The Outrage Game

As a follow-up to last week's post, Joe Klein has a fine column on the AIG bonus outrage:

There is a real crisis out there. It has existed for a while. It has been spreading slowly as factory after factory has shut down, as the gap between rich and poor ballooned, as the rich found ways to get richer betting on exotic financial instruments with all the economic substance of a roulette wheel, as the middle class found it harder to pay for college, for health care, for gasoline.

But most of the anger we see and hear comes from people who are paid to be angry, on cue, on cable television--as opposed to people with actual grievances. Suddenly, the White House press corps goes barking mad over the AIG Bonuses. It is said that the bonuses are an aspect of the bust that the "public" can understand; in truth, the bonuses are an aspect of the bust that reporters can understand. Suddenly, the Obama Administration has a "crisis." The President has to go on television and act as if he's angry, even though he knows these bonuses are the tiniest outcropping of outrageousness.

A bunch of people on Wall Street engaged in high-stakes gambling with a lot of other people's money and the reputations and stability of financial institutions that had endured for many decades. They amassed personal fortunes that the rest of us could scarcely imagine while burning down their firms and taking the entire global economy down with them. That's outrageous. That is un-fucking-believably outrageous. That a CEO at AIG who had been installed by the federal government to clean up the mess (along with some folks in the Treasury Department) decided it wasn't worth fighting in court over $150m in bonuses that the company was contractually obligated to pay--that's not outrageous.

Financial Regulation

I'm somewhat perplexed by this blog post by Richard Posner on financial regulations. Posner argues that there should be no new financial regulations until the current recession has bottomed out. There is a basic intuitive support for this argument in that additional regulations could limit risk-taking and drive up the cost of lending at a time when the federal government is desperately trying to encourage new lending. But Posner's position is focused primarily on uncertainty in the marketplace. He writes:

Any regulatory initiatives at this time will simply increase the already great uncertainty in which the financial industry is operating; and as Keynes pointed out, anything that increases uncertainty in a depression causes hoarding, which can in turn precipitate a deflation likely to deepen and protract an economic downturn.

His point is well taken, but I think he gets the matter of uncertainty backwards. The uncertainty Posner appears to be worried about is already priced into the market. The one thing that investors are not uncertain about at this point is that there will be new financial regulations. I don't think anyone doubts that at this point. The uncertainty is about what those regulations will be. The sooner the government can spell that out, the sooner this uncertainty will be diminished. The additional benefit is that the financial crisis has severely undermined public confidence in the banking system, and if the new regulations are well-crafted (or at least are broadly perceived to be), they can begin to restore some confidence. And in any case, when it comes to the Obama administration and Democratic congressional leaders, all of these concerns may be secondary to the fact that there is huge public support for financial regulations at present, leading to a desire to strike while the iron is hot.

You Are Outraged Because We Say You Are

Thanks to Al Giordano for writing this column so that I don't have to.

Whenever executive salary and bonus caps have been discussed in the context of the various bailouts and rescue packages, I have supported any draconian measure that legislators have been willing to contemplate. I think it would be difficult to overstate the moral and ethical culpability of these executives and traders in this financial disaster. And if that means they quit their jobs, big deal. There are plenty of unemployed financial workers who would be happy to have them.

But this drama over the AIG bonuses leaves me cold. I just can't bring myself to give a shit about it. Given the context we talking about here, it is small potatoes and completely unsurprising. The mad rush of media personalities and politicians to trump one anothers' expressions of outrage, on the other hand, inspires a fairly visceral reaction in me (nausea). There are few things more pathetic than the panic of a politician who suspects that he or she may be missing a populist moment, and their willingness to dive head first off a cliff in hopes of landing on the bandwagon. And I can't help but suspect that if there were real populist outrage over this it would have taken longer to build and longer for the press to pick up on it. When the media goes into full-on shrieking populist outrage mode the moment it hears about the story, it rather seems like it's the media that's outraged more than the populace.

Further Developments in the War on IPTV

A few weeks ago I noted that the networks shut down Boxee's efforts to deliver their content to viewers' TVs via Hulu's streaming web service. I speculated there as to why the networks would not want to play ball with Boxee. There is no question, on the other hand, why the cable companies are frightened of pure IPTV services, and it should come as no surprise that they are actively looking for ways to wall off content from them. Comcast and Time Warner are attempting to lock up cable TV content for online distribution (more details here). This content will be transmitted over the Internet in the same manner that a pure IPTV service would transmit it. The catch is that it will only be available to people who also subscribe to the cable companies' TV service.

Many cable TV programmers are likely to jump at this opportunity, as they've never been able to survive on a purely ad-supported basis and rely on cable carriage fees for about half their revenue. And, of course, even on that basis many cable channels could not survive if they were not tied together in cable tiers with other more popular channels (this is what much of the fight over a la carte cable revolves around). In fact, ESPN got out ahead of this game by trying (with considerable success) to strong arm ISPs into paying for its exclusive online content in a system analogous to a cable carriage agreement. What's next, regulatory battles over a la carte Internet? Oh, Kevin Martin, where have you gone?

On the other hand, for any really successful cable channels, my guess is they could do better by going it alone. This move will necessarily limit their online audience (as big as Comcast and Time Warner are, there are a lot of folks on the Internet who are not Comcast/Time Warner subscribers [though Harold Feld suggests that all MVPDs will be in on this game--anticompetitive conspiracy anyone?]). Moreover, they will be stuck in the position of subsidizing the crappy cable channels just as they have been through cable tiering all along. And if the good channels all flee, this may end up to be a pointless endeavor for the cable companies.

Obviously this move creates one more hurdle for IPTV providers to jump before going head-to-head with cable and telco video services. But it also creates potential net neutrality questions. This article suggests that Comcast will not treat this content any differently from other traffic for the purposes for traffic management or bandwidth caps. But if they or any other ISP were to in any respect preference this traffic, I'm calling it right now: instant FCC smack-down. This is exactly the sort of thing that net neutrality is intended to prevent.

In fact, I think the existence of monthly bandwidth caps at all will soon become highly suspect in the FCC's view. The Comcast Order hinted that monthly caps might be an acceptable network management technique. But anyone who routinely uses an Internet connection to view high def video will chew through these caps (I've seen estimates that HD video requires 4-12GB/hr (depending largely on the type of content), meaning a 250 Gb cap will last between 20-60 hours spread across all PCs and TVs in the household). In essence, monthly caps can be utilized to preference a non-IP-based video service over IP-based competitors.

ps. As you might note from my links here and in the previous post, I've been enjoying Silicon Valley Insider's Dan Frommer on this topic. He seems to be the go-to guy for this stuff.