Caroline Baum on Greenspan’s AEA Talk

By Paul Kedrosky · January 6, 2004 · ·

The ever-savvy Caroline Baum struck an appropriate mix of criticism and congratulation in her Bloomberg column today about Alan Greenspan’s AEA speech last weekend. In short, she thinks Greenspan has good reason to be pleased about his bubble-fixing policies for the bubble that wasn’t a bubble, but she rightly worries about the effect of a continuing negative funds rate in a now-booming economy:

“It’s an invitation to runaway borrowing (bank credit has been unchanged for the past six months). It’s likely to lead to a misallocation of capital into interest-rate sensitive sectors of the economy, such as housing. And historically it’s ushered in higher inflation.”

Filed Under: Economists

Disruptive Innovations & LCD Projectors

By Paul Kedrosky · January 6, 2004 · ·

Do “disruptive technologies” have to be cheaper than the thing they are disrupting? It’s may seem a silly question, but it cuts to the heart of an anomaly in Clay Christensen’s widely-loved theory. After all, Clay argues compellingly that many businesses are caught napping by cheaper, toy-like technologies that rapidly mature and eventually unseat market incumbents.

So, can more expensive technologies be disruptive too? Under the orthodox version of Christensen’s model the answer is seemingly “No”. All of his favored examples, from hard-drives to milkshakes, are of cheaper technologies that increased rapidly in price-performance and quality and eventually won the day.


Consider, by way of counterpoint, the case of overhead projectors. The old-style overhead projector, the sort of thing you used to see in almost any classroom, is $700 or so — and it is rapidly disappearing. It is being replaced, however, by the LCD beam projector, whether portable or ceiling mounted.

But here is the issue. The LCD projector is much more expensive than the 3M-style thing it is replacing. A good LCD projector can easily cost $10,000. It is, nevertheless, rapidly replacing acetate-requiring overheads in many classrooms, and in almost all boardrooms.

So what does it mean? Is the LCD beam projector not disruptive? Would Clay call it instead a sustaining innovation? It would be hard to argue the latter point, given how different such machines are from the old units they are replacing. It seems intead that there is an anomaly at the core of disruptive innovation, one that threatens to disrupt disruption by turning its basic price principle upside-down.

Filed Under: Technology

Microsoft & its FAT Problems

By Paul Kedrosky · January 6, 2004 · ·

The news that Microsoft wants money for its file formats being used by flash memory makers has the usual Everything-But-My-Stuff-Should-be-Free crew in a tizzy. They’re wrong and being typically silly, of course:

  1. Microsoft has a $250K cap per licensee — this is not big money for Sandisk, Lexar, et al. Microsoft is telling analysts that the licenses will not be material to future revenue.

  2. The licensing is only for using Microsoft’s implementation of FAT, not for just anyone’s implementation. In particular, it looks like it may even be limited to people looking to have strong support for file names longer than 8 characters.

  3. Critics are trying to have it both ways. They want Microsoft to be open and to offer access to its intellectual property and trade secrets, but they don’t want to offer anything in exchange for that unfettered access.

As near as I can tell, Microsoft never said it would not charge licensing fees for use of its FAT format. Matter of fact, all along it has been a reasonable presumption that it would. The argument that if people had only known that there were patents underlying FAT they would not have used it is revisionist and wilfully naive.

Filed Under: Public economics

“Ace” Greenberg Does Magic Tricks

By Paul Kedrosky · January 5, 2004 · ·

Alan “Ace” Greenberg is one of a kind. The chairman of investment bank Bear Stearns is a profligate donor to charities, a fountain of one-liners, a champion bridge-player, an accomplished amateur magician, a darn good yo-yo user, and perhaps the best practitioner of risk abritrage who has ever lived.

Here is Warren Buffett on Ace Greenberg:

“Ace Greenberg does almost everything better than I do: bridge, magic tricks, dog training, arbitrage — all of the important things in life.”

Here are some snippets from Charlie Rose’s interview with Greenberg:

  • If you make a mistake then take a loss

  • Dollar averaging is dumbest thing I’ve ever heard of: You’ll be the biggest shareholder when the company goes into Chapter 11
  • Asking management about their company is asking a father what his daughter looks like: she’s always beautiful
  • The biggest mistakes I’ve made have all been about losing good people
  • We don’t hold it against people who have advanced degrees, like MBAs, but we do prefer people with PSDs: poor, smart, and a deep desire to become rich
  • I don’t pay much attention to Buffett’s view on the market: he is always pessimistic, and he is always buying things
  • Dick Grasso’s case was dumb over-payment, but not a scandal: the proof is that there has been no class-action suit

Filed Under: Investing

Google’s IPO and Banking Fees

By Paul Kedrosky · January 5, 2004 · ·

Bloomberg said today that Google had chosen the underwriters for its upcoming initial public offering. It chose the two blue-bloods of such things, Morgan Stanley and Goldman Sachs, to do the issue (likely this coming April).

But most people are focusing on the wrong numbers. They are fixating on the post-IPO market valuation that Google will obtain, something on the order of $15 billion would be a good guess, which is not bad, considering the search company’s reputed $1 billion in sales. Similarly, people are fascinated that Sergey and Larry will be paper billionaires.

The more interesting number, at least to me, is a much-smaller one: $280mm. That is how much in fees Google’s IPO will earn investment bankers at Morgan and Goldman.

The figure is 7% of the offering, which is typical for such things; but it is remarkably large for the minimal service Google’s investment bankers need provide. After all, be serious: no road show is required, no marketing need be done, and investment bankers can pretty much pick a price and investors wil pay it. It is, truly, money for nothing.

It is a reminder how screwy (read: broken) the stock issuance game remains. It is perverse and indefensible that underwriting fees are 0.9% for corporate bonds, about 0.3% for mergers & acquisitions advice — and a whopping 7% to play midwife for a company whose stock could be randomly dropped from airplanes and still hit interested buyers.

Filed Under: Boom-boom

Me, NPR, and the Cost of False Positives

By Paul Kedrosky · January 5, 2004 · ·

nprOne of the more interesting media “hits” you can do is a guest Commentary spot for NPR. It is the audio equivalent of a column — a few minutes of nattering with no interruptions. I have only done a couple such hits for NPR, but it was so darn pleasurable that now and then I propose an idea to them.

Recently, however, I received an email from NPR that was immediately grabbed by my spam filter. Upon checking it out I discovered that the message was responding to an email from me to NPR about the Sobig virus/worm. It turns out that I had proposed a Commentary piece to Morning Edition on the subject back on August 20, 2003 — they were finally getting back to me, six months later.


While it could be that NPR is just really, really slow at processing Commentary ideas, more likely is that my mention of Sobig caused the email to be filtered at their end, just as happened here. It was, to use the favored phrase, a false positive: a message that was deemed spam when it wasn’t. It seems that some poor intern at NPR must be spending their current work term digging through the detritus of NPR’s spam box.

The consequences were minimal in my case, but it is worth wondering what the overall costs are across the economy from such false positives. How many deals have been lost, contracts mislaid, and introductions vanished because an over-zealous spam filter somewhere snagged the message and sent it off some distance circle of email hell? I have a hunch that it is rapidly becoming non-trivial.

Filed Under: Society

Regulate Telecommunications … or Else!

By Paul Kedrosky · January 5, 2004 · ·

For today’s discussion of technology & rhetoric, the following chained proposition:

“Telecommunications is essential to … democracy. It is essential, in fact, to keeping an informed populace.” And therefore, “If somebody doesn’t regulate this, it’s buyer beware.”

Source: Loretta Lynch, California Public Utilities Commission

Which logical fallacy is exhibited by Ms. Lynch?

a) Petitio principii

b) Non sequitur

c) Post hoc reasoning

d) Ignoratio elenchi

d) None — it’s all Latin to me

Filed Under: Politics

Greenspan to his Biographers

By Paul Kedrosky · January 4, 2004 · ·

In another comment on January 3rd at the AEA meeting, Fed Chairman Alan Greenspan engaged in a little pre-emptive revisionism. He prepared the ground for a future recession and the inevitable blame game around it. Here, from a note to the prepared speech, is his comment, direct from Alan to his future biographers:

“Even if imbalances still persist in our current environment, the business decline that began in March 2001 came to an end in November of that year, according to the National Bureau of Economic Research. We experienced tepid recovery until the second half of last year, when GDP accelerated considerably. Hence, when the next recession arrives, as it inevitably will, it will be a stretch to attribute it to speculative imbalances of many years earlier.”

Put another way, while a recession will come, sooner or later, it won’t have anything to do with my fixes for the bubble that I wasn’t sure was a bubble until after I said it wasn’t. Or more succinctly, “We fixed things — it’s not my fault they won’t stay fixed”.

Filed Under: Economists

Greenspan versus Greenspan

By Paul Kedrosky · January 4, 2004 · ·

Federal Reserve Chairman Alan Greenspan is truly some sort of wizard — or at least he has the power to cloud men’s minds. First, early in the 1990s, he cited irrational exuberance in referring to the boom-in-progress. Things were, he strongly implied, more than a little out of control.

But a few years later, after the economy demonstrably got futher out of control, he changed his mind; he defended the markets and said that the then-exuberance seemed, well, rational. Now, however, Greenspan has done a rhetorical backflip-straddle with half-twist (Degree of Difficulty: 5.6): in a speech at the American Economics Association conference here in San Diego he tried to have it all ways at once:

“There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble’s consequences rather than the bubble itself has been successful.”

In other words, the bubble that wasn’t a bubble was successfully handled by Fed policies that weren’t intended for a bubble because there wasn’t one. Ah, the life of a central banker.

[Update] In case anyone’s interested in reading Greenspan’s speech directly, it’s at this link. Other Fed speeches from the AEA conference this weekend can be found here, including the dollar-moving comments by Ben Bernanke.

Filed Under: Economists

Loss Leaders and Skipping Stones

By Paul Kedrosky · January 4, 2004 · ·

All businesses require loss leaders. Men’s suits, consumer electronics, software, and yes, academic journals — they all need ‘em. Case in point, Nature’s current issue and an article therein about the best way to skip stones.

While Nature does periodically run this sort of article, it’s worth wondering why. After all, it does nothing for their academic bona fides — few to none of the most-cited papers at Nature are this sort of frivolous stuff, and it takes up space that could be more fruitfully devoted to, say, the fruitfly genome.

So why does Nature do it? Well, they will say it’s because a) it’s interesting science, b) it was well done, and c) they aren’t stuffy. All three are true, but it still doesn’t answer the question. There are plenty of other papers that fit the preceding criteria, yet it is infrequent (to say the least) that any of them make the cut at Nature.

The real answer is best seen by clicking here. Running papers like this one in the current Nature issue get the journal press. It is easier and more predictable getting press from running populist stuff about stone-skipping than it is waiting for the New York Times or CNN to run gushy features on “Coherent spin manipulation without magnetic fields in strained semiconductors“. Attention begets circulation — which helps, when you’re trying to increase revenues in the competitive academic journal business.

Meanwhile, hear that sound? It is the snick of success as three French professors lock down a 2004 Ig Nobel prize.

Filed Under: Economics, Public economics
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