Category Archives: Business and Economy

Looking at how consumers are the major beneficiaries of fixed-rate mortgages

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The historical development of the fixed-rate mortgage, usually 30 years in the United States, helped contribute to the post-World War II suburbanization boom in the United States. Several scholars take a look at who exactly benefits from the fixed-rate mortgage (FRM):

The FRM clearly occupies a central role in the U.S. housing finance system. It has been the dominant instrument since the Great Depression and currently accounts for more than 90 percent of mortgage originations. The FRM is regarded as a consumer-friendly instrument, which is one reason why it enjoys enduring popularity. But the instrument can cause problems for both current and prospective borrowers. And part of its popularity is due to government support as well as past regulatory favoritism. The FRM is heavily subsidized through the securitization activities of Fannie Mae and Freddie Mac. These subsidies, which lower the relative cost of the instrument, are an important factor in its popularity. The FRM also imposes costs on the mortgage industry and on investors in mortgage securities—costs that are likely to rise as the economy recovers. Importantly, the FRM is a onesided design. Consumers, particularly those who utilize the prepayment option, benefit while investors and taxpayers bear the cost.

The PDF file linked to from this document has a lot of interesting information. A few thoughts about this:

1. The fixed-rate mortgage came about because of particular historical conditions and interests. Prior to World War II, other kinds of mortgages were sold.

2. The fixed-rate mortgage is not as common in lot of other countries around the world. There are other ways the mortgage market could be set up.

3. The authors suggest that the FRM is the primary mortgage instrument in this country because of governmental approval. Here are the final two sentences in the conclusion of the PDF:

There is nothing so special about housing finance that necessitates the government absorbing the credit risk of the vast majority of the mortgage market or underwriting the interest-rate risk of the that market. Two episodes with massive taxpayer loss should convince us of that fact.

But I think this may be overlooking the cultural and symbolic value Americans place on owning a home. While this scheme may put taxpayers on the hook, Americans also value homeownership, particularly as a lynchpin of the American Dream. Most (if not all) presidents since Calvin Coolidge have pushed policies that would boost the homeownership rate. From FHA and VA loans to Fannie Mae and Freddie Mac, the government has poured billions into homeownership. So while consumers might benefit from this setup, would we be willing as a nation to push for different types of mortgages that might make it more difficult for Americans to purchase a home?

The synchronicity of stock traders

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In recent years, sociologists have produced a number of interesting works regarding the behavior of economic insiders. In a recent study published in the Proceedings of the National Academy of Sciences, the authors argue that stock traders have fairly synchronized behavior:

Sociologist Brian Uzzi of Northwestern University in Evanston, Illinois, and colleagues analyzed all trades taking place in a single firm of 66 employees over 2 years. As is usual in trading firms, the employees specialized in different markets—housing, autos, or health care, for example—so they had no obvious incentive to copy one another’s behavior. Each trader typically bought or sold stocks about 80 times a day, which the researchers allotted to second-long time windows.

A 7-hour working day is roughly 25,000 seconds, so the chance of one employee’s 80 trades randomly synchronizing with any of his colleague’s is small. Yet Uzzi’s group found that up to 60% of all employees were trading in sync at any one second. What’s more, the individual employees tended to make more money during these harmonious bursts…

This is interesting information in itself: there are common patterns to behaviors in which we might typically assume that traders act on their own. But perhaps the more interesting aspect of all of this is why these trader’s actions are so synchronized. Here is what the authors suggest:

They believe the synchronized behavior is simply a general indicator that the market is ripe for safe trading. Although each individual trader has a short-sighted view of his or her specialist market, the traders’ collective monitoring of events in the outside world means that, at some point—indeed, at 1 second—group instinct prompts many of them to buy or sell together. The researchers found that instant messaging among traders spiraled at times of synchronicity, which seems to support this view. Trading out of sync, Uzzi says, would mean the trader misses out on the time when the market information was optimal for a return.

So even with specialized tasks, these traders are then monitoring broader conditions and responding to group behavior. This seems to fit with other sociological research that suggests that economic decisions that often get chalked up to things like rationality or intuition are influenced by social factors.

There is an intriguing implication as well:

Uzzi thinks trading firms could capitalize on the phenomenon by giving their employees more money to trade when they are in sync. But he warns that the traders themselves must never be told about the decision. “It is well-known that once people become self-conscious of their own behavior, their behavior changes,” he says.

So will behaviors (and outcomes) change if this article becomes common knowledge amongst traders?

Dumb NYTimes pricing

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The NYTimes is indeed erecting a paywall, as the rumors had it.

I won’t address the decision to charge users directly for content, but I will note that $15 every 4 weeks is annoying and ridiculous as a pricing methodology. That’s not $15/month; that’s $16.25/month.  (Already feels like a “gotcha”, doesn’t it?)

And then there’s this: assuming you’re being billed via recurring charges to a credit card with a monthly statement (a pretty safe assumption), one of your credit card bills per year is going to have 2 charges from the NYTimes on it.  (Yep, there’s “gotcha”, part 2).

Wherever NYTimes had decided to set its price, this is absolutely the wrong billing methodology.  It’s going to make for some terrible customer relations; just imagine all the the people who are going to look at their credit card bills at some point in the first year and go “wait…why did they bill me twice?”

IP enforcement, spying, and reasonableness

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Today’s posts have touched on who should enforce IP rights and what that that enforcement should look like.  Recent comments by Ed Black, President & CEO of the Computer & Communication Industry Association (CCIA — Wikipedia backgrounder), address both of these issues in the context of the White House’s Intellectual Property Enforcement Coordinator’s recent white paper:

The government has shown how its zeal leads to carelessness [previously covered here] in its unprecedented efforts to widely seize domain names for IP enforcement, which ICE undertook this year. Sites were wrongfully shut down based on allegations the user was engaged in criminal conduct deemed lawful by their courts. We are concerned the same low threshold will be used in making decisions to spy on U.S. citizens.

Some in Congress and the White House have apparently decided that no price is too high to pay to kowtow to Big Content’s every desire, including curtailing civil liberties by expanding wiretapping of electronic communications. Even the controversial USA PATRIOT Act exists because of extraordinary national security circumstances involving an attack on our country.  Does Hollywood deserve its own PATRIOT Act?

This new punitive IP agenda follows just weeks after dictators spying on citizens online was the lead story in every major newspaper.  Perhaps the obvious hypocrisy caused someone to decide to wait to announce the U.S. goal of expanding our government’s powers to spy online.   A screenwriter could almost market this plot as a comedy – if it weren’t so serious.

Maybe we should be grateful our government only wants to make streaming a song or movie a felony with potential prison time as punishment.  What’s next corporal punishment?

This is the latest indication of the extent to which the content industry has infiltrated this administration and managed to turn the Administration’s IP agenda into a policy which protects old business models at the expense of consumers, citizens’ rights and our most innovative job creating industries.

To be sure, Mr. Black speaks as the head of a trade group, advocating for his clients’ interests.  Nonetheless, we’ve covered advocates for the content industry and the broadband industry before.  I think it is important to remember (1) that both sides of the IP debate can make sweeping — sometime unprovable — assertions and (2) there are usually two sides to every story.

Broadly speaking, I have to agree with Mr. Black’s concern with the disconnect between official condemnations of “dictators spying on citizens online” and “the U.S. goal of expanding our government’s powers to spy online.”  As illustrated only a few months ago, the line between vigorous copyright enforcement and totalitarianism can be a thin one indeed.  As Harold Feld of Public Knowledge put it recently over on the LA Times:

In the virtual world, the real but mundane problem of shoplifting undergoes a Hollywood-esque transformation into “piracy,” causing the entertainment industry and folks in Washington to lose all perspective. Consider that Rep. Howard Berman (D-Valley Village) proposed a bill in 2002 to allow record companies to hack into your computer to search for illegal downloads. And how did Berman justify the equivalent of an electronic strip search? “There is no difference between pocketing a CD in a Tower Records and downloading copyrighted songs from Morpheus,” Berman told the crowd of aghast tech executives. “Theft is theft.” True, theft is theft. But I suspect Berman would have objected to an amendment allowing Tower Records to break into your home to recover a stolen CD.

Whatever you think of Mr. Black’s rhetoric — even hyperbole — I think most people would agree that truly draconian IP enforcement is not worth the terrible price it exacts.  Now we just need to reach a consensus on exactly how much is too much…

LA piracy debate

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The LATimes just posted the second round of its “piracy Dust-Up” (you can read the first round here), and I thought I’d pull two quotes.

The first is from Harold Feld, the “legal director of Public Knowledge, a Washington-based digital rights advocacy group”, who points to the hidden costs of copyright enforcement:

It’s easy to understand 9 million illegal downloads of “The Social Network,” and hard to understand how the new regulations Sony wants will raise the price of your broadband subscription and your iPod while keeping you from doing cool things on your iPhone.  As the crowning insult, there is no evidence that these new rules would actually make a dent in the illegal downloading problem, or that marginally reducing illegal downloads would translate into an increase in legal sales.

The second is from Andrew Keen, “the author of the upcoming Digital Vertigo: An Anti-Social Manifesto...[and] an advisor to Arts and Labs, a coalition of entertainment and technology companies”:

Rather than worrying about doing “cool things on our iPod,” shouldn’t we instead be trying to craft legislation guaranteeing that 21st century artists have the opportunity to make a living selling their books, their recorded music and their movies?

Here’s the thing that I don’t understand:  in 2006, Keen accused Larry Lessig of being “an intellectual property communist”.  Yet if I understand this debate correctly, it is Keen who wants to focus on ways of “guaranteeing that 21st century artists have the opportunity to make a living” and who is unconcerned whether or not people can do “cool things on [their] iPod[s]”.

Last time I checked, “guaranteeing” certain people paychecks is strongly associated with communism.  It is innovation of the sort that allows people to “do cool things on [their] iPod[s]” that smacks of the capitalism Keen so implicitly embraces.

Keen will no doubt object that I mis-characterize his view insofar as he “only” seeks opportunity, not outcome.  This objection is fair enough — so far as it goes.  But it’s a tricky objection to maintain credibly when it is your opponent (here, Feld) who is calling for balance and proportionality in infringement penalties and you (Keen) who is engaging in the take-no-prisoners logic that “we surrender to the online thieves by treating piracy as a ‘cost of doing business'”.

Mr. Keen, accepting business loses due to shoplifting (in the physical realm) or piracy (in the digital realm) is not “surrender”; it is a fundamental recognition of reality.  Failure to recognize this reality seriously undermines your argument — as does your claim that you only seek “opportunity” when you so clearly will be satisfied only by enactment of one particular outcome.

Who will enforce IP laws?

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Ars Technica and TorrentFreak are reporting that Australian ISP iiNet (Wikipedia backgrounder) recently released a policy report calling for changes in the way that IP laws are enforced:

The ‘Hollywood solution’ (in very simple terms) involves the employment of private detectives, hired by content owners, to trawl the public internet and gather information. The content owner uses this information to generate notices which are sent to internet service providers. The notices demand that the ISP should terminate the service of a customer subsequently determined by the ISP (not the content owner).

Naturally, ISPs find this approach unattractive and unsatisfactory, to say the least.

Rather than merely passively complaining about Hollywood’s solution, however:

iiNet has developed a model which it believes addresses ISP concerns and is likely to be far more effective. We believe it to be attractive to all participants and one which offers a sustainable strategy that includes an impartial referee, for resolution of disputes between the parties and the issue of penalties to offenders.

Here is iiNet’s proposal:

1.    A content owner will carry out their own detective work and identify an offending computer making unauthorised copies of their content available for sharing via (typically) bit-torrent software. This will provide them with an ‘IP Address’ that can be traced by the issuing ISP to a specific internet service.

2.    The independent body will determine whether the evidence meets a test of ‘cogent and unequivocal evidence’.

3.    IP addresses can be provided to an independent body who is able to identify the issuing ISP and ask that ISP for contact details for the service account holder. The ISP provides those matching contact details to the independent body.

4.    Using those contact details the independent body can issue notices to the account holder informing them that they had been detected making unauthorised copies available, provide educative information, advise the consequences that may follow continued behaviour and ask the account holder to ensure that the behaviour stops.

5.    The independent body keeps records of the notices and may modify the notice for a repeat infringer, or seek further sanctions. Some of those sanctions may include fines, court charges or changes to the internet service.

6.    Consumers who believe the allegations are incorrect will be able to appeal the notice to the independent body. These appeals and/or complaints would be dealt with by the independent body.

7.    Consumers who believe an insecure wireless access (or other technical issue) may be involved, will be referred, by the independent body, to their ISP for technical assistance.

As I read the proposal, it seems like iiNet is primarily trying to do two things:

  1. Remove itself as arbiter of IP-related disputes; and
  2. Lower the transaction costs involved in full-blown litigation by setting up a quicker (and cheaper?) arbiter of disputes.  (Perhaps they have something in mind like the Uniform Domain-Name Dispute-Resolution Policy, which administratively resolves certain types of domain name disputes without having to go to court.)

With respect to #1, I agree with iiNet.  ISPs are ill-positioned to adjudicate IP disputes, especially since the cheapest solution (and thus a compelling business model) is simply to comply with any content owner’s request, no matter how tenuous the underlying legal cases.

With respect to #2, however, I have serious doubts.  iiNet’s proposal could be read as an ISP’s attempt to shift online infringement clearly from a malum in se crime (crimes that are inherently wrong, like murder) to a malum prohibitum crime (crimes that are wrong by statute, like minor speeding violations).  Acts that are malum prohibitum generally require less evidence for conviction (e.g., strict liability), but this is supposedly outweighed by lesser penalties and less social censure (e.g., fines for speeding are relatively small and do not carry the social opprobrium of murder).

Here’s the problem:  current copyright statutes don’t have the malum prohibitum “balance” built in.  While there may be lesser social censure for copyright infringement than for other crimes, it is hard to think of many non-violent crimes with higher penalties.  U.S. law assesses damages as high as $150,000 per infringing act, and there are never-ending proposals to increase penalties.  Even if such penalties seem grossly disproportionate to the underlying crimes and raise serious constitutional concerns regarding due process and punitive damages, they nonetheless are “the law” as it exists on the books.

Given the reality of enormous statutory penalties for infringement, streamlining copyright enforcement procedures could lead to disaster.  As a policy matter, it’s one thing to argue for streamlined procedures (i.e., fewer due process protections) in exchange for lower penalties.  Under certain circumstances, that can be a reasonable policy tradeoff.  But it’s a dangerous thing to argue that every content owner in the world should have a fast, easy way to sue individuals up for $150,000.  Copyright trolls like Righthaven exist even in a world with the due process protections of courts; it’s truly frightening to imagine how many new trolls will arise if the potential payoffs remain the (astronomical) same but the bar for suit is set even lower.

To be fair, iiNet appears to recognize this danger and suggests:

Infringements can be ranked as minor (say, single instances), major (say multiple instances of different files) or serious (at a commercial level). Each level having prescribed penalties….A scale of fines can be established, relative to the economic loss represented, and demerit points could also be awarded in line with the severity of the infringements.

Nonetheless, I fear that their report does not highlight just how pivotal such gradation and balancing would be to any implementation.

White House report on “Women in America”

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The White House Council on Women and Girls recently released an 85 page report on “Women in America.” According to the administration, “it is the first comprehensive look at the status of women in America since the Kennedy administration released a similar report in 1963.” There is a lot of interesting data in here. Here are two graphs out of the report:

1. Comparing bachelor’s degrees granted to men and women in 1998 and 2008, by field:

Outside of engineering and computer sciences and mathematics and physical sciences, women are getting more bachelors’ (and master’s) degrees.

2. Unemployment rates by gender, going back to the late 1940s:

 

A shift seems to take place in the late 1970s and early 1980s where it is men who become more affected by recessions than women. This would line up with the loss of manufacturing jobs and the move to a post-Fordist, information-based economy.

 

The 84,000 question

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I hadn’t had a chance yet to comment on the 84,000 websites the U.S. government seized about a month ago because they were supposedly associated with child pornography.  Turns out the government was wrong about that, but the damage was done since a lot of visitors to the websites of innocent small business owners were directed to a page displaying an imposing government seal and the statement:

Advertisement, distribution, transportation, receipt, and possession of child pornography constitute federal crimes that carry penalties for first time offenders of up to 30 years in federal prison, a $250,000 fine, forfeiture and restitution.

Whoops.

Recently, the White House’s IP Czar Victoria Espinel testified before the House Judiciary Committee, and Rep. Zoe Lofgren (D-CA) had a lot of pointed questions (YouTube video of the exchange here).  Now Ars Technica has posted an interview Rep. Lofgren in which talks about the due process problems with seizing domain names without giving people a chance to defend themselves before the seizure takes place:

You’ve got the prosecutors coming in, they have a judge sign something, and the people whose property is being seized are never heard from. It doesn’t appear, honestly—though it would not solve the due process problems—that there’s much inquiry on the part of the prosecution, either. Is there a fair use right? Is there an authorized use? Is there legitimate business going on? There’s no opportunity for that to be raised, and once the damage is done, it’s done.I’ve not yet talked to some of the individuals, but we’ve had second-hand reports of people in the child pornography takedown [i.e., who owned one of those 84,000 websites] whose businesses were essentially destroyed. There’s hardly anything you can say. It’s worse than accusing somebody of being a pedophile.

These are troubling developments indeed.  The whole point of giving the innocent-until-proven-guilty the chance to defend themselves before seizure is to help prevent these sorts of devastating mistakes from happening.

The iPad as magic

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Sales of Apple’s iPad have been impressive. Virginia Postrel argues that the appeal of the iPad is in its magic:

When Steve Jobs appeared on stage last week to unveil the iPad 2, which hit stores Friday, he said, “People laughed at us for using the word ‘magical,’ but, you know what, it’s turned out to be magical.”

Apple has long had an aura of trend-setting cool, but magic is a bolder—and more provocative— claim…

With its utterly opaque yet seemingly transparent design, the iPad affirms a little-recognized fact of the supposedly “disenchanted” modern world. We are surrounded by magic…

“Between a wish and its fulfillment there is, in magic, no gap,” wrote the anthropologist Marcel Mauss in “A General Theory of Magic.” Effortlessly, instantly, the magical alters reality with a tap of the finger or wave of the hand. Sound familiar?

This argument reminds me of Max Weber’s claims about the rationalization of the modern world. On a broader scale, Weber argued that bureaucracy, efficient for dealing with large groups of people, would lead to a “iron cage” where everything would be routinized. Postrel argues that even though the iPad is the product of modern bureaucracies (even Apple is a bureaucracy though it positions itself as the anti-bureaucracy, usually referring to Microsoft, with a charismatic leader), it is magic in that the user has little idea of how it all works, is unable to open it up and “look under the hood,” and it is like an extension of oneself.

This could be one explanation for the iPad as magic. There could be some other reasons as well: its size, the vibrant screen, the Apple brand, and its positioning as the most popular (and the first mass-market product?) of the burgeoning tablet market. Another explanation could be this: the iPad brings joy or happiness to its users in a way that many modern products do not. While laptops are often intended for work and new cars are functional transportation options, the iPad is there for enjoyment. In a disenchanted world, this is an re-enchanting product in the same way that the Microsoft Kinect (with its own impressive sales) is magical: it is meant to be used for fun.

Will the magic decline over time as more products offer the same possibilities? Probably. But for now, the iPad may have just cornered the short-lived market on magic and re-enchanting its user’s worlds.

Strong IP

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Techdirt points to a story illustrating how strong IP enforcement comes around after going around:

We’ve been talking about how ridiculously aggressive Sony has been lately in enforcing its intellectual property rights concerning PS3s, so it seems like there might be a bit of karmic retribution in the fact that a shipment of PS3s has been seized in Europe as part of an ongoing legal fight with LG over patents covering parts of the PS3. I’m always amazed at how frequently companies who push for stronger and stronger enforcement of IP laws never seem to consider the consequences when those laws are directed at their own activities.

There’s been a lot of talk this week about patent reform since the Senate passed a bill 95-5 that would, among other things, move the U.S. to a first-to-file system similar to what most of the rest of world uses.  Some commentators think the proposed statutory reforms wouldn’t amount to much, though others suggest that the FTC’s recent report suggest that administrative reforms may be on the way.