American Kremlin Conference – Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

[DSpencer]

Re: American Kremlin Conference – Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

real old fashioned equity capital investment is as close to classic socialism as one can get, yet remain completely "onside" with free markets and free enterprise.

What definitions of "classic socialism" and "real old fashioned equity capital investment" are you using to come to this bizarre conclusion?

From wikipedia:

Socialism /ˈsoʊʃəlɪzəm/ is an economic system in which the means of production are commonly owned and controlled cooperatively; or a political philosophy advocating such a system.

What definition of equity capital investment is at all consistent with this?

That the real interest of an investor MUST be to ensure ongoing freedom of the people of their nation.

It MUST be? Or what?

The problem we have faced, is that productive capital (and now, most heinously, debt) tends to accrue more capital

The problem? More like one of the best things to ever happen to humanity.

so we end up with an unsustainable concentration of ownership and peonage.

I don't think this is because of the first statement as much as other factors.

[*T*]

Re: American Kremlin Conference – Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

What definitions of "classic socialism" and "real old fashioned equity capital investment" are you using to come to this bizarre conclusion?

From wikipedia:

Socialism /ˈsoʊʃəlɪzəm/ is an economic system in which the means of production are commonly owned and controlled cooperatively; or a political philosophy advocating such a system.

What definition of equity capital investment is at all consistent with this?

It MUST be? Or what?



The problem? More like one of the best things to ever happen to humanity.



I don't think this is because of the first statement as much as other factors.

Good challenge.

Let me have a go at unpicking this. I think it's no coincidence that Chris Coles & I are British -- the definition of the same words seems different to their use on your side of the pond. For example, the word socialism. I would class a worker-owned company as a form of socialism, even though it is privately owned.

The point Chris and I arrived at (without wishing to speak for him) is that the benefits traditionally given by advocates of common ownership may well be achieved by widely disbursed equity ownership. The further point is that overly-concentrated ownership does not have those benefits.

I would guess Chris means 'old fashioned equity investment' to mean grass-roots, small-scale equity investment where there is a link between the productive labour, the investment capital and the benefits accruing due to the value created. For example, a small company of vegetable-market traders and producers who own their own stalls and patch of land to grow on. Or a consultancy partnership. An example of the opposite might be my purchase of a junk bond issued by a car manufacturer who outsources work abroad, on the speculation that it will get a government bail-out. In that case, the benefit scales with the capital invested, rather than the value created, and the value creation does not obviously relate to where the benefits end up.

My point is that, while I agree it is good that benefits should accrue to good investments and bad ones penalised, is that if that process goes too far, then ownership becomes too concentrated and society cannot sustain the wealth inequality.

To generalise, at the moment I would contend, benefits accrue to those who lend (wisely or unwisely) because of taxpayer guarantees. Wealth accrues to those who already have wealth, rather than those who create value. Even worse, wealth is accruing to those who get government subsidy and those who can borrow for free and lend at high rates with government guarantees. Most of us agree that is bad.

[EJ]

Re: American Kremlin Conference – Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

Wonderful!

For a long time now I have held the impression that EJ is caught between his past experience of working and friendships with venture capital, (what I describe as the core of the feudal mercantile economy), and his constant contact with the iTulip community that expresses a much wider viewpoint of the overall problems we face. Add that, as I see it, real old fashioned equity capital investment is as close to classic socialism as one can get, yet remain completely "onside" with free markets and free enterprise.

That the real interest of an investor MUST be to ensure ongoing freedom of the people of their nation.

Something not possible with a feudal mercantile economic model.

I disagree with you on venture capital (VC). It is not a feudal system.

The first thing to understand about VC is that it occupies a completely unique sector of the banking industry: VC funds losses.

In the early stages of the development of a capital-intensive technology company, the company loses money.

VC is the only source of financing that provides capital in meaningful quantities to fund such losses.

Only the United States has VC firms that fund losses on the scale that permit an Amazon, Google, Intel, or other world-class U.S. business to scale to a dominant, unbeatable global position.

Say what you want about U.S. VC, but it is the primary reason why these companies developed in the U.S. and not in the UK or elsewhere.

Next it's important to differentiate between old school and new school VC.

Old school VC was built from the early 1930s (Venrock was the first, and in pitched their partner meeting once) to approximately 1997 (the year before iTulip was founded). The founders were experienced and successful technology entrepreneurs who invested their capital in new start-ups with partners who were similarly experienced and successful. The judgement, intuition, and compassion they developed by walking the walk increased the chances that the new CEO of a new venture might succeed.

A VC industry composed of experienced former entrepreneurs is inherently non-scalable. It is limited by the total number of experienced and successful technology entrepreneurs who are willing to do the hard work of helping a new company succeed.

Along comes the technology bubble in 1998. By the year 2000, VC returns lept from an average annual 12% rate to 60%. One of our deals returned over 200 times our investment. We had seven liquidity events out of 20 investments.

VC starts to look like a lottery that you can't lose. Money pours in, rising from $17 billion in 1997 to $100 billion in 2000.

Money generated by IPOs was re-invested back into VC funds.

As it was the limited pool of experienced VC talent was quickly exhausted; there were not enough experienced entrepreneurs to invest all of the money that limited partners (investors in VC funds) wanted to throw at the latest dot com, optical switch, or photo sharing site.

The MBA VC investment manager enters the scene, dilution teams of experienced VCs but also founding new MBA-only VC firms.

There also weren't enough start-up founding CEOs with operational experience to meet demand. The most successful entrepreneurs before the bubble were former VP level engineering or sales executives out of large technology firms. By 2000, the VC industry started to scrape the bottom of the talent barrel for directors of business development to find founders for technology companies to chase the hot investment sector de jour.

Then the market crashed in 2000, as I warned here in March of that year.

Since then, the VC industry has continued to revert to the mean 12% rate from 60% in 1999 by overshooting to the downside. For the past decade, across the VC industry, returns have been negative as a weak economy reduced consumer and business demand for all but a narrow range of start-up industries and a lack of liquidity opportunities via M&A and IPOs depressed investment returns.

The formula of far more work for much lower returns motivated many of the general and managing partners with operational expertise to pocket their tech bubble gains and retire from venerable VC firms, leaving the MBA partners, who hadn't made any money yet, in charge.

In too many cases, they drove even the most venerable firms into the ground over the past ten years. Most of the VC horror stories you hear are about MBA VC partners on boards mis-managing unqualified start-up founders -- the blind leading the blind through a desert.

I learned from personal experience what kind of board members a start-up needs, but Dick Testa put it best.

Dick Testa was founding partner of Testa, Hurwitz & Thibeault LLP, a Boston law firm of approximately 400 attorneys at its peak in 2002 with revenues approaching $450 million.

He told me in 2000 that in his 20 years of experience, a technology start-up board should be "two VCs who are former start-up CEOs, two outside directors who are start-up CEOs, and the CEO. Everything else is a disaster."

Here's the picture today.

As a percentage of total VC deals done, seed stage is in 2011 half what it was in 1995 when the tech boom began that was harvested over the following five years.

The U.S. needs a new generation of successful entrepreneurs to reform the VC industry.

The rest of the world needs to adopt the U.S. VC model.

We will publish a compete picture of which industries are getting VC money in our State of America article next month.

I remain active in the industry and invested in four companies over the past two years.

As part of the new iTulip, if there is sufficient demand, we may create a special forum where members can pitch their company ideas to other members.

[Chris Coles]

Re: American Kremlin Conference – Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

I am truly sorry about this EJ, but from my viewpoint, the U.S. VC model is entirely responsible for the current state of the Western economy; it's evolution into a feudal mercantile model, that has left much of the Western economies in near total collapse.

It is late evening here and I will reply in much detail when you produce your State of America article.

[Jill Nephew]

Re: American Kremlin Conference – Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

I would appreciate such a forum very much. I have spent the last two years developing an idea under my own capital (meaning, it is almost fully built, ready for alpha testing) and would only consider bringing external funds if I knew that the investors had the long term success of the company in mind and don't want to flip it for a quick profit. Otherwise, i will stick to self funded or angel funded extremely slow organic growth so that i can teach myself everything i need to know as i go (if i can...).

A friend of mine started a technology company 10 years ago decided to go this route when he failed to find any long term leadership in the VC community that approached him, it hasn't been easy for him to say the least and he, like me, is designed to invent and innovate, not run a company. I don't want to follow in his footsteps, and i also want my idea to live on beyond the vision of a bunch of 30 year old MBA's trying to make a quick buck.

Thanks for sharing this insight EJ. Invaluable.

[dcarrigg]

Re: American Kremlin Conference – Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

I wonder: Does the Fed actually have any tools to address full employment?

Sure they could switch to NGDP as a primary target, but what would that do other than stoke inflation and raise nominal equity values as people flee treasuries? It will vindicate Bill Gross, but I don't think that it matters for Main Street.

Ultimately, this is not done in a vacuum. Labor has no teeth. Wages will not rise. Extending ZIRP for a decade or more will destroy what was left of savings and pensions.

They are missing this fact: GDP can increase and employment can drop. I don't think that they have internalized that macroeconomic truth yet.

Someone with no income or savings will never pay you back, no matter how cheap you make previous debts.

Any thoughts on the above? The thoughts there are steep conjectures, and I wouldn't mind hammering out the ramifications of a Fed target switch to NGDP if one were indeed to occur.

[charliebrown]

Re: American Kremlin Conference – Part I: Boston Federal Reserve "Long-Term Effects of the Great Recession" - Eric Janszen

What tools does the fed use to do this? Buy every last treasury security, so the gvt gets to borrow all the money it wants at no interest? Then I suppose gvt spending would pump up GDP. With the gvt buying food and fuel and concrete etc, etc, either directly or indirectly, does not this add to inflation pressures? Infinite money
chasing finite goods.

With coporate intermediate and long rates very low, I don't see how lowering rates is going to get them to borrow, spend and expand. I don't think interest rates are the limiting factor.
It's a shortage of worthwhile projects.


If we need to increase GDP to say 4% y-o-y, we are running around 2% now, that means the gvt borrow another 300B a year and the fed monitizing it. This assumes a non gvt increas of 2% a year and not another slide back into recession.