Tuesday, September 30, 2008

Bankruptcy, not bailout, is the right answer

Editor's note: Jeffrey A. Miron is senior lecturer in economics at Harvard University. A Libertarian, he was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan.

CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

This bailout was a terrible idea. Here's why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

Wednesday, September 24, 2008

G1 backers tout Android’s openness - RCR Wireless News

G1 backers tout Android's openness

Exec comments draw line between Android Market and Apple App Store

Colin Gibbs

Story posted: September 23, 2008 - 4:27 pm EDT

T-Mobile USA Inc.'s new G1 phone will serve as a kind of one-stop shop for Google Inc.'s mobile offerings, but the device's prospects may hinge on the success of Android Market.

The phone will integrate Google Maps (with Street View), Gmail with Contacts, Google's instant messaging service and YouTube, and will sport a dedicated key to launch the company's flagship Internet search service. Contacts, calendar entries and other offerings will be synchronized on the Web, with data stored in the cloud.

And Google has brought presence to mobile with the G1, allowing users of Google's e-mail and instant messaging services to allow friends and colleagues to see when they have limited availability.

"One of the things we're particularly proud of is that this will be the first implantation of online presence live in the phone book; Google Talk presence," said Cole Brodman, T-Mobile USA Inc.'s CTO, "so we'll be able to really start building more powerful communications services with this, as well as using messaging as a path" for other applications.

But the bulk of the G1's unveiling today in New York was spent touting Android's "openness," as highlighted by Android Market, an online storefront similar to Apple Inc.'s App Store that will offer "dozens" of applications when the G1 comes to market next month. The event spotlighted three downloadable applications that will be available for G1 users: ShopSavvy, which allows shoppers to send UPC codes with their cameraphones to compare prices; Ecorio, an environmental-minded app that lets users see their carbon footprints; and a photo-based map-creation offering called BreadCrumbz.

And the companies behind Android seem confident that third-party developers will fill in some of the gaps in the G1's services. The device doesn't fully support Microsoft Exchange or Office documents, but that disconnect "is a perfect opportunity for a third-party developer" to provide a solution, Google's Andy Rubin said.

"There's no third party there (in Android Market) to say 'You can't do that,'" ShopSavvy co-developer Jason Hudgins said during a video presentation spotlighting third-party developers during the event. "And in the end, that's going to benefit consumers, because they're going to get the best product."

Limits on openness?

Just how "open" Android Market will be remains unclear, of course. Google describes Android as a free-for-all storefront with YouTube-like ratings where developers can upload applications at will —a stark contrast to the App Store, which has seen Apple reject offerings deemed offensive or outrageously priced. But a completely unregulated storefront is sure to draw the wrath of watchdog groups and busybodies as adult content and other controversial stuff sees the light of day, potentially creating public-relations nightmares for T-Mobile USA and Google.

Regardless of whatever constraints Android Market may see, though, Google and its partners are sure to continue to woo developers with a flexible platform that should leverage impressive marketing power and big-budget developer contests. And developers — who have suddenly become the rock stars of the mobile data space — seem to be responding.

"A developer will be able to modify the platform, make the platform better," said Rubin, who serves as Google's senior director of mobile platforms. "Therefore we think that since the platform is open, Android is somewhat future-proof. It's future-proof because it has openness built in."

Tuesday, September 23, 2008

Verizon officially announces contract-free service


Verizon Wireless has announced that, starting today, it is offering consumers the ability to use its service without signing a one or two year contract. Customers that sign up for the new month to month service have the option of either paying the full retail price for purchased cell phones or they can bring their own compatible CDMA handset with them from another carrier.

Since there are no contracts to sign, customers can end their month to month agreement without any early termination fee at the end of each monthly period if they so choose. All normal Verizon voice and data plans are now available without a contract.

Thursday, September 18, 2008

Google and T-Mobile USA to showcase first Android phone next week - RCR Wireless News

T-Mobile will provide "details" on the HTC device next week, but a carrier spokeswoman would not elaborate. The most avidly sought details, of course, will be when it will be launched, how much it will cost, and what features it will offer to consumers.

The launch of the device — dubbed the "Dream," according to media reports — is important to all three players. Google seeks "eyeballs" for its mobile OS, a new area for the company to play in. For HTC, the device represents a departure from its historic devotion to using Microsoft Corp.'s Windows Mobile OS. And for T-Mobile, which is beginning to build out a 3G network, the device and its associated services may help it retain subscribers who might be tempted by other high-tech handsets at rival carriers.

The much-hyped Android operating system and its value proposition for consumers will be under a spotlight next week, as it is one of the most high-profile efforts to take Linux into the mobile handset. Inevitably, it will be compared with Research In Motion Ltd.'s proprietary BlackBerry OS, Apple Inc.'s proprietary iPhone OS and Nokia Corp.'s Symbian OS, not to mention other Linux efforts such as those by the LiMo Foundation.

Indeed, in recognition of RIM's global success, Apple's ambitious international launches and Google's long-incubated mobile plans, Nokia this summer bought Symbian outright and declared that it would make the software open source and free to handset vendors — an echo of Android's main selling points.

But Android's debut is something of a high-wire act. While it applies initially to one device at one carrier, it must demonstrate convincingly that Android offers consumer value, said one analyst.

In August, analyst Avi Greengart at Current Analysis captured the thumbs-up/thumbs down nature of Google's effort to join the mobile fray. If the handset OS does not provide "compelling" consumer value, it will "fall flat," Greengart said last month.

Android app store

There's some indication that Google has struggled with its application development efforts; by many accounts, the crucial element in any software-based endeavor is to attract as many imaginative applications as possible from the developer community. To that end, the leading OS efforts have all launched programs with financial incentives to create those applications.

In Google's case, it promised in July a new software development kit, or SDK — the main means of application development — to only the 50 winners of its Android Developer Challenge. That led to an online petition in August signed by nearly 220 developers asking for more information on the progress of the new SDK. By late August, Google released an Android SDK in beta form, with a timeline for future updates, to all interested developers.

At the end of August, Google announced that the first wave of applications would be free at its own, self-styled Android Market — a structure akin to Apple's App Store concept — with paid-for apps to come in the future.

Given the long lead time and high-profile nature of Google's efforts, the news emanating from New York on Sept. 23 will be closely followed by the wireless industry.

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Wednesday, September 3, 2008

Google is getting into the Browser Business

Google is getting into the browser sphere

What will become of my Firefox...?