Friday, October 30, 2015


I am incredibly excited about Nintendo's new mobile game/messaging app, Miitomo. Messaging, and photos, are the killer apps on mobile phones, and I cannot wait to see what Nintendo has created by adding it's game magic to these basic core functionalities.

Monday, October 26, 2015

The Housing Bubble involved banks

Two economists from my alma mater have an article on 538 about why the Housing Bubble tanked the economy when it burst in 2008, but the Internet Bubble of 2000 did not.
What explains these different outcomes? In our forthcoming book, “House of Debt,” we argue that it was the distribution of losses that made the housing crash so much more severe than the dot-com crash. The sharp decline in home prices starting in 2007 concentrated losses on people with the least capacity to bear them, disproportionately affecting poor homeowners who then stopped spending. What about the tech crash? In 2001, stocks were held almost exclusively by the rich. The tech crash concentrated losses on the rich, but the rich had almost no debt and didn’t need to cut back their spending.
It pains me to say this, because I love economics and I love Chicago, but Sufi and Mian get this wrong because of the core gap in monetary economics -- they miss the finance system.

In general, economics treats money as an "illusion" in that it facilitates the trade and exchange of real goods and services, but fundamentally does not impact or distort that exchange (at least to no great degree). A rose is a rose is a rose, and therefore a good is a good is a good regardless of whether it's prices in dollars or shekels. Therefore, money in general and banks in particular do not play a central role in macro monetary models, which instead focus on things like time preference, consumer expectations, etc.

In reality, money, or more particularly credit, plays a central role in the economy because of how bank lending works. When banks lend, they lever up their balance sheet, and therefore create money out of "thin air", constrained only by capital requirements on the supply side, and the number of qualified borrowers on the demand side.

Saif and Mian are unaware of this dynamic, as they show in their opening paragraphs:
In 2000, the dot-com bubble burst, destroying $6.2 trillion in household wealth over the next two years. 
Five years later, the housing market crashed, and from 2007 to 2009, the value of real estate owned by U.S. households fell by nearly the same amount — $6 trillion
These two $6T are not comparable. In the dot-com bubble, the loss wiped out venture accounts and household wealth in brokerage accounts, but neither was enabling additional lending (and therefore money supply). In the housing bust, $6T of bank capital (which collateralized the loans) was propping up an additional $120T or so (at a 5% capital requirements ratio) of money supply, so the impact on the economy was over an order of magnitude greater.

Without understanding credit, and the role banks play in the economy, economics will continue to struggle to explain the business cycle, and fall for fads like distributional spending effects.

Thursday, October 22, 2015

Peak Unicorn?

Dan Primack writes in Fortune that we might be seeing "peak unicorn".
Since landing in San Francisco on Wednesday, I’ve met with an assortment of senior venture capitalists, bankers, entrepreneurs and crossover investors. All of them have, in one way or another, been involved with so-called ‘unicorn’ companies. As in the past, they are nearly unanimous in sentiment. The difference now is that their sentiment is fear.

The past several years of raising too much, too high, too soon has run smack into a much more conservative investor ethos. Later-stage tech startups can still raise growth equity — and still lots of it — but not necessarily at the terms they were receiving just two months ago.
He follows up in his newsletter:
In response, many have shrugged and said something like, "Even if all of these companies were to completely fail, it wouldn't really have a broad economic impact. The amount of venture capital invested each year is tiny compared to the public markets, and just half of the amount of VC invested in the dot-com boom."

But that's a pretty narrow view of what matters, given how many people each of these companies employ (and how many new employees they keep adding). Research firm PitchBook reports that 91 of the U.S.-based unicorn cohort employ around 57,000 people, with many of them adding hundreds of new workers within the past year.
57,000 really isn't that many people. Apple employs about 40,000 all by itself. And since this bubble is equity financed, not debt financed like the housing bubble, if it pops the write downs will not impact general credit and economy function.

Also, the likelihood of unicorns absolutely failing is very low. You have to have some product market fit to get to the size they have, the only question really is of valuation. If valuations are too higher, and the investors have been smarter about the deal terms than the entrepreneurs, then the only outcome will be lower (or no) returns for the entrepreneur and modestly worse outcomes for the investors.