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Fw: The Baseline Scenario(Big Bank Consensus Shifts, But Not at Treasury)

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  • Eric Reinhardt
    Scroll down for article. Why should we be surprised? Geithner is the former head of the NY Fed!! ... From: The Baseline Scenario
    Message 1 of 1 , Jun 1, 2010
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      Scroll down for article. Why should we be surprised? Geithner is the former head of the NY Fed!!

      --- On Sun, 5/30/10, The Baseline Scenario <baselinescenario@...> wrote:

      From: The Baseline Scenario <baselinescenario@...>
      Subject: The Baseline Scenario
      To: ericreinhardt2003@...
      Date: Sunday, May 30, 2010, 8:24 PM

      The Baseline Scenario

      Posted: 30 May 2010 10:31 AM PDT

      By James Kwak
      This week, Apple passed Microsoft to become the most valuable technology company in the world (measured by the market value of its stock).* I’ve been wondering about Apple and, in particular, why “apps” — which at first glance struck me as a giant step backward in computing technology — have gotten so much buzz in the media. Then I bought an iPad, and while I understand apps a little better, I’m still perplexed. But since this isn’t a particularly technology-savvy audience, this is going to take some setting up. The background is here in Part 1; Part 2 will be coming shortly.
      (Note that here I’m talking about personal computing, which is what people like you and I do on our own; enterprise computing is something very different that I’ve written about before, and still largely takes place on mainframe computers.)
      A Little Background
      Rather than recap the entire history of computing (hilarious synopsis here, hat tip Brad DeLong), I’ll start in the early 1990s. At this point, many people had personal computers, but for the most part they weren’t connected to anything except maybe a printer. (Actually, in the early 1980s my father brought home one of those primitive modems where you actually placed your phone receiver into a socket to communicate, so we could log into the mainframe at his university, but that was the exception.)
      A personal computer has an operating system (Windows, OS X, Linux, etc.). This isn’t quite correct, but you can think of the OS as the software that manages  the physical parts of a computer: it runs the internal parts, like the CPU and the hard disk drive, and it controls the interface to the parts that you interact with, like the keyboard and the screen. There are also applications that run on a computer (Excel, PhotoShop, Half-Life, etc.). These applications don’t directly manage the physical parts of the computer; instead, they talk to the operating system, which in turn talks to the physical parts. They do this via the application programming interface, or API, that is published (made accessible) by the operating system.
      For our purposes, there are two important features of this structure. First, each operating system has a different API, so you have to write programs differently for each OS. That doesn’t mean every line of code has to be different, but the way you call lower-level functions will differ across operating systems. On top of this, each OS developer (Microsoft, Apple, etc.) provides a different set of tools that you use to write programs for its OS. Software developers tend to become better at using one set of tools than another, and hence more likely to write programs for one OS than another.
      Second, programs that can access the operating system’s API can do a lot of different things to your computer — this is what makes software powerful. At the same time, that means they can do damage to you.
      So in the early to mid-1990s, we had self-contained personal computers (Windows or Mac) that ran programs that were written specifically for the operating systems they ran on. (A given program, like Excel, might exist in both Windows and Mac versions, but those were two completely different pieces of software that just looked the same on the outside.) Microsoft dominated this world for a couple of reasons, most importantly that many more programs were being written for Windows than for Mac. I believe this is partly because it was easier to write programs for Windows (Microsoft did a better job providing tools for developers), and partly because the Windows installed base was a lot bigger than the Mac installed base, so a new Windows application had a lot more potential buyers. The Windows installed base was bigger, in turn, because of Microsoft’s business model: it licensed Windows to any hardware manufacturer who wanted it, and therefore you had more diversity, more innovation, and lower price points for Windows PCs than for Macs. There were other factors as well, but those are the basics.
      The Internet
      Then Tim Berners-Lee gave us the Internet, and Marc Andreesen gave us the browser, and everything changed.
      Ever since the mid-1990s, the Internet has played a bigger and bigger role in our daily computing. And so the most important application of all became the Internet browser (Internet Explorer, Netscape, Firefox, Safari, Chrome). This is an application that has the ability to find, display, and interact with resources on the Internet. Like all applications, it talks to the operating system via its API. But it’s special in a few respects.
      • One is simply that many people spend more time in their browsers than in all their other applications put together.
      • Another is that the Internet is largely built around a few basic standards, like HTML (a language that web pages are written in). All browsers have to be able to interpret those standards. So if you build web pages using those standards, you know that all browsers will be able to access them; you don’t have to worry about what operating system your visitor’s computer is running.**
      • A third is that the browser can be designed in such a way as to minimize risk to the computer it is running on. Ordinarily, browsers do not have the ability to modify data on your filesystem. This is for security reasons; the goal is to prevent web sites from automatically launching attacks on your computer. Of course, web sites are constantly asking if you want to save files to your computer, and then you’re on your own. And there are technologies that can be added to a browser, like ActiveX, that give programs on web sites the ability to get at your hard drive. But in principle, it is harder for a program that lives on a web site and runs inside a browser to do damage than for a program that you install on your computer and that has direct access to the operating system via the API.
      The result was the golden age of web-based computing. Around a decade ago, during the Internet boom, the idea became popular in the technology community that all computing would move “to the Web.” That is, instead of installing standalone applications that ran on directly on our computers and accessed the operating system’s API directly, the interesting software would live on web sites on the Internet, would conform to Internet standards, and would therefore run properly in any browser. This was supposed to have several benefits:
      • Computing would be safer, since our computers would be protected by our browsers.***
      • People wouldn’t have to worry about installing and updating software — just about keeping track of their bookmarks.
      • Programs would be easier to learn and use for ordinary people, since browsers offer a consistent and intuitive way of interacting with programs.
      • We wouldn’t have to worry about carrying our data around, backing it up, and syncing it between computers, because it would all be on the Internet.
      • Developers would only have to write each program once, because then it would automatically work on all browsers (assuming everyone conformed to standards) and hence on all operating systems.
      • As a corollary, the Age of Microsoft would come to an end, since one pillar of its dominance — the huge community of developers writing for Windows — would now be irrelevant.
      To some degree, this has happened. I’m writing this post using Firefox at WordPress.com. The computers in my house have three different operating systems and I use three different browsers (Firefox, Safari, and Chrome), which I keep synchronized using XMarks. I spend the vast majority of my computer time in a browser, and not just for consuming information; besides the blog (WordPress), my email, tasks, calendar, and contacts all belong to Google, I try to do most of my lightweight work in Google Documents, I share photos using Flickr, etc. Much of the modern, interactive computing that people do (like Facebook) is done in a browser.
      This is, roughly speaking, what Google is all about: a world where the OS and the browser don’t matter because they are just tools to get us onto the Internet, where we keep our data and do all our work. It’s why Google is writing two operating systems, Android and Chrome, that will both be free, and is developing a suite of Web-based “productivity” applications; they want to cripple Microsoft’s business model by giving away their versions of the two things that make Microsoft so profitable: Windows and Office.
      Microsoft is still a big, profitable company, because PCs will be around for a long time, most companies use Windows, Office, and other Microsoft products for networking, email, etc., and those products can be very sticky, especially in a corporate environment. But the world is moving away from the 1990s model. Microsoft recognizes this, of course. This is why they fought so hard to crush Netscape in the 1990s — they wanted control of the browser. And it’s why they’ve spent so much money — Hotmail, MSN, .NET, Windows Live, Bing — trying to establish a presence on the Internet. But they just haven’t been very good at it.
      So at a high level, this is the story of personal computing over the past fifteen years. But recently there has been a new plot twist, which will be subject of Part 2.
      * Great quote by Steve Ballmer in the New York Times story: “Windows phone – boom! We have to deliver devices with our partners this Christmas.” Does he realize that he talks like Ari Gold on Entourage?
      ** This can be thought of as a kind of isolation layer. With Windows, software developers don’t need to worry about whether the customer has a Dell, HP, or Acer computer; as long as it has Windows, it will behave in a predictable way. With Internet standards, now you don’t need to worry about what OS the customer has, just what browser she has.
      *** Yes, browsers have security flaws, so this isn’t a perfect system.

      The Future of Personal Computing, Part 1

      The Consensus On Big Banks Shifts, But Not At Treasury

      Posted: 30 May 2010 05:15 AM PDT

      Attitudes towards big banks are changing around the world and across the political spectrum.  In the UK, the new center-right government is looking for ways to break them up:
      “We will take steps to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this will take time to get right, the commission will be given an initial time frame of one year to report.”
      The European Commission, among others, signals that a bank tax is coming; presumably, as suggested by the IMF, this will have higher rates for bigger banks and for banks with less capital.  And other European officials are increasingly worried by the lack of capital in German banks, by the recent reckless lending sprees in Ireland and Spain, and by the dangers posed by banks that are much bigger than their home countries (e.g., Switzerland).
      Yet top Obama administration officials refuse to change their opinions in the slightest; they have dug in behind the idea that they represent the moderate center on banking policy.  This is a weak position; it is simply a myth with no factual basis – the people who pushed effectively for more reform over the past few months were the center, not the left, of the Democratic party.
      In the best profile to date of Tim Geithner, by John Heilemann in New York Magazine, even the Treasury Secretary himself expresses frustration with the biggest banks – calling them “the warlords”.
      “The irony here was rich, of course, since Geithner’s stabilization scheme would turn out be strikingly favorable to Wall Street. From the outset, his aim was never to punish the banks. Quite the contrary, it was to save them—by pouring money into them, restoring confidence in them, treating them with kid gloves. Nor was his goal to restructure the financial system. It was to prevent the existing system from collapsing and then strengthen the rules governing its operation. In all this, Geithner was betraying the extent to which he shared Wall Street’s mind-set, even if he wasn’t a creature of it. “His office was there and he was deeply enmeshed in that culture and he had those relationships,” says one of his best friends. “That part of the critique is fair.”
      David Brooks argued in the New York Times on Friday – writing about a different industry – that this is unavoidable, and perhaps normal:
      “Finally, people in the same field begin to think alike, whether they are in oversight roles or not. The oil industry’s capture of the Minerals Management Service is actually misleading because the agency was so appalling and corrupt. Cognitive capture is more common and harder to detect
      More specifically, however, it’s not that “people in the same field begin to think alike”, but rather that “people who are supposed to regulate” begin to see the world through the eyes of the biggest private sector players.  Note, for example – and this is important – most hedge fund managers agree big banks are dangerous and will again mismanage risk in a reckless manner.
      And cognitive (or cultural) capture, as we argued last year in The Quiet Coup, runs deep in the financial system.  Last year David Brooks rejected our argument; it seems the graphic failures of big oil have further shifted the consensus.
      Geithner insists that, above all, he represents the reasonable center of responsible opinion,
      “I care about us passing [reform legislation] good and strong,” he tells me. “And my feeling is that you have to do this from the center.”
      But this is simply not a left-right issue (look at the blurbs and reviews for 13 Bankers).  This is regulatory capture, as laid out by George Stigler from the University of Chicago (a man of the right) – supersized by the increasing gap since 1980 in incomes between the regulated and the regulators (see Figure 2 in this paper, on p.29, by Thomas Ferguson and Robert Johnson).
      Mr. Geithner is no closer to a moderate, centrist view on the financial sector than Robert Rubin and Larry Summers were vis-à-vis derivatives (and financial deregulation more broadly) in the 1990s – as documented at length in 13 Bankers.
      The constraints on size, leverage, and activity of our largest banks could have been much stronger in the Senate bill (and presumably in the final legislation).  Matt Taibbi has a good account of what was (and what could have been) and this is not denied by the administration (speaking to John Heilemann):
      ‘If enacted, Brown-Kaufman would have broken up the six biggest banks in America,’ says the senior Treasury official. ‘If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.’
      (In case you missed it, Brown-Kaufman was an amendment to the main financial reform bill in the Senate; more detail here.)
      The people in charge of our strategy towards big banks are not fools and they are not corrupt; they are also not doing things just because someone on Wall Street calls them up.  Our top policymakers are simply convinced that what is good for the biggest and most dangerous element on Wall Street is good for the American economy.
      This is cultural capture in its purest and most extreme form.  It increasingly stands out as a problem both in the US context and around the world.  Unfortunately, the White House and Treasury may be the last to realize this.

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