100 Megabits

One of Kevin Rudd’s main goals is to implement a blazingly fast nation-wide 100Mb/s national broadband network, at a cost of around $43b. This would place Australia at the pinnacle of world broadband networks. Frankly, I can’t think of a single bigger waste of tax-payer’s money than this (especially when we are due to run huge deficits). After all, what does one use 100Mb/s for? Movies, music and porn – that’s it. I’m a fairly heavy internet user, yet I can’t for the life of me think how I would use anywhere near 100Mb/s. You don’t need 100Mb/s to check your email. You don’t need 100Mb/s to do research for your high school essay. You don’t need 100Mb/s to chat to your Mum over Skype. All you need it for is BitTorrent. Should the government really be spending several tens of billions of dollars of taxpayer’s money on subsidizing BitTorrent? I don’t think so – especially given that governments around the world are spending billions of dollars trying to fight copyright infringement. It would be much more cost effective to subsidize rental video outlets and adult stores, which would have the same effect for a fraction of the cost.

I see two possibilities for how this scheme could develop. First, given that it is estimated that use of the network by the end user will cost around $200/month, there is a very real possibility that few people will want to pay the price to use it, in which case the resources will have been wasted. Alternately, lots of people might start using the network for its speed which will put private sector ISPs out of business, since they will be unable to compete against this newly created, heavily subsidized behemoth. This could have devastating implications for the telecommunications industry and might effectively socialize this critical sector of the economy. Either of these possibilities is undesirable.

In Australia, like in other developed countries, the market has proven very effective at providing broadband services to our residents. If a 100Mb/s network hasn’t already developed in the market, this is probably a fairly good indication that such a network would be economically unviable and therefore shouldn’t be pursued by the government.

This post has been cross-posted at the Australian Libertarian Society’s blog – Thoughts on Freedom.

One of the best BASE jumping videos I’ve seen

What does an ant city look like?

This is wicked cool. I’d love to understand the dynamics of how ants communicate to build complex structures like this.

In defence of capitalism

Following the recent credit crisis and collapse of several major financial institutions, many commentators have jumped to the conclusion that this proves that the case for free market capitalism is invalid and that libertarian ideals are dead. This includes comments to this effect by prominent people like Nicolas Sarkozy who said “Le laisser-faire, c’est fini” (”Free market capitalism is dead”). The view taken by Sarkozy and many other commentators is fundamentally misguided and suggests a misunderstaning of the real reason for our recent financial troubles. The real reason was not free market capitalism, but quite to the contrary, government interventionism.

Our troubles started with the sub-prime mortgage crisis, which, I think it is fair to say, was the event that triggered the remainder of the problems we have seen. The sub-prime crisis was not caused by free marketeers, but rather by two forms of interventionism. First, the US government offered backing to the two major mortgage backers, Freddie and Fannie. Second, having given them the guarantee of government backing, pressured them to expand their sub-prime lending – lending to people who in a normal (free market) situation would be ineligible for loans on the basis of their credit rating or ability to pay off their debts. Naturally, Freddie and Fannie were more than happy to comply. After all, if the government is guaranteeing your financial position, you can afford to take risks you ordinarily wouldn’t take. So sub-prime lending flourished and as a result many people who were unable to pay off their loans were given loans anyway. A few years down the line, and, surprise surprise, Freddie and Fannie found themselves in a situation where they had vast amounts of bad investments on their hands.

There can be no argument that this sequence of events came about as a result of free market capitalism. Rather, it came about as a result of a misguided, interventionist policy to artificially expand home ownerships rates. This problem was compounded by an ultra-expansionary monetary policy championed by Greenspan et al., which further artificially expanded the amount of bad debt in the market.

Following the government bailout of Freddie/Fannie, their financial woes sent shockwaves of loss of confidence through the rest of the market, which triggered the remainder of the troubles we are seeing today – the collapse of banks and other financial institutions, the decline in world stock markets.

Nonetheless, despite the overwhelming evidence for the real cause of our problems, I haven’t seen many politicians or media commentators call for measures that really address the problems, such as eliminating government involvement in the mortgage market, allowing for insolvent companies to go down, and a more restrained monetary policy. Instead, they’re all too busy calling for the death of capitalism, while advocating bailouts and the injection of more credit.

Capitalism was never the root of today’s problems. Interventionism was. And the only solution is to scale back interventionism and return to free-market principles.

I conclude with this picture…

Google Flu Trends

This is a fascinating demonstration of how search data can be taken advantage of to extract all sorts of information. Google Flu Trends uses search data to build up a picture of flu epidemics in the US. It makes me wonder what other sort of trends can be inferred from search data. Presumably lots of economic indicators could easily be extracted from search data in a similar manner – things like consumer confidence measures, measures of economic activity on a sector-by-sector basis, or other market indicators. The Google database is incredibly large, essentially cataloging the entire internet and people’s search histories. There must be a lot that can be extracted from this vast amount of information.

It’s been a good week

Two good things have happened in the last week. First, Obama won. But more importantly, this week I got my iPhone. I’ve just ordered a book on iPhone programming so I can delve into writing my own apps. I’m also keeping an eye out for the first Android phones (Android is Google’s new platform for mobile phones), which looks to be a very exciting (and more open) platform too.

The European solution to banking woes

Several European nations, most notably Germany, have introduced government guarantees on personal savings accounts at their banks. This approach to bailing out, bailing out the consumer, is completely different to the until-now ‘conventional’ approach of bailing out the institutions. There are very valid arguments both ways on this issue, so here’s how I see things.

The downside

The government guarantee approach adopted by Germany et al. might skew the allocation of capital in the market in favour of more risky investment decisions. Without government backing, every person with a savings account must first make an assessment of which bank or savings institution to deposit their money with. This decision will be based on numerous factors, with the security and stability of the bank being a major consideration. This in turn creates a market mechanism whereby savings tend to be deposited in institutions which are perceived to be safer. With full government backing this mechanism is completely destroyed. We are left with a system in which savers couldn’t care less about the security or stability of the bank in which they are depositing their funds because they know their savings are government backed. Presumably, this will in turn will lead to more money being deposited at dubious institutions which engage in more risky allocation of capital – malinvestment. So although the government backing approach is probably better for the consumer, which is good, it by no means bypasses the problem of moral hazard, which was my biggest criticism of the US bailout package.

The upside

The upside of this type of government intervention is that it virtually eliminates the possibility of bank runs. Ironically, a government backing of savings at banks reduces the possibility that the backing will actually be needed. When people know their money is guaranteed they have no reason to rush to the bank to withdraw their funds as soon as there is any loss of confidence. In other words, the positive feedback loop of loss of confidence is contained and not allowed to spread and engulf the entire banking sector and broader economy. So from this point of view the government backing can be seen as an investment into creating a positive market psychology that will rarely (if at all) actually require the investment of taxpayer dollars.

Conclusion

It’s important to remember that a government backing of bank deposits most of the time requires no input of taxpayer dollars whatsoever. It is only when there is a serious collapse of a bank that the intervention is actually called upon. I think the real questions are ‘what is the probability of a significant crash occurring that would require taxpayer dollars being spent?’, ‘to what extent will this kind of backing reduce the chance of a bank collapse occurring?’ and ‘to what extent will this kind of intervention distort the allocation of capital in the markets, leading to malinvestment?’. I don’t know the answer to any of these questions, but I’d welcome comments. On the whole though I tend to be inclined against deposit guarantees – they seem to be more of a populist measure than anything else. Having said that, like many issues in economics, I don’t think there is substantial data supporting either case, so it’s impossible to draw a conclusion based on empirical evidence.

What do you do after you’ve been bailed out by taxpayers?

Why, go on a $440,000 junket of course. What else?

Monetary madness

Bear Stearns. Freddie Mac. Fannie Mae. AIG. What next? I’ve already had my rant on the federal bailouts of these financial giants. But there’s one thing that bugs me even more than the bailouts, and it’s the crazy monetary policy surrounding them. Following the collapse of these institutions, Wall Street entered a state of despondency. The solution by the Federal Reserve, and other central banks around the world, was to pump hundreds of billions of dollars more cash into the system. Unfortunately this is not something that is without precedent. Indeed, it seems that whenever the markets take a dive the immediate response of the Fed is to inject more cash. I have two objections to this. First, easy money was surely a contributing factor to the financial problems we are seeing today. Consumers, and homeowners in particular, are living beyond their means because money is easy to come by. This in turn has led to excessive debt to income ratios, which fueled the impact of the sub-prime problems. So, how is pumping more money into the system helping this problem? It’s not. It’s just prolonging the pain. It’s akin to taking out a new loan to pay off an old one – you’re not actually any better off, you’ve just delayed the inevitable, and allowed it to grow in the meantime. Second, when the Fed pumps more money into the financial markets, this is money that is coming from nowhere – it’s just printed. This in turn devalues the dollar. Let there be no mistake, this is a direct form of taxation – an inflation tax. It is a tax paid by every person who holds dollars in order to subsidize Wall Street. This is wealth redistribution in its most perverse form – money is being taken from every citizen, including every member of the middle and lower classes, and redistributed to a large extent to the upper end of town to cover them for mistakes made during the course of their own greed.

Not only does the US government have a lot to answer for by engaging in the socialistic policy of repeatedly bailing out some of the biggest institutions in the country, but the Federal Reserve has a lot to answer for with its solution to the problem of simply printing more money. This approach in unsustainable. You simply cannot go on forever printing money to cover your losses. Eventually you devalue the currency. Indeed this is exactly what has happened. The US dollar is today worth almost half as much as a few years ago compared to many other major currencies.

If you don’t believe me, ask Ron Paul… (I apologize for citing a Fox News story. It won’t happen again)

As a bonus, here’s a personal message from Ron Paul about the current situation

Chess Boxing