The Pennsylvania-based U.S. Steel company recently agreed to be purchased by the Tokyo-headquartered publicly traded company Nippon Steel. This deal makes sense to economists. It will encourage other foreign companies to invest in the U.S., creating wealth and new job opportunities, and further shoring up the U.S. economy, particularly amid inflation worries. More importantly, this deal makes sense to the owners of U.S. Steel.
And yet, in our age of government shoving its fingers into everything, President Joe Biden announced that he opposes this purchase for muddled, misguided reasons. Former President Donald Trump agrees, showing once again that when it comes to trade there is little difference between the two presidents.
Such government meddling is what American steel producers get for having clamored for decades—often successfully—that they need protection from foreign competition. The Trump steel tariffs are the latest expression of this attitude. But one stupid policy move doesn't justify a second. As soon as the announcement of Nippon's $14.1 billion deal with U.S. Steel was made public, fans of protectionism and industrial policy, including prominent policymakers, came swarming out of the woodwork to explain why the government should be able to override, or at least modify, the decision of the rightful owners of a company to sell their company to a particular buyer.
Assertions of dangers to "national security" are being used to scare Americans into thinking that a good deal for investors, employees, and the U.S. economy will somehow make America less militarily secure. This is nonsense.
Japan has been a strong ally of the U.S. for over 60 years. In a recent piece, the Cato Institute's Scott Lincicome and Alfredo Carrillo Obregon remind us that "the Defense Department doesn't currently buy from U.S. Steel, and DOD needs just 3 percent of domestic steel production to meet its procurement obligations." Furthermore, U.S. Steel, despite its historic significance, is no longer a major player in the steel industry and could benefit from Nippon Steel's investment and technology enhancements. Besides, foreign investments, including those from Japan, are typically beneficial to the domestic economy and workforce—and to the millions of Americans holding corporate shares in retirement portfolios.
According to the fearmongers, Nippon Steel, being a Japanese company, perhaps harbors secret plans to spend $5 billion above U.S. Steel's market capitalization to shutter it. Obviously, this is total nonsense. It should go without saying that investors don't purchase companies to then shut down those companies' profitable operations. Yet it needs to be said, since that's one of the main fears about the acquisition. The fact is that Nippon, by saving U.S. Steel and enhancing the domestic production of steel, will bolster our national security. Opponents of the deal ignore this reality. Yet again, the facts don't seem to matter to those who use nationalist rhetoric to oppose Americans' peaceful commercial dealings with non-Americans—in this case, even a crucial, decadeslong ally.
The business practice of buyouts is not inherently bad. Nippon Steel will save U.S. Steel and make it better through new ownership. John Tamny wrote at Forbes on March 4 that "neither bankruptcy nor buyouts signal the vanishing of businesses as much as they signal the happy, pro-employee and pro-business scenario of physical and human capital being shifted into the hands of more capable stewards." Tamny is right, and U.S. Steel is in a good position if another successful company sees value in purchasing the company to make it more efficient and productive. For all the protectionist handwringing, you'd think policymakers would recognize that this buyout will save the company from eventual bankruptcy without the deal and might secure the jobs of U.S. workers.
The merged company will be able to provide for the massive demand for high-grade steel in the United States—demand exploding in no small part because of increased domestic production of electric vehicle motors. It makes economic sense for Nippon Steel to invest in this Pennsylvania-based company to meet the growing demand for steel in the U.S.
Nippon Steel has the potential, and the incentive, to restore U.S. Steel into a strong and leading steelmaker once again, unless the U.S. government and the hordes of economic nationalists get in the way. As meddling in the dealings of successful companies increases, the American economy will suffer the creeping statism that has hamstrung so many European economies, where intrusive government control impedes private enterprise.
COPYRIGHT 2024 CREATORS.COM.
The post Opposition to U.S. Steel Sale Shows How Similar Biden and Trump Are on Trade appeared first on Reason.com.
]]>In the latest volley of policy proposals that seem more rooted in populist rhetoric than economic knowledge, President Joe Biden's budget plan to hike the corporate income tax rate from 21 percent to 28 percent strikes me as particularly misguided. This move, ostensibly aimed at ensuring a "fair share" of contributions from corporate America, is a glaring testament to a simplistic and all-too-common type of economic thinking that already hamstrings our nation's competitiveness, stifles innovation, and ultimately penalizes the average American worker and consumer.
Beyond the president's class warfare rhetoric, the lure of putting his hands on more revenue is one of the factors behind the proposal. Biden likes to pretend he is some sort of deficit cutter, but his administration is the mother of all big spenders. He's seeking $7.3 trillion for next year without acknowledging the insolvency of Social Security coming our way or addressing what happens when Congress makes the Republican tax cut permanent in 2025 for people earning less than $400,000 a year.
Unfortunately, no fiscally irresponsible budget is complete without soothing individual taxpayers by promising to tax corporations. Never mind that the burden of corporate income tax hikes isn't shouldered by corporations. Yes, corporations do write the checks to the IRS, but the economic weight will be partially or fully shifted to others, such as workers through lower wages, consumers through higher prices, or shareholders through lower returns on investment. That means that many taxpayers making less than that $400,000 will be shouldering the cost of the corporate tax hike.
It is worth expanding on the fact that much of a corporate tax increase will be shouldered specifically by workers. A recent Tax Foundation article, for instance, explained that "a study of corporate taxes in Germany found that workers bear about half of the tax burden in the form of lower wages, with low-skilled, young, and female employees disproportionately harmed."
Biden's planned tax hike would raise revenue for sure. Kyle Pomerleau at the American Enterprise Institute told me that it would raise roughly $1 trillion over a decade. However, it will do it in the most damaging way possible.
Indeed, it is well-established by the economic literature that increasing corporate taxes is the most economically-destructive method due to its impact on incentives to invest. Investments that were previously feasible at the lowest rate of capital are now out of reach. Firms forgo machinery, factories, and other equipment, reducing their capital stock. That in turn reduces productivity, output, and overtime wages.
The good news is that the reverse is also true. That's what the Republicans did in 2017 when they cut the federal corporate tax rate from 35 percent to 21 percent while broadening the tax base. Chris Edwards at the Cato Institute recently noted that the move increased investments and wages as one would hope—and it also managed to boost federal corporate tax collections from $297 billion in 2017 to a projected $569 billion in 2024.
While this spike was attributed to temporary factors—the revenue is anticipated to decrease to $494 billion in 2025—it also reduced tax avoidance from firms who repatriated much of the revenue they used to keep abroad. Instead of avoiding higher tax rates, they invested more in America and boosted wages along the way.
In addition, for all the concerns about fairness expressed by the administration to justify its tax hike, the corporate tax is quite unfair. Profits are already subject to taxation at the individual level when distributed as dividends or realized as capital gains. Increasing the corporate tax rate will exacerbate the issue of double taxation, distorting investment decisions and reducing economic efficiency, not to mention encouraging aggressive planning for more tax avoidance.
Last, the administration's plan ignores one of its usual priorities: the fact that many U.S. companies must compete on the international stage. Raising the corporate income tax at home makes them less competitive abroad. According to the Cato Institute's Adam Michel, if Biden is successful in raising the corporate income tax to 28 percent, the U.S. would have the second-highest such rate among the market-oriented democracies that make up the Organization for Economic Cooperation and Development. America would instantly become less attractive for multinational corporations and mobile capital.
In an era where economic literacy should guide policymaking, reverting to such tax hikes is a step backward—a misstep we can ill afford amid the delicate dance of post-pandemic recovery and an increasingly competitive global economy.
COPYRIGHT 2024 CREATORS.COM.
The post Biden's Proposed Corporate Tax Hike Will Punish the Average American appeared first on Reason.com.
]]>My income tax is due in a few weeks!
I hate it.
I'm pretty good at math, but I no longer prepare my own taxes. The form alone scares me.
I feel I have to hire an accountant, because Congress, endlessly sucking up to various interest groups, keeps adding to a tax code. Now even accountants and tax nerds barely understand it.
I can get a deduction for feeding feral cats but not for having a watchdog.
I can deduct clarinet lessons if I get an orthodontist to say it'll cure my overbite, but not piano lessons if a psychotherapist prescribes them for relaxation.
Exotic dancers can depreciate breast implants.
Even though whaling is mostly banned, owning a whaling boat can get you $10,000 in deductions.
And so on.
Stop! I have a life! I don't want to spend my time learning about such things.
No wonder most Americans pay for some form of assistance. We pay big—about $104 billion a year. We waste 2 billion hours filling out stupid forms.
That may not even be the worst part of the tax code.
We adjust our lives to satisfy the whims of politicians. They manipulate us with tax rules. Million-dollar mortgage deductions invite us to buy bigger homes. Solar tax credits got me to put panels on my roof.
"These incentives are a good thing," say politicians. "Even high taxes alone encourage gifts to charity.
But "Americans don't need to be bribed to give," says Steve Forbes in one of my videos. "In the 1980s, when the top rate got cut from 70 percent down to 28 percent…charitable giving went up. When people have more, they give more."
Right. When government lets us live our own lives, good things happen.
But politicians want more control.
American colonists started a revolution partly over taxes. They raided British ships and dumped their tea into the Boston Harbor to protest a tax of "three pennies per pound." But once those "don't tax me!" colonists became politicians, they, too, raised taxes. First, they taxed things they deemed bad, like snuff and whiskey.
Alexander Hamilton's whiskey tax led to violent protests.
Now Americans meekly (mostly) accept new and much higher taxes.
All of us suffer because politicians have turned income tax into a manipulative maze.
We waste money and time and do things we wouldn't normally do.
Since I criticize government, I assume some IRS agent would like to come after me.
So, cowering in fear, I hire an accountant and tell her, "Megan, don't be aggressive. Just skip any challengeable deduction, even if it means I pay more."
I like having an accountant, but I don't like having to have one. I resent having to pay Megan.
I once calculated what I could buy with the money I pay her. I could get a brand-new motorcycle. I could take a cruise ship to Italy and back every year.
Better still, I could give my money to charity and maybe do some good in the world. For the same amount I spend on Megan, I could pay four kids' tuition at a private school funded by SSPNYC.org.
Or I could invest. I might help grow a company that creates a fun product, cures cancer, or creates wealth in a hundred ways.
But I can't. I need to pay Megan.
What a waste.
COPYRIGHT 2024 BY JFS PRODUCTIONS INC.
The post Congress Continues To Make the Tax Code Ridiculously Hard To Understand appeared first on Reason.com.
]]>This week's featured article is "Is ESG Already Over?" by Russ Greene.
This audio was generated using AI trained on the voice of Katherine Mangu-Ward.
Music credits: "Deep in Thought" by CTRL and "Sunsettling" by Man with Roses
The post <I>The Best of Reason</I>: Is ESG Already Over? appeared first on Reason.com.
]]>It may not seem unusual that a corporate CEO would want to focus on increasing shareholder value, but in October this was treated as big news. A Financial Times headline announced that "Unilever's new chief says corporate purpose can be 'unwelcome distraction.'" That new CEO, Hein Schumacher, went on to explain that he rejected the idea that "every brand should have a social or environmental purpose." He intended, he said, to build a "performance culture" instead.
Why would it be newsworthy for a CEO to be focused on corporate performance? Not long ago, that was simply assumed. What changed?
The change is summed up by three letters of corporate jargon: ESG. The initials stand for environmental, social, and governance factors, and the term dates back two decades. Early ESG documents—such as the 2004 report "Who Cares Wins," produced under the auspices of the United Nations (U.N.)—suggest an effort to globally coordinate private and public sector activity toward a shared set of social objectives. This was a departure from previous efforts at injecting political and moral values into business (such as corporate social responsibility, socially responsible investing, impact investing, and so on) in that it pointed to a future of uniform ESG standards, enforced and encouraged by governments around the world.
The rise of ESG has further blurred the lines between the government and the corporate world. Under an ESG regime, the government is called to advance goals in the private sector and the private sector is called to support the government's policies. The public-private distinction has been foundational to both classical liberal principles and constitutional government, but the line is becoming increasingly difficult to find.
Unilever's history is a microcosm both of the rise of ESG and of the challenges the ESG agenda is now facing. The British consumer packaged goods corporation owns several successful brands, including Ben & Jerry's, Dove, and Magnum. It has prided itself on its ESG credentials, particularly under Paul Polman, Unilever's CEO from 2009 to 2019.
Under Polman's leadership, the company made a series of corporate commitments to environmental and social causes. It supported sustainable agriculture at the World Economic Forum. It helped create the United Nations' "sustainable development goals." It "made a stand to #unstereotype the way men and women are portrayed in marketing." Again and again, it filtered its corporate purpose through a progressive worldview.
While it is now common for brands to advertise their commitments to such causes, Unilever took the lead in incorporating "purpose" into virtually everything it did. Polman often called for CEOs to focus on creating value for a wider group of "stakeholders," as opposed to narrowly focusing on shareholders; he also campaigned for government efforts to fight climate change.
At first, Polman's play worked. In his decade atop the company, Unilever's stock price rose by about 150 percent—"well ahead of the FTSE [Financial Times Stock Exchange] 100 average," The Guardian notes—and it reported decreasing emissions from its factories by 47 percent from 2008 to 2018. Perhaps it indeed was possible to achieve both purpose and profits, to serve both "stakeholders" and shareholders at once.
Toward the end of his term, though, signs of trouble appeared. Kraft Heinz, a firm closely associated with Warren Buffett and his holding company Berkshire Hathaway, made a bid for control of Unilever in 2017. The company rejected the offer. This event carried symbolic meaning, as Buffett has a long history of favoring profits over "purpose." In the fallout, investors increasingly put pressure on Unilever to cut bureaucratic overhead.
After Polman left the company in 2019, his replacement Alan Jope eagerly picked up the ESG mantle. A 2021 Unilever blog post declared that there was "No trade-off between purpose and performance." In 2022, after a backlash against ESG had begun, Jope declared at a Clinton Global Initiative event that Unilever "will not back down on this agenda despite these populist accusations."
Indeed, the populists did not prompt Unilever to back down from ESG. After all, Unilever is a British company, and in Britain, even conservative politicians have embraced aspects of the ESG agenda. Market forces, on the other hand, have had an impact. Investor Terry Smith repeatedly ridiculed Unilever's "virtue-signaling," calling on the company to focus on fundamentals. Why did Hellmann's mayonnaise need a purpose? Didn't it already have one, as a salad and sandwich condiment? Nor was Smith the only investor concerned with Unilever's flagging performance.
Within months of his promise not to back down, Jope announced that he was stepping down as CEO. His replacement, Schumacher, is the one who called the focus on ESG goals a "distraction."
Schumacher had good reasons for a change in course. In the U.S., for example, a poll conducted by Todd Rose at Populace suggests, as Axios put it, that "an astonishing four times as many Democrats say CEOs should take a public stand on social issues (44%) than actually care (11%)." Gallup has found that support for large corporations plummeted among Republican voters during the same period that businesses most loudly proclaimed their environmental and social commitments.
Schumacher's shift in focus is not guaranteed to pay off. Plenty of companies focus on performance and still fail. But that's the point. Business is hard enough without extraneous political objectives. If you chase two objectives at once, you risk falling behind those with a singular focus.
Some advocates have argued that ESG is just good business. ESG, they say, is simply about managing the risks that environmental and social factors pose to businesses. But that understates the extent of the policies that ESG imposes. In the words of Reuters' Corporate Sustainability Reporting Directive Playbook, "the aim of these changes" is "to affect the whole business model of the Organization." A company's ESG reports, it declares, should disclose how its negative impacts are being mitigated "in relation to the U.N. Sustainable Development Goals."
Why exactly should a business concern itself with U.N. goals?
ESG efforts have been on the retreat recently. The financial firm Vanguard announced in 2022 that it was withdrawing from the Net Zero Asset Managers initiative, and Blackrock CEO Larry Fink said in June that he was moving away from the term ESG. U.S. investors have been pulling their money out of ESG funds, and corporations are mentioning ESG on earnings calls far less frequently than at the trend's peak in 2021.
ESG opponents may be tempted to declare victory. Perhaps ESG was just a byproduct of zero–interest rate policies. But to proclaim the battle over now would be to overlook the critical role of governments in advancing ESG. The effort initially stemmed, after all, from coordinated public and private sector activity. Government policy can prop up bad ideas long after they've exhausted their economic viability.
During a series of House of Representatives hearings this past summer, Politico reported, Democrats "characterized Republican opposition to ESG as anti-capitalist, discouraging market choice and investor freedom." This was supposed to be an ironic, turn-the-tables moment.
But Democrats' invocation of markets was just rhetorical. They are correct that some Republican responses to ESG, such as certain aspects of the anti-ESG law Florida Gov. Ron DeSantis signed in May, have reduced market choice. But many Democrats have pursued an aggressive policy agenda in the opposite direction, as when they support the Securities and Exchange Commission's (SEC) mandatory climate disclosure rule. It is a strange free market phenomenon that requires a regulation that will, in The Wall Street Journal's words, "raise the cost to businesses of complying with its overall disclosure rules to $10.2 billion from $3.9 billion."
Nor is the SEC alone. In November 2022, the Federal Acquisition Regulatory Council proposed a rule requiring all significant government contractors to "disclose their greenhouse gas emissions and climate-related financial risk and set science-based targets to reduce their greenhouse gas emissions." In other words, ESG disclosure and goals would become a condition for contractors making bombs, bullets, and planes for the U.S. government.
As the U.S. Chamber of Commerce has noted, this proposal "would require thousands of employee hours and saddle contractors with billions of dollars in added implementation and compliance costs. The government's acquisition costs would rise as a consequence, and some contractors, and companies in the supply chain, would likely drop out of the market entirely, weakening the competitive forces that keep prices down. The Council substantiates no offsetting benefits to speak of."
Meanwhile, the Department of Labor has moved to advance ESG objectives by amending the regulatory standards for private pension plans. President Joe Biden's first veto was against a Congressional Review Act effort to repeal this rule.
Several Democrats in Congress supported the effort to repeal the Labor Department's rule. Several have criticized the SEC's climate disclosure rule too. Support for ESG has not been uniform within the party.
But the Biden administration has been firmly pro-ESG, adopting a "comprehensive, Government-wide strategy" for climate risk. Climate risk is a component of ESG that includes both physical risks and "transition risks." The latter are attributed to potential future changes in government policy and consumer demand. This is inevitably highly speculative since no one can know much about consumer demand or government policies in the distant future. It's also circular: The government is using the implicit threat of future environmental policies to achieve those policies' expected effects now.
The whole-of-government ESG agenda raises major constitutional and knowledge problems for government agencies. As SEC Commissioner Hester Peirce remarked of the agency's climate disclosure proposal, "the regulators designing the framework have no expertise in capital allocation, political and social insight, or the science used to justify these favored ends." Similar concerns apply to climate risk efforts at the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and so on.
Europe and California are even further along the path of compulsory compliance. The European Union recently released the Corporate Sustainability Reporting Directive, which will force banks to incorporate ESG into their credit decisions. California has passed two ESG reporting bills that go considerably further than the federal SEC is expected to go with its final climate disclosure rule.
While blue states like California have been supporting ESG, a number of red states have advanced anti-ESG regulation. This runs the gamut from protecting public pensions from politicization to banning state contracts with entities that engage in ESG-related activities. Critics of these bills allege they end up costing taxpayers significantly by limiting the pool of financial institutions that are available to the state. Advocates counter that ESG poses an existential threat to the states' largest industries—oil, gas, coal, agriculture, mining, etc.—and that this justifies state action.
Another wrinkle: Public pensions and sovereign wealth funds are among the most significant institutional investors. This further complicates the public-private distinction, since many large companies count government entities among their largest shareholders.
For example, Norway manages the world's largest sovereign wealth fund. The Financial Times reported in May the fund plans "to step up ESG proposals to US companies." This suggests the Norwegian government is using its oil revenue to discourage oil production in other nations. Meanwhile, three New York City pension funds have been sued for violating their fiduciary responsibilities because they divested from oil and gas companies.
That original 2004 United Nations report called for governments, pension fund managers, and corporations worldwide to begin incorporating ESG into their decisions. Such global public-private coordination was necessary, the U.N. argued, because "only if all actors contribute to the integration of environmental, social and governance issues in investment decisions, can significant improvements in this field be achieved." A follow-up report in 2005 suggested that significant progress had already been achieved in directing public- and private-sector activity toward ESG goals, noting actions by a French public pension fund and lauding new ESG regulations in the U.K. and Germany.
Some lament the "politicization" of ESG, but ESG has been political since inception. Though markets have been trending against ESG recently, governments may well step in to counteract that trend, rendering the line between public and private even blurrier than before.
The post Is ESG Already Over? appeared first on Reason.com.
]]>Remember "stonks"? Remember "hodl"? Remember "to the moon"? Remember a strange man with long hair, a red headband, and ironic cat T-shirts speaking into his webcam about the stock market to members of the House Financial Services Committee in Congress? If you are somehow nostalgic for the time in which these words and characters entered our national lexicon, then Dumb Money might be the movie for you.
Dumb Money plays out during the depths of the COVID-19 pandemic, when many Americans were shut indoors and much of the world seemed to have simply emptied out. Instead of partaking in large communal gatherings, people interacted online, on Zoom, and social media—and when they did venture into populated places, they wore masks that made it exceptionally annoying and difficult to communicate with others. Dumb Money is at its best as a low-key pandemic period piece, capturing the quiet, lonely oddness and anxiety of this era. While it is not the film's primary point, it works best as a story about one of the many collective manias that took hold during this period.
Specifically, it tells the mostly true story of the collective furor around the Reddit forum WallStreetBets and a handful of stock picks, most notably the mall-based video game retailer GameStop, which became known as "meme stocks" thanks to its popularity with small-time retail investors who frequented crass, meme-heavy message boards.
Much of this activity was driven by Keith Gill, a small-time investor with a penchant for cat imagery who went by the online alias Roaring Kitty. Thanks in part to Gill's videos promoting the stock, GameStop's share price rocketed upwards. As a result, Gill and others who bought in early quickly saw the value of their stocks increase massively—at least on paper. Moreover, as these small-time investors saw their holdings increase in value, large funds that had shorted GameStop—effectively betting that it would drop in value or fail—lost money. As losses mounted, one large fund, Melvin Capital, eventually had to shut down.
Dumb Money tries to present this as a relatively straightforward David and Goliath story, an underdog tale about little-guy investors who stick it to moneyed institutional investors. A final title card argues that because of Gill and the GameStop stock drama, big Wall Street firms must now pay attention to "dumb money"—the derogatory term large investment firms use to dismiss small individual investors they see as less savvy. Like The Big Short before it, the oft-expository movie wades through the jargon and systematic complexity of the financial market: There are explainer-y bits on short squeezes and references to "payment for order flow," a business model employed by Robinhood, the trading app that powered much of the GameStop frenzy. Yet as knotty as all these market mechanisms might seem, Dumb Money tells an essentially simplistic story about how the system is rigged to benefit the rich and powerful at the expense of the little guy.
And the problem is that the real story is anything but simplistic. Fundamentally, the big-money short sellers the movie presents as villains were right about GameStop: It's a troubled company on the decline. Not only was it hit hard by the pandemic, which decimated in-person, mall-based retail, but it's been beset by management and leadership problems, and its business model is under external threat from the rise in digital video game downloads. The big firms shorting GameStop were obviously trying to make money. They were also providing meaningful market information about the company's likely chances.
Meanwhile, the movie's hero, Keith Gill, pushed the stock onto less-savvy individual investors, many of whom ended up losing money in the end. Although we don't know exactly what has happened to Gill since 2021 as he has receded from public life, when we last heard from him, the value of his GameStop stocks had risen to tens of millions of dollars.
The point is not really that Gill is a villain—he was playing the markets just as everyone else was, and he appears to have come out as a winner. But many of the little guys who participated in what the movie casts as his revolution lost money in the process, betting on a company that remains on shaky ground.
Dumb Money does not entirely shy away from showing those losses; along with Gill, the film follows a handful of fictionalized GameStop investors, including Jennifer, a nurse played by America Ferrara, who becomes obsessed with Gill and GameStop stock, buys in big, and ends up losing money after failing to sell at the top. But it indulges in an unconvincing heroes-and-villains triumphalism that reality simply doesn't support.
Moreover, the film resolves in a strange showdown, in which the major players in the GameStop finance farce all have to testify before the House Financial Services committee. Here we see Democratic lawmakers portrayed as reformers fighting for the little guy. It's worth recalling, however, that at the time, Sen. Elizabeth Warren, possibly the Democratic party's most prominent policy entrepreneur, was calling for federal regulators to step in to shut down the meme-stock maniacs this movie lionizes. Meanwhile, as a title card notes, the Securities and Exchange Commission investigated the GameStop episode and took no action against the big firms involved. Nor is it obvious what sort of regulatory intervention would even theoretically be warranted.
The real story of Dumb Money is not that the little guys toppled the big guys, or that the big guys tried to rig the system and heroic federal lawmakers took them down a peg. It's that a bunch of stocks-obsessed weirdos on an internet forum found what amounts to an exploitable loophole in the financial system that would allow them to do something they saw as both epic and funny: wreck the balance sheet of a very large investment firm by buying a nostalgia stock associated with video games. Many of them did it for money, and a few lucky investors even won big. But many of them did it, well, for the lulz—for sheer chaotic amusement, because chaos is often funny, and because in the dreary depths of the pandemic, you had to do something to pass the time. Dumb Money is a nicely made, often human, and affecting movie, especially if you don't know too much about the real-life events it's based on.
But it largely misses the mischievous prankster's sensibility that drove much of the GameStop frenzy, recasting it into something more noble. It's not a bad movie, exactly, but it's too earnest, too in thrall to a simplistic moral worldview. This is a story about stonks, vulgar memes, and bizarre cat videos as much as it's one about financial system intricacies; frankly, it could have used a lot more lulz.
The post <i>Dumb Money</i> Misses the Point About Its Meme-Stock Underdogs appeared first on Reason.com.
]]>As elections approach, sweeping generalizations have a certain allure that often energizes the frustrated and captivates the hopeful. However, it's essential that we as voters remember that things that seem too good to be true typically are. Here are a few warnings.
First, as far as our finances go, beware of politicians promising that they won't touch Social Security and Medicare. In reality, they'll have no choice. For one thing, if they keep this hollow promise, Social Security benefits will be cut across the board in 2033 by over 20 percent. According to the Committee for a Responsible Budget, that's a cut of between $12,000 and $17,000 annually for a traditional retired couple. Medicare faces the same predicament for a variety of reasons.
The only workaround from this reality, which has been known for decades, is for Democrats and Republicans to finally come together for serious reform. That will likely result in a reduction of benefits and an increase in taxes. As unpleasant as it will be, we'd better hope that politicians don't take the cowardly path and resort to shoving the problem onto Uncle Sam's proverbial credit card (by paying all benefits that exceed payroll-tax receipts out of general revenues).
As the Manhattan Institute's Brian Riedl noted recently, "Social Security and Medicare are projected by the CBO to spend $156 trillion in benefits but collect only $87 trillion in payroll taxes and premiums. This $69 trillion cash shortfall will have to be financed by budget deficits, which will in turn be responsible for $47 trillion of interest costs on the national debt." Who will lend the U.S. government $114 trillion, even at unprecedentedly high interest rates?
That's a question voters should ask politicians who promise never to touch entitlement programs. Those who claim it's an easy fix by taxing the rich should be immediately dismissed as unserious. The numbers don't add up. Any other one-sided ideological answers to an accounting question won't cut it, either.
Politicians are also masters of making complex societal problems appear as if they can be solved easily with a single piece of legislation. For instance, voters should beware of politicians promising to improve social media and online retailing by hammering Big Tech with antitrust lawsuits, as if these companies represent true monopolies. Google, Amazon, and today's other large tech firms grew so successfully only because consumers chose to buy their services, and they will remain successful and large only as long as consumers continue to do so.
Every allegedly "dominant" tech firm has competitors just waiting for it to get lazy or fail. In such a fast-changing industry, these competitors will swoop in and quickly take market share. Or a firm that makes too many mistakes will be bought out by investors who aim to improve its performance. Think here of Elon Musk purchasing Twitter.
To use antitrust against successful firms is to obstruct the operation of very complex patterns of commercial organization that no politician or government lawyer can hope to understand. The kind of antitrust interventions now demanded by populists on the left and right would be like angry bulls in a china shop. They'll be able to destroy, but all that they'll create is rubble.
Finally, be careful as politicians skillfully play the populist card, painting a picture of "us" against "them" and tapping into deep-seated fears and frustrations. For instance, beware of the claim that many economic problems stem from foreign competition and can easily be solved by applying a blanket 10 percent tariff across all imports. These tariffs are supposed to encourage firms to source their inputs domestically and to incentivize consumers to buy American. That won't work, as we should know by now after the Trump/Biden protectionist fiascos.
Because tariffs raise prices, they reduce the purchasing power not only of American consumers, but also of American producers who need inputs. What follows are a series of adjustments making everyone worse off without addressing the problem at hand. For instance, protecting American sugar with tariffs and quotas results in more imports of candy. Protecting aluminum with tariffs results in more imported garbage disposals and other products made with aluminum.
Politicians' messages offer a simplified view of the world—one in which government interventions are all benefits and no costs. But life, as we know, is anything but simple, and Uncle Sam's intervention can be quite destructive. Therefore, it's incumbent upon us to demand from our politicians more than charismatic speeches and lofty promises. We must demand clear, implementable, and serious policy proposals along with the acknowledgement of trade-offs.
COPYRIGHT 2023 CREATORS.COM.
The post This Election Season, Beware of These False Promises appeared first on Reason.com.
]]>Institutional investors that buy and rent out single-family homes are increasingly scapegoated for driving up prices, gentrifying neighborhoods, and depriving working and middle-class Americans of the opportunity for homeownership.
They've come under fire from liberals like Sen. Jeff Merkley (D–Ore.) and conservatives like Sen. J.D. Vance (R–Ohio).
"In every corner of the country, giant financial corporations are buying up housing and driving up both rents and home prices. They're pouring fuel on the fire of the affordable housing crisis," said Merkley last year. He's introduced a bill to tax large investors' purchases of single-family homes.
Several Georgia municipalities in suburban Atlanta have gone so far as to ban build-to-rent housing or otherwise subject it to stricter regulation.
A new study suggests this handwringing is much ado about nothing.
Last week, a team of Dutch researchers affiliated with the University of Amsterdam and Erasmus University released a study on the effects of a new law letting municipalities in the Netherlands ban buy-to-let arrangements. In Rotterdam, the country's second-largest city, officials used the new law to ban investors from purchasing homes in specific neighborhoods.
That allowed researchers to compare home sales, home prices, and the characteristics of new residents between the two types of neighborhoods.
They found that banning investors from buying and converting housing to rentals worked in one sense: The share of investor-owned rental properties in affected neighborhoods fell, and the number of properties bought by first-time homebuyers increased.
On the other hand, however, these new homeowners tended to be richer than the renters they were replacing, and the costs of rental housing increased overall.
"The ban has successfully increased middle-income households' access to homeownership, at the expense of buy-to-let investors. However, the policy also drove up rents in affected neighborhoods, thereby damaging housing affordability for individuals reliant on private rental housing, undermining some of the intentions of the law," write researchers in the study published on SSRN.
The number of homes sold and overall home prices also stayed flat, according to the study.
This cuts against common arguments against investor-owned rental housing: that it's raising prices for everyone else.
Indeed, the Dutch study suggests that institutional investors are playing a productive role in the market by providing rental housing to people who can't qualify for a mortgage.
Another 2022 study likewise found that institutional investment in real estate increases neighborhood diversity by opening up more affordable rental housing options. That study did find that these investors were raising home prices overall.
As The Atlantic's Jerusalem Demsas noted in an essay from earlier this year pushing back on the anti-investor pile-on, these institutional investors are a small portion of homebuyers, owning only about 3 percent of single-family homes.
That challenges the idea that BlackRock's homebuying business is driving major national trends in home prices.
Institutional investors are similar to Airbnb owners and foreign buyers: small, unpopular participants in the housing market that get blamed for high prices caused by a general insufficiency of supply.
Policy makers would do better to look for ways to expand housing supply through deregulation of construction and mortgage finance than passing laws restricting who's allowed to buy a house.
The post Study: Banning Investors From Buying Homes Leads to Higher Rents, More Gentrification appeared first on Reason.com.
]]>Entrepreneur Vivek Ramaswamy is obviously a long shot presidential candidate, but he's refreshing. Unlike most politicians, he speaks clearly and seems smart.
He probably is smart. He went to Harvard and Yale and then founded a biotech firm that creates drugs that treat prostate cancer, endometriosis, fibroids, and more.
That made me ask him, since he clearly helped people as a medical entrepreneur, why go into politics when most politicians are useless or destructive?
"I am in this race to speak truth," Ramaswamy says in my new video. "To revive our missing national identity." Most Americans, he says, don't know "we're a nation built on the rule of law, free speech and open debate, that we embrace meritocracy over grievance, that we embrace the unapologetic pursuit of excellence."
In other words, Ramaswamy is running as the "anti-woke" candidate. "Wokeness," he says, "is a cultural cancer."
I ask him about the border crisis.
"A nation built on the rule of law," he answers, "cannot tolerate somebody breaking the law as their first act of entering this country."
His parents came here legally from India. But our rules are tougher today.
"An Indian computer engineer who applied legally," I point out, "would take 20, 50, 100 years to get in."
Ramaswamy answers that there should be "'merit-based' immigration." Skilled migrants should get preference.
What would he do about Social Security and Medicare going broke?
"Democrats say we need to increase taxes. Republicans say we have to make cuts. There's a third way: restoring GDP growth…. We will grow our way out of our problems."
He'd speed growth by "abandoning the climate cult, drilling more, fracking more, burning coal unapologetically."
"Coal is really polluting," I point out.
"I don't think it's nearly as pollutive as the public narrative makes it out to be, especially with modern methods," he replies.
He embraces nuclear power. "The very people opposed to fossil fuels are mysteriously hostile to the best-known form of carbon-free energy production, which tells you what's going on." The "climate cult" rejects nuclear power, he says, because it might be "too good at addressing their made-up climate crisis."
Promoting free and open speech is one of Ramaswamy's favorite issues. After George Floyd was killed, many company CEOs issued statements supporting Black Lives Matter (BLM). Ramaswamy refused because BLM criticized what it called the "Western-prescribed nuclear family." A nuclear family is something Ramaswamy (and I) consider a good thing.
Ramaswamy's refusal to endorse BLM brought pushback from some employees. Workers who agreed with him would only tell him privately. "This culture of fear had spread across the country. It prevented people from expressing themselves in public."
Ramaswamy wants all ideas expressed, even those considered "misinformation" or "hateful." "That's part of what preserves peace in a diverse democracy."
Suppression of speech, he says, leads to more hatred and outbreaks like the riot at the Capitol.
"I don't think Jan. 6 happened because we had too much free speech," he says. "It happened because we didn't have enough."
When people don't feel they can freely say what they think, "people are left to just sort it out with sticks and stones."
Ramaswamy's new book, Capitalist Punishment, criticizes big Wall Street firms for investing your retirement funds in companies that claim to promote the environment or social justice.
I push back. "That sounds good! Americans agree that we should have a clean environment and be 'socially kind.'"
Today's Environmental, Social, and Governance (ESG) asset managers don't do that, says Ramaswamy. Most just advance "progressive political agendas."
Ramaswamy created his own investment firm, Strive Asset Management, which invests money in firms that simply maximize profits without promising ESG magic.
"Your fund has higher expense fees," I say, because a Forbes article claimed that.
"Drivel!" he replies. He says they write that because political insiders don't like him. "It's an ideological cartel. Defect from that orthodoxy, they will punish the defector. I refuse to stand by silently."
I'm glad Ramaswamy refuses to be silent. America needs candidates who speak freely.
COPYRIGHT 2023 BY JFS PRODUCTIONS INC.
The post Vivek Ramaswamy Thinks 'Wokeness Is a Cultural Cancer' appeared first on Reason.com.
]]>Want to support small business growth and expand investor opportunities? Then you should want to reform the "accredited investor definition," a federal rule that largely limits investment in certain private securities offerings to those who are comparatively wealthy.
Private securities offerings are a substantial portion of the capital raised by businesses. From July 1, 2021, to June 30, 2022, twice as much money was raised in this way than by all public offerings. But the Securities and Exchange Commission (SEC) prevents individuals from investing in these offerings unless they qualify as accredited investors by having a net worth of at least $1,000,000 or an annual income of at least $200,000. The SEC estimates that about 13 percent of U.S. households qualify.
There seems to be bipartisan agreement that this rule is broken. This was evident during a February hearing dedicated specifically to the accredited investor definition, and it came up again during last week's House Financial Services Committee hearing on "encouraging capital formation and investment opportunity for all Americans."
It's long past time to translate that agreement into action. It's bad enough to paternalistically give the SEC the authority to decide how individuals invest their own money. But even when judged against the SEC's own goal of limiting private offerings to the financially sophisticated, the accredited investor definition is a failure.
Being wealthy is no proxy for financial sophistication. The current cutoff gives an investing green light to lottery winners and to elderly folks with substantial retirement savings; it excludes people with smaller nest eggs but lots of investment knowledge. A bright-line wealth test fares no better at limiting investment to those who can "afford" to take a loss. Such generic metrics cannot capture individualized loss tolerances that vary with many factors, including age, diversification needs, and investing goals.
Eli Velasquez, founder of the Investors of Color Network, testified at the February hearing that despite having "evaluated thousands of deals, vetted hundreds as viable investment opportunities, and partnered with dozens of angel and venture investors"—obvious hallmarks of financial sophistication by any reasonable standard—he was unable to make such investments himself because he didn't meet the definition's wealth thresholds. Similarly, David Olivencia, CEO of Angeles Investors, detailed how he couldn't invest in startups even though he had studied that asset class when he earned his MBA, because he had no family wealth to rely on. Both Brandon Brooks, founding partner of Overlooked Ventures, and Rodney Sampson, executive chairman and CEO of Opportunity Hub, gave similar testimony at last week's hearing.
This mismatch between wealth tests and investor sophistication makes it harder for those who are not already wealthy to make gains. Most Americans depend on the public markets for investment, but there are fewer public companies to choose from today. Companies that do go public these days tend to be more mature and likely past their high growth phase, leading to lower potential returns. But even if there are no better returns, most investors are missing out on the different opportunities available in the private markets, including startup investments and diversification options.
These impacts are felt more acutely by black and Hispanic Americans and those who don't live in relatively wealthy locales. Due to existing wealth divides, those who qualify as accredited investors are disproportionately white and are concentrated on the country's coasts.
And these impacts are not limited to investors. The accredited investor definition limits entrepreneurs' ability to turn to those they know best for business funding. The SEC itself has recognized that minority-owned businesses and businesses in lower-cost-of-living areas may benefit from increased access to accredited investors.
The accredited investor definition also places major hurdles on the path of both entrepreneurs and investors to have an ownership stake in a private business, an important way to accumulate wealth.
Those skeptical of increasing access assert that private securities offerings are too opaque for those who have less to lose. But while private offerings don't make the same mandatory disclosures as public offerings, disclosure is commonplace in practice. Such disclosures—which vary based on the complexity of the transaction and the sophistication of the investors—are subject to anti-fraud rules, just like public securities offerings.
Private market investment is risky, but that is no good reason for this barrier to investment. Risk is a part of both the public and private markets, and investors are compensated for risk by a chance at higher returns. Prohibiting investment eliminates exposure to the potential downside, but it also excludes realization of the potential upside.
There are a number of ideas for reforming this rule, including those scheduled for consideration at committee mark-up today. Congress should, at the very least, find a way to expand access for investors who are financially experienced or can obtain sophisticated advice from regulated financial advisers. You shouldn't have to be wealthy to deserve a chance to invest.
The post This SEC Rule Makes It Harder To Invest—Unless You're Already Rich appeared first on Reason.com.
]]>In a dispute with Congress over the proper role of environmental, social, and governance (ESG) in retirement investing, President Joe Biden chose to promote progressive environmentalism. On Monday, Biden vetoed a congressional resolution to nullify a recent Labor Department rule issued that explicitly allows retirement managers to weigh ESG factors in investment decisions.
Congress attempted to employ the Congressional Review Act, a statute that allows legislators to review certain administrative rulemakings with a simple majority in each house. Republicans voted in favor, and all but two Senate and one House Democrats against. Only defections by Sens. Joe Manchin (D–W.Va.) and Jon Tester (D–Mont.) carried the resolution through the Senate.
At first glance, this could seem like a case of anti-ESG Republicans attempting to block deregulation that allows investors more freedom—that's Biden's narrative. But this framing is incomplete. In truth, the president is shrouding the fact that he is acting at the edges of his statutory mandate, consistent with his administration's long-standing commitment to the bureaucratic furtherance of progressive environmental policies.
The Biden administration and Democrats generally argue that ESG-based investing harmonizes market capitalism with social-justice policy preferences; profitable clean energy stocks are a classic example.
Republicans say ESG investing can violate the fiduciary legal obligations of retirement funds, which should maximize returns for their clients, not engage in activism by divesting from lucrative but controversial industries or funding eco-friendly but economically suboptimal companies.
The result is a partisan fight over how federal regulations and case law have defined fiduciary duty and whether investing models that consider nonfinancial criteria satisfy the "prudence and loyalty" requirements of the Employee Retirement Income Security Act (ERISA).
In 2020, the Department of Labor under then-President Donald Trump issued a rule reaffirming that placing "non-pecuniary" interests above pecuniary interests was not prudent. The department published a rule requiring that fiduciaries covered by ERISA—i.e., the firms that manage private defined contribution plans and defined benefit retirement plans—must "select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action." Trump's rule held that if two good investments graded equally on likely risks and potential returns, ESG factors could serve as a tiebreaker, but, like the vice president's vote in the Senate, should have no deciding force absent a deadlock.
Although Trump's Labor Department initially proposed policies outright unfavorable for ESG, it moderated to the neutral final rule, which didn't actually ban ESG investing but made clear that any ESG factors must be coincident with optimal financial gain and risk mitigation.
The Biden administration argues its predecessor had "a chilling effect" on ESG investment, which, it says, "can improve investment value and long-term investment returns for retirement investors." To that end, the 2022 rule "amends the current regulation to delete the (the 2020 rule's) 'pecuniary/non-pecuniary' terminology based on concerns that the terminology causes confusion and a chilling effect to financially beneficial choices," the Labor Department explains.
While it excises the offending terminology, however, the 2022 rule leaves largely intact the definition underlying "pecuniary factor,"—i.e., "a factor that a fiduciary prudently determines is expected to have a material effect on the risk and/or return of an investment" (emphasis added). Instead, the new rule states, fiduciaries must invest "based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis" (emphasis added). The two standards diverge more in intent—and likely application—than in language.
Lest investors mistake the operative political considerations, the 2022 rule clarifies that such analysis "may include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action."
"The Biden Rule, like the Trump Rule, confirms the permissibility of ESG investing in pursuit of improved risk-adjusted returns in accordance with prudent investor principles without mandating such an investment strategy," argue Northwestern's Max M. Schanzenbach and Harvard's Robert H. Sitkoff. "ERISA fiduciaries who did not use ESG factors prior to 2022 should feel no greater urgency to begin doing so now. And ERISA fiduciaries who are investing for collateral benefits continue to run the same fiduciary risk as before."
Though much of the partisan debate has centered on these core principles of fiduciary duty, the Biden rule does indeed contain other noteworthy policy changes. "Specific restrictions on making ESG considerations a part of investment decisions have been removed, allowing 401(k) plans under ERISA to insert ESG metrics into their risk and return evaluations," reports Zachary Christensen, a managing director for the Pension Integrity Project at the Reason Foundation, the nonprofit that publishes Reason. "The rule also reverses the restrictions on proxy voting that were applied in 2020, opening up possibilities for retirement plans to use stakeholder positions to shape the decisions of the companies they are investing in, even if the matter is unrelated to economic outcomes."
Nevertheless, politicians—the president among them—have exaggerated the new rule's immediate policy impact. "It simply states that if fiduciaries wish to consider ESG factors—and if their methods are shown to be prudent—they are free to do so. … The Republican rule, on the other hand, ties investors' hands," Majority Leader Chuck Schumer (D–N.Y.) wrote last month in The Wall Street Journal.
Republicans, meanwhile, continue to insist that Democrats are subordinating the primary aim of retirement investments, which is to ensure that investors can securely retire. "In a time when Americans' 401(k)s have already taken such a hit due to market downturns and record high inflation, the last thing we should do is encourage fiduciaries to make decisions with a lower rate of return for purely ideological reasons," Sen. Mike Braun (R–Ind.), the resolution's Senate sponsor, said in a statement.
But the Trump rule did not "tie investors' hands," nor does the Biden rule allow them "to make decisions…for purely ideological reasons." And the president's pretense that the resolution would "mak[e] it illegal to consider risk factors MAGA House Republicans don't like" is flatly mendacious.
"Much of the confusion that the 2022 Biden Rule endorses ESG investing, and that the 2020 Trump Rule opposed it, traces to the original proposals for those rules," Schanzenbach and Sitkoff argue. "The Biden Proposal favored ESG factors by deeming them 'often' required by fiduciary duty. The Trump Proposal disfavored ESG factors by subjecting them to enhanced fiduciary scrutiny. However, following the notice-and-comment period, the Department significantly revised those proposals before finalization."
In the end, the Biden rule does serve, however, a clear, extra-statutory purpose: to promote ESG. The Labor Department is explicit on this count. A quick scan of its Federal Register entry counts 516 uses of the initials ESG. It's an advertisement that the executive branch—for the moment, at least—wants more ideologically progressive investing.
Biden's mandate within the ERISA framework is to protect the citizenry's retirement funds from unscrupulous investors, not advocate his preferred strain of investing. ESG-friendly investments may coincide with optimal investment returns—e.g., innovative, environmentally friendly technological ventures—yet often they don't. Investment decisions are made best by market participants, not technocrats. ESG-focused investing in ERISA-regulated retirement funds is perfectly legal as long as it's profitable.
"Over the past five years, global ESG funds have underperformed the broader market by more than 250 basis points per year, an average 6.3% return compared with a 8.9% return," Terrence Keeley, chief investment officer of 1PointSix LLC, wrote in September. "This means an investor who put $10,000 into an average global ESG fund in 2017 would have about $13,500 today, compared with $15,250 he would have earned if he had invested in the broader market."
This is due to unavoidable economic tradeoffs: If investors avoid profitable ventures for noneconomic reasons, returns tend to dip. For instance, "Last year, tech stocks fell by more than 30% while the energy sector, including oil and gas firms, gained nearly 60%," Keeley explained last month. "Yet because of their net-zero pledge, ESG funds continue to overweight the former and underweight the latter."
Biden's Labor Department positioned itself as a deregulator. But the new rule has left untouched the ERISA regime itself—which everyday Americans (correctly) assume imposes a fiduciary duty—seeking instead to obscure those underlying economic realities inconvenient to the president's pet causes.
The post Biden's First Veto Protects and Promotes ESG appeared first on Reason.com.
]]>What little financial privacy you have when trading stocks is about to get even smaller next month. When you make a stock trade, your broker already is required by the Bank Secrecy Act to maintain records of it, monitor your trading activity, and report any suspicion of illegal activity to the federal government. But, starting in March, your broker will be required to directly report all of your trades, including your personal information, to a massive government database. If the Bank Secrecy Act concerns you—and even if it doesn't—just wait until you hear about the Consolidated Audit Trail (CAT).
The Consolidated Audit Trail is intended to collect and accurately identify every order, cancellation, modification, and trade execution for all exchange-listed equities and options across all U.S. markets, allowing the Securities and Exchange Commission (SEC) to track orders and identify who made them.
The SEC ordered the CAT to be created in 2012 after regulators had difficulty identifying the causes of the 2010 "flash crash." At the time, then-SEC Chair Mary Schapiro described the CAT as providing regulators with the "data and means to exponentially enhance [their] abilities to oversee a highly complex market structure." And in years since, the CAT has been championed as necessary for the SEC's enforcement efforts.
The CAT began collecting trading data in 2020, after years of development replete with challenges and controversies. It is scheduled to begin collecting customer information on March 17, 2023. Although the SEC has limited the scope of customer information to be collected—initial plans called for Social Security numbers, dates of birth, and account numbers—brokers must still provide customer names, addresses, and birth years which allows for easy identification of individual investors.
This massive surveillance database is a financial privacy nightmare.
Most of the criticism leveled at the CAT has focused on data security. The CAT will absorb information about tens of billions of trades daily, making it quite possibly the largest database in the world. Its sheer size will be an invitation for criminals, who then-SEC Chair Jay Clayton recognized in 2017 "could potentially obtain, expose and profit from the trading activity and personally identifiable information of investors."
The government is hardly immune from hacking; indeed, the SEC itself was hacked in 2016. Thousands of users (not just at the SEC) will have access to the CAT, with vague standards guiding their use of the data accessed, creating even more security gaps. And while the SEC proposed a rule to address some data security concerns in 2020, the agency has taken no action to finalize that rule or anything similar (despite a flurry of other rule making).
But these criticisms seem to assume that if the government had good enough data security, this type of intrusion into Americans' financial privacy would be acceptable. That's simply not the case. Personal and financial privacy are key components of life in free societies, where individuals enjoy a private sphere free of government involvement, surveillance, and control. As SEC Commissioner Hester Peirce recognized:
Our purchases and sales of securities, particularly when aggregated together as the CAT would do, are a rich form of value expression. They might express a view of how markets work, a determination on the efficiency of markets, expectations about the future, or even a moral philosophy.
Trading is thus an expressive activity, and the CAT raises the same types of civil liberties concerns as any other mass surveillance program. It doesn't matter if the SEC has good intentions, seeking only to use the CAT to understand our markets better and to enforce existing laws. Financial privacy is vital because it can be the difference between survival and oppression for those who hold disfavored views.
In this way, the CAT burdens not only Americans' First Amendment rights of speech and expression but also their rights under the Fourth Amendment to be free from unreasonable government searches and seizures. Although a 1976 Supreme Court case about the Bank Secrecy Act found that information shared with a third party—there, the bank—is not protected by the Fourth Amendment, that doctrine is ripe for revisiting given the ubiquitous role of intermediaries in modern life. But even if the CAT's surveillance isn't constitutionally deficient, its data collection is troubling and should be treated no differently than other areas of American life where people reject broad-based surveillance of their activity.
This is especially true where the benefit of surveillance seems marginal. The SEC isn't without the ability to analyze trading information absent the CAT, although it's understandably tempting for the agency to want to see every trade in close to real time. Some have suggested alternatives to prohibit personal information from the database, leaving the SEC to make case-by-case requests of brokers when warranted. This is the minimum the agency could do to protect customer privacy (especially where the SEC is touting enforcement cases brought with CAT data prior to including personal information). But such solutions leave the surveillance machinery in place; Commissioner Peirce's suggestions of a more limited database focused on institutional investor trading or improvements to already existing systems are better choices to protect the privacy of individual investors.
The CAT threatens American investors' privacy. Knowing that the SEC is watching your every trade is too great a cost for easier SEC enforcement. Despite the years of planning and expenses already incurred, the SEC should put the CAT back in the bag—or let it out only when declawed—to protect the liberties of American investors.
The post The SEC Is Starting a Massive Database of Every Stock Trade appeared first on Reason.com.
]]>The Power Law: Venture Capital and the Making of the New Future, by Sebastian Mallaby, Penguin Press, 496 pages, $30
"Liberation capital," as investor Arthur Rock called it, "was about much more than keeping a team together in the place where its members happened to own houses." In 1957, Rock took a gamble on the "traitorous eight"—a team of promising engineers at Shockley Semiconductor Laboratory—and counseled them to free themselves of their authoritarian boss by quitting en masse and striking out to form Fairchild Semiconductor.
Rock was an amalgamation of consigliere and connector. He helped the group secure funding, cementing his place in history as the father of modern venture capital, which offered an alternative to stuffy East Coast financial institutions that were leery of lending to tech ventures they perceived as risky.
In The Power Law: Venture Capital and the Making of the New Future, journalist Sebastian Mallaby draws on interviews with scores of high-profile venture capitalists (V.C.s)—and other sorts of reporting, including four years of sitting in on firms' meetings—to tell the story of Rock's new paradigm: a form of financing that centers on funding high-risk, high-reward companies in their early days. Mallaby, who similarly embedded himself in the world of hedge funds when writing his 2010 book More Money Than God, smartly details the well-placed V.C. interventions that produced technologies too many industry critics take for granted today.
While detractors frequently downplay how much public policy can help or hinder innovation, Mallaby never neglects the subject. A reduction in the maximum individual capital gains tax rates in the late 1970s and early '80s—from 35 percent for most of the '70s to 20 percent by 1982—left venture capitalists flush with cash and eager to invest. Without these preconditions, Apple and Atari might not have flourished; Leonard Bosack and Sandy Lerner's Cisco, which pioneered multiprotocol routers, might not have received enough investment; and advances in computing might not have taken off at the time and speed that they did. As Silicon Valley competed with larger, more established investing firms in Boston and Japan, its nimble spirit—a "bubbling cauldron of small firms, vigorous because of ferocious competition between them, formidable because they were capable of alliances and collaborations"—made it rich with creative ferment, especially when compared with the "self-contained, vertically integrated" cultures of its faraway competitors.
Three decades later, public policy was still shaping Silicon Valley. "While Wall Street recovered painfully from the crisis of 2008, its wings clipped by regulators aiming to forestall a repeat taxpayer bailout," Mallaby writes, "the West Coast variety of finance expanded energetically along three axes: into new industries, into new geographies, and along the life cycle of startups." Many politicians today threaten trustbusting crusades against Google and Amazon, or rumble about changing which types of speech are allowed on Facebook and YouTube. What legislators and regulators do now could shape V.C. appetites for years to come, altering which types of investments firms make or how many new entrants can emerge in the face of greater regulatory costs.
One of the book's strongest throughlines is that there's no one correct way to evaluate a company's promise or to foster its growth. On Sand Hill Road in Silicon Valley, there are activist V.C.s such as the late Don Valentine of Sequoia Capital, who would aggressively intervene in the decisions made by leaders at his portfolio companies, and there are passive V.C.s like Peter Thiel, who have deliberately chosen to be more deferential to founders. There have also been safety-net V.C.s whose presence has allowed outside management to take the risk of coming aboard young ventures, knowing their V.C. network would help them land on their feet if all hell broke loose.
That's what happened when Kleiner Perkins' John Doerr wanted to bring in an outside founder as a condition of investing in a promising company called Google. Doerr convinced Eric Schmidt, who at the time was running a software company named Novell, that he should take a chance on the search company, signaling to Schmidt that Kleiner Perkins would help him land in a comparably good position if Google failed to take off. And so the right manager made the right jump at the right time.
V.C.s have served as bubble enablers, fecklessly pumping cash into startups that are poorly managed or that peddle flawed products. They have been envoys to Wall Street and establishers of credibility. And they have been crazy gamblers like billionaire Masayoshi Son, whom Mallaby accuses of "barely pausing to sort gems from rubbish."
Although outsiders may not see it, V.C.s have strong incentives to mediate competition. Silicon Valley, in Mallaby's telling, is a land of cooperative as well as competitive pressures. In the late '90s, Max Levchin pitched Thiel on an encryption technology he was working on, and Thiel applied the tech to cash payments. They called the payment processor PayPal and named the company Confinity, but they struggled to raise money from top Silicon Valley firms, instead getting funding from the Finnish company Nokia. Competitor X.com, helmed by Elon Musk, secured five times as much Sequoia funding as Confinity, although Confinity's technical talent was arguably better than X.com's. "Pretty soon," Mallaby writes, "both sides understood that they could fight to the death or end the bloodshed by merging."
Back in the '80s, Thomas Perkins "presided, Solomon-like, over the dispute between two Kleiner Perkins portfolio companies," Mallaby recalls. Sometimes the future echoes the past, even in the land where all things must be creatively destroyed: "Twenty years later [Sequoia's Michael] Moritz was determined that cooperation should prevail. Sequoia would be better off owning a small share of a grand-slam company than a large share of a failure." Moritz thus had a clear incentive to facilitate the birth of PayPal after rounds of heated negotiations (and a power struggle between Thiel and Musk). PayPal's ongoing dominance is evidence that Moritz's instinct was correct. And the universe of technology companies that have sprung from, or been funded by, people involved in the early days of PayPal—Tesla, YouTube, Palantir, LinkedIn—has shaped our world in ways good, bad, and unexpected.
Some of today's biggest tech critics have long been thorns in venture capitalists' sides, nursing grudges and filing suits long before they set their sights on dismantling Section 230 of the Communications Decency Act (which protects free speech on the internet), breaking up tech companies, or attacking the idea of a Twitter run by Elon Musk. Investor Ellen Pao, who last April wrote in The Washington Post that "Musk's appointment to Twitter's board shows that we need regulation of social-media platforms to prevent rich people from controlling our channels of communication," unsuccessfully sued Kleiner Perkins for alleged gender discrimination back in May 2012. Pao said she was denied a promotion because of her gender; supervisors claimed it was because of her performance. She lost the lawsuit in court. Since then, she has spent eight months as CEO of the message board platform Reddit (a Y Combinator company) and, more recently, has been a tech critic and a promoter of diversity and inclusion initiatives.
Mallaby treats Pao and other early critics fairly, detailing some evidence of bad practices in Silicon Valley. There were sexual come-ons, he reports, and some women were cut off from male V.C. networks. But he doesn't think there's airtight evidence that women were systematically denied promotions. It is interesting to see the same names calling for new tech regulations in The Washington Post a decade later.
Mallaby also notes that some V.C.s, such as Kleiner Perkins' Doerr, made deliberate efforts to bring more women into the Sand Hill investment scene, believing that "exclusion of women represented wasted talent" and that such talent ought to be profitably captured. But Doerr failed to appropriately manage the integration of more women into the firm, which some female V.C.s claim hindered their longer-term success at Kleiner. There's a lesson there for those who call for governments to mandate corporate diversity quotas. In the V.C. world, blunt-force initiatives didn't create the lasting change that was desired; it was incrementalism that brought a better situation for women in tech, creating incentives that spurred investors like Doerr to address festering problems.
The Power Law is a useful, thorough corrective to tech critics who don't recognize the delicate balance that allowed the tech boom of the last half-century to happen. As V.C.-backed companies struggle with profitability and possible layoffs loom, and as we face a broader sense that the tech party may be over, it's more important than ever to understand the components that made this period of flourishing possible.
The post How Venture Capital Made the Future appeared first on Reason.com.
]]>On Thanksgiving, we rightly give thanks. And let's be clear that, amid all the turmoil that consumes daily headlines, we Americans do indeed have a lot to be thankful for. We are still relatively free. We are also incredibly prosperous—a prosperity that would be impossible without uniquely talented and driven entrepreneurs and the courageous investors who back them. But this year I want to give special thanks to those workers we call "low-skilled."
They may not have acquired the know-how or years of education possessed by the people you see on TV, or by academics, tech gurus, or financial-market whizzes. But low-skilled workers are nevertheless among the unsung heroes of our lives.
Before I begin, I want to challenge an increasingly popular fallacy. It has become a talking point of the political left to insist there are no such thing as low-skilled workers. Rep. Alexandria Ocasio-Cortez (D–N.Y.) for example, tweeted earlier this year that "the suggestion that any job is 'low skill' is a myth perpetuated by wealthy interests to justify inhumane working conditions, little/no healthcare, and low wages." Many have since jumped on the bandwagon to make the same point. But it's utter nonsense.
If simply calling workers "low-skilled" allowed employers to underpay and overwork them, then every worker in America would be labeled as such and paid a pittance, including professional sports stars and neurosurgeons.
Now to be fair, a lot of the confusion comes from the sloppiness of the term. We tend to lump together entry-level jobs with jobs that don't require much of an education, or with jobs that require hard skills but no formal education. These are very different types of jobs, and they offer very different prospects to those doing them. The term is also complicated by the fact that some of these workers haven't yet acquired the skills necessary to perform more specialized tasks. Plenty of 16-year-olds who mop up spilled milk in supermarkets and mow people's lawns will learn to weld, program computers, or perform brain surgery. In a few years, with more education, they may very well become high-skilled.
While it shouldn't be controversial to say that some workers have fewer job skills than others, there aren't any "no-skilled" workers. In fact, many of the jobs we casually describe as "low-skilled" require important skills, know-how, and gumption. Does anyone truly believe that there isn't special knowledge and practice involved in being a nanny, a prep cook, a gardener, or carpenter's helper? Most college graduates couldn't do these jobs, either because we don't know how (proving that the jobs really require different skills) or because such work is typically terribly hard.
Identifying the workers who currently have the least valuable set of workplace skills isn't part of some scheme to perpetuate a myth; it's simply a way of speaking about, although imprecisely, a reality. That some members of Congress are oblivious to this is evidence of low-skilled thinking (or perhaps high-skilled politics).
While some on the left insist that it's wrong to assume some jobs truly are low skill, some on the right assume that low-skilled workers are somehow undesirable and worth demeaning, especially when these workers come from poor foreign countries. But this, too, is nonsense.
Close your eyes for a second and imagine what your life would be like if, overnight, all workers employed in these fields disappeared. It would be a disaster. Indeed, whether we acknowledge it or not, all of us benefit from these workers busting their butts at work, stocking shelves, picking fruits and vegetables, cleaning homes and hospitals, delivering food, watching kids at day care or home care, and so much more.
These are people who showed up for this country when the economy was shut down by the government, working in jobs labeled "essential." Your local grocery store wasn't kept open during that time by the computer class who stayed comfortably at home. Low-skilled workers were the ones who prepared your food, delivered it and kept the economy going as much as possible. And we all feel the pain right now as others have failed to return to work, leaving millions of jobs unfilled.
More important, many of these workers are part of our families. They care for our children, allow us to work and get promoted, and are an essential part of what makes our lives comfortable. So, on this Thanksgiving, we need to forget the policy and political divides and simply give thanks to these workers without whom our lives would be lesser.
COPYRIGHT 2022 CREATORS.COM.
The post Be Thankful for Low-Skilled Workers appeared first on Reason.com.
]]>What's going on with FTX? The cryptocurrency exchange FTX has filed for bankruptcy amid revelations that it lent billions in customer assets to an affiliated trading firm called Alameda Research. Now its owner—a prominent Democratic donor and supporter of cryptocurrency regulation—is reportedly under criminal investigation.
Both FTX and Alameda Research were owned by Sam Bankman-Fried. Earlier this year, a Fortune magazine headline said he "has been called the next Warren Buffett." But "now, Bankman-Fried looks, at best, like the original storyline for Michael Saylor of Microstrategy during the Dotcom bust. Or, more likely, like Elizabeth Holmes of Theranos infamy. Or, with increasing plausibility, like a less civic-minded Bernie Madoff," writes Michael W. Green at Common Sense.
Bankman-Fried's downfall is bad news for Democrats. He spent a reported $36 million on donations to Democrats this election season, making him "the second-largest donor to Democrats after George Soros," according to the Financial Times.
What it means for cryptocurrency regulation is less clear. Bankman-Fried and FTX were major proponents of the proposed Digital Commodities Consumer Protection Act (DCCPA), which was introduced in the Senate in August and passed out of the Committee on Banking, Housing, and Urban Affairs in September. "The whole thing was being spearheaded by Sam and FTX, and their credibility has just been shredded," Nic Carter, a general partner at Castle Island Ventures, told Fortune.
"While some hoped that legislation like the DCCPA would pass during the lame-duck session after Tuesday's midterms, [Kristin Smith of the Blockchain Association] said that's now unlikely, both because Bankman-Fried was a driving force and that policymakers may be more reluctant as they wait for the fallout," Fortune reports.
But FTX's implosion could ultimately serve as fodder for those who think cryptocurrency-related businesses need more oversight. "The recent events show the necessity of congressional action," argued Rep. Patrick McHenry (R–N.C.), the top Republican on the House Financial Services Committee, in a statement.
The downfall of FTX is at once simple and complicated.
The root cause seems to be simple: poor decisions—bordering on fraud—by Bankman-Fried. As a cryptocurrency exchange, FTX is supposed to hold people's crypto assets and help them make trading transactions (a service for which it collects a fee). Instead, it lent billions of dollars in customer assets to Alameda Research, a scheme The Wall Street Journal described last week:
FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, one of the people said.
All in all, FTX had $16 billion in customer assets, the people said, so FTX lent more than half of its customer funds to its sister company Alameda….
FTX paused customer withdrawals earlier this week after it was hit with roughly $5 billion worth of withdrawal requests on Sunday, according to a Thursday morning tweet from Mr. Bankman-Fried. The crisis forced FTX to scramble for an emergency investment.
FTX made a deal to sell to its rival Binance, but Binance backed out, saying the company's problems were "beyond our control or ability to help."
Now the U.S. Department of Justice, the Securities and Exchange Commission, and the Manhattan U.S. attorney's office are reportedly investigating.
Whether or how Bankman-Fried broke the law is more complicated. Lending out customer funds without their consent "is generally forbidden in the regulated securities and derivatives markets," notes the Journal, but the same rule doesn't apply when it comes to cryptocurrency. Still, the move may be considered fraud or embezzlement. From the Journal:
"What this will boil down to is, were there deliberate lies to convince depositors or investors to part with their assets?" said Samson Enzer, a former Manhattan federal prosecutor. "Were there statements made that were false, and the maker of those statements knew they were false and made with the intent to deceive the investor?"
Prosecutors also could home in, the lawyers said, on statements Mr. Bankman-Fried made on Twitter last week, when he said FTX was "fine" and customer assets were safe—comments he later deleted.
Jurisdiction in this case is also complicated. FTX is based in the Bahamas, and was previously based in Hong Kong, though it did serve U.S. customers and have a U.S. affiliate.
The details of FTX's bankruptcy are also complicated. "FTX is what's known in the industry as a 'free fall' bankruptcy," reports Bloomberg:
More than 130 related companies sought court protection at the end of last week without filing any of the usual court motions or explanatory documents seen in a big US insolvency case. Two days later, the companies' main court docket contains only a 23-page fill-in-the-blank petition. In nearly every other multi-billion dollar Chapter 11 case in recent years, lawyers quickly file a smattering of routine requests designed to stabilize operations.
In a statement, the company's new chief executive officer—a man who helped oversee the unwinding of Enron Corp.—told customers that details about the bankruptcy would hit the court docket "over the coming days."
Democrats retain control of Senate. The victory of incumbent Sen. Catherine Cortez Masto in Nevada means Democrats will continue to control the U.S. Senate next year. Cortez Masto beat Republican Adam Laxalt in a very close race. That means Democrats now have 50 Senate seats and—with the vice president's tie-breaking vote in play—a Senate majority, no matter what happens in Georgia, where Sen. Raphael Warnock (D–Ga.) and Republican challenger Herschel Walker are heading into a runoff vote.
Several elections for seats in the U.S. House of Representatives are still too close to call. "Republicans were closer to taking the House, having won 211 seats compared to Democrats' 206, with 218 needed for a majority," reports Reuters. "But the final outcome might not be known for days as officials continue counting ballots nearly a week after Americans went to the polls."
RIP Sharon Presley and Martin Morse Wooster. Two libertarian luminaries, Sharon Presley and Martin Morse Wooster, passed away recently. Both were contributors to Reason.
Wooster died on November 12 after being struck by a car in a hit-and-run in Williamsburg, Virginia. He was a senior fellow at the Capital Research Center, a journalist, and the author of several books, including Angry Classrooms, Vacant Minds; The Great Philanthropists and the Problem of "Donor Intent"; and Great Philanthropic Mistakes. For a while he served as Reason's Washington editor. You can find his extensive Reason archive here.
Presley died on October 31 after a long struggle with various health issues. A longtime libertarian activist, she was the founder of Laissez Faire Books, the founder and executive director of the Association of Libertarian Feminists, and the author or editor of several books, including Exquisite Rebel: The Essays of Voltairine de Cleyre. You can find her Reason archive here.
A preview of Scott Lincicome's new book on how free markets can help American workers:
?NEW TODAY?: The first 8 chapters of the forthcoming @CatoInstitutue book, Empowering the New American Worker: Market-Based Solutions for Today's Workforce https://t.co/DiiSKXnlFz #NewWorker
Thread? on the book's motivation, content, & objectives: /1 pic.twitter.com/XZE6iWFJ0A
— Scott Lincicome (@scottlincicome) November 10, 2022
If you're suffering from a case of the Mondays, at least you (probably) don't work for an institution that seeks to sentence (or allows people to be sentenced) on the basis of acquitted conduct. So you got that going for you, which is nice.https://t.co/ECROSTdDQR pic.twitter.com/CeOS8awxYo
— Clark Neily (@ConLawWarrior) November 14, 2022
• "Every election denier who sought to become the top election official in a critical battleground state lost at the polls this year, as voters roundly rejected extreme partisans who promised to restrict voting and overhaul the electoral process," reports The New York Times.
• Arizona Republican Kari Lake looks like she's losing the Arizona's governor race.
Lake's the only one of the full-MAGA conspiracy candidates with some charisma, strong pre-existing ties to the state's voters AND an opponent who's been widely criticized for a poor campaign. If she's not getting over the hump, the damage from the brand is pretty undeniable.
— Benjy Sarlin (@BenjySarlin) November 14, 2022
• There's no good reason to expand the government-funded school lunch program, argues Baylen Linnekin.
• "Donald Trump's attorneys filed a lawsuit seeking to block the House January 6 select committee's subpoena demanding testimony in the investigation into Capitol attack," reports The Guardian.
• A potted plant could beat a Trump Republican these days, writes J.D. Tuccille.
• Nataša Pirc Musar, a lawyer who has represented Melania Trump, has become the first female president of Slovenia.
• New York Republican George Santos has won a seat in the U.S. House. Santos is the first openly gay non-incumbent Republican to be elected to Congress:
George Santos appears poised to make history as the 1st openly gay Republican non-incumbent elected to Congress. Previous openly gay Republican congressmen were outed or came out after being elected the for the 1st time. No out LGBTQ Republican has served in Congress since 2007. pic.twitter.com/SVcWvm626M
— Benjamin Ryan (@benryanwriter) November 9, 2022
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]]>Kardashian case highlights foggy rules surrounding crypto promotion. The Securities Exchange Commission (SEC) has ordered Kim Kardashian to pay $1.26 million for promoting the cryptocurrency EMAX without disclosing that she was paid to do so.
Federal securities law requires anyone paid to promote a crypto asset to "disclose the nature, source, and amount of compensation they received in exchange for the promotion," said SEC enforcement director Gurbir S. Grewal in a press release.
Kardashian was charged with violating the anti-touting provision of the Securities Act of 1933, which prohibits giving "publicity to…any…advertisement…or communication which…describes [a] security for a consideration received or to be received…without fully disclosing the receipt…of such consideration and the amount thereof."
According to the SEC, Kardashian "was paid $250,000 to publish a post on her Instagram account about EMAX tokens, the crypto asset security being offered by EthereumMax." Without admitting or denying the SEC's allegations, Kardashian has "agreed to settle the charges, pay $1.26 million in penalties, disgorgement, and interest," as well as refrain from promoting any crypto assets for three years.
The SEC is clearly trying to make an example of Kardashian. "This case is a reminder that, when celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn't mean that those investment products are right for all investors," said SEC Chair Gary Gensler in the press release. "Ms. Kardashian's case also serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities."
Gensler also made a video warning against taking celebrity advice on cryptocurrency.
It's a good idea not to base your financial decisions on celebrity promos. But that doesn't mean cases like these are a good use of the SEC's time. And the penalty imposed here—more than a million dollars—is way out of proportion with the offense.
Commercial speech is still free speech. But the SEC's anti-touting rule impedes this speech and holds crypto assets and other securities to standards that other types of products, investments, and services are not.
The situation gets extra dicey when we're talking about digital currencies and assets, which aren't always considered a security that falls under the SEC purview. SEC officials have previously stated that Bitcoin and Ethereum are not securities.
"Crypto enthusiasts say that their ventures are decentralized in a way that makes old rules a poor fit, and crypto trading platforms argue that the assets they're listing should be considered commodities, not securities," notes Bloomberg.
The securities versus commodities debate is still raging, with the answer far from clear. And the SEC hasn't been explicit about which tokens it considers securities and which it considers commodities, leaving anyone who promotes or otherwise works with crypto assets vulnerable to prosecution for rules they weren't aware they had to follow.
Supreme Court heads back to business with a historically low approval rating. The U.S. Supreme Court is back in business today after its late summer recess. The new term will include cases on affirmative action, voting rights, free speech versus anti-discrimination law, and adoption of Native American children by non–Native American parents.
The court heads back into session with a historic low approval rating, according a new Gallup Poll:
Forty-seven percent of U.S. adults say they have "a great deal" or "a fair amount" of trust in the judicial branch of the federal government that is headed by the Supreme Court. This represents a 20-percentage-point drop from two years ago, including seven points since last year, and is now the lowest in Gallup's trend by six points. The judicial branch's current tarnished image contrasts with trust levels exceeding two-thirds in most years in Gallup's trend that began in 1972.
This week, "the new term will begin with a lineup that promises another historic series of rulings—and even greater levels of rage directed at the court," writes Jonathan Turley at The Hill.
Big government is back, warns Bloomberg Businessweek. To which a reasonable reply might be: Wait, when was it gone? It would be more accurate to say that big government is getting bigger. Either way, the prognosis isn't good:
Germany's government made an extravagant promise as it announced its second multibillion-euro nationalization of an energy company in a week. Speaking in Berlin on Sept. 21, Economy Minister Robert Habeck pledged that "the state will do everything" to minimize disruptions in natural gas supplies.
The message was intended to instill calm at a time of high anxiety, with Europe scrambling to replace imports of oil, coal, and above all gas from Russia. But Habeck's choice of words also underscored that we're living in a new era of big government. Whether it's replacing lost income for workers and businesses during pandemic lockdowns or ensuring that there's enough fuel to heat homes and power industries, state intervention is back in vogue in a way we haven't seen since the early 1980s, when a toxic combination of high inflation and ballooning fiscal deficits forced a retreat.
More here.
• Officials say at least 76 people in Florida and four people in North Carolina were killed by Hurricane Ian.
• Throwing money at the IRS won't fix its problems.
• California police killed a 15-year-old girl while engaged in a shootout with her father.
• Inside Google's rehab clinic.
• A belated vindication for school reopeners.
The post Kim Kardashian Must Pay $1.26 Million for Illegally Promoting Cryptocurrency Tokens appeared first on Reason.com.
]]>Marc Andreessen can't seem to decide whether he wants to fix America's housing crisis, make it worse, or creatively reinvent an untenable status quo.
On Monday, the billionaire venture capitalist announced that his firm, Andreessen Horowitz, would be a major investor in controversial WeWork founder Adam Neumann's new housing venture Flow. The New York Times reports that Andreessen's firm will plow $350 million into the new company and its as-of-yet unrevealed business model and that Andreessen will sit on its board.
In a blog post, Andreessen said that Neumann—who was ousted from WeWork in 2019 after a disastrous initial public offering—had the brains and vision to remake a residential real estate market characterized by overly expensive owner-occupied housing on the one hand and "soulless" rental options that build neither financial equity nor personal connections on the other.
"In a world where limited access to home ownership continues to be a driving force behind inequality and anxiety, giving renters a sense of security, community, and genuine ownership has transformative power for our society," writes Andreessen. "When you care for people at their home and provide them with a sense of physical and financial security, you empower them to do more and build things."
These are awkward words to hear from the billionaire investor who's taken a drubbing in the press recently for his own part in limiting access to homeownership and stopping people from building things.
Earlier this month, The Atlantic's Jerusalem Demsas spotlighted a June public comment submitted by Andreessen and his wife, Laura Arrillaga-Andreessen, to the planning department of Atherton, California, opposing a plan that would allow multifamily housing in the ultra-expensive San Francisco suburb where he lives.
Allowing new apartments, the two wrote, "will MASSIVELY decrease our home values, the quality of life of ourselves and our neighbors and IMMENSELY increase the noise pollution and traffic." The vast majority of the Andreessens' neighbors who filed public comments likewise opposed zoning for new multifamily housing in Atherton, and the plan was dropped by the city.
As Demsas notes, this kind of NIMBY (not in my backyard) opposition to new housing, and the restrictive regulations it births, is a primary cause of America's housing shortage, estimated at somewhere between 4 million and 20 million missing units.
Andreessen isn't unaware of the country's housing shortage, or all the problems of immobility, unaffordability, and instability it creates.
His blog post from Monday notes that the unattainability of homes near prime job centers is a product of cities not building enough housing. And Andreessen's famous April 2020 essay "It's Time to Build" also called out American cities' failure to construct enough housing as yet more evidence of our hopeless national stagnation.
"We can't build nearly enough housing in our cities with surging economic potential—which results in crazily skyrocketing housing prices in places like San Francisco, making it nearly impossible for regular people to move in and take the jobs of the future," he wrote then. "The problem is inertia. We need to want these things more than we want to prevent these things. The problem is regulatory capture. We need to want new companies to build these things, even if incumbents don't like it."
One might be tempted to see his investment in Flow as redemptive—a $350 million investment to fix a housing crisis clearly counteracts any damage his NIMBYism has done. Yet, from the limited details available, Flow won't try to tackle the problems of overregulation and undersupply that Andreessen has correctly identified as the root of our housing woes.
The Wall Street Journal reported last year that companies linked to Neumann have been buying up thousands of existing apartments in fast-growing cities like Nashville, Atlanta, and Miami. The New York Times describes Flow's business model as basically a property management company offering "a branded product with consistent service and community features."
Rather than build new housing, Andreessen describes Flow as a new way of managing existing units that combines a "community-driven, experience-centric service with the latest technology" to solve renting remote workers' loneliness and inability to build equity and community in a home they own.
There's a strong whiff of standard NIMBYism in this idea. The alleged failure of rented apartment units to foster community and good morals has long provided the spiritual case for banning their construction. Encouraging people to build wealth primarily through homeownership has also sometimes given incumbent homeowners (including the Andreessens, apparently) a financial incentive to oppose new construction in their neighborhoods.
This isn't to say that remote workers' loneliness isn't a problem, or that lots of people are renting only because they can't afford to buy a house. But both those problems are downstream of our failure to build.
The superstar cities that took the biggest population hits during the pandemic also happened to be the places that have been building the least. If New York or San Francisco had managed to add new housing anywhere close to the rate at which they were adding new jobs, perhaps fewer people would have left behind their offices and professional communities for a lonelier but cheaper lifestyle of Sunbelt remote work. Massive home price increases in metros that have grown substantially post-COVID are proof we need to be building there too.
The same regulations that drive up construction costs and housing prices work against the community that Flow is trying to foster.
The first victims of restrictive zoning regulations were boarding homes and single-room occupancy hotels, places where people shared kitchens and common rooms, with meals frequently provided by their hosts. Laws still ban dorm-like housing in much of America today. If the idea behind Flow is to create more congregate living arrangements, a good first step would be to legalize those arrangements.
Eliminating density restrictions on housing would mean that developers wouldn't have to choose between adding more apartments and adding more communal space and amenities in a new building. That could also foster the kinds of social connection Flow is aiming to create.
There's obviously plenty of room for different approaches to the management and financing of apartments. Andreessen has a long history of backing successful Silicon Valley breakout companies. Maybe Flow will be one of them.
But even if successful, Flow will only be working on the margins. The housing supply crisis in America isn't primarily a problem of technology or stagnant business practices. Rather, it's a pretty straightforward product of government regulations that prevent new home construction.
Solving it is going to require building much more housing, not just a sense of community with your landlord. In addition to writing checks to Neumann, Andreessen could also choose to write fewer letters to his local planning department.
The post Marc Andreessen's High-Tech Fix for the Housing Crisis Lets Him Keep Being a NIMBY appeared first on Reason.com.
]]>Who actually uses cryptocurrency, and why? A new report from the Federal Reserve shows that for some, digital currencies like bitcoin can be a real alternative for those who lack financial access. Although crypto schemes and spectacular busts get a lot of attention, peer-to-peer digital money has transactional use for the unbanked.
Every year, the Fed puts out a publication called the Survey of Household Economics and Decisionmaking. Since 2013, it has collected survey responses from American families about their finances, job situations, and abilities to cover unexpected expenses.
The report for 2021, "Economic Well-Being of U.S. Households in 2021," was just released in May. For the first time, the Fed included questions about cryptocurrency in the survey. The responses from the 11,874 participants of all ages, incomes, ethnicities, and educational levels show that depending on your state of life, you might be using digital currency in very different ways.
The new data on cryptocurrency usage is on page 46 of the report. First, it finds that 12 percent of participants, a little over 1,400, held or used cryptocurrency at some point over the previous year. If that extrapolates to the general American population, that suggests that almost 40 million Americans were involved in cryptocurrency last year.
This is in line with other estimates of American cryptocurrency usage; in 2021, for instance, the Pew Research Center reported that around 16 percent of Americans, or 53 million, had ever bought or held cryptocurrency. That these two estimates are so close suggests that Americans may be becoming more comfortable with cryptocurrency, since the Fed report only examined activities over the previous year.
The new Federal Reserve report is helpful because it breaks down the groups who have either invested in cryptocurrency—that is, bought it to hold and trade for a profit—versus those who use the cryptocurrency for transactions—as a digital cash. It furthers dissects those groups out by income and banking level.
Most of the participants who said they used cryptocurrency in 2021 did so as an investment. Some 11 percent of the survey participants reported such, then three percent reported using it as a payment mechanism. Two percent said they used cryptocurrency to purchase goods or services, while another one percent said they used it to send money to friends and family. Note that these numbers overlap—some people who used bitcoin as an investment also used it to transact.
One and two percent doesn't sound like a lot. But when you extrapolate it out to the general American population, you get a decent crowd of people. If this survey is roughly representative, that means that more than six million Americans may have used cryptocurrency as a payment method last year.
What's interesting is that users who transacted using cryptocurrency tended to be lower income. Sixty percent of people who used cryptocurrency for transactions had annual incomes lower than $50,000.
Furthermore, people who used cryptocurrency for transactions were more likely to be unbanked than those who did not use cryptocurrency at all. Thirteen percent of transactional cryptocurrency users lacked a bank account, compared to six percent of people who did not use cryptocurrency, while 27 percent of cryptocurrency transactors did not have any credit cards, compared to 17 percent of non-users.
We can also get insights from the profile of people who used cryptocurrency for investments. These respondents were less likely to be unbanked (1 percent), lack credit cards (7 percent), or lack retirement savings (11 percent) compared to both transactional cryptocurrency users (13, 27, and 29 percent) and non-cryptocurrency users (6, 17, and 27 percent). Relative to these other groups, people who see cryptocurrency as an investment vehicle have more financial access and perhaps more financial acumen. Almost half of these people had an income of at least $100,000.
For context, 5.4 percent of U.S. households are unbanked, according to the FDIC. Depending on the size of each household, we could be talking anywhere from 12 to 18 million American adults. If six million or so people are becoming more accustomed to cryptocurrency transactions each year, this could fertilize the roots of a real alternative for financial access for many households.
We shouldn't get ahead of ourselves. Someone reporting that they used Dogecoin one time to pay for something does not mean that person is a bankless sovereign individual. And most of the people who used cryptocurrency for transactions did have bank accounts. The vast majority of unbanked people do not use cryptocurrency. There's a lot of work to be done in expanding cryptocurrency adoption and ease of onboarding so that things like cheap bitcoin payments become a real everyday alternative for transactions.
But this survey does show that people who use cryptocurrency for transactions are more likely to be unbanked or lack access to credit cards. Cryptocurrency users who are higher income, on the other hand, are more likely to see it as an asset or investment.
What are the policy implications? For one, the survey helps give us a more nuanced view of cryptocurrency users. If you only listened to critics, you might think cryptocurrency is just a high-tech value shredder.
This report shows that different people use cryptocurrency for different reasons. Those who primarily invest in cryptocurrency tend to be higher income with better financial access. This doesn't mean that they are savvy investors, but they are at least more likely to have above average financial sophistication.
Those who primarily transact in cryptocurrency, on the other hand, tend to be lower income and have less access to financial services than cryptocurrency investors and non-users alike.
Policymakers should take care that their ideas to protect (or punish) one of these groups does not inadvertently hurt (or encourage) the others.
It will be interesting to see how the responses to these cryptocurrency questions change over time. Ideally the Federal Reserve will refine their methods going forward. For instance, it would be nice to distinguish between "trading"—short-term price speculations—and long-term investments, or people who hold cryptocurrencies like bitcoin in a similar way to commodities like gold. This would shed even more light on the distinctions between riskier financial strategies (the "crypto casino") and lower time preference investing, often called "hodling."
It will also be interesting to see how cryptocurrency usage will change in the 2023 report, which will look at user behavior during 2022, the year that inflation became a household name. I would expect more people to view cryptocurrencies like bitcoin as a safe haven asset like gold, but we will have to see.
Either way, having more empirical data on real cryptocurrency usage is always welcome. It helps us to get a better picture of reality so we can separate it from common hyperbole from both supporters and detractors. Let's hope that more financial regulators start to incorporate robust data-driven considerations when they are crafting cryptocurrency policy.
The post Fed Report Shows Who's Actually Using Crypto and How appeared first on Reason.com.
]]>Bitcoin has emerged as an attractive savings option in a time of creeping global inflation and general uncertainty—to say nothing of the situation facing the stock market. Like gold, this scarce digital asset can serve as a hedge against currency depreciation. Despite short-term volatility, bitcoin's long-term price growth has been impressive, with an average annual return of around 98 percent. No wonder so many people would like to set aside at least a small portion of their nest egg into bitcoin.
Well, the government does not like this one bit. Its lackeys will fight tooth and nail to curtail your ability to hold bitcoin as part of a particular kind of tax-advantaged retirement account.
Recently, the asset manager Fidelity announced it would start allowing customers to hold bitcoin as part of their 401K accounts. By the end of the year, the 23,000 companies that use Fidelity to manage retirement accounts (around a third of the $7.7 trillion industry) should have the option of allowing bitcoin investments of up to 20 percent of an individual portfolio.
Citing growing interest from clients, the company states the move is intended to provide a "diverse set of products and investment solutions for our investors," adding that "cryptocurrency is going to shape the way future generations think about investing."
Fidelity has been thinking about cryptocurrency for a long time. It was among the first major investment houses to hire full-time bitcoin analysts, many of whom have gone to spin off their own bitcoin businesses. In 2018, the company opened Fidelity Digital Assets to provide cryptocurrency investment services—like buying, selling, and custody—to institutional clients. Extending 401k bitcoin investments is a logical next step in the company's established history of careful study and service provision.
The Department of Labor probably hasn't been thinking as carefully about bitcoin as Fidelity, but it still has strong opinions on the matter.
In March, perhaps after getting tipped off about Fidelity's plans, the Department of Labor put out a guidance urging 401k plan fiduciaries (like Fidelity) to "exercise extreme care" when considering cryptocurrencies. Citing the Employee Retirement Income Security Act of 1974, which states fiduciaries much act in the financial interests of plan participants when considering 401K investment options, the short document rattled off the normal fearmongering about cryptocurrency: that it is risky, complex, and part of an "evolving regulatory environment" (well, whose fault is that?). In other words, nothing that the crypto-savvy analysts at Fidelity Digital Assets hadn't heard a million times before.
Nevertheless, Fidelity persisted, and proceeded to announce the 401k bitcoin plan later in April. Unfortunately, other firms who may have been exploring bitcoin options for their clients may be spooked by the letter, despite being ultimately nonsensical in terms of fiduciary law and management.
Speaking of persisting, this made Sen. Elizabeth Warren (D–Mass.), that crusader against big banks, hit the roof. She and fellow Sen. Tina Smith (D–Minn.) wrote a blistering letter to Fidelity's CEO, "inquir[ing] about the appropriateness" of the company's new 401k options and demanding answers to such questions that can essentially be paraphrased as "How dare you ignore the Department of Labor!" (In fact, Fidelity did not ignore the Department of Labor, and has already answered many of the questions raised by the Senators in an April 12 letter to the agency.) Department of Labor agents, likewise, have "grave concerns," and have publicly stated their intentions to beat down Fidelity's proposed 20 percent limit, which can be set lower by companies, to a measly 5 percent.
The funny thing here is that it's not clear what exactly the Department of Labor can do about Fidelity's bitcoin plan. Department of Labor functionary Ali Khawar told Barron's that their enforcement authority here is limited to "investigating and litigating" this issue—in other words, it doesn't seem that Department of Labor can ban or prohibit the 401k bitcoin option. This might be why Fidelity decided to brush off the concern trolling of a department that didn't seem to know much about cryptocurrency anyway.
Another peculiarity: people have been holding cryptocurrency as part of a tax-deferred retirement account for a good amount of time. Early adopters have been setting up self-directed IRAs to include bitcoin for many years. By now, the arrangement is so institutionalized that many professional bitcoin IRA companies and services are open to less-engaged investors. You can even get bitcoin exposure in an IRA account managed by a big dog like Vanguard with the Grayscale Bitcoin Trust. Somehow, these people's retirement savings have not imploded.
Fidelity isn't even the first entity to offer 401k functionality. In 2021, Coinbase teamed up with retirement manager ForUsAll to allow workers to squirrel away up to 5 percent of their contributions in cryptocurrencies such as bitcoin and ether. The Department of Labor doesn't like this too much either, but ForUsAll is a much smaller fish than Fidelity.
This may be why politicians like Elizabeth Warren are so upset about Fidelity's 401K plans but didn't bat an eye at the many years of IRA bitcoin investing—assuming that they knew this was occurring. IRAs are set up independently of employment. They are not the default with many jobs like 401ks are. So when a major 401k administrator allows people the choice to set aside part of their retirement savings in bitcoin, a lot more people will be exposed to that option.
If you don't like bitcoin, that is bad news. You want as few people to use this independent currency as possible. Even giving people the option to consider putting a modest amount of bitcoin as part of the most popular retirement vehicle in America is basically a nightmare scenario. No wonder there are so many "concerns."
Many puzzle over why Elizabeth Warren in particular is so gung-ho against bitcoin. She has a reputation for fighting the big banks and standing up for the little guy. You might think she would champion a disintermediating technology that allows the little guy an alternative to established finance—at the very least, you wouldn't expect such a person to emerge as a key anti-bitcoin player, putting forth antagonistic legislation and taking every opportunity to agitate against peer-to-peer money.
You might expect someone who doesn't like financial concentration to welcome more diversity in 401k investments. Since the 2008 financial crash, the common wisdom has been to prefer a passive investment strategy for retirement accounts. Rather than actively picking and choosing different investments, which not only incurs fees, but also adds complexity and therefore more opportunities for loss, many have favored index funds and exchange-traded funds for their 401ks.
Such funds are dominated by a few big firms—BlackRock, Vanguard, and State Street—which constitutes its own kind of macroeconomic risk. (Incidentally, many of these large investment powerhouses are promoting a so-called "environmental, social, and governance" movement that falsely portrays certain cryptocurrencies as "bad for the environment" and therefore unworthy of capital.) Allowing bitcoin as an option for 401k investing may not only be the best option for an individual investor, it also brings more diversification to an otherwise concentrated industry.
Whatever the reason for the anti-big-bank Sen. Elizabeth Warren's perplexing crusade against cryptocurrency, the policies she promotes would lead to less competition and opportunity in finance.
In the grand scheme of things, saving a little bit of money on taxes on a bitcoin investment—while certainly nice—is small potatoes. The future of cryptocurrency does not hinge on whether or not it is included in a tax-advantaged retirement account, particularly one that is always vulnerable to government penalties or even predation. Nevertheless, the knee jerk opposition of government agents to more people accessing bitcoin as a savings vehicle is revealing, particularly at a time when the stock market looks to be teetering at best.
It's a good thing that there isn't much that the Department of Labor or these Senators can do right now beyond writing angry letters. But the outsized government outrage at any marginal expansion of the bitcoin economy shows that our economic sovereignty is not going to be won without many fights.
The post Why Are the Feds So Mad About Bitcoin Retirement Investing? appeared first on Reason.com.
]]>One of the surest fire ways for a government to look like it's doing something is to commission a report. President Joe Biden's hotly anticipated executive order on cryptocurrency released last week was chock full of such time-buying busywork for basically every federal agency. Everyone from the Department of the Treasury to the Environmental Protection Agency has been tasked with a slew of reports, commissions, and frameworks to study digital assets and how they affect established government authorities.
The resulting EO was greeted by a sigh a relief from the cryptocurrency industry, which had (unnecessarily) feared it portended harsh crackdowns from the feds. After weeks of doomsaying, the Bitcoin price jumped up once everyone had the chance to review the text.
Instead of harsh cryptocurrency sanctions for the purpose of furthering international sanctions, the EO mostly talked about the need for the United States to "lead on innovation"—albeit in whatever way the Biden administration considers to be "responsible and equitable"—with some redundant language about exploring the possibility of creating a "digital dollar" or central bank digital currency (CBDC), an undertaking several years underway at different Federal Reserve banks.
It's not all good news. Inviting the entire federal government to scrutinize bitcoin and related technologies under a microscope will invite many excuses to try to control a liberating ecosystem at odds with the Washington status quo. Some of the EO's priorities—political buzzwords like climate change and financial equity—indicate inherent allergies to the open nature of permissionless blockchains. And while this order is not the first to discuss an American CBDC, we should be wary of a whole-of-government move towards a cashless world with mandated government-controlled digital currencies.
Still, the EO is a lot better than it could have been. It was inevitable that governments would turn more attention to bitcoin as it grew bigger and stronger. At the very least, this directive falls far short of enacting any policy at all, let alone hostile ones, and even gives some lip service to the need for America to lead on "blockchain technology."
Typically, documents that are supportive of some new development will start off with a few flowery sentences about its promise and potential. This order does not even bother with such niceties, instead kicking off with some causes for government concern: consumer and investor protection, financial stability, crime, national security, "human rights," financial inclusion and equity, and climate change. It then spares a few words for "responsible innovation," meaning controlled development on the kinds of things that the government would like: "cross-border funds transfers" and "cost-efficient access to financial products and services," maybe just accomplished with a CBDC.
It's these concerns that are inherently objectionable on their own. It's true that cryptocurrency exchanges and services have succumbed to cybersecurity failures and expensive data breaches. Few, if any, in the cryptocurrency community would disagree that "digital payments ecosystems should…include privacy and security in their architecture," although it is a curious statement for the US federal government, which is not the biggest fan of private encryption, to make.
But some of the "safeguards for consumer and investor protection" that are invoked as solutions have traditionally ended up removing options for everyday Joes while well-connected investors are freer to invest in higher yield opportunities.
Then there are the concerns that are outright hostile to open innovation. Bitcoin is a fantastic tool for financial inclusion because it allows anyone—including the underbanked—the opportunity to "be their own bank" at virtually no cost. Well, the Biden administration is more worried that "the benefits of financial innovation are enjoyed equitably"—there's that word (emphasis added) again—"by all, and that any disparate impacts of financial innovation are mitigated." That sounds a lot like a call for enforced equality of outcomes to me.
While the EO fell far short of "banning Russia from cryptocurrency"—whatever that would mean—as some had feared, there is the normal language about money laundering and international sanctions, too. Agencies will have to do some reporting on this as well, with the added specification of studying "sanctions evasion." Odd, since financial surveillance is arguably the most well-developed body of law surrounding cryptocurrency, but hey, it's better than bad policy.
There's a lot of language about "negative climate impacts," too. When governments talk about the environment and cryptocurrency, it usually means they want to limit bitcoin, which is mined through a consensus mechanism called "proof of work." Proof of work mining attains validation and decentralization through costly computations. It's expensive, but worth it. Governments don't like proof of work because it is almost impossible for them to influence. They would much prefer cryptocurrencies that are pseudo-decentralized or not decentralized at all, I mean, "greener alternatives."
One such purportedly "greener alternative" could be a CBDC that is completely controlled by a central bank. I suppose this could be "greener" if we set aside the goodly number of emissions required to fuel the infrastructure for our legacy financial system, to say nothing of the US global defense system that helps prop up dollar dominance.
Much of the EO discusses the need to explore a CBDC, both in Section 4 and throughout the document. From the horse's mouth: "My Administration places the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC." Biden's people believe a CBDC can "facilitate faster and lower-cost cross-border payments," "boost economic growth" (probably through easier "monetary stimulus"), and most importantly: "support the continued centrality of the United States within the international financial system, and help to protect the unique role that the dollar plays in global finance." Translation: we need to keep up with China.
The prospect is undeniably alarming. Removing any lingering physicality from our money system would almost certainly mean the end for financial privacy and limits on monetary control.
Giving government a programmable digital currency without physical cash would mean a God's eye view of the economy for the central bank. (Biden says "privacy protections" will be built in—yeah, so does China.) Knowing a person's commercial history is a bit like peeking into a person's brain. It would be a frightening amount of data for the government to have.
Then there's the possibilities for control. Money could be programmed to not be spendable on certain things or by certain people. Were you at the wrong protest? Maybe your money doesn't work anymore. Or maybe as part of the government's exciting new green economy plan, the eDollar won't be spendable on high carbon offerings on certain days. Use your imagination.
But while it's easy to contemplate how such power can be abused, the idea did not come from the EO. Different Federal Reserve branches have been actively studying and prototyping an American CBDC for years. There's the Digital Currency Initiative at the Massachusetts Institute of Technology with the Federal Reserve Bank of Boston, the New York Innovation Center with the Federal Reserve Bank of New York and Bank of International Settlements, and the Technology Lab (TechLab) of the Federal Reserve Board of Governors.
Maybe more CBDC projects will be created, or these will get more support. But this has been well underway for a while. It's good that the EO is at least drawing attention to the quiet exploration of a CBDC so that we can learn the risks and the vital need for a private censorship-resistant hard digital cash like bitcoin.
The Executive Order was far from a "success" for the industry, no matter the optimistic language from some about the government "recognizing that we are a serious force." The most that can be said is that it bought bitcoin and related technologies a little more time, with the catch that basically every federal agency will be scrutinizing it for any possible angle of enhanced government control over the coming year. The good news is that if there's one thing bitcoiners appreciate, it's the value of time.
The post Biden Has His Eye on Bitcoin appeared first on Reason.com.
]]>Initial public offerings (IPOs) are booming these days. But instead of operating companies offering their shares publicly—like Airbnb or DoorDash, both of which went public in 2020—the IPO market these days is being driven by a different kind of vehicle: the special purpose acquisition company (SPAC). While demand for SPACs appears to be cooling down, the Securities and Exchange Commission's (SEC) interest is heating up. As the SEC looks at SPACs, it must recognize the benefits of variety and innovation in IPO offerings to companies and investors.
To start, let's consider what SPACs are and what may be making them popular. A SPAC's purpose is to raise money in order to merge with an existing private company; it has no business of its own. The strength of the management team—often successful investors themselves—is the key selling feature. After the merger, also known as de-SPACing, the private company assumes the SPAC's place as a public company. SPACs typically have two years to complete a deal, or they must return the money to the investors.
The traditional IPO process takes about four to six months, not counting the time that a company spends preparing to start the process, and includes meetings with potential investors, known as a "roadshow," intended to create demand for the offering and to help set the offering's price. While the SPAC itself goes through a traditional IPO process, that process is simpler when there is no operating business to evaluate. And the private company that merges with the SPAC can avoid the costly and time-consuming process altogether by assuming the SPAC's public company status. Private companies also have considerably more flexibility in talking about, and talking up, their business through the merger process than through the IPO process, adding to the SPAC transaction's attractiveness.
SPACs are not new, but recently they've become a much larger part of the market. About 100 SPAC mergers have been completed since 2018, involving well-known companies like DraftKings and Virgin Galactic. More than 240 SPACs went public in 2020. SPACs raised $81 billion last year, compared to $100 billion raised by traditional U.S. firm IPOs. And SPACs have dominated the IPO market so far in 2021, raising more than $95 billion and accounting for 70% of all IPOs. In addition to SPACs backed by well-known financiers, a number of SPACs have debuted with celebrity connections, including Peyton Manning, Shaquille O'Neal, and Jay-Z.
Despite signs that the SPAC boom is cooling down, the SEC's interest is only growing. Following disclosure guidance and an investor bulletin in December 2020, the SEC issued three more statements on SPACs in March 2021: a statement from the Division of Corporation Finance, a statement from the acting chief accountant, and an investor alert. These statements address different parts of a SPAC's life cycle, from IPO to merger, and include a warning to investors that "it is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment." The SEC's Division of Enforcement has also begun an inquiry of underwriters involved in the SPAC process.
None of the SEC's recent statements or bulletins impose new regulatory obligations with respect to SPACs, nor can they. But the SEC's approval process for SPAC IPOs reportedly has slowed, even while fewer SPACs appear to be seeking approval. The reasons for the slowdown are not known—and there could be any number of reasons—but throwing up new hurdles to approval, where no new obligations have been imposed, runs afoul of the same limitations that should also prevent the SEC from regulating through its enforcement inquiry.
If the SEC chooses to change requirements that apply to SPACs, it should first recognize the benefits of variety and innovation in the IPO market. A diversity of offering types, and many paths to public company status, can better serve companies that have different capital structures and goals. While a SPAC merger may not be the right decision for every company, having the option adds depth to the public market. A SPAC provides a different path to public company status than a traditional IPO, but the result is the same: a public company subject to the SEC's public company disclosure regime.
This innovation benefits investors, too. As SEC Commissioner Hester Peirce recognizes, "We should welcome the addition of startup public companies that historically would have experienced their growth stage in the private markets, where retail investors are not permitted to participate." SPACs may offer ordinary investors the chance to see bigger returns that are usually reserved for wealthy accredited investors, but even if the returns are no more robust, encouraging more companies to join the public markets gives investors more choice.
While the SPAC boom has caught the SEC's attention, the SEC should not attempt to impose hurdles to their use. Of course, investors should understand the risks inherent in a potential investment, especially where that investment, like a SPAC, is more complicated than average. But if anything, the demand for SPACs should cause the SEC to examine why companies want to avoid the traditional IPO process. Rather than limiting options for companies and investors, the SEC may do better to make the IPO process more attractive for startups.
The post SPAC Attack: SEC Slowdown Hits Investment Vehicle appeared first on Reason.com.
]]>"It's that time of year again" doesn't land quite right this year. It is, in fact, that time of year again—the time for religious festivals and giving thanks, for peppermint candy and evergreen needles, for wassailing and hall-decking, and for the sounds of Mariah Carey's Christmas renditions playing on repeat. (In the spirit of honesty, I admit I am known to play a certain Carey holiday classic on loop in the Reason offices no matter the time of year, but I digress.)
It's also the time for gift-giving!
But this year, is, uh, a bit different. The COVID-19 pandemic has wreaked havoc on 2020, and I'm sure I'm not the only one who hopes we never again have a time of year like this one. This is my grown-up Christmas list.
Yet the world keeps on turning in these unorthodox times, and you still have to find a way to get that shopping done—even if you're in, say, California, as I am, where stay-at-home restrictions have made patronizing your favorite businesses a bit difficult. Take heart! The Reason team has you covered with a slew of creative and personality-driven suggestions to make your present-hunting a bit easier in these trying times.
I would be remiss if I didn't recommend A Glorious Liberty: Frederick Douglass and the Fight for an Antislavery Constitution, a new book by Reason's own Damon Root about the man who, perhaps more than anyone, insisted that the U.S. live up to its founding principles. "Root and Douglass, like root beer and ice cream, are an irresistible American combination," writes The Washington Post's George Will in a review. Yum.
Also at the very top of everyone's lists should be Ten Global Trends Every Smart Person Should Know: And Many Others You Will Find Interesting by Reason's Ron Bailey and the Cato Institute's Marian Tupy. It makes a highly compelling case that the world is, in fact, getting better, which, according to the data, will surprise the vast majority of America. (Shocking!) Don't just take their word for it, though—they've brought the receipts. The poverty rate? It's plummeted. Life expectancy? It's more than doubled over the last century. Natural resources? There's more of them, and they cost less. After the year we've all had, we could use some good news. This book is good news.
And for any number of miscellaneous ideas, check out the weekly recommendations from The Reason Roundtable, our flagship podcast where editors sign off with their favorite cultural items of the moment, whether it be a novel, a video game, a cocktail-infused newsletter, or, in last week's case, Reason magazine itself. (We sell yearly gift subscriptions for less than $20, which is well worth the cost of converting a friend!)
As for a personal recommendation, I love to give experiences—Celine Dion tickets, a trip to the ballet, a bird-watching cruise, oh my!—but those are likely moot for the next several months. The birds will have to wait. So might I suggest you do one better and donate an experience in the name of that friend or family member who has a soft spot for criminal justice reform? There's the Pawsitive Change Prison Program courtesy of Marley's Mutts Dog Rescue, a group that hopes to reduce recidivism by teaching inmates how to train at-risk shelter pups over a rigorous 14-week curriculum. For the more religious giftee, you can send your dollars to a number of initiatives at Prison Fellowship; my favorite is the Prison Fellowship Academy, which employs a personalized approach to tackling the root cause of an inmate's criminal past so that they'll avoid a criminal future. And if you're looking for a family bonding activity, pick out some prison pen pals and send some holiday cheer via snail mail.
Now, without further ado, here are your Reason writers' and editors' carefully honed and versatile picks for spreading some holiday cheer. Glad tidings! —Billy Binion, Assistant Editor
For the budding scientist (or the hardheaded science denier):
What is science? A serviceable definition can be summed up as follows: It is the pursuit of knowledge and understanding of the natural and social world using a systematic, evidence-based methodology.
Scottish psychologist Stuart Ritchie persuasively and urgently makes that case in Science Fictions: How Fraud, Bias, Negligence, and Hype Undermine the Search for Truth: "Science, the discipline in which we should find the harshest skepticism, the most pin-point rationality, and the hardest-headed empiricism," he writes, "has become home to a dizzying array of incompetence, delusion, lies, and self-deception. In the process, the central purpose of science—to find our way ever closer to truth—is being undermined."
That might sound familiar right about now as we navigate a pandemic where swaths of people disagree on the facts. Fortunately, Ritchie outlines the necessary steps to take in order to restore trust in science by, among other things, encouraging replication, applying anti-plagiarism algorithms, requiring open access to all data, and reducing the incentives to overhype findings. —Ron Bailey, Science Correspondent
For the picky (yet practical!) coffee snob:
Getting through 2020 has required a lot of caffeine, but it's also changed how I've prioritized the coffee-making experience. Side trips to the office coffeemaker or the café down the block have been limited. Using a pour-over kit or French press might be nice for that first cup, but there's no way I'm going through that whole process five or six times before 3 p.m.
And yet efficiently making a large enough volume of coffee to last all day presents other problems. How do you keep it warm without being left with burnt dregs, the unavoidable result of a glass carafe sitting on a warming plate for hours?
The Hamilton Beach BrewStation has been the answer for me. It makes 12 cups at a time—enough to keep even the most hardened addict set for a few hours—and has an internal reservoir with a built-in heating element to limit burning. The last cup won't taste exactly like the first sip, but then again, nothing ever does.
And it costs less than what you used to spend on Starbucks in a couple of weeks. Once the BrewStation pays for itself, use the savings to order up some bags of fresh beans from a local coffee shop (or someplace halfway across the country), get out your Reason mug, and offer cheers to the globe-spanning supply chains that make it all possible. —Eric Boehm, Reporter
For the seasoned gamer:
Euphoria is just one emotion you'll feel when playing this ultra-complex, post-apocalyptic-themed, worker-placement board game from Stonemaier Games.
Between two to six players compete to "build a better dystopia" by collecting resources and artifacts in a Brave New World-like landscape, all while trying to keep their workers' morale high and their intelligence low (lest they get dissatisfied with their station in this totalitarian future).
The gameplay itself resembles other worker-placement games like Settlers of Catan, though it comes with a lot more rules, pieces, and ways to win. That occasionally frustrating level of detail creates a steep learning curve for beginners, but also a tremendous amount of replay value for veteran players trying to find the optimal path to victory.
Euphoria's strategic depth and bizarre—yet charming!—artwork help justify the higher-than-average list price, making it the perfect gift for that special board game nerd in your life. —Christian Britschgi, Associate Editor
For the fashionable libertarian:
I bought one of these
scarves at the Free State Project's Liberty Forum last February and have had so many people ask where I got it. It's a really nice weight and texture and has held up well with washing. Plus, it can double as a face covering, with some libertarian flair, in a pinch!"No one will step on THIS snake while you wear it," reads the product description. Can confirm. —Elizabeth Nolan Brown, Senior Editor
For the self-care queen (or king):
Libertarians, it's time to take a break. It's been a hard year for everyone and it looks like the discourse will only get worse. So after reading some Reason stories for the day, treat yourself or someone you love to the gift of self-care.
Start with a blessed bar of soap from Monastery Creations. This ain't your momma's bar of soap! It's actually your sister's. Well, a Catholic sister's, created entirely by the Benedictine Sisters of Perpetual Adoration. I personally recommend the sage meadow bar, which has worked wonders for my face. Each batch is made with a few drops of holy water and a prayer—something we all could use a little of after this unsettling year.
Pair with this ginger/orange/eucalyptus candle from Reason icon Lauren Krisai, who's been an important criminal justice reform advocate over the years.
And lastly, listen to queen Blue Ivy Carter narrate Matthew Cherry's "Hair Love" in the background, a book which I may or may not be recommending because the main character shares a name with another Reason writer who also cares a lot about criminal justice reform. (That would be me.) —Zuri Davis, Assistant Editor
For the baby crypto bro:
"How do I invest in bitcoin?"
That's a question that more people than ever will be asking the libertarians in their lives this holiday season, thanks to the recent stunning price surge and bullish chatter on CNBC and elsewhere. The simple answer: Open an account on Coinbase or the Cash App, or buy some on PayPal, which recently started allowing U.S. customers to purchase cryptocurrencies inside their accounts. These platforms are like any other exchange or financial account: Send them money, and they'll purchase and take care of your bitcoins for you.
That's the easy way to do it, but it doesn't take advantage of one of bitcoin's game-changing attributes. Satoshi Nakamoto created the first digital asset without third-party intermediaries. That means you can physically hold possession of your own bitcoins, so governments will have a harder time confiscating them. If you think that's wildly implausible, remember that in 1933 President Franklin D. Roosevelt signed an executive order making it illegal for Americans to own gold. It wasn't repealed until 1974. So this holiday season, encourage the budding bitcoin enthusiasts in your life to use Nakamoto's invention the way it was intended. Gift them "hardware wallets," which are basically flash drives with all sorts of advanced security features built in to keep cryptocurrency from being lost or stolen.
How will they get bitcoins onto the device? They'll be able to connect their hardware wallets to a computer to transact with other users or cryptocurrency exchanges. It's like having your own digital gold vault doubling as a full-service bank that conveniently slips into a pocket or a desk drawer.
There are a handful of reputable brands, including Trezor, which sells the entry-level "model one" for $55. Many people also swear by the elegant Ledger Nano S, which retails for $59. Buy only direct from the companies to make it less likely that the built-in software has been tampered with by hackers. Being your own bank is terrifying and exhilarating. Help your friends and family join the monetary revolution! —Jim Epstein, Executive Editor of Reason TV
For the boomer who still enjoys a little Reefer Madness:
This year, why not give the gift of a safe, increasingly legal way to get a little distance from reality? Thanks to at least some form of legalization or decriminalization in every state, there has never been a better time to make and share edibles with your loved ones.
I particularly recommend pot brownies for your boomer friends and relatives, who likely have residual nostalgia for THC in baked-goods form, but may not have the wherewithal to acquire their own supply in the current grey market. Remember that while many states have legalized it, cannabis has yet to be legalized at the federal level, so be cautious about interstate shipping. If you're looking to buy close to your recipient, try Where's Weed. But everyone loves a homemade gift, so consider making your own according to my well-tested official Reason recipe. Feel free to hit me up on Twitter if you have questions or just need help with the math. —Katherine Mangu-Ward, Editor in Chief
For the self-reliant problem-solver (with a resilient stomach):
For many years, I relied on chemical clog-busting gels to fix a slow bathtub drain, knowing full well that such products are bad for the environment and corrosive on pipes. But when Drano failed me earlier this year, I took some inspiration from desert DIYer and Reason Contributing Editor J.D. Tuccille, and I set about finding a more sustainable and hands-on approach.
My local hardware store sold me a short metal snake that had a claw on the end and a spring-loaded trigger on the other. This device is very cool, but proved impossible to get through the cross grate caulked into the floor of my bathtub. As a renter, I didn't feel comfortable disassembling anything I couldn't put back together with a screwdriver. I also didn't like the idea of asking my landlords to pay a plumber for a hairball problem.
So I asked myself: What would J.D. do?
I went back to researching, and that's when I discovered the Annie Sullivan of plumbing products: a flexible plastic strand with teeth and a pull tab. No matter how small your tub drain, this plastic thing can get through it. No matter how thick the hairball lurking in your pipes, this plastic thing will grab it and pull it out. A pack of them on Amazon costs less than $10, and each one can be used several times apiece.
My advice? Snake the drain after a shower. The hairball will be wet and slimy and easier to pull out in one giant, satisfying mass. —Mike Riggs, Deputy Managing Editor
For the friend who still uses a filing cabinet (and who really should stop doing that):
The reMarkable 2 is part of that class of luxury object that does very little—but does it very well. It's a black and white tablet that can't play music and won't let you surf the internet. Instead, it offers a digital replacement for paper that looks and feels almost like the real thing. Take notes by hand and the software will convert your words to text and email them to the destination of your choice. Sketch out ideas during a brainstorming session and then use the reMarkable desktop app to refer back to the results. Read and mark up (grayscale) documents and save them in the cloud, freeing up coveted office storage space that might otherwise be filled by notebooks and three-ring binders. A Chrome browser extension even lets you convert web articles to PDF and transfer them to your device for offline consumption.
Billed as the thinnest tablet on the market, the reMarkable 2 features an eye-friendly (and energy-efficient) E Ink display—the kind made famous by old-school Kindles. Its user interface is simple and relatively intuitive. And its pressure sensitivity allows the stylus to impressively mimic the experience of writing or drawing with a real pen or marker. There's no question that $399 feels steep for a device that won't even let you check Facebook. But the lack of distractions is part of the selling proposition: By cutting out everything that's not essential, the reMarkable suggests, it can bring focus and pleasure back to the tasks of reading, writing, and thinking. —Stephanie Slade, Managing Editor
For the bar-hopper who can no longer hop to bars:
Bitters are an essential part of many classic cocktails, including the Old Fashioned, the first cocktail in the American tradition. A boozy infusion of herbs, roots, and spices, bitters are generally used in tiny drops, as a kind of cocktail flavoring. They're the bartender's spice rack.
Sadly, the cocktail bitters that were used in early drinks were lost by Prohibition. Today they exist only as replicas, like The Bitter Truth's Bogart's Bitters, a historical recreation of the brand first mentioned in Jerry Thomas's seminal 1862 cocktail book, extra booze you've been buying in 2020. —Peter Suderman, Features Editor
For the modern John Wayne:
Who doesn't like a .22 caliber gun? They're handy plinkers, capable of clearing varmints out of the garden, and of putting small game in the pot. They don't cost a lot to feed and can be handled by pretty much anybody who cares to develop shooting and survival skills. And the caliber is available in everything from classic revolvers, to single-shot youth rifles, to semiautomatics that can be tricked out in ways that make coastal politicians suffer heart palpitations.
But sometimes you want to blast bunnies in the backyard without getting the neighbors all hot and bothered. That's where the .22 air rifle comes in—a punchier bigger brother to the classic .177 caliber. After years of pumping an ancient Benjamin air pistol to knock down rabbits—which conveniently rely on "make more rabbits" as their survival strategy—I recently purchased a break-action air rifle.
My choice was the Stoeger S4000-E, a single-shot weapon powered by a gas piston that compresses when you open the action (with a fair exertion of strength) to insert the pellet. Unlike firearms, pneumatics can be fitted with sound suppressors without regulatory muss and fuss, and this Stoeger has one integrated. The result is a remarkably quiet shooter that can knock down pests and small game without raising eyebrows.
Like many air guns, the Stoeger is finicky about pellets. But at a time when even .22 long rifle ammo can be pricey and difficult to find, pellets remain abundant and inexpensive for even the better brands. The trigger is a bit mushy no matter how you adjust it, so feel free to go up-market if your budget allows (the Diana 34 is well-regarded). But for me the price vs. quality point is right and I have no complaints so far. In most jurisdictions, pneumatic weapons are unregulated or subject to light regulation relative to firearms, so chances are you'll be able to ship this directly to the recipient with little or no hassle. —J.D. Tuccille, Contributing Editor
For the nostalgic Middle-earth vagabond:
There is a persuasive argument to be made that, like the Beatles catalog, there really are no nourishing crumbs left from the never-ending lembas cake that is J.R.R. Tolkien and his signature Hobbit/Lord of the Rings stories.
Besides the books themselves, plus the lovingly realized and controversially expanded Peter Jackson film adaptations, and even the wince-inducing Led Zeppelin lyrics, there's plenty more for completists to scratch their itches with—the lousy 1978 animated movie, the probably-shoulda-stayed-unpublished Silmarillion, the mercifully shorter Leonard Nimoy song. There was a young-J.R.R.-in-love biopic as recently as last year, as many video games as Gandalf has nicknames, and, oh yeah, the sprawling Amazon TV series is back in production this month.
Yet in this age of ephemeral, cloud-based media-on-demand, there's a hole near the center of the Middle-earth content mill that can be filled only with a fairly significant chunk of change…and shelf space. It's well-known that Tolkien was a top linguist and unbeatable world-maker—writing book-length backstories, inventing whole languages, and drawing and redrawing meticulous maps. But the diminutive writer was also one hell of a visual artist, painting and sketching often in vivid purples and pinks the Lonely Mountain, the mines of Moria, the bucolic valley of Rivendell.
Most of Tolkien's submitted artworks, alas, were rejected by his publishers for reasons of cost, and so tens of millions of us first and most lastingly encountered his startlingly thorough vision through dog-eared paperbacks with smashed-up words and the odd hand-drawn map of Mirkwood. An immersive literary experience, to be sure, but less than what could have been.
Two special editions of the source material started the process of redressing that oversight. The 50th anniversary hardcover edition of The Hobbit from 1987, currently retailing at $125, has a handsome gold cover with some authorial rune work, plus some fine black-and-white drawings, more maps, and rich color renderings of Hobbiton and the dragon Smaug. The 50th anniversary hardcover of The Lord of the Rings from 2004 (just $70.49!) similarly includes some fold-out maps, color paintings, and gilded packaging.
More recently, and more competitively priced, is the 2015 collection The Art of the Lord of the Rings, which showcases most of Tolkien's visual output in one volume. But my main recommendation is tied to the 2019 Morgan Library & Museum exhibition that first opened my eyes to the philologist's surprisingly good paintings. Tolkien: Maker of Middle-earth, by Catherine McIlwaine, is only $57.27, the largest repository of Tolkienia ever assembled, and—I can testify!—a crowd-pleaser for the LoTR fanatic in your household. —Matt Welch, Editor at Large
For the wanderlust-ridden globetrotter catching the first flight post-pandemic:
I am a glutton for coffee-table books, with their glossy pages and their strange specificity—long-haired surf stars of the early aughts? Vogue magazine covers? Cabin porn? Pantone colors over the last hundred years? I'll take them all, gladly swimming through stacks of them whenever fancy house parties exist again and I can enter other people's living rooms with happy abandon. But none stands out so much as the recent release Xi'an Famous Foods: The Cuisine of Western China, from New York's Favorite Noodle Shop, which is best categorized as a mix of the two most glorious mediums: cookbook and coffee-table book.
If you've never been to one of Xi'an Famous Foods' dozen or so locations in New York City, make haste and remedy that. But since the pandemic has rendered travel much more difficult, you can also live vicariously through this book, and even take a stab at some of their recipes and techniques from the privacy of your own kitchen.
If you're an eating enthusiast, but not much of a cook yourself, you'll benefit from the guide to NYC's various Chinatowns (Flushing in Queens, Sunset Park in Brooklyn, and the classic one in Manhattan). If you're a drinker, you'll appreciate the green tea/Hennessy cocktail recipe that purports to help you "lose your karaoke stage fright" in a hurry—something we might all need help with after a year of being boring shut-ins. And if you're just, well, a libertarian, you'll appreciate Jason Wang's family's immigration story from Xi'an—a "dry, dusty city in northwestern China," heavily influenced by the flavors of the Middle East, full of charcoal smoke and "rough, ragged street noodles swimming in bright red chili"—to Michigan, then Connecticut, then finally Queens.
Wang tells the story of his dad, David Shi, laboring for years, working in restaurants all over the Eastern Seaboard before finally opening up the first Xi'an location in a 200-square-foot basement stall in a shopping mall in Flushing. Shi logged 20-hour days, the simple street fare gained a massive following, and eventually the food-world documentarian Anthony Bourdain came in with a film crew, helping to propel the restaurant to a place of well-deserved prominence.
The operation has expanded in the years since, and has even put out meal kits so customers can try their hand at reproducing Xi'an's famous hand-ripped noodles and spicy cumin lamb at home. In a world that's looked especially bleak for restaurateurs over the last year, put your dollars toward helping some really great labors of love survive, and subtly make the case to skeptics on your gift list that immigration makes America tastier and more entrepreneurial (among other perks) while you're at it. —Liz Wolfe, Staff Editor
The post The Ultimate 2020 Libertarian Gift Guide appeared first on Reason.com.
]]>Want to make money and help the world, too?
Wall Street says you can!
If you invest in "socially responsible" funds, say big investment funds like BlackRock, Parnassus, TIAA-CREF, etc., then they'll do good things for the world, and your retirement funds will grow.
These funds obsess about what they call Environmental, Social, and Governance factors. For example, Parnassus says it picks investments based on "their environmental impact, how they treat their employees, the quality of their relationships with local communities."
People believe. More than $100 billion poured in just in the first half of this year.
But I won't invest. My new video explains why.
One popular "socially responsible" fund, Generation Investments, is run by former Vice President Al Gore. His website claims they invest in "sustainable" companies that do things "consistent with a low-carbon, prosperous, equitable, healthy and safe society."
If you don't invest, Gore warns, you'll miss out on "the single largest investment opportunity in all of history. He says, "Sustainability can actually enhance returns!"
They do enhance his returns. The management fees help him pay for his many homes.
ESG funds probably won't do as much for you, if you invest.
"I've had a lot of experience looking at these types of investments," says Thomas Hogan, senior research fellow at the American Institute for Economic Research. "They don't actually accomplish the goals of being environmentally or socially responsible."
Al Gore's Generations Investments, for example.
"They're not really making socially conscious investments," says Hogan. "Their No. 1 holding is Alphabet, parent company of Google. They're just buying, basically, regular companies."
So, why do people invest?
"It makes people feel good," says Hogan.
Some "green" investment funds did well lately because oil prices dropped. But most will give you lower returns because they charge higher fees.
A Pacific Research Institute report found that their fees average 0.7 percent per year, which meant, over 10 years, the "green" portfolio was worth about 40 percent less than what you would have gained had you bought an S&P 500 index fund.
On top of that, what Wall Street calls "sustainable" or "social impact" investing is often just marketing.
Parnassus' brags that it owns US Foods and Clorox. What's special about them? Parnassus says food and cleaning supplies help meet U.N. sustainability goals like "nutrition" and "sanitation." Give me a break. US Foods and Clorox make good products, but there's nothing uniquely responsible about them.
The Boston Trust Walden ESG Impact Report brags about its activism, as if as lobbying for bigger government helped the world. They promote their lobbying for the Paris climate accord (see my video on why that's a bad idea) and for tougher workplace regulations in Bangladesh. Do they not know that tougher regulations make employment more costly, leaving more people more desperate?
BlackRock's socially "aware" fund brags that it gives you 2.62 percent more exposure to gender diverse boards. 2.6 percent? So what? Their "environmentally aware" fund also invests in Chevron and Exxon.
I asked BlackRock about these examples, but they never got back to us with an answer.
Worse, some of today's "environmentally responsible" funds probably harm the environment.
For example, most "green" funds wouldn't invest in the Keystone pipeline, but pipelines are much better for the environment than the alternative: hauling oil by train and truck.
Some "green" investors oppose fracking, but the United States led all countries in reducing carbon emissions mostly because fracking's natural gas reduces demand for coal and high carbon oil.
The ugly truth is that most so-called responsible investment funds charge more to sell feel-good nonsense that accomplishes nothing.
Instead, suggests Hogan, invest in any company that produces things people want. All those companies "(create) a lot of value for society."
They do.
I save money by investing in passive investments funds and exchange-traded funds that don't charge fat fees. They grow our economy without misleading people about "sustainability"—or enriching Al Gore.
COPYRIGHT 2020 BY JFS PRODUCTIONS INC.
DISTRIBUTED BY CREATORS.COM
The post Don't Believe the Hype About 'Socially Responsible' Investing appeared first on Reason.com.
]]>Can a bot run a company? A hot new tech venture that wants to run entirely by code thinks so. It's called "The DAO"—short for Decentralized Autonomous Organization—and it aims to run as a for-profit corporate body that will obviate the need for human beings to make business decisions. That is, provided that the human beings behind The DAO can set it up right.
While this leaderless digital profit-maximization machine may sound more like a clever science fiction plot device than a serious investment vehicle, The DAO has raised over $150 million worth of funding on the Ethereum platform since it first launched a mere month ago. For context, this blew the $116 million record for cryptocurrency-business financing raised by Silicon Valley darling 21 Inc. out of the water. An eyebrow-raising start to be sure, but The DAO faces a long and bumpy road to the world of ubiquitous, autonomous digital organizations that its founders envision.
Disrupting Investing
The DAO presents itself as part venture capital fund, part crowdfunding platform, and part super-cool engine of democratic capitalism for tomorrow. It seeks to raise investment into the platform by selling digital "DAO tokens" in exchange for ether (ETH), the cryptocurrency of the distributed computing platform Ethereum on which The DAO is built. The DAO, which defines itself as "the sum of those holding the DAO's representative tokens," will then invest these funds into promising projects that will hopefully yield big returns for token holders.
Where The DAO differs from traditional venture-capital firms is in its management structure. Like the similar BitShares project that preceded this effort, there are no executives or middle managers to call shots and guide activity. As its website proudly informs: "THE DAO IS CODE." Or maybe code plus consensus, but more on that in a moment. Purchasing a DAO token is a bit like entering into a new kind of business arrangement where you bind yourself to the financial outcomes of a crowd-influenced, pre-programmed directive.
Integral to this are "smart contracts." First conceived by the cryptographic legal theorist Nick Szabo two decades ago, a smart contract is a computer protocol that digitally enforces terms in way that is self-executing or self-enforcing. Relying on an established court of law to adjudicate contracts can be messy and costly. Digitization provides us an opportunity to secure agreements in a way that makes it expensive or even impossible to breach contractual terms—no taxing trips to the justice of the peace required! Smart contracts can largely enforce themselves.
Vending machines are a kind of proto-smart contract. You insert the right amount of money into the machine, select your choice of snack or beverage, and the machine spits out your tasty treat. You did not need to engage with a physical human to munch on those Peanut M&M's since the parameters of each transaction are prefigured into the mechanics of the machine: It can tell how many of each kind of snack can be sold, and at what price. It's a cheap and low-risk way to do business.
Smart contracts work similarly, but instead of physical currency and mechanical verification, cryptocurrency and digital consensus combine to execute conditional agreements. Parties can create a digital contract that is coded to perform certain functions in response to specific inputs. Futures contracts can self-execute when a market feed shows that a price moves in a particular way. Rental cars can unlock themselves for use upon receiving the right cryptocurrency payment. And, in the ambitious case of The DAO, investment firms can theoretically automate core business operations.
The Humans Behind the Bots
So, if The DAO is "run by robots," how do decisions get made? By humans, actually. Humans decide what terms to select, and the code executes. Here's how it is supposed to work.
There are three kinds of parties in The DAO: contractors, curators and token-holders. Contractors are teams who propose projects to be funded by The DAO. These are the "investees" that will actually build the goods or services that receive funding. Not just anyone can be a contractor. They must first be pre-approved by one of a handful of "curators" that largely consist of the Ethereum development and support team.
Then there's the token-holders: regular old Joes who pick which pre-approved projects to fund. They vote with their DAO tokens—the more DAO you have, the more your vote counts. If a contractor's proposal receives majority approval with a participation rate of at least 20 percent of token-holders, The DAO will automatically execute that investment and distribute profits as programmed. At least, this is the plan.
Slock.it is one of the first technology projects to put The DAO's plans into practice. The company hopes to build a peer-to-peer smart contract infrastructure for physical properties—kind of like a "Smart Contracted Internet of Things." It also developed much of the infrastructure at the core The DAO.
The Slock.it team put forth their investment proposal to The DAO community to be vetted and voted. The DAO community liked it. The proposal reached the minimum approval threshold and was greenlighted for sale on The DAO. If all goes well, Slock.it will be able to build a profitable product with the money raised through The DAO, and DAO token holders will enjoy revenue streams from the product for years to come. DAO tokens appreciate, ETH appreciates, and more innovations are introduced to the world.
The folks at Slock.it are so serious about distributed technologies that they are willing to fund their venture through a heretofore unproven, autonomous, decentralized corporation that will retain rights in their product. This requires considerable trust in the platform. As Slock.it CTO Cristoph Jentzsch and DAO White Paper author told CoinDesk, "We don't actually know who started [The DAO]. Of course we can see the address on the blockchain but we don't know who owns the address. The only way to speak to The DAO is to make a proposal and vote."
Digital Democratization
There are hundreds of millions of dollars worth of ETH tied into these hopes for The DAO. But why? Established crowdfunding and venture capital organizations seem to do well enough. Sure, you need to trust that the old centralized platforms don't unduly censor projects or abscond with your money. But what of the alternative? This kind of corporate arrangement is untried and potentially quite vulnerable to unknown attack or programming errors. It is almost certainly illegal in many places throughout the world. And who in their right mind would entrust their personal capital in a loosely-defined autonomous system with no known creator?
The New York Times found one such intrepid soul to highlight in its weekend feature on the project. The "31-year-old French socialist with an appetite for risk" that invested in The DAO is excited about profit opportunities as well as the prospect of disrupting money management. And he's bullish on experimentation for experimentation's sake as well: "It's important for people to propose and try an alternative," he said.
Seth Bannon of TechCrunch gushed that with The DAO, "a new paradigm of economic cooperation is underway—a digital democratization of business." He envisions a world where not only "the privileged" but anyone with access to the internet and a working knowledge of the Ethereum platform can found and fund promising new ventures.
Noln Bauerle of Bordless Blockchain writes at CoinDesk that The DAO should be thought of as a "new Dow," but unlike the legacy stock market index, it will be owned and controlled primarily for the benefit of market participants.
And about that latent robophobia? The Ethereum website cheerily suggests that "one of the many advantages of having a robot run your organization is that it is immune to any outside influence." Of course, this can sometimes be a disadvantage as well.
DAO or DOA?
Not everyone is wowed by The DAO. Even the more innovation-minded among us may understandably balk at the prospect of investing serious money in a proudly leaderless corporation operating purely via experimental code in dubious legal circumstances.
There have already been missteps: Miscommunication over the start date of the Slock.it sale lead to controversy and tension, resulting in a terse reprisal from CTO Cristoph Jentzsch that "The DAO will instantiate when it damn well pleases… Welcome to true decentralization, middlemen not welcome." (The press coverage inspired even less confidence, replete with a disclaimer that the author could not guarantee whether any of the story's facts and statements were accurate or legitimate.) "Leaderlessness" may yet prove to be a bigger challenge than first anticipated.
But even if a lack of leaders proves surmountable, there remains the question of investor quality. Daniel Larimer was the founder and chief developer of BitShares, an earlier, similar project that ultimately failed. He recently wrote an intriguing blog post comparing his project to The DAO and predicting what challenges this newcomer will face. He was quite blunt: "Smart contracts cannot fix dumb people."
If you put garbage in, you'll get garbage out, no matter how fancy the distributed mechanism that processes it all. The DAO could be quite good at eliminating the core problem it set out to solve: the corrupt administrator. But it does nothing to improve the economic and political problems that plague any such venture, and in fact could actually make them worse.
The biggest uncertainty, however, is the legal status of such an undertaking. Depending on an investor's national jurisdiction, participating in this leaderless stock market could run one far afoul of established securities regulations.
For their part, The DAO's top facilitators (don't call them leaders!) believe that the platform is set up in such a way that they bear no legal responsibility for the project's outcomes. But this defense has not saved others operating cryptocurrency projects in legal grey-areas in the past. Successfully integrating into existing legal systems will require lots of patient outreach to policymakers and judges until the appropriate norms are developed. This is quite difficult, but not impossible.
In the meantime, the Slock.it team is seeking to program around regulations with a project called DAO.LINK. While still in development, DAO.LINK is described as a "bridge between and brick-and-mortal companies" that will allow firms to harmonize their DAO operations with their municipalities' regulations. Leaderlessness, it seems, requires a much more complex digital infrastructure than one might anticipate.
The DAO is an ambitious project that has already amassed an almost incredible amount of funds in short order. A lot can go wrong, but in the event that things do go right with this maiden robocorp, the implications of a world occupied by autonomous digital corporations will be interesting indeed.
The post Can a Bot Run a Company? appeared first on Reason.com.
]]>Should shareholders have a say in how companies report on their "gender pay gaps"? The U.S. Securities and Exchange Commission (SEC) says yes, rejecting a request from Amazon.com to avoid shareholder voting on a pay-gap proposal that the tech company calls "vague and misleading."
The pay-gap proposal comes via Arjuna Capital, an arm of the investment firm Baldwin Brothers, on behalf of Amazon shareholders Michael and Margherita Baldwin. In 2015, Arjuna asked Amazon and eight other tech companies to hold shareholder votes on whether the companies should report "the percentage pay gap between male and female employees, policies to address that gap, and quantitative reduction targets."
"It's not simply a social justice issue," said Natasha Lamb, director of shareholder engagement at Arjuna, to Reuters. "It's an issue that affects performance, affects the company's ability to attract and retain top talent."
The Arjuna proposal explains that "the gender pay gap is defined as the difference between male and female earnings expressed as a percentage of male earnings according to the Organization for Economic Cooperation and Development" (OECD).
But Amazon sought permission from the SEC to omit the proposal from shareholder voting. In a January letter, it complained that the proposal offered no instruction on how to calculate the pay gap and claimed that "neither shareholders nor [Amazon] can determine what action the Proposal requires, rendering the Proposal impermissibly vague and misleading." Arjuna's letter referenced the OECD definition, but OECD offers multiple ways of calculating the gender pay gap.
OECD's "definitions and sources" file "contains a list of the 43 definitions of 'earnings' OECD 'used for the calculation of the gender pay gap in,'" noted Amazon. "The Proposal gives no indication of how earnings should be calculated for purposes of the requested report. Among other things, the Proposal makes no mention of whether the gender pay gap is calculated based on median earnings or mean average earnings, whether earnings are calculated based only on full-time employees or full-time/full year employees, or whether part-time employees should be included (and if so, whether their earnings should be converted to a full-time equivalent basis). Finally, the Proposal gives no indication of which of the various definitions of earnings used by the OECD is to be applied."
"Different calculation methods for determining 'earnings' could show significantly different results," it continued. "Thus, by referring to a third-party standard for reporting on the gender pay gap, a central and critical aspect of the Proposal, but failing to adequately describe the standard, and in fact misleadingly suggesting that there is a single, clearly understood OECD standard, the Proposal is impermissibly vague and misleading."
Arjuna responded that "the current proposal does not incorrectly describe any standards because it does not point to any set of standards to implement the proposal." The gender pay gap, "defined or not, is a commonly understood and significant social policy issue and a topic on which shareholder are equip to weigh in," it argued to the SEC. "The [OECD] definition is simply included to prevent an argument by the Company that the Proposal is vague or indefinite."
In a March 15 response, the SEC told Amazon that it may not omit the proposal from proxy materials and a shareholder vote. SEC Attorney-Adviser Ryan J. Adams stated that the SEC was "unable to conclude that the proposal is so inherently vague or indefinite that neither the shareholders voting on the proposal, nor the company in implementing the proposal, would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires."
The post SEC Says Amazon Must Allow Vote on 'Gender Pay Gap' Even If No One's Quite Sure What the Term Means appeared first on Reason.com.
]]>The late, great David Bowie wasn't just a
gender-bending "shape-shifter and a persona-generator," he was the rare rock star who not only survived the ravages of drug addiction but also had enough sense of self-preservation to diversify his economic portfolio before the music industry imploded.
In 1997, under the guidance of banker David Pullman, the creation of "Bowie Bonds" allowed the musician to sell the royalty rights to the 25 albums he recorded before 1990 for a lump-sum of $55 million, with the buyer of the bonds receiving all future revenue brought in by Bowie's back catalog plus 8% interest. At the time, Moody's blessed the bonds with a quality A rating.
As noted in a 2004 Reason article by Gene Callahan and Greg Kaza:
From Bowie's point of view, his financial future was too dependent on the vagaries of his popularity. By selling some of his royalty income to others, Bowie was able to diversify his investments. (We assume that he did not spend the entire $55 million on a huge shopping spree for his supermodel wife Iman.) He reduced the risk that a major shift in the public's musical taste would leave him a pauper. Meanwhile, investors who had not previously had any stake in the sales of Ziggy Stardust could diversify into that area and earn a decent interest rate while doing so.
In 2002, the erstwhile Thin White Duke presciently told the New York Times:
The absolute transformation of everything that we ever thought about music will take place within 10 years, and nothing is going to be able to stop it. I see absolutely no point in pretending that it's not going to happen. I'm fully confident that copyright, for instance, will no longer exist in 10 years, and authorship and intellectual property is in for such a bashing.
Music itself is going to become like running water or electricity. So it's like, just take advantage of these last few years because none of this is ever going to happen again. You'd better be prepared for doing a lot of touring because that's really the only unique situation that's going to be left. It's terribly exciting. But on the other hand it doesn't matter if you think it's exciting or not; it's what's going to happen.
Although the idea of Bowie Bonds was emulated by artists like James Brown, Joan Jett, the Isley Brothers and the state of Marvin Gaye, their value was not built to last. Peter Campbell of Financial Times writes of the downfall of music as a commodity:
But the rise of peer-to-peer music sharing service Napster blew a hole in copyright legislation, causing artists and the industry to fear for their financial future — and resulted in Bowie Bonds hitting an all-time low.
In 2004, with physical CD sales being cannibalised by piracy and the rise of online music services, Moody's cut the credit rating of Bowie Bonds to BBB+ — one notch above junk status.
The credit agency blamed "lower than expected revenues generated by the assets due to weakness in sales for recorded music" at the time.
In the prevailing spirit of today, in which music fans all over the world have taken to social media to freely share their favorite Bowie tunes (which were once only available as an expensive physical commodity), check out the link below where Bowie sings of "The Man Who Sold the World," long before he sold futures of his past.
The post David Bowie Foresaw the Collapse of the Music Industry and Adjusted Accordingly appeared first on Reason.com.
]]>The great thing about markets is that they encourage learning among participants. Sometimes the learning may take awhile, though. An article in today's New York Times reported that the executives who run the top 25 hedge funds took home $11.62 billion in compensation last year. However, the Times further noted:
For investors, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance, returning only 3 percent on average, according to a composite index of 2,200 portfolios collected by HFR, a firm that tracks the industry. Hedge funds are lightly regulated private pools of capital open to institutional investors like pension funds, university endowments and wealthy investors.
For example, Bridgewater Associates executive Ray Dalio earned $1.1 billion while his All Weather Fund ended the year down 3.9 percent. in fairness, his Pure Alpha fund did rise 5.25 percent.
Three percent? In 2014, an S&P index fund would have returned 13.68 percent when reinvested dividends are included.
Hell, I just looked at my Merrill Lynch quarterly performance report and found that over the past 7 years the S&P average was 8.95 percent and my return (i invest in a lot of risky biotechs and infotechs) was 8.03 percent over that period. Sadly, at no point did my investments out-earn the S&P over the past 7 years, but my returns have never fallen below 7.9 percent per year in the past seven years. That's a lot better than 3 percent.
So are there any hedge funds hiring at a modest salary? I will work cheap—say, $10 million per year to start?
The post Poor Hedge Fund Managers appeared first on Reason.com.
]]>Back in September 2013, Google launched Calico, short for California Life Company, which Google CEO Larry Page announced will focus on health and well-being, in particular the challenge of aging and associated diseases.
But that's not the only bet on longevity and health that the company is making. Today's Bloomberg Business is profiling Google Ventures chief Bill Maris and some of the biomedical and health startups that his team is investing in.
The profile begins promisingly when Maris says: "If you ask me today, is it possible to live to be 500? The answer is yes."
Google Ventures has stakes in Foundation Medicine which has created and is improving a bioinformatics platform that analyzes all genes known to be relevant to solid and blood cancers. This enables physicians to more precisely target treatments for each individual patient's cancer. Flatiron Health is a "big data" project focused on creating an "OncologyCloud" to capture and analyze the vast reams of clinical data hidden in the cancer care notes of doctors and nurses.
Bloomberg Business adds that Maris …
…hopes to find, and fund, the next generation of companies that will change the world, or possibly save it. "We actually have the tools in the life sciences to achieve anything that you have the audacity to envision," he says. "I just hope to live long enough not to die." …
In this vision of our future, science will be able to fix the damage that the sun or smoking or too much wine inflicts on our DNA. Alzheimer's, Parkinson's, and other scourges of aging will be repaired at the molecular level and eradicated. In the minds of this next generation of entrepreneurs, the possibilities are bizarre and hopeful and endless. We probably won't live forever, but we could live much longer, and better.
These are the bets Google Ventures is hoping will ultimately be its biggest wins. "We aren't trying to gain a few yards," Maris says. "We are trying to win the game. And part of it is that it is better to live than to die."
Work hard guys. Work hard.
See also Reason TV's segment, "What If You Could Live 10,000 Years? Q&A with Transhumanist Zoltan Istvan."
The post Google Invests in Immortality appeared first on Reason.com.
]]>critical inflection point," Peers noted on its website. "This rapidly evolving model has global and local implications that are changing markets, cities, and lives."
So what's the "sharing economy?" As I argued in an article last week, even the movement's big thinkers aren't quite sure what the phrase means, but it's often used to refer to businesses like Airbnb, Uber, Lyft, Sidecar, Getaround, RelayRides, and EatWith. These companies are also sometimes described as "peer-to-peer" because they connect buyers and sellers through online marketplaces.
In a series of four videos, I looked at how these companies are providing consumers a way around bad government policies. They're also demonstrating how regulation often serves no purpose other than to protect existing players.
Click below to watch the stories.
The post Is the 'Sharing Economy' a New Paradigm for American Capitalism? appeared first on Reason.com.
]]>But what if instead of free DVDs and tounge scrapers for your pet new companies could offer their funders an equity stake in the business itself? Security regulations dating back to the 1930s have made it difficult for companies to trade equity for cash. But two years ago president Obama signed the U.S. JOBS Act, which is supposed to open venture capital markets to the masses.
Indiegogo plans to open its platform to these sorts of deals. The company's co-founder, Danae Ringelmann, says equity crowdfunding will allow regular people to make investments based on their direct knowledge of specific industries. "There's a whole world of people who know what they know, but they don't have the ability to invest in what they know," says Ringelmann. "Equity crowdfunding is going to give mainstream investors the same opportunities that Wall Street has had forever."
But will Washington actually allow this new approach to work? It took a full year and a half after the passage of the U.S. JOBS ACT for the Securities and Exchange Commission (SEC) to release a 585-page document laying out how it will regulate equity crowd funding. Among other things, companies that want to raise money on platforms like IndieGoGo will have to produce financial statements, provide "a narrative discussion of financial results," and file annual reports with the SEC. Compliance costs could chase away lots of promising ventures. And in a world of open information, why do we need the SEC getting in the way in the first place?
"If the SEC can just stay open and allow the platforms to experiment," says Ringelmann, "I think we'll get there."
Click here to watch Reason TV's entire series on the sharing economy.
About 3:21.
Written, shot, and produced by Jim Epstein.
About 3:21 minutes.
Scroll down for downloadable versions and subscribe to Reason TV's YouTube Channel to get automatic updates when new material goes live.
The post Want to Buy Stock in Your Corner Bistro? The Government Opens Venture Capital Markets to the Masses appeared first on Reason.com.
]]>As free-market and smaller-government advocates work to save money and restore fiscal stability to states and municipalities by pushing government employees from debt-building pensions to 401(k)-style defined contribution savings plans, unions are obviously going to hit back. The American Federation of Teachers (AFT) has decided to make it a little more personal by going after anybody who works in the area of retirement asset management who also supports a handful of blacklisted free-market think tanks calling for such changes.
The "watch list" on their "Ranking Asset Management" report (pdf) contains only four nonprofits: StudentsFirst, the Show-Me Institute, the Manhattan Institute, and Illinois Is Broke. The Reason Foundation (the nonprofit that publishes this site and Reason magazine) is not on the list, despite the foundation's involvement in encouraging similar reforms. We even have our own pension policy expert!
Anyway, the AFT warns it's going to be looking at those who support privatizing government retirement funds, particularly asset managers who are "funding or playing leadership roles" in its blacklisted think tanks. The justification in the report for exposing these people is to identify those who make money off pension funds yet also actively support efforts to shift government employees to defined contribution plans. It lists the names of several people who work at investment companies and are also connected to the blacklisted groups. The report states, "The AFT is committed to shining a bright light on organizations that harm public sector workers, especially when those organizations are financed by individuals who earn their money from the deferred wages of our teachers, school-related personnel and other members."
The logic of that argument is a little unclear. It seems to want to indicate some sort of hypocrisy, but doesn't really do so. If somebody who earns their money from pensions wants to shift to defined contribution plans what does that actually mean? The report, per usual union behavior, claims shifting away from pension plans threatens employee retirements without any actual evidence. Why would somebody who makes a living off retirement funds want to shift to a system that threatens retirements? I suspect the answer to this would be a screed against Wall Street and fund fees, but as Union Watch at the California Policy Center notes, public employee pensions are really not in a position to be complaining about the vagaries of Wall Street:
CalSTRS [The California State Teachers Retirement System] invests in companies and financial instruments they supposedly detest: Skip along in the CalSTRS Annual Report to page 101 and take a look at their "largest equity holdings." They include Exxon Mobil Corp at the #1 position, and Chevron Crop at #5. Go back to page 45 to see where CalSTRS has $22 billion in "Private Equity Investments." How many Wall Street wolves fatten themselves on that rather substantial hunk of fresh meat?
What more does it take to make clear there is a phony war going on between public sector unions and the financial community? This isn't an ideological battle, it's an intramural struggle for dominance between two groups who are both elitist and privileged, who need each other far more than they need taxpayers.
"Dark money," or money that doesn't pass the "smell test," seems to be a favored meme of public sector unions these days. Especially if that money is used to fund challenges to their interests, hence, a new "blacklist." But why does public sector union money, sourced involuntarily, falling into their accounts automatically by the millions and billions, emanating directly from taxpayers, used to intimidate opponents, fund political campaigns and academic studies, organize activist groups, and feed Wall Street financiers, get a pass?
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]]>Those who remember the 1990s may recall some really expensive and awful virtual reality games popping up in arcades right before they mostly died off for good. Players put on giant helmets that projected a virtual space they pretended to play in while standing around in the real world looking like dorks.
While those virtual reality systems are long gone, the dream did not die. Meet Oculus Rift: a new virtual reality headset that has developed enormous buzz among gamers and in the gaming industry. And it owes a significant amount of its development to crowdfunding. Oculus, the Long Beach company designing the system, raised $2.4 million on Kickstarter after asking for just $250,000.
Then, Tuesday afternoon, Facebook bought Oculus for $2 billion, $400 million of which is cash. It may seem like a strange acquisition for Facebook—it's hardware, not some app that can be incorporated into Facebook's offerings. But Facebook CEO Mark Zuckerberg said in a statement he's looking beyond the current mobile setting: "Mobile is the platform of today, and now we're also getting ready for the platforms of tomorrow. Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate."
Some of Oculus Rift's funders feel betrayed and used, though they're undoubtedly still going to get whatever perks their backing paid for. The developer of Minecraft tweeted that he was canceling a deal to bring the game to Oculus Rift because Facebook "creeps [him] out." Reddit is full of rage about the sale, but rage is half of Reddit's deal anyway.
Over at ValleyWag, Joel Johnson, who donated $300 to the Oculus VR Kickstarter campaign, provides more useful detail as to why somebody might feel betrayed by the decision. What's wrong with Oculus Rift drawing the interest of Facebook, getting bought, and possibly becoming even bigger than anybody ever predicted?
The fact that everyone involved made a rational choice to sell out isn't what I find frustrating, I don't think. (I don't even particularly care that Oculus sold to Facebook and not, say, Microsoft. Ultimately a sale is a sale, even if Facebook is the worst possible partner for Oculus of any of the large technology companies.) It's that I, as a consumer, bought into the narrative that underpins almost every Kickstarter project: that without my contribution, something novel would not exist. And while that remains true—and is a reason that Kickstarter's owners continue to underline that their goal is to fund "creators" and not "products"—Oculus' sale to Facebook also highlights the disparity inherent in the current capitalist and investment structure, where small investors are excluded from returns by regulation, but investors with more capital can quickly extract more capital by pushing a quick expansion into untapped markets, even without proving that those markets actually, truly exist.
The way our investment regulatory structure is run, those small Kickstarter donors are simply not allowed to be offered a piece of the company in exchange for their gifts. Johnson's early support of Oculus won't—and currently cannot—pay off like it would for an investor. It's a problem supporters of crowdfunding are trying to fix, and some are hoping a massive, 585-page new set of rules by the Securities Exchange Commission (SEC) will help. The new rules will allow a company to raise up to $1 million in investment—not just donations—from crowdfunding sources in a one-year period.
But obviously there are some strings attached, or it wouldn't take the SEC the duration of a novel to give companies permission to sell stakes to small donors. An analysis at VentureBeat calculates that the various reporting and compliance requirements the SEC wants to put into place to allow crowdfunded investment could eat up more than a third of funds raised this way. The compliance costs eat up less of the money the more money raised, which doesn't exactly encourage these companies to stick with smaller donors. For those who are frustrated that their early financial support of Oculus won't pay off with a share of Facebook profits, they are going to have to use the developer's kits they paid for to try to make awesome games instead. Clearly what Farmville needs is the feeling like you're on the actual farm, begging your virtual friends to help you milk cows.
The post Facebook Buys Crowdfunded Pioneering Virtual Game Company: Opportunity or Betrayal? appeared first on Reason.com.
]]>The move is a novel way for the San Mateo company to finance the enormous cost of installing panels on thousands of roofs—a typical residential system costs $25,000—while appealing to retail investors who are on the hunt for better rates of return than they can find in savings accounts and government bonds.
The securities will likely be similar to bonds or certificates of deposit. But instead of being backed by SolarCity, they would be backed by hundreds or thousands of contracts with rooftop solar customers. Wall Street has long created such products, called securitizations, which bundle assets such as mortgages or other loans into securities that can then be bought and sold.
The post SolarCity to Offer Direct Securities Investments appeared first on Reason.com.
]]>•One of the big undertold, and by the nature of it will likely remain undertold since the potential subjects of those stories have every incentive to keep it to themselves, tales of the Bitcoin boom are specific details of the specific visionary liberty and tech types who found their belief in an agorist free future paying off in literal millions for literal half hours of effort.
But Vocativ has a nice profile of early adopted and Bitinstant entrepreneur Charlie Shrem, who without details admits he's living the high life now. Detail:
Many Bitcoiners are fervent libertarians: They believe that because Bitcoin is a decentralized currency, the government can't touch it. Shrem tells me he stays away from all that "libertarian stuff"—and yet his world view is pretty starkly libertarian.
"I don't care about politics," Shrem says. "I don't care for the Fed—I mean, I do. It sucks. I hate our current monetary policy, and I hate our current fiscal policy. I think that technology can change the world, and that technology will trump whatever the government says."
Shrem, who is also the vice chairman of the Bitcoin Foundation, a nonprofit that spreads the word about Bitcoin, plans to re-launch his site in the next few weeks. In the meantime, he's enjoying life—and his fat stockpile of Bitcoin.
"A lot of what I do is making deals, closing deals, getting people to like me. It's impressing people. I have to take a lot of people out to clubs, buying bottles, buying dinners. BitInstant is my day job. Bitcoin is my life. I drink for free, I eat for free. It's a good life so far."
•What did lots of Bitcoin holders spend their Bitcoins on on Black Friday? According to Business Insider, $900,000 in Bitcoin value was spent at one gold and silver exchange, Amagi Metals, over Thanksgiving weekend.
•Forbes reports that Bank of America is now "the first major financial institution to initiate analyst coverage of Bitcoin" and "declared a maximum fair value of $1,300."
•Wired reports on homeless men (and they aren't alone) who regret spending any of their Bitcoin on food now that they realized if they'd saved it it would be far, far more valuable now.
Between April and September, while living on the streets of Pensacola, Florida, they used their laptops and smartphones to collect a total of about four or five bitcoins. Some of it arrived through donations. Some of it came from rather unsophisticated online services that dole out tiny fractions of the digital currency if you spend some time looking at videos and ads. And over the course of the summer, this free money bought them a pretty steady supply of pizza and chicken tenders.
Today, after finding a house they can rent with a little help from the government, the trio is off the streets, and life is even better than it was before — except that a bitcoin is now worth over $1,000. "The $600 we spent would now be worth $6,000," says Angle. "I wish we had gone hungry."
His buddy Kantola feels much the same way. "We're definitely kicking ourselves. We spent $5,000 or $6,000 on food!" he says. "Back in 2009, you could have bought four bitcoins for a dollar. If I could go back [and buy some then], I wouldn't be here right now. I'd probably be in a mansion."
I wrote less than three weeks ago with some perspective on zooming Bitcoin prices when they had just topped $500–yes, less than three weeks ago. Jerry Brito wrote for Reason in our December issue on the many uses of Bitcoin protocols for a wonderful human future.
The post Bitcoin: Regrets, Triumphs, Going for the Gold, and Bank of America Takes Notice appeared first on Reason.com.
]]>The music streaming company has reportedly secured $250 million in new financing, valuing it at more than $4 billion, according to The Wall Street Journal. Spotify previously raised $100 million almost exactly a year ago at a $3 billion valuation.
Spotify declined to comment on the report.
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]]>The concept has been used for everything from public radio pledge drives to helping families with medical bills.
With advances in technology, however, crowdfunding has become a popular way to raise money for just about any purpose, from an art project to a video game startup.
To date, there have been two distinct ways of using electronic crowdfunding. One is using websites like Kickstarter or Indiegogo, where people funding an idea get something in return for their money. For example, the developers of Pebble Smartwatch raised more than $10 million by offering investors the first batches of watches once they were manufactured, and at a discount.
(H/T Matthew Begemann)
The post Wisconsin Crowdfunding Bill Allows Ordinary Citizens To Take Part in Early Stage Investing appeared first on Reason.com.
]]>The firm announced Saturday that Geithner will serve as president and managing director of the firm starting March 1, 2014.
The post Geithner to Join Private Equity Firm appeared first on Reason.com.
]]>The Securities and Exchange Commission filing shows that Berkshire Hathaway held about 40 million Exxon Mobil shares as of Sept. 30.
The company, however, appears to have begun amassing its shares during the second quarter. A separate amended filing Thursday showed that it had bought the bulk of the Exxon Mobil shares, about $2.82 billion worth, in the three-month period ending June 30.
The post Warren Buffett's Firm Buys Big Stake in Exxon Mobil appeared first on Reason.com.
]]>The proposed deal, which must receive court approval, was disclosed in a letter from Preet Bharara, U.S. attorney for the Southern District of New York, to two judges overseeing the case. The agreement does not contain measures to limit how SAC principal Steven A. Cohen may continue to manage his personal fortune, estimated at $8 billion.
The U.S. attorney's office released documents detailing the agreement ahead of a scheduled 1 p.m. press conference to discuss it.
The post SAC Capital to Pay $1.8 Billion for Insider Trading appeared first on Reason.com.
]]>A Gallup poll released on Tuesday shows that for the first time a clear majority of Americans (58 percent) say the drug should be legalized.
Investors are watching this momentum. Some of them believe legal pot sales will be the next "big thing" and they hope to strike it rich by getting in on the ground floor.
This "green rush" mentality is custom-made for scammers.
"Anytime something has cachet and people are paying attention to it, there's the chance that people with evil intent will take advantage of that," said Bill Beatty, director of the securities division in the Washington State Department of Financial Institutions.
The post New Marijuana Investment Opportunities Lead to Scams appeared first on Reason.com.
]]>The Securities and Exchange Commission voted unanimously to propose rules that, for the first time, would allow investors to buy stock in companies over the Internet using a crowdfunding exchange. These rules could reinvent the way that companies raise money by allowing them to bypass the traditional costs of going public, which usually involved hiring costly investment bankers and accountants.
The SEC's vote on so-called equity crowdfunding is in direct response to Title III of the JOBS Act, passed last year, in which Congress is looking for a loophole to allow smaller companies to get an exemption from the strict rules controlling the sale of securities to individuals. Congress is hoping that by using Internet crowdfunding, small and promising companies could gather capital needed to grow and expand from a wide pool of investors. These companies could, in theory, raise money they need to grow well before they could afford the relatively high costs of a traditional initial public offering.
The post SEC Ponders Allowing Crowdfunding for IPOs appeared first on Reason.com.
]]>The indictment accuses Mr. Konigsberg of assisting Mr. Madoff in doctoring the false account statements that were central to carrying out the fraud. Prosecutors say Mr. Konigsberg performed services for more than 300 accounts invested with Bernard L. Madoff Securities, including those held by some of the firm's earliest and wealthiest clients.
The post Accountant Who Worked with Madoff Indicted appeared first on Reason.com.
]]>In Denver, more than 60 investors from The ArcView Group met with 22 startup marijuana companies—including several directly involved in marijuana sales or cultivation, which was a first for the investment group—seeking capital. By the end of the meetings, the investors committed "well over $1 million" to Colorado marijuana companies, ArcView CEO Troy Dayton told The Denver Post.
And it may have been even more, however, due to Colorado's marijuana laws which requires investors to qualify as state residents for three years before making equity investments in a marijuana business, some investors had to cap their deal pens.
The post $1 Million Invested in Colo. Marijuana Industry appeared first on Reason.com.
]]>In a Sept. 4 letter, more than 50 people with a campaign known as StartupEquality.org urged the SEC to afford gay couples the same rights as straight couples to invest in private placements and other startups.
At issue is an SEC rule that defines who is eligible to participate in private stock offerings.
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]]>Adopted by a 4-1 vote, the rule eliminates an 80-year regime of advertising restrictions intended to safeguard small investors from taking on potentially dangerous risk. The rule covers the way issuers raise funds through private offerings, a process that is exempt from requirements to report public financial statements.
While the rule would authorize firms to raise unlimited amounts via mass advertising of private offerings, it would require reasonable steps to ensure that buyers are so-called accredited investors — who are wealthier and deemed better able to gauge investment risks.
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]]>"I hope our fund will be the first hedge fund to take advantage of using bitcoins," explains Managing Partner Anatoliy Knyazev. Exante actually announced the fund in October last year, but they did not make a serious effort to market it. Now, with more institutional interest emerging, they agreed to provide this update to Forbes.
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]]>According to the recent Reason-Rupe pollAmericans believe private not public investment primarily drives technological innovation. This does not mean Americans ignore public investment's role, but that the economy's technological engine is primarily fueled by risks and investments made by the private sector. Republicans are far more likely to say private investment primarily powers the economic 83 to 10 percent, as do Independents 72 to 21 percent. Only a slim majority of Democrats agree, with 51 percent versus 39 percent who think public investment is most important for technological innovation.
Among Americans who believe public sector investment is most important for innovation, 77 percent approve of President Obama and 18 percent disapprove. Fifty-seven percent of these respondents also "strongly support" increasing taxes on the wealthy to balance the budget. In contrast, those who say private investment is most important, 54 percent disapprove of the president while 41 percent approve, and 32 percent "strongly support" increasing tax rates on the wealthy.
Middle age is correlated with greater belief in private investment. For instance, 56 percent of 18-24 year olds and 63 percent of Americans over 65 compared to 71 percent of 35-54 year olds. Majorities of Caucasian (73 percent) respondents as well as a slight majority of Latinos (52 percent) believe private investment is most important; in contrast 53 percent of African-Americans think government investment is most important.
Although households connect private investment with innovation, the connection is less clear betweentax structure and investment, and thus taxes and innovation. The Reason-Rupe poll asked Americans whether raising taxes on wealthy households makes a significant difference in reducing the money available for investing in business start-ups, only 35 percent thought there was a connection. Likewise, only 26 percent thought raising taxes on high earners reduces the amount they work and invest. Consequently, it is less surprising that 73 percent thought raising taxes on wealthy households would have no significant impact on innovation. Read more about these results here.
Nationwide telephone poll conducted January 17th-21st 2013 interviewed 1000 adults on both mobile (500) and landline (500) phones, with a margin of error +/- 3.8%. Columns may not add up to 100% due to rounding. Full methodology can be found here. Full poll results found here.
The post 66 Percent Say Technological Innovation Depends Primarily on Private Not Public Investment appeared first on Reason.com.
]]>According to the recent Reason-Rupe poll Americans believe private not public investment primarily drives technological innovation. This does not mean Americans ignore public investment's role, but that the economy's technological engine is primarily fueled by risks and investments made by the private sector. Republicans are far more likely to say private investment primarily powers the economic 83 to 10 percent, as do Independents 72 to 21 percent. Only a slim majority of Democrats agree, with 51 percent versus 39 percent who think public investment is most important for technological innovation.
Among Americans who believe public sector investment is most important for innovation, 77 percent approve of President Obama and 18 percent disapprove. Fifty-seven percent of these respondents also "strongly support" increasing taxes on the wealthy to balance the budget. In contrast, those who say private investment is most important, 54 percent disapprove of the president while 41 percent approve, and 32 percent "strongly support" increasing tax rates on the wealthy.
Middle age is correlated with greater belief in private investment. For instance, 56 percent of 18-24 year olds and 63 percent of Americans over 65 compared to 71 percent of 35-54 year olds. Majorities of Caucasian (73 percent) respondents as well as a slight majority of Latinos (52 percent) believe private investment is most important; in contrast 53 percent of African-Americans think government investment is most important.
Although households connect private investment with innovation, the connection is less clear between tax structure and investment, and thus taxes and innovation. The Reason-Rupe poll asked Americans whether raising taxes on wealthy households makes a significant difference in reducing the money available for investing in business start-ups, only 35 percent thought there was a connection. Likewise, only 26 percent thought raising taxes on high earners reduces the amount they work and invest. Consequently, it is less surprising that 73 percent thought raising taxes on wealthy households would have no significant impact on innovation. Read more about these results here.
The post 66 Percent Say Technological Innovation Depends Primarily on Private Not Public Investment appeared first on Reason.com.
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