Markets are basically emotionally hysterical mobs and herds. They typically run furiously in one direction, until the mood changes, then they run just as furiously in the opposite direction.

Suddenly, in 2008, a nation-wide real estate slump led to a natural enough increase in mortgage defaults, generally on the part of no-down payment, or low down payment, buyers with no equity stake worth preserving. Single-digit mortgage default increases were reported in screaming headlines as clear evidence of catastrophe, and before you knew it, the credit markets were in a panic, and great and famous financial institutions suddenly found themselves in serious trouble as securitized mortgage debt almost overnight became non-negotiable.

Market confidence, or the lack thereof, had a great deal to do with the tone and volume of negative reporting, which was, to say the least, extreme. There is a natural conflict between the media, which needs the most exciting, easiest-to-sell story it can produce, and the interests of truth and the investing public. This Fall, there was an even greater conflict of interest between accurate and sensible reporting and the desire of the overwhelmingly liberal journalist community to amplify economic bad news during a presidential election.

Breitbart reports an Opinion Research poll indicating the overwhelming majority of the public recognizes what the media has been doing very well.

Seventy-seven percent of Americans believe that the U.S. media is making the economic situation worse by projecting fear into people’s minds.

The majority of those surveyed feel that the financial press, by focusing on and embellishing negative news, is damaging consumer confidence and damping investment, making a difficult situation much worse. The poll was conducted via telephone, December 4 – 7.

Bloomberg reports that, while other businesses find sales plummeting, cybersecurity is booming.

Lockheed Martin Corp. and Boeing Co., the world’s biggest defense companies, are deploying forces and resources to a new battlefield: cyberspace.

The military contractors, eager to capture a share of a market that may reach $11 billion in 2013, have formed new business units to tap increased spending to protect U.S. government computers from attack.

Chicago-based Boeing set up its Cyber Solutions division in August “because of a realization by the company that it’s a very serious threat,” Barbara Fast, vice president of the unit, said in an interview. “It’s not a question of if we’ll be attacked but when and so how will we be prepared.” Lockheed launched its cyber-defense operation in October.

President George W. Bush announced a national cybersecurity plan in January to be supervised by the Department of Homeland Security, after an increasing number of attacks on U.S. government and private sector networks by groups linked to foreign governments, organized crime gangs and hackers. In a Dec. 8 report, a panel of experts said President-elect Barack Obama should create a White House office to oversee the effort.

“The whole area of cyber is probably one of the faster-growing areas” of the U.S. budget, Linda Gooden, executive vice president of Lockheed’s Information Systems & Global Services unit, said in an interview. “It’s something that we’re very focused on. I expect there will be a significant focus” under Obama.

The number of security breaches of U.S. and private-computer networks reported to the Computer Emergency Readiness Team of the Homeland Security Department almost doubled to 72,000 in the fiscal year ended in October from about 37,000 the previous year, agency spokeswoman Amy Kudwa said in an interview.

U.S. government spending to secure military, intelligence and other agency computer networks is forecast to rise 44 percent to $10.7 billion in 2013 from $7.4 billion this year, according to a report by market forecaster Input.

Security-system spending will grow 7 percent to 8 percent annually, “significantly faster” than information-technology, which has increased about 4 percent a year in the past five years, said John Slye, an analyst at the Reston, Virginia, company.

Michael S. Malone explains in the Wall Street Journal why the 1990s boom in the creation of new technology corporations never came back. The news is not all bad, of course. The Accounting business has been booming like never before.

From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of “fairness,” preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.

The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Faced with crushing reporting costs if they go public, new companies are instead selling themselves to big, existing corporations. For the last four years it has seemed that every new business plan in Silicon Valley has ended with the statement “And then we sell to Google.” The venture capital industry is now underwater, paying out less than it is taking in. Small potential shareholders are denied access to future gains. Power is being ever more centralized in big, established companies.

For all of this, we can first thank Sarbanes-Oxley. Cooked up in the wake of accounting scandals earlier this decade, it has essentially killed the creation of new public companies in America, hamstrung the NYSE and Nasdaq (while making the London Stock Exchange rich), and cost U.S. industry more than $200 billion by some estimates.

Meanwhile, FASB has fiddled with the accounting rules so much that, as one of America’s most dynamic business executives, T.J. Rodgers of Cypress Semiconductor, recently blogged: “My financial statements are a mystery, even to me.” FASB’s “mark-to-market” accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive.

But FASB’s biggest crime against the economy and the American people came when it decided to measure the impossible: options expensing. Given that most stock options in new start-up companies are never worth anything, this would seem a fool’s errand. But FASB went ahead—thereby drying up options as an incentive for people to take the risk of joining a young company and guaranteeing that the legendary millionaire secretaries would never be seen again.

Not to be outdone, the SEC has, through the minefield of “full disclosure” requirements and other regulations, made sure that corporate directors would never again have financial privacy and would be personally culpable for malfeasance anywhere in the company. This has led to a mass exodus of talented people from boards of directors in places like Silicon Valley. Full disclosure was supposed to make boards more responsible. Instead, it has made them less competent.

Read the whole thing.

Holman W. Jenkins Jr. swats away the predictable outcry for more regulation, and observes that when one finds oneself with a problem involving lemons, one should simply make lemonade.

Where was the SEC? Such is the plaint lofted in the wake of the Bernie Madoff scandal.

Huh?

When has the Securities and Exchange Commission ever found a fraud except by reading about it in the newspapers? ...

What makes the Madoff story interesting, though not evidence of systematic failure of the regulatory or legal system, is that Mr. Madoff and some of his clients had dealt on a basis of trust for more than a generation. True Ponzi schemes, in which early investors are paid a “return” out of funds deposited by later investors, tend to falter at the first market downturn. Waning investor enthusiasm dries up new funds required to pay off earlier investors. The scheme collapses.

In all likelihood, Mr. Madoff was not running a pure Ponzi scheme, but had real assets. He was operating a blind pool, in which investors had no real idea what they owned or how it was performing, relying on Mr. Madoff who reported metronomic returns, brooked no nosiness into his methods, and seemed always willing to pay off investors who wanted to withdraw their money.

He may have been casual from the start about what money he used to pay withdrawals. It is almost inconceivable, though, that he could have built a true Ponzi scheme to a height of $50 billion, in which there were never any real assets, just his superhuman 40-year juggling act to ensure new investors were recruited as needed to provide funds to meet withdrawal requests from earlier investors.

If so, he is a genius who should immediately be put in charge of the Social Security and Medicare trust funds.

Macon News:

For sale: One Senate seat. Goes to the highest BLEEP-ing bidder. Seller’s positive feedback rating: since Tuesday, just about zero.

Outraged by the arrest of Illinois Gov. Rod Blagojevich, more than a dozen people have put the state’s vacant Senate seat up for bid on eBay.

The offers popped up on the Internet auction site after Blagojevich was accused Tuesday of trying to benefit financially from his power to appoint a Senate replacement to President-elect Barack Obama.

Daniel Finnegan, a student at the University of Georgia, said he started an auction because he’s “extremely upset about what happened” and wants to voice his opinion.

Finnegan says he’s glad others posted similar auctions so the accusations against Blagojevich don’t go unnoticed.

University of Illinois student Matt Platino says he posted his entry to be funny, but also because he’s upset with Blagojevich. ...

And folks are bidding, some jokingly. One posting (“Used Illinois Senate seat, all wood and leather, willing to deal on this one! Please be advised I will be away from my office for a while…”), had 78 bids and was going for $99,999,999.00 Wednesday morning.

Literal Senate seats have been eliminated as of this morning, but Internet domains named ObamaSenateSeat, newspaper clippings, and numerous joke references can be found.

Investors Business Daily debunks the spinning regulators trying to deny responsibility.

Four federal agencies enforce the CRA, a banking regulation whose original purpose of encouraging homeownership among the poor was well-intended. Abused by the Clinton administration, however, the act triggered the subprime crisis by relaxing lending standards across both the primary and secondary mortgage markets.

These agencies, which over the years have become entrenched in pushing the act, include the FDIC, Office of Thrift Supervision, the Comptroller of the Currency and the Federal Reserve. Top agency officials each took a turn Monday defending the CRA during a C-SPAN-covered panel discussion on the housing crisis.

OTS director John Reich insisted it “had absolutely nothing to do with the mortgage crisis.” FDIC chief Sheila Bair said it was a “myth,” adding that “it’s really unfortunate that this is out there.” “It’s simply not true,” she asserted. Next up was Comptroller of the Currency John Dugan, who agreed the CRA “certainly was not the cause of the subprime crisis.” ...

In a more aggressive pursuit of “social justice,” the Clinton administration revised the CRA in April 1995 to mandate that banks pass lending tests in “underserved” communities and suffer tough new sanctions for failing to make enough loans there.

According to the language of the new Clinton regs, banks that used “innovative or flexible lending practices” to address the credit needs of low-income borrowers passed the test. Banks with poor CRA ratings were hit with stiff fines and blocked from expanding their operations. Soon, “flexible” lending became the norm, and banks used subprime loans, which charge higher interest rates, to cover the added risk.

But it wasn’t enough. So Clinton ordered HUD to pressure Fannie Mae and Freddie Mac to buy the higher-risk loans from private banks and lenders, while adopting the same “flexible” credit standards. By 2000, HUD had mandated that low-income mortgages — including CRA-related loans — make up half of their portfolios.

To further spread the risk, Clinton legalized the securitization of such mortgages. In 1997, Bear Sterns securitized the first CRA loans — $385 million worth, all guaranteed by Freddie Mac. Thus began the massive bundling of subprime mortgages that wound up poisoning the entire industry.

The cause and effect is clear. As ex-Fed chief Alan Greenspan recently testified: “It’s instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA.”

It strains credulity for top regulators to now say the CRA had “absolutely nothing” to do with the subprime crisis. It smacks of political spin and bureaucratic CYA.

Michael Lewis, author of the Wall Street memoir Liar’s Poker, tells the story of some hedge fund guys who saw the handwriting on the subprime mortgage bond wall in time to bet on the side of reality, and how the investment banks even helped them place those bets.

There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman (housing-market analyst at Credit Suisse), says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.”...

By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn’t understand who was making all these loans or why. He had a from-the-ground-up understanding of both the U.S. housing market and Wall Street. But he’d spent his life in the stock market, and it was clear that the stock market was, in this story, largely irrelevant. “What most people don’t realize is that the fixed-income world dwarfs the equity world,” he says. “The equity world is like a fucking zit compared with the bond market.” He shorted companies that originated subprime loans, like New Century and Indy Mac, and companies that built the houses bought with the loans, such as Toll Brothers. Smart as these trades proved to be, they weren’t entirely satisfying. These companies paid high dividends, and their shares were often expensive to borrow; selling them short was a costly proposition.

Enter Greg Lippman, a mortgage-bond trader at Deutsche Bank. He arrived at FrontPoint bearing a 66-page presentation that described a better way for the fund to put its view of both Wall Street and the U.S. housing market into action. The smart trade, Lippman argued, was to sell short not New Century’s stock but its bonds that were backed by the subprime loans it had made. Eisman hadn’t known this was even possible—because until recently, it hadn’t been. But Lippman, along with traders at other Wall Street investment banks, had created a way to short the subprime bond market with precision. ...

The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.

The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. “What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’ ” Eisman says. “In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’” ...

Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

Essentially, it was in nobody’s interest, except for FrontPoint Partners, of course, to look at the subprime lending business realistically. So no one did.

Read the whole thing.
—————————————————
Hat tip to Karen l. Myers.

Heck, Declan McCullagh suggests, why not bail out everybody?

The Honorable Henry Paulson
U.S. Department of the Treasury
1500 Pennsylvania Avenue NW
Washington, DC 20220

Dear Secretary Paulson:

I understand that House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid are urging you to hand $25 billion or more to Detroit’s nearly bankrupt automakers. While President-elect Obama indicated on 60 Minutes that he likes the idea, the Bush administration has been skeptical.

That is unfortunate. Bailing out companies that lose money on every vehicle they manufacture and cannot adapt to changing market conditions is not merely necessary in today’s economic climate—it’s the American way.

It would be shortsighted to stop at GM, Ford, and Chrysler. My modest proposal is that plenty of other nondeserving companies could use a helping hand.

Mervyn’s department store can’t compete with its rivals on price, selection, and locations. But its stores are a fixture of local neighborhoods across California and the West, and the federal government surely has an obligation to prop up this failed company—even if it means everyone else pays more in taxes. This is the price we pay for keeping part of the American dream alive. ...

Read the whole thing.

UK’s Daily Mash reports that, even in this lagging economy, investors are able to identify one hot new sector.

Venture capitalists in New York and London are pumping millions of dollars into Somalia’s booming pirate sector.

The sharp-eyed investors say Indian Ocean piracy has replaced Bangladeshi t-shirt factories as the developing world’s strongest source of high-growth revenue streams.

Julian Cook, head of strategy at Porter, Pinkney and Turner (PPT), said: “The margins are very impressive. These guys can board a Chinese freighter or Saudi oil tanker and turn it around in less than a week. Usually without killing anyone.

“The staff are well-trained and they operate a structured bonus system involving the daughters of nomadic tribal chiefs and as much hallucinogenic tree bark as they can eat.

“The tax position is also very favourable given that Somalia isn’t really what you would describe as a ‘country’ with ‘laws’ and a ‘government’.”

PPT has paid £25.7 million for a 32% stake in Captain Ahmed’s Crazee Bastards with the initial tranche used for capital purchases including new speed boats, 200 yards of very strong rope and a gun the size of a cow.

Malcolm Gladwell, in the New Yorker, contemplates the history of the famous firm laid out in Charles Ellis’s The Partnership: The Making of Goldman Sachs, and connects the current Wall Street debacle to the wrong kind of leadership.

The rags-to-riches story—that staple of American biography—has over the years been given two very different interpretations. The nineteenth-century version stressed the value of compensating for disadvantage. If you wanted to end up on top, the thinking went, it was better to start at the bottom, because it was there that you learned the discipline and motivation essential for success. “New York merchants preferred to hire country boys, on the theory that they worked harder, and were more resolute, obedient, and cheerful than native New Yorkers,” Irvin G. Wyllie wrote in his 1954 study “The Self-Made Man in America.” Andrew Carnegie, whose personal history was the defining self-made-man narrative of the nineteenth century, insisted that there was an advantage to being “cradled, nursed and reared in the stimulating school of poverty.” According to Carnegie, “It is not from the sons of the millionaire or the noble that the world receives its teachers, its martyrs, its inventors, its statesmen, its poets, or even its men of affairs. It is from the cottage of the poor that all these spring.”

Today, that interpretation has been reversed. Success is seen as a matter of capitalizing on socioeconomic advantage, not compensating for disadvantage. The mechanisms of social mobility—scholarships, affirmative action, housing vouchers, Head Start—all involve attempts to convert the poor from chronic outsiders to insiders, to rescue them from what is assumed to be a hopeless state. Nowadays, we don’t learn from poverty, we escape from poverty, and a book like Ellis’s history of Goldman Sachs is an almost perfect case study of how we have come to believe social mobility operates. Six hundred pages of Ellis’s book are devoted to the modern-day Goldman, the firm that symbolized the golden era of Wall Street. From the boom years of the nineteen-eighties through the great banking bubble of the past decade, Goldman brought impeccably credentialled members of the cognitive and socioeconomic élite to Wall Street, where they conjured up fantastically complex deals and made enormous fortunes. The opening seventy-two pages of the book, however, the chapters covering the Sidney Weinberg years, seem as though they belong to a different era. The man who created what we know as Goldman Sachs was a poor, uneducated member of a despised minority—and his story is so remarkable that perhaps only Andrew Carnegie could make sense of it.

Read the whole thing.

Linn and Ari Armstrong, at the Grand Junction Free Press, issue a rejoinder to Alan Greenspan, John McCain, and Barack Obama on behalf of Ayn Rand and the Free Market.

Ayn Rand recognized a common pattern in the growth of political power: The enemies of liberty blame the free market for economic problems caused by government interference, then use those problems as a pretext for yet more political controls. Much of Rand’s prescient novel “Atlas Shrugged” revolves around that cycle.

Now Rand’s critics sound exactly like the villains of Atlas. They wouldn’t attack her if they didn’t recognize her as a barrier to their grand central plans.

Recently Alan Greenspan fueled the Rand hunt. In an Oct. 23 statement to a Congressional committee, Greenspan said he had “found a flaw” in his ideology of “free, competitive markets.”

There’s just one problem with Greenspan’s statement: He practiced no such ideology. For two decades, Greenspan served as chairman of the Federal Reserve, a central planning agency tasked with manipulating the money supply. Greenspan’s flaw is that he long ago abandoned the ideology of liberty.

Two decades before becoming a central planner, Greenspan, while still in association with Rand, warned of the dangers of the Federal Reserve. In a 1966 article, Greenspan noted that, in the late 20s, the “Federal Reserves pumped excessive reserves into American banks.” This “spilled over into the stock market — triggering a fantastic speculative boom.” Sound familiar? Greenspan became the monster he once warned against.

Today’s crisis centers around risky home loans. But were these loans made on a free market? No. Instead, they were encouraged, and in some cases mandated, by the federal government.

Both major candidates for president followed that stock line. While John McCain also blamed unspecified “corruption in Washington,” he emphasized the “greed and mismanagement of Wall Street.”

Barack Obama blamed greed and deregulation, despite the fact that nobody can point to the repeal of a regulation that could have caused the crisis. By contrast, the mechanisms by which government controls caused the crisis are clear.

Henry Blogett draws a grim pictures of the Times’ unhappy situation.

Specifically, the company must deliver $400 million to lenders in May of 2009, six months from now. The company has only $46 million of cash on hand, and its operations will likely begin consuming this meager balance this quarter or next. The company has been shut out of the commercial paper market, but has a $366 million short-term credit line remaining that it entered into several years ago, when the industry was strong. It has not yet drawn this cash down, and given the current environment and the trends at the company, we would not take for granted that it will be able to do so.

The New York Times is in discussions with its lenders about the May payment, and management thinks it will be able to work something out (“We expect that we will be able to manage our debt and credit obligations as they mature.” Note the use of the word “manage” as opposed to “meet.”)

So sad. Maybe they can sell the paper to Murdoch.

Read the whole thing.

Apple mocks Microsoft’s approach to defending Vista through advertising.

0:30 video

The Wall Street Journal responds to the latest attempt by the left to pin the credit crisis on a lack of regulation.

In an attempt to fill out Mr. Obama’s talking points, the press corps has now fingered a 2004 change in SEC net capital rules. In fact, then-SEC Chairman William Donaldson’s reform was anything but deregulation. A regulatory failure, yes, and a cautionary tale for those who think new regulation will solve everything.

The 2004 change won unanimous approval from SEC commissioners and Democrat Annette Nazareth, who ran the market regulation division at the time. Rather than deregulation, it was a breathtaking regulatory leap for an agency that had traditionally focused on protecting individual investors. Under the new program, the SEC would not simply monitor broker-dealers to ensure that client accounts were safe. The commission staff would collect new data from the parent companies of brokerages and require new monthly and quarterly reports. Firms were supposed to provide detailed explanations of internal risk models.

Before approving the rule at an April 2004 meeting, several commissioners wondered if the SEC staff was up to the task. Apparently not. It’s clear from a recording of that meeting that the commission expected investment banks to employ more debt. This was no unintended consequence but the inevitable result of adopting the so-called Basel II banking standards. The SEC was supposed to apply these standards created for commercial banks to investment banks, but with additional measures to ensure liquidity.

Was Basel II a libertarian plot cooked up at the Cato Institute? Not quite. It was the product of years of effort by the world’s major central banks, intended to avoid crises such as the U.S. savings and loan disaster. Basel embraced the theory that a common set of global banking standards and more intensive study of the risks of particular assets would yield both more efficient use of capital and a more stable financial system.

We now know it did not create stable investment banks, but the SEC could be forgiven for thinking that if it was good enough for the world’s central bankers, it was good enough for the commission. As Ms. Nazareth said of the SEC’s new approach, “It’s largely modeled after Federal Reserve-type supervision and I can’t imagine anyone would question that kind of approach.” Few did. Swiss banking regulators are only now raising mandatory capital ratios above those permitted under Basel II.

————————————————————-

Columbia Business School Professor Charles W. Calomiris joins in the demolition of the same contention.

As for the evils of deregulation, exactly which measures are they referring to? Financial deregulation for the past three decades consisted of the removal of deposit interest-rate ceilings, the relaxation of branching powers, and allowing commercial banks to enter underwriting and insurance and other financial activities. Wasn’t the ability for commercial and investment banks to merge (the result of the 1999 Gramm-Leach-Bliley Act, which repealed part of the 1933 Glass-Steagall Act) a major stabilizer to the financial system this past year? Indeed, it allowed Bear Stearns and Merrill Lynch to be acquired by J.P. Morgan Chase and Bank of America, and allowed Goldman Sachs and Morgan Stanley to convert to bank holding companies to help shore up their positions during the mid-September bear runs on their stocks.

Even more to the point, subprime lending, securitization and dealing in swaps were all activities that banks and other financial institutions have had the ability to engage in all along. There is no connection between any of these and deregulation. On the contrary, it was the ever-growing Basel Committee rules for measuring bank risk and allocating capital to absorb that risk (just try reading the Basel standards if you don’t believe me) that failed miserably. The Basel rules outsourced the measurement of risk to ratings agencies or to the modelers within the banks themselves. Incentives were not properly aligned, as those that measured risk profited from underestimating it and earned large fees for doing so.

That ineffectual, Rube Goldberg apparatus was, of course, the direct result of the politicization of prudential regulation by the Basel Committee, which was itself the direct consequence of pursuing “international coordination” among countries, which produced rules that work politically but not economically. International cooperation, in case you haven’t heard, is exactly what the French and the Germans now say was missing in the past few years.

So why blame deregulation and small government? The social psychologist Gustav Jahoda says that unreasonable beliefs often arise in circumstances where people lack control and need to believe in something to get them through a highly stressful situation. And a fellow named Machiavelli might help us to understand a different reason for simplistic explanations.

Techradar.com discusses the behemoth software maker’s struggle for survival.

Microsoft is still making enormous sums of money, but cracks are appearing in its $16 billion Windows business. The death of XP has been postponed several times – the current rash of ultra-small, ultra-cheap laptops don’t have the horsepower to run Vista – and while Microsoft claims to have sold 180 million Vista licences, many of those licences are for machines running XP.

As Jane Bradburn of HP Australia told reporters in July, “From 30 June, we have no longer been able to ship a PC with an XP licence. However, what we have been able to do [is] to ship PCs with a Vista business licence but with XP pre- loaded. That is still the majority of business PCs we are selling today.”

There’s no compelling reason for users to upgrade: Vista requires more powerful hardware than XP, and it’s been plagued by driver problems and incompatibilities. As a result, it’s faced an avalanche of bad publicity – some of it deservedly so, as users found that their devices didn’t work.

The bad publicity isn’t helping enterprise adoption. According to Forrester analyst Ben Gray, “Desktop operations professionals tell Forrester that they see the value in standardising on Vista, but many are having a hard time convincing their CIOs that the move isn’t a risky bet, given the mixed reaction it’s received in the press and the speculation surrounding what to expect after Vista.” Forrester reports that 8.8 per cent of enterprise customers have migrated to Vista; 87 per cent are still running XP.

The ‘mixed reaction’ has been a gift for Apple, whose ‘Mac vs PC’ campaign mocked Microsoft ruthlessly. The ads worked: according to BMO Capital Markets analyst Keith Bachman, “More than 50 per cent of customers buying Macs in Apple stores are first time buyers.” ...

So has Microsoft lost it? A company with 93 per cent of the worldwide operating system market, rising revenues, a $60billion turnover and around $22.49billion in operating income is hardly struggling. However, the world in which Microsoft operates is changing dramatically, and Microsoft knows it. ...

Microsoft is fighting back on multiple fronts. It’s “developing versions of our products with basic functionality that are sold at lower prices than standard versions”, but more importantly it’s chucking enormous sums of money at things that may or may not work. ...

To many observers, the way in which Microsoft’s online division is haemorrhaging cash is a sign that Microsoft has missed the boat – but the ‘let’s throw money at this until it works’ approach has worked in the past for Windows, Office, Internet Explorer and Xbox, none of which were immediately successful. Microsoft may not be the leader in search, cloud computing or mobile phones, but the combination of determination and deep pockets is a powerful one.

Hat tip to Meaningless Hot Air.