed it though at a Fed meeting! (And it won't take effect until Feb '09) Why did it take so long to require borrowers to check a box at the end of their mortgage docs releasing their tax records? Then Standard and Poor's or Moody's would have had actual data to base their bond ratings on. The FDIC has been restructuring loans at or below a 30% debt/income ratio to much success (but it can only do it to assets it has acquired, which is basically IndyMac) - this would be a good threshold for lenders to loosely base restructuring (after all they will take a bit of an interest rate hit, but it's better than losing the whole loan). There's also a new study which estimates a million mortgage defaults could be prevented via utilizing $10b of TARP to increase the fees HUD provides private mortgage securitizors (source of over 50% of current defaults) get for restructuring a loan. Right now there is little incentive for them to make the effort to restructure versus just write off or auction off.

8) Global Exchange Harmony – If you trade in a market you are subject to its rules, for instance European/London traders in NYMEX are often exempt as they are considered to be regulated from abroad, not good, e.g. close loopholes. If a satellite trading shop for a European firm opens in Atlanta it should be fully regulated by the U.S.

7) Fix Entitlements – Non-discretionary spending is 65% of federal spending today and will continue to spur deficit spending and eat up the budget, which crowds out private investments – either a Greenspan style fix by say indexing benefits to the CPI rather than wage and bumping up the retirement age, or more innovative (and promising) approaches like volunteer personal savings accounts (the market has never had less than 7% returns over a decade, ever)

6) Infrastructure stimulus – Largely in the form of revolving loans to states and localities, including national direct current electricity grid (particularly applied in so called 'solar parks' which establish all the prerequisites for solar permitting and transmission in government land leased by private firms, removing the uncertainty that currently inhibits at scale development along with #5) and water infrastructure

5) Embrace the clean economy – less taxes on labor and income and more on pollution. The marginal social cost of carbon according to the Stern Report, the International Academy of Sciences and the U.N. is about $30/ton CO2, conveniently about the exact amount needed to make renewables and sequestration cheaper than coal, tar sands, oil shale etc. The IRS could oversee this program with existing authorities at the point carbon enters the economy, either the ground or port, and then recycle all revenues back via tax cuts.

4) 50% margin call (collateral) for paper (non-deliverable) hedging and speculating, today it’s often 2-5% which encourages speculating and thus bubbles

3) Warranty on bond ratings – If collateral backed bonds get a rating from one of the big agencies that proves grossly inaccurate they should take big haircuts in their contracts

2) Successful WTO Doha round – Trade needs to be opened up, and this means new negotiations with more flexibility on easing subsidies and accepting developing economy safeguards (this was the big sticking point)

1) Relax – Expectations and anxiety are self-fulfilling, losses are only realized if you sell, most of the big banks had balance sheets that were OK, it was the market cap losses that did them in. Citigroup for instance has lost $2b each of the last couple quarters, on a balance sheet of nearly $2 trillion and with tons of cash on hand (and $25b more thanks to TARP). And yet they have a current market cap of $21b, grossly undervalued in my opinion, traders would benefit from some perspective - any company, even very strong ones, can be undone by 90%+ market cap losses (which all that have gone under have sufferred). If bovine mass hysteria dictates market positions, any company can be victim - and valuation models are powerless in the face of this. If Wall Street focuses on creating wealth rather than manufacturing it (creating wealth includes products, services, consulting, insurance, liquidity/risk management, and manufacturing it includes things like arbitraging bond rates with SIVs (structured investment vehicles) or backing capital raises with deteriorating underwriting standards, like subprime backed collateralized debt obligations or massive paper speculation/derivative bets). Wealth production beyond wealth creation is the root of bubbles, and they will always burst.

Also, I think the Big Three should get their additional $25b, which is far far less than it would cost the economy if they failed. But they need to realize this is a bridge loan in two senses: 1) getting on a sustainable cash flow trajectory and 2) finally innovating. The top reason they are in this position is not because of events of the last few months but because they have been making the same vehicle since Carter was in the White House, and actually have gone backwards in fuel efficiency. As a result they've had their shirt handed to them by Japan and German automakers. Maybe with the Chevy Volt the Big Three can finally be out front on the innovation curve instead of three decades behind.

Channeling Norman Mailer

The Calzaghe-Jones fight is tomorrow night. I’ve always deeply respected boxing, and ever since getting HBO it’s become a new little hobby, a slight step up from my main collegiate hobby of gluing beer bottle caps to the ceiling, or testing which detergents actually make for the freshest smelling laundry. But anything requiring a hot glue gun or sniffing your sweatpants like crack either belongs on closed-circuit television or in a halfway house, definitely not fraternities. Yet for a pale weak washed up distance runner, such as myself, the badass tattooed prize-fighter seems to exhibit a strong allure. Ever seen that nanosecond glance between a fighter right after a knockout and his girlfriend sitting ringside in a cocktail dress? It’s the human equivalent of a lion killing a gazelle and then roaring to the whole pack that the feast is ready, pretty hot. I guess we’re most drawn to that which best conforms to our own self delusions. Ha. Ha. Both fighters are future Hall of Famers and looking to finish their careers with a big win. They’re also both superlative businessmen, their promotional outfits co-produced this whole thing from start to finish, an extreme rarity. They are simultaneously partners and adversaries. This makes for an entertaining pre-fight build-up, as two people who clearly like each other have to exhibit faux-hate to make for a more compelling narrative. Their incentive is to advance their business interest by pretending to hate the one person for whom their business interest actually depends. This split-personality incentive actually makes for a fuzzier, more intelligent sport (and also more enduring because they are masters of their own destinies). And as far as picks, from the guy who thought the Seahawks would be incredible this year no less (on a related note: dammit), Calzaghe is the very real deal. He can shift between straight power punches and super-smooth combos at will, and is flat out awesome in the later rounds, where so far no one has been able to keep up, even a little. He does seem undersized relative to Roy Jones Jr, the first man in over a century to carry both the light heavyweight and heavyweight titles, and size can overcome even significant ability gaps. Otherwise he seems hard to beat – except maybe by a close friend.

MDGs, GSEs and BTUs

Sixty four percent of income in least-developed nations comes from agricultural output and only 4% of international development assistance in these economies goes to agriculture. The typical yield per hectacre (about 4 acres) in developed economies is a little over 4 tons. In these subsistence agricultural communities the average output is only 1 ton. This combination of low productivity because of an inability to supply basic farm inputs like nitrogen fertilizer and high yield seeds, combined with essentially no targeted aid in these areas creates the ideal environment for poverty traps. Here the inability to afford basic inputs limits output, which reduces savings, which further precludes necessary productivity enhancing investments. This is where official development assistance can provide not just relief or temporary aid, but over several years be a catalyst to pull economies out of the poverty trap and develop a domestic savings pool deep enough to afford the productive inputs they need to raise income, make more investments and over time diversify their productive sectors. The world (via the UN) has pledged for over 30 years to provide .70% gross national product towards such assistance, most recently via the UN Millennium Development Goals. The United States currently provides .17% GNP towards ODA, and the EU roughly twice that. As interim targets towards the two to four fold increases required to reach these goals the EU pledged in ’06 to get aid up to .5 % GNP by 2015. A report was just released monitoring progress of these pledges to get closer to meeting the initial pledges. They show that ODA fell over 4% in ’06 and over 8% in ’07 and of the $25 billion of pledged assistance to Africa, only $4 billion was actually allocated. The world community needs to meet its commitments, and not simply as a philanthropic endeavor, but because there is no more comprehensive way to engender sustainable and inclusive national security, economic development, trade and productivity growth and environmental sustainability than through targeted development aid that in essence doesn’t just “give a fish” but “teaches how to fish.” The crutch of the problem that has beleaguered the international community and led to many failures in reaching these commitments is the structure of the United Nations. There is no legal accountability or international mechanism that is not simply an aggregation of sovereign entities, which then ultimately have final authority. Countries and member states should make pledges with legally enforceable contracts or not at all.

The government sponsored enterprises Fannie and Freddie are intrinsically sound. Their profit and losses and capitalization are adequate. They have over $5 trillion in assets and have sustained very manageable losses of only about $30 billion this year. Their independent regulators have observed this many times in the last few months. Their 80%+ market cap drops since last year are unwarranted. However, because their price depreciation so negatively affects market expectations, hinders new investments, and creates “real” losses in savings and jobs via the secondary effects of financial investment losses, the recent takeover is warranted. One can only wonder if the Fed had enacted their new common sense mortgage lending standards 5 years ago if we would even be in a downturn. It is mind-blowing to think that it took all this time to get official regulations requiring income verification of borrowers, or the inclusion of insurance or tax payments in estimates, or removing punishments for early payments. There is a huge moral hazard here and we have seen the results. I don’t know why the Fed under Greenspan did not act on these years ago. The lax lending standard only acted as an accelerant for lending practices that essentially discounted the future completely to earn commissions in the very short term. This sort of principal-agent dillemma could have been prevented with common sense rules.

There will be a huge new market in clean technology exports in the next decade. Right now Germany and Japan control about 90% of the solar market because they have the pricing less wrong than the rest of the world with a cap and trade system, significant public outlays in basic research and repurchase agreements for clean energy producers or feed-in tariffs. The surest and most sustainable way the U.S. will restore fiscal and trade balance in the next decade or two would be to learn a thing or two from Japan and Germany and price carbon. This could be achieved most efficiently with a revenue neutral carbon/BTU tax, offset with reduced income and payroll taxes. There are literally tens of thousands of people in my generation that could get filthy rich in this industry if the U.S. would simply level the playing field by removing the existing artificial carbon subsidy that makes it more difficult for our clean technology companies to build sustainable revenue models. Price carbon and we will have a domestic investment driven boom and export our technological advantage to the world. The private sector is the engine, but the government has to turn the key.

i'm ready for my closeup, bitches

blogs are a funny medium. why do we write them? there's no grades for them. no money or career. no glory. no forum where you can see people's reactions and feel their responses in person. no platform, power or authority comes from being a great blogger. there is a global tournament for beer pong and bird calling but no world champion of blogging. no pulitzer prize or fields medal. i guess most people write them as a hybrid journal/portfolio. it's simultaneously a way to remember and unpack different experiences and events, and also show our skills to the world. i think most people half expect that there's secretly a simon cawell (sp.?) of bloggers out there searching for the next big star. blogs are people's response to that ultimate frustration of having so many good ideas but never actually codifying them in a written piece. blogs are the common dude's response to the ultimate injustice of unnoticed talent. i think it could be a painful realization though when someone cites "blogspot" as one of their references. any medium where the norm is not to use caps just doesn't fly in interviews. my whole perspective on the existential nature of blogging changed though the other night when at a bar someone (you know who you are, hello, are you there?) actually told me, unsolicited too, that they read my blog! it was one of the finest moments of my life. all of a sudden i felt a little light. the back of my wrists pulsed a little harder thann usual and my stomach dropped from the adrenaline rush. wow, someone had actually read my blog. i looked around the room with starry eyes and everything seemed so perfect. i remember signing a few autographs and beating back the paparrazzi. now that i was a read blogger i would have to get used to it. in a world with no centralization, no authority or formal rules or professional standards, being read was like being a published author, like getting signed as an artist, like getting a standing ovation. 'cause i have learned one of the endearing truths of business, that it doesn't matter if its crap, so long as it sells. and my crap is selling. so it's time for a little flossin'.