The Greater Fool

This time, the risks didn't pan out. So they should pay the price. That's capitalism.

great depressionThe global debt crisis, of course, is nothing new.

Since the dawn of time, men have been lending other men money (or other things of value) and not getting them back.

But it's only recently that the solution to this state of affairs has gotten so complicated that even PhD economists can't figure it out.

In most situations in which people or companies can't pay their debts, a simple thing happens.

It's called "bankruptcy."

The borrower says, "I can't pay you back" and then the borrower surrenders his or her claim on any assets that he or she still possesses.

The lender, meanwhile, sifts through those assets and recoups what he or she can.

And in this normal, natural state of affairs, both parties get hurt by the experience, and they go home to nurse their wounds, having learned a harsh lesson that hopefully will help them avoid making similar mistakes in the future.

And that's as it should be.

great depressionBecause they're both responsible for the mistake.

The borrower borrowed too much. And the lender loaned too much.

And they both paid the price for their optimism and/or greed.

Now, note what does NOT happen in this normal, natural "debtor can't pay lender" state of affairs:

The world doesn't freeze up with paroxysms of angst, denial, finger-pointing, can-kicking, moral hazard, and endless bailouts--in which no one is ever forced to acknowledge his or her mistake and learn his or her lesson.

In the US housing market, as in the European sovereign debt market, borrowers borrowed too much and lenders loaned too much.

Both sides had good intentions, but the good intentions didn't work out.

And now we're in the age-old situation in which borrowers can't pay.

And, as always, both sides bear responsibility for this situation.

No matter how popular it is to bash Wall Street, no one forced American consumers and European countries to borrow money. And no matter how popular it is to rail about deadbeats and the loss of personal responsibility, no one forced Wall Street to make all those dumb-ass loans.

great depressionIn a simple, fair, and just world, both sides would now pay the price.

And the world would move on, quickly, and put this whole mess behind it.

But instead, we just get denial, empty promises, can-kicking, finger-pointing, and endless bailouts.

The reason we're not getting the simple solution this time, of course, is that so many people borrowed so much and so many people loaned so much that, collectively, they have a lot of power to influence the solution.

And, of course, like anyone else who has made a colossal, painful mistake, they're slow to acknowledge that they made a mistake, and they're doing everything they can to never have to acknowledge that.

But that shouldn't change anything.

The simple, fair, and best solution to the global debt crisis is the same as it ever was:

  1. Acknowledge the problem
  2. Restructure the debts
  3. Move on

Yes, step 2 will involve "losses" -- big ones.

DepressionInFrontOfStockMarket AP 10 10 08Yes, these losses are so huge that they will filter through the financial system and economy and eventually hit just about everyone.

(But that, too, is as it should be: By repeatedly electing politicians who promised us again and again that we could have it all, we facilitated the problem.)

Yes, the losses are so huge that we will likely require a lender-of-last-resort to recapitalize bankrupt financial institutions and keep them operating (because, given the interconnectedness of the global financial system, it really would be a mess if the entire thing suddenly entered bankruptcy court at the same time).

But the need for a lender of last resort shouldn't scare anyone. In bankruptcies, there have always been lenders of last resort: They're called "debtors-in-possession." These folks provide the capital that the company needs to keep operating--in exchange for amazing protection and terms.

As long as the lender behaves responsibly, it will get the same terms that any debtor-in-possession would get: Its money will be "senior" to all other claims on the financial institution's assets. So the only way the lender will lose money is if the institution has been so astonishingly irresponsible that it has blown through all of equity and debt capital it had before it was restructured.

Debt to GDP 112511

Image: St. Louis Fed

U.S. Debt To GDP: A long way to go to get back to reality.

Yes, the financial institutions' equity investors will get wiped out.

Yes, the financial institutions' lenders will get dinged.

But again, that's as it should be.

They were the ones, after all, who trusted the financial institution not to make dumb-ass loans.

By making those loans, the lenders took risks--with the aim of reaping nice rewards.

This time, the risks didn't pan out. So they should pay the price.

That's capitalism.

And as hedge-fund manager Kyle Bass recently remarked, capitalism without bankruptcy is like Catholicism without hell.

The solution to our global debt problems is simple. It's time we started talking about it.

SEE ALSO: Here's What's Wrong With The Economy (And How To Fix It)

It's not an easy solution but it a solution. One that needs to get implemented sooner rather than later. One thing the article has right is that the finger-pointing, posturing, and bailouts have to stop. They're unproductive and ultimately hurting our chances of ever "recovering." Just like Ireland and Greece, the rest of the world including the US equity market players will have to suck it up and ride it out.

The driving force behind those ever-escalating bad-proposition loans was our increasing standard of living. As each of us tasted the fruits of the next step on the socio-economic ladder, we wanted more. We expanded our current economy to its limits and then grew more by literally mortgaging the future.

The reality is that not everyone has the right to large house in the 'burbs with its requisite 50" flat-screen HD television and 2.3 automobiles. As the article states, "no one forced American consumers and European countries to borrow money" and "no one forced Wall street to make all those dumb-ass loans." We, collectively as creditors and debtors, share the blame and as such should share in the solution.

When Requirements Attack!

Requirements are also a form of inventory and should be considered goods that go stale.  Requirements should flow to downstream consumers as fast as possible as requirements have no value without implementation. 

Joel Semeniuk has an interesting dissertation on the practice of Scrummerfall but this one line really stood out to me. Requirements are inventory that can go stale.

As engineers, we tend to think of our products (shipping software) as our inventory. Requirements are part of that deliverable; the product is the requirement, realized. When software is specified to solve a business problem, it is usually done after some research and before other research. One of the reason we continually get scope creep and requirement changes is that customers continue to do research on their problem after they agree to the specification. It's just the way business works. They're not going to sit on their hands while we flail at their problem. Accordingly, they also do not comb through every permutation before engaging us; it's inefficient to do so, we call it analysis paralysis.

So it's in our best interest to deliver the minimum viable product as soon as possible before to aid in their continued research. The longer we wait to deliver, the greater the chance for those requirements go stale and your product becomes irrelevant.

One of the strangest conversations I've ever witnessed, LMFAO's Redfoo and Jim Cramer

Redfoo, one of the "artists" in LMFAO, the band behind the most insipid tune of the summer, Party Rock Anthem, is the son of famous Motown musician Berry Gordy. Not only that, but he is used to be a day trader and comes on Jim Cramer's show to discuss his portfolio diversification and investment strategy in a down market (buy for dividends).

By the time they get down to Cramer's game "Am I Diversified?" the conversation is so ludicrous that it cannot be made up. Fact is truly stranger than fiction here.

Amazon's Silk may be the real game changer!

Amazon released their new Kindle line up today, including the new Kindle Fire and its innovative Silk browser that reinvents the web browser paradigm. It combines many optimizations including content caching, last-mile delivery, decentralized browser components, and group predictive analysis to improve the mobile browser experience.

I think it's the most innovative use of the EC2 platform yet. By splitting the heavy, done by most browsers today to deliver a rich media experience, into separate subsystems that can be allocated to portable local device or powerful cloud processing, Silk tries to deliver the promise of truly portable web applications. Combine that with a pricepoint of less than half the starting price of an iPad and Amazon has a winner on their hands.

My biggest caveat of this device is that it further reinforces the walled garden approach to content delivery. Amazon has in effect cached and indexed the entire Internet (not particularly difficult since they host a good amount of it anyways).

Physics is fun!

Remarkable series of videos describing the counter-intuitive, but totally logical, explanation of a Slinky spring and the propational characteristics of waveform energy. Watch them from top to bottom to get the full effect. It really is quite remarkable.

The most difficult part, to me, at least, is understanding the nature of forces acting on the Slinky while it's "at rest."

Are we at the next event horizon?

Antonio Ereditato, spokesman for the researchers, said: “We have high confidence in our results. We have checked and rechecked for anything that could have distorted our measurements but we found nothing.”

Scientists agree if the results are confirmed, that it would force a fundamental rethink of the laws of physics.

John Ellis, a theoretical physicist, said Einstein’s theory underlies “pretty much everything in modern physics”.

We live in interesting times, that is certain. If these guys at CERN are to be believed, and they must since we have given them the tools to destroy the world, then the study of quantum physics has just gotten turned on its head.

Einstein's theory of special relativity is based on the assumption that nothing can travel faster than the speed of light. All of modern physics has built upon that foundation. Will this revelation put CERN on the same page as Galileo, Newton, and Einstein?

On Thursday, Facebook will be reborn. Prepare yourselves for the evolution of social networking

What Facebook cares about most deeply is emotion, explains Parr, who says the site "has lost its emotional resonance over the years"—we come back again and again because we have to, not because we want to. Parr, of course, won't leak the ways in which Facebook plans on rekindling the flame, but he prophesizes that the "changes will make it so you know your friends better than you ever thought you could. On Thursday, developers will be elated, users will be shellshocked, and the competition will look ancient. On Thursday, Facebook will be reborn. Prepare yourselves for the evolution of social networking.

I'm excited to see what facebook v2 holds for developers and users alike. The UI and API have been almost universally derided for years now. One of the best things about facebook, IMO, is their gumption to push change despite of the userbase demands. It allows them to stay innovative in a space that measures longevity in months, not years. So let's see what facebook has to offer after 1PM EDT today during their f8 conference in San Francisco.

HP brings back a classic!

HP 15c Limited Edition Scientific Calculator

Price: $99.99

Also new from HP, the limited edition 15c provides what scientists and engineers count on. This classic RPN calculator is up to 100x faster than its predecessor and features a unique production number and “limited edition” script, making it a great gift for collectors and technical professionals.

I was introduced to RPN logic and programming with an HP 11c back the summer of 1985 between seventh and eighth grade. I convinced my parents to buy me my own before high school and it was eventually stolen in my sophomore year. I've wanted a 15c ever since then. It's not often to lust after a 25 year piece of technology but this is it. If you've ever used one, you'd understand. The landscape form-factor, the crisply-beveled keys, the stack of three watch batteries that powered it, all contributed to the awesomeness. There's a link on the page to buy but it doesn't appear in their online store, yet.

Vintage examples sell for 2 to 5 times this cost on ebay so if this is re-issue is the same quality, then it's a bargain. I recognize the absurdity of paying $100 for a calculator that barely fits in my pocket in this day and age of smartphones and tablets, but this will be mine.