Focus on the bankers...

Whose fault is our current cauldron of burning economic misery? Greedy, incompetent bankers playing with combustible financial instruments, or incompetent Central bankers unleashing a tidal wave of low interest rates and cheap money?

We think it’s the latter. High street bankers merely did what they’re supposed to do with cheap, plentiful money: they lent it to anyone able to sign their name on a loan application (and a few that couldn’t). The rest is asset bubble history.

However, politicians and Central bankers are a cunning lot. Capitalising on public envy at bankers’ plush bonuses, they’ve successfully laid the blame on the men in blue suits. Meanwhile, having escaped beheading for the last fiasco, they’re merrily re-enacting their crimes against economy by creating new and better bubbles.

And not content with successfully besmirching the image of innocent and cuddly bankers everywhere, they’re proposing the taxation of international financial transactions. It’s like a rapist successfully prosecuting his victim, then getting her to bear the cost of her own punishment.

This opportunistic tax may line depleted government coffers, but will certainly not eliminate business cycles. It will however create frictions in international trade that make normal cycles more destructive, by reducing the market’s ability to self-correct through reallocation of capital.

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An offer eBay couldn't refuse.

In a negotiation for the ages, Niklas Zennstrom and Janus Friis, the founders of Skype, have just wiped the floor with Ebay.

In 2005, they sold their internet telephony busines to eBay at a valuation of $2.6bn. Blinded by the fashion of buying any internet company with lots of ‘eyeballs’, eBay overpaid. Skype has now been written down to a less lofty value of $1.7bn.

It’s clear who got the fag end of that price negotiation. But that wasn’t all. The crafty duo retained IP rights over the core technology, and when eBay tried to sell Skype, they cried foul. Lawyers were mobilised, and they threatened to withdraw Skype’s license to use their technology.

This was masterful brinkmanship. Without the technology, Skype would have to be shut down. Nobody would buy a company with such a gun to its temple. They had eBay by the short hairs, and were pulling firmly. Negotiations resumed.

In exchange for unclamping Skype’s cojones, the pair were given 14% of the company plus cash. Unencumbered, Skype has now been sold, and the savvy Europreneurs are laughing to the bank. Presumably, the MBAs at Skype who led the first negotiations are seeking employment opportunities elsewhere.

Good together

Countries, like people, see the world through the frame of their defining memories. This explains why black and ethnic minority teachers in the UK are suffering ‘endemic racism’: The defining memories of whites and minorities in the UK involve colonialism, slavery and empire.

The indigenous British mind simply knows of no other way to view ethnic minorities than as an inferior class interloping upon hallowed turf. Even liberal, post-racial attitudes are not an absence of this bias, but an overcoming of it.

China is saddled by no such historical baggage. As the Chinese premier enthusiastically deepens his economic partnership with Africa, the sense of equal partnership and mutual trust is a far cry from the extractive, master-servant relationship that was colonial ‘trade’. The reason is simple: historically, China never related with black people as inferiors.

The implications to the West are serious. Closely behind the wave of rising BRICS is an incipient African resurgence.  The Africa-China alliance is a partnership of fast-growing titans. Saddled by debt, fiscal deficits and mature economies, exclusion from this powerhouse club could spell perpetual stagnation for the West. Inclusion will mean accepting Africans and Asians as equals. And such practical humility must begin at home.

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Modern management

The French word for work is ‘travaille’, and new mental health reports indicate it is painfully appropriate. The Beeb is reporting that a quarter of the UK’s health care costs go to salving the souls of people traumatised by the workplace.

The fact that 25% of workers describe their mental health as moderate or poor is sad but unsurprising. The modern workplace is inherently oppressive, and bad managers- the main villains of the piece- have structural incentives to keep it so.

Managers need power to get things done- including the right to coerce and intimidate. It is in firms’ interest to give this power, and to tolerate coercive supervision up to the point where it starts being illegal.

Individuals too, feel more confident and perky when they oppress other people. We take the stress from our bosses and pass it down to subordinates. Abusing power feels good, and most people will do it, again up to that point when we expose ourselves to sanctions.

This is why the article’s exhortations to say ‘well done’ to staff are naive. There’s no incentive to do so. People endure just enough workplace misery to offset the value of their paycheck. The system is in equilibrium, and will stay that way.

Yes, it’s currently fashionable to question The Way of The Capitalist. The current economic whirlpool is considered a signal failure of the idea that free markets self-correct and guarantee the consistent creation of wealth.

The anti-capitalist bandwagon is chock full. Michael Moore, the talented film-maker who never lets facts get in the way of good, tendentious sensationalism, is cashing in with a documentary lambasting the excesses of our creed.

In former communist countries, many citizens are disillusioned with capitalist reforms (surprise, surprise, only a small number of people can afford a Mercedes). This is misguided. Communism delivered bread lines, ill-fitting pajamas, drab living and stagnant economic growth.

The current travails may make the past seem attractive, but that is just nostalgic bias. The market is self-correcting, and this recession too, will pass. The consumer’s recovering optimism is evidence that on a visceral level, he senses this. Viva la Capitalism.

All together now...

Economists counsel that during a recession such as this, the thing to do is make money cheap, so that people can go out shopping, and happily get themselves deeper into debt.

The problem is, it was cheap money that got us into this mess in the first place. There could have been no house price bubble without low interest mortgages allowing every man and his dog to become a real estate mogul.

Welcome to deja vu all over again. UK house prices are almost up to the same levels they were before the bubble exploded, as consumers lap up the low interest mortgages on offer. If house prices were inflated then, they are inflated now.

That’s not all. The gold price bubble is still merrily inflating, with governments now jumping the bandwagon. Today’s vertiginous stock market correction should remind us that what goes up too far too fast always comes down hard.

If interest rates had been kept high, the recession would have been more brutal. But it would be over by now, with asset prices back to rational levels. Instead, we’re in suspenseful trepidation, wondering which asset class will follow the stock market over the cliff. Brace yourself.

Apple and Diamonds: Value in Scarcity

We all want what we can’t have- especially if other people have it. And the more we can’t have it, the more we want it. Canny marketers know how to make money out of this human quirk.

Take the new Michael Jackson documentary, This is It. When its cinematic release was first announced, it was promised to run for ‘only two weeks’. Our inner cynic scoffed at the naked ploy, and predicted the run would eventually be extended.

We were right. The cinematic run has now been extended. And largely because of the sense of scarcity, record ticket sales have resulted.

This scarcity effect is everywhere. Restaurants where it is hard to get a table are in high demand. Apple under-produces new product models so that the long ensuing queues raise their perceived desirability. Internet marketers tell you their ’special offer’ will only be available until midnight, so you’d better sign up NOW!

Bizarrely, it works. And you’re either a perpetrator or a victim of it. To be the former, the trick is to convince your potential buyers that they want your product more than you need to sell it to them. The potential to backfire is obvious. Good luck pulling it off.

One product to rule them all

Most companies have too many products. It’s one of those axioms of business that are true in all industries at all times.

Crunchgear illustrates the point by comparing Apple’s tiny product line with the multiplicity of offerings by such companies as Garmin. Where typically, 20% of your product line will deliver 80% of your profits, why retain the lagging 80%?

The reasons are rooted in organizational psychology. The first is politics: multiple departments want to launch their ‘own’ products, and powerful managers prevail. Competitor imitation also contributes: the urge to produce ‘fighting brands’ that mirror every competitor’s entry is irresistible to those who think a full product line retains customers.

Then there is segmentation taken to ridiculous extremes in the hope of maximising revenue through differentiated pricing. Lastly, there’s the psychological comfort in the portfolio effect: the more products you have, the more likely one of them will be making money.

However, excessive choice just frustrates and confuses buyers, and an unfocused portfolio means wasteful cross-subsidies. By offering only one product per segment and making it the best it can be, you maximise returns on human and financial capital through better focus. Just ask the iPhone.