Alex Blumberg and NPR's Adam Davidson—the two guys who reported our Giant Pool of Money episode—are back, in collaboration with the Planet Money podcast. They'll explain what happened this week, including what regulators could've done to prevent this financial crisis from happening in the first place.

And if you call now, you'll receive a lovely, cuddly, NPR horse blanket.

Another Frightening Show About the Economy | This American Life

We show that it is extremely difficult to devise incentive schemes that distinguish between fund managers who cannot deliver excess returns from those who can, unless investors have specific knowledge of the investment strategies being employed. Using a ‘performance‐mimicking’ argument, we show that any fee structure that does not assess penalties for underperformance can be gamed by unskilled managers to generate fees that are at least as high, per dollar of expected returns, as the fees of the most skilled managers. We show further that standard proposals to reform the fee structure, such as imposing high water marks, delaying managers’ bonus payments, forcing them to hold an equity stake, or assessing penalties for underperformance, are not enough to separate the skilled from the unskilled. We conclude that skilled managers will have to find ways other than their track records to distinguish themselves from the unskilled, or else the latter may drive out the former as in a classic lemons market.

From the Brookings Institution.

The Hedge Fund Game

It's not so much about the demand. It's about the supply. Or, rather, the fight to be your supplier.

I will say this again: this is to stymie services like Hulu, NetFlix and Amazon On-Demand.

Recently:

What service providers publicly promise to do, if they are given complete control of their networks, is to build special facilities for streaming movies. But there are two fatal defects to that promise. One is that movies are unlikely to offer all that much revenue. The other is that delivering movies in real-time streaming mode is the wrong solution, expensive and unnecessary.

If service providers are to derive significant revenues and profits by exploiting freedom from net neutrality limitations, they will need to engage in much more intrusive control of traffic than just provision of special channels for streaming movies.

And from way back:

Just a few short months ago, it seemed that humanity stood on the edge of a communications revolution. Now a grim face replaces yesterday's optimism.

Something fundamental is at work. The situation has been shaped by a paradox inherent in the very nature of the new technology:

The best network is the hardest one to make money running.

This is the Paradox of the Best Network.

Comcast Metered Broadband Official; Beware What You Download

Joel Spolsky, in Inc.:

Frankly, people here seem to be happier with a little bit of middle management. Not middle management that's going to overrule the decisions they make on their own. Not symbolic middle management that only makes people feel important. But middle management that creates useful channels of communication. If my job is getting obstacles out of the way so my employees can get their work done, these managers exist so that, when an employee has a local problem, there's someone there, in the office next door, whom they can talk to.

From the archive:

The spread of ES has resulted in a declining emphasis on creativity and ingenuity of workers, and the destruction of a sense of community in the workplace by the ceaseless reengineering of the way businesses operate. The concept of a career has become increasingly meaningless in a setting in which employees have neither skills of which they might be proud nor an audience of independently minded fellow workers that might recognize their value.

...

The evidence suggests that from an executive perspective, the most desirable employees may no longer necessarily be those with proven ability and judgment, but those who can be counted on to follow orders and be good "team players."

How I Learned to Love Middle Managers

Andrew Odlyzko:

Service providers argue that if net neutrality is not enforced, they will have sufficient incentives to build special high-quality channels that will take the Internet to the next level of its evolution. But what if they do get their wish, net neutrality is consigned to the dustbin, and they do build their new services, but nobody uses them? If the networks that are built are the ones that are publicly discussed, that is a likely prospect.

What service providers publicly promise to do, if they are given complete control of their networks, is to build special facilities for streaming movies. But there are two fatal defects to that promise. One is that movies are unlikely to offer all that much revenue. The other is that delivering movies in real-time streaming mode is the wrong solution, expensive and unnecessary.

If service providers are to derive significant revenues and profits by exploiting freedom from net neutrality limitations, they will need to engage in much more intrusive control of traffic than just provision of special channels for streaming movies.

From 1849:

It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriage or to upholster the third-class seats that some company or other has open carriages with wooden benches ... What the company is trying to do is prevent the passengers who can pay the second-class fare from traveling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich ... And it is again for the same reason that the companies, having proved almost cruel to the third-class passengers and mean to the second-class ones, become lavish in dealing with first-class customers. Having refused the poor what is necessary, they give the rich what is superfluous.

And more recently:

Noooooo problem ... don't worry about privacy ... privacy is dead ... there's no privacy ... just more databases ... that's what you want ... that's what you NEED ... Buy my shit! Buy it -- give me money! Don't worry about the consequences ... there's no consequences. If you give me money, everything's going to be cool, okay? It's gonna be cool. Give me money. No consequences, no whammies, money. Money for me ... Money for me, databases for you.

The delusions of net neutrality

Guy Kawasaki:

1. Focus on cash flow.
2. Make a little progress every day.
3. Try stuff.
4. Ignore schmexperts. (Schmexperts are the totally bad combination of schmucks who are experts -- or experts who are schmucks.)
5. Never ask anyone to do something that you wouldn't do.

The five most important lessons I've learned as an entrepreneur

Tyler Cohen:

A bursting real estate bubble set off the Japanese recession of the 1990s, which deepened as ailing banks languished. It took Japan’s economy more than a decade to resume steady, noticeable growth.

Will this happen to the United States? Probably not, but we may face a protracted process of recovery, stretching longer than the two or so years usually required to climb out of recession.

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings.

From the archive:

Are Americans suffering from an undue sense of entitlement?

Somebody said to me the other day that the entitlement we need to get rid of is our sense of entitlement.

From last month:

Given a Shovel, Americans Dig Deeper Into Debt

And further back, we have "Memorable Quotes from Mystery Men":

The Shoveller: We're not your classic heroes. We're the other guys.
The Shoveller: God's given me a gift. I shovel well. I shovel very well.
The Shoveller: We struck down evil with the mighty sword of teamwork and the hammer of not bickering.

David Brooks, from June:

The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.

Over the past 30 years, much of that has been shredded.

Finding the Mess Behind the Mess

The information technology industry is about to face its toughest period since the dotcom bust.

Corporate IT budgets remain the big, boring engine that powers Silicon Valley and the rest of the technology industry. Now, with a pronounced economic slowdown in the US and the UK, the engine has started to sputter.

The industry's seemingly endless hype cycle feeds optimism: there's always a new computing architecture about to go mainstream, a new must-have gadget, and a Next Big Thing.

But there is no escaping the fact that, after five years of steady growth, tougher times lie ahead.

"We're just putting our heads down, and hoping that in two or three years things will have re-emerged." For many Web 2.0 hopefuls, that time will never come.

Back to bust?

Why are many storefronts in Moscow empty while street kiosks in front are full of goods? This article develops a theory of anticommons property to help explain the puzzle of empty storefronts and full kiosks. Anticommons property can be understood as the mirror image of commons property. By definition, in a commons, multiple owners are each endowed with the privilege to use a given resource, and no one has the right to exclude another. When too many owners have such privileges of use, the resource is prone to overuse -- a tragedy of the commons. In an anticommons, by my definition, multiple owners are each endowed with the fight to exclude others from a scarce resource, and no one has an effective privilege of use. When there are too many owners holding rights of exclusion, the resource is prone to underuse -- a tragedy of the anticommons. Anticommons property may appear whenever new property rights are being defined. For example in Moscow, multiple owners have been endowed initially with competing rights in each storefront, so no owner holds a useable bundle of rights and the store remains empty. Once an anticommons has emerged, collecting rights into private property bundles can be brutal and slow. This article explores the dynamics of anticommons property in transition economies, formalizes the empirical material in a property theory framework, and then shows how the idea of anticommons property can be a useful new tool for understanding a range of property puzzles. The difficulties of overcoming a tragedy of the anticommons suggest that property theofists n-fight pay more attention to the content of property bundles, rather than focusing just on the clarity of rights.

The Tragedy of the Anticommons

For those of you who might not recall, the paradox of thrift posits that if we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income – the fountain from which savings flow.

This principle is part of a whole range of macroeconomic concepts under the label of the paradox of aggregation: what holds for the individual doesn’t necessarily hold for the community of individuals. Understanding this paradox is absolutely vital to understanding macroeconomics and even more so to understanding what is presently unfolding in global financial markets.

Once the double bubbles in housing valuation and housing debt burst a little over a year ago, everybody, and in particular, every levered financial institution – banks and shadow banks alike – decided individually that it was time to delever their balance sheets. At the individual level, that made perfect sense.

At the collective level, however, it has given us the paradox of deleveraging: when we all try to do it at the same time, we actually do less of it, because we collectively create deflation in the assets from which leverage is being removed. Put differently, not all levered lenders can shed assets and the associated debt at the same time without driving down asset prices, which has the paradoxical impact of increasing leverage by driving down lenders’ net worth.

The Paradox of Deleveraging