Adeo Ressi talking his book?

I don't mind it if people talk their book. As John Doer once said, "no conflict, no interest." But whenever someone is explaining to you why you should spend your money or give away your labor, particularly if it benefits them, reach for your wallet to make sure it's still there.

It's no secret that the explosion in early-stage funding, plus the continuing drought of IPOs (and poor performance of the few tech companies which did go public), has changed the landscape in Silicon Valley. Now, the way to exit is to be bought by Google, Facebook, Yahoo!, Apple, and Amazon. According to Adeo Ressi, those companies aren't being acquisitive enough and they should buy more startups. This would, quite incidentally, help him cash out, but that's not the reason he's giving this advice. The reason is, because if they don't, the startup eco-system "will implode."

“Look at the facts,” he says. “You’ve got a ton of small companies that have consumer and business mind share. And you have a ton of large companies seeking relevance that have a ton of cash.” If the big companies would shift a “little bit” more of that cash toward acquiring more of those small companies, it would “create more liquidity and a more sustainable growth pattern.”

As for the obvious argument that enterprises like Google, Apple, and the like aren’t in the charity business, Ressi says that while there “may be some truth to that,” spending too conservatively is short-sighted and could prove crippling.

“If the gravy train stops, if the startup movement derails, those big companies will get hurt alongside the small companies and their investors,” he says. “I don’t know if it’s 5% or 10% or 20% [of large companies’ revenue], but the reality is that a lot of [the large companies’ business] comes from [small- to medium-size businesses], including startups. If they collapse, everyone will suffer. There will be blood in the water.”

I wonder if this article was published as a joke : )

Compare and contrast with this excellent insight from Asymco re: Apple (who, famously, hardly ever buys anyone):

Whereas there is a constant clamoring for Apple’s to use its cash to “acquire” or “buy” something, anything, maybe people not looking hard enough. If you need the satisfaction that comes from knowing that money is being spent, a glance at the Cash Flow statement and Balance Sheet shows that Apple buys the equivalent of one Yahoo! every three years[3].

The main difference with this type of acquisition is that there is less value destruction. Using the capital to ensure access to capacity, differentiation and hence a high margin is better than writing off the goodwill after a few years.

Pretty brilliant, and a smarter way to use cash strategically than bid in an open market. Very very strategic sourcing, I'm impressed.

Why Netflix encourages binge watching

Netflix released it's recent exclusive shows, Arrested Development and House of Cards, as one big block instead of dripping them out over time the way they would be run on regular TV. Daily Beast wonders why they do this:

While it's fun in a way to fry your brain watching episode after episode in a gluttonous feast, I'm still not quite sure why Netflix is releasing all the episodes of these shows at once. I know they want to recreate the experience of watching an entire season of a television show on DVD... but this is first-run programming we're talking about. TV on DVD means the show has already aired, it's had its incremental first release and now those who missed it can consume it at their own pace. But presumably they want to do that because they've heard things about it, people they know watched the show in real time, other people reviewed or recapped it or whatever else we do with television shows these days.

But in the case of an all-new series that comes tumbling out all at once, where's the opportunity for momentum, build-up, even word of mouth?

Seth Godin made a similar points a while ago:

In launching an entire seasion of House of Cards at once, Netflix made a mistake (fwiw, I haven't seen it):

Buzz is a function of both interest and timing. If 100 people talk about something over the course of a week, it pales in comparison to 100 people talking about something right now. Conversations beget conversations. The next big thing, the it girl, the one of the moment--most buzz is meta-buzz, talk about the talk. Think about it... Superbowl buzz is almost entirely about the buzz, not about the game. It's the sync that matters.

I think Netflix released their programming this way because, when they look at user logs, it's how they observe their actual customers actually watching actual shows. From this perspective, buzz marketers are objecting because facts are getting in the way of their theory.

Alternatively, watching a season quickly may be like a child eating all of his Halloween candy as soon as he gets back from trick-or-treating. The child does not know what is best for him, and therefore binges when he should be stretching the treats out over a few days.

Entertainment industries are the trickiest areas to apply data, because customers are not interested in speedy transactions, they way they are when they are searching for information on Google or buying something on Amazon. The viewing patterns Netflix sees are real. The question is, how to interpret them and make the best decision for their business.

The Identity Wars

Companies have been trying to control online identity for a long time. Remember Hailstorm? Well, Facebook cracked the code of a single identity system (1) without seeming to worry about privacy, and other companies have been trying to get-in on the act as well. Google's trying with Google+, to limited success, and Apple has actually succeeded with AppleID by building up iOS (to those who remember the old Mobile Me service will note how remarkable this is). Electronic Arts is trying with Origin, OpenFeint tried to do it on mobile, Twitter kind of has it working with Twitter ID etc.

Now Amazon is hoping to get in on the action as well with "Login with Amazon".

I think Microsoft failed largely because multiple logins are irritating, but not that bad a problem since everyone just solves it by using the same username/password combination on every site. This is not a good solution, but it works and it's simple.

Facebook solved it by making it useful to have your Facebook account connected to your other accounts, and using Facebook to identify yourself made that simple.

Apple solved it by just being convenient -- if you're on the iOS platform, might as well use the same thing you you use for every other Apple service.

Amazon is using the same language Microsoft did years ago with Hailstorm: "reduce sign-in friction", "good for developers", "better customer engagement and order conversion" etc. Their success points to date are Woot and Zappo's -- both Amazon subsidiaries incidentally, which would be like Microsoft claiming Hotmail (which I think they own) or MSN usage being evidence of Hailstorm adoption.

I think Amazon's key benefit is actually payment and checkout. I don't know how Amazon does at payment compared to Paypal, but making that easy for customers and developers may work. It's why Amazon's iPhone Kindle app can get away with the purchase being made on m.amazon.com -- the customer already has a login and it saves Amazon from having to pay Apple 30% on the transaction. Most other companies would not be able to get customers to re-enter login information, and then enter credit card information on a phone.

Ask a banker, and listen to what they say!

Nice post on Planet Money which actually gets many of the facts right! Unfortunately, they do not see how these facts actually pull together, and so do not quite capture the core insight into bank operations. But overall, it's a nice piece.

So, on some simplistic assumptions, capital is just the result of some arithmetic:
Capital is how much money would be left in the bank if you sold all the bank's stuff and paid off all its debts.
If you actually did that - and you wouldn't, it wouldn't really work out this way, but pretend - if you actually did that then that leftover money would go to JPMorgan's shareholders. They're what's called the "residual claimants," which just means that they get what's left after everyone else has been paid off.**** So the capital is sometimes called "shareholders' capital," because it belongs to them.

Yes, not bad! They've shown a balance sheet, and highlighted how capital is, in some sense, the stub value between assets and liabilities.

Those arithmetic definitions of capital should make clear an important fact: if a bank loses money, its capital is reduced before any of its debts are. The capital is the "first-loss position"; sometimes people say it "absorbs" losses. If JPMorgan just misplaces $100 billion of cash, then its assets will go from $2.4 trillion to $2.3 trillion, but its debts won't change by a penny: it'll still owe various bondholders, depositors, etc. a total of about $2.3 trillion. This means that its capital will now be $107 billion, say, instead of $207 billion: the entire $100 billion loss will go directly to the people who own stock in JPMorgan — the people with a claim on JPMorgan's capital. If JPMorgan misplaces $300 billion of cash, then its capital will be zero, and the stock in JPMorgan will be worth zero. On top of that, some of the people who loaned money to JPMorgan won't be paid back.

Yes, this is core fact. Capital is money in first loss position. If you want banks to make more responsible credit decisions, you need to put the folks who own the bank (shareholders) in more of a first loss position for when those decisions turn out to be wrong. That, by itself, is a strong argument for higher capital levels.

But there's another issue, which is that banks - and their shareholders - tend to like leverage, which is the superpower that borrowed money creates. Borrowing money - especially when you can borrow it really cheaply, like you can today - allows you to magnify your profits and losses. Magnifying your profits is good for shareholders (they get the profits!). Magnifying your losses isn't great, but since the shareholders don't necessarily suffer all of the losses (their shares can't go below zero), they might still prefer to take the risk. "Capital," remember, just refers to money that the bank hasn't borrowed: the more capital a bank has, by definition, the less leverage it has.

Great point. When you have an asymmetric payout structure (heads I win, tails I get bailed out) then increasing risk is the rational strategy. Lower capital, combined with the structural reasons we have had and will continue to have tax payer bailouts, increase this risk and so help banks make more money.

The article then gets lost in the maze of liquidity, not understand regulatory capital requirements, the forbearance thereof, and not looking at the very strange role the overnight interbank market and Fed discount window plays in all of this. Oh well. However, at the end it just becomes wrong.

But sometimes that's a good secret to keep. Ultimately banks get their money from people. People for putting money into banks in "safe" forms (deposits, etc.), rather than "risky" forms (shares of stock). If regulation shifts the mix into more "risky" forms of bank financing - if it makes people face up to the risks of their banks - then they will have a harder time satisfying that preference for safe assets. Then what happens?

Deposits are not substitutes for equity investments. Banks do not get their money to make loans from deposits. On the contrary, bank make loans out of thin air which then create deposits.

Fundamental error in banking

Megan McArdle, who I am fond of, is smart and understands economics and data well. And she illustrates the pervasive misunderstanding of how banking works in a throwaway line about Obamacare:

A bank account with $500 in it costs just as much to services as a bank account with $50,000 in it, in terms of ATMs and teller time and account statements mailed.  But the bank account with $50,000 turns a lot more profit for the bank when it's loaned out. 

Emphasis mine.

Banks do not loan out deposits, whether they are $500 or $50,000. Banks create loans out of thin air, expanding the asset and liability side of their balance sheets simultaneously, constrained by the amount of capital they hold and the capital requirements enforced by the regulatory regime. Loans create deposits.

Woolwich Machete Attack Ignored in US

Yesterday, two black Muslims cut down a British Soldier in Woolwich with a machete. But you would not have known looking at the front pages of the US's Paper of Record, or the Capitol's favorite rag. British papers did focus on the incident, however.

Why people don't like deficits

I think Robert Vienneau is being disingenuous when he asks claims "our rulers don't know why they don't like deficits". Furthermore, I think his arguments about conspiracies by evil capitalists hoping to keep down the common man reflect his (and Krugman's) politics more than anything real. Not that politics isn't real.

People don't like deficits because they've 1) been told that deficits are bad, and 2) it's easy to make an analogy between an overly indebted family and an overly indebted nation. I think we need to address these matter-of-fact concerns first -- going straight to conspiracy explanations are political, and that's a shame because this core misunderstanding is causing real economic hardship right now.

I think anyone reading this would see the obvious partisanship dissmiss Vienneau:

They report views on many areas of public policy. Generally, our rulers are reactionary and the opposite of benevolent. Business backgrounds in finance or industry, inherited wealth or "earned" wealth, were not correlated with differences in views. The sample size might be too small to provide enough power to distinguish, among the wealthy, effects of where they sit on where they stand. Professionals, mainly lawyers and doctors, tended to be slightly less reactionary. 

Really? Our current President does not have a background in finance or industry, nor did he inherit much wealth (you can decide whether he's "earned" the wealth that he has). Looking through most of Congress, by and large their members are professional politicians. And let us not overstate their power, given how independent most Government agencies are in their operations. Finally, the antonym of "benevolent" is "cruel". Enough said.

Professional Economists are generally poorly versed in accounting, and so do not understand how the balance sheet of a currency issuer operates and is different from the balance sheet of a currency user. Accounting entries like "negative capital" are rare birds, but important in understanding sovereign monetary operation. But since this is a blind spot, they too are guided by their familiarity with household finance and we are told deficits are bad.

Keynesians, are slightly more nuanced and say that deficits aren't bad now, but will be bad in the future, so therefore we should let the Government spend more immediately. However, there is a second way to generate deficits which is to cut taxes, and Keynesians do not put this option on the table. As such, their prescription is partisan in nature and observed as such. Much like Vienneau.

More on the XBox One

Yesterday, I posted my initial reactions on the Xbox One. Some additional thoughts.

1. While the instant response makes it easier to switch from TV to the game, it's not clear to what degree this XBox One is really a gaming machine at all. Tadhg Kelly asks what the whole thing is for, anyway.

2. It wasn't just me, there seems to be no DVR support in the Xbox. Not so good for TV then.

3. While elements of the XBox One were iOS like, it does not have an independent app store where indie developers can self publish. I think this is most likely a temporary state of affairs, perhaps to support the major 3rd party game developers to support the console and invest in some launch, post-launch titles.

4. The fact that MSFT will simply consolidate all games together suggests that yes, we will be seeing indie next to free-to-play next to AAA titles in the same library. Just like iOS with the market pressures that will bring.

5. Sony's PS4 is the more gamer-centric gaming console. From a pure core-Gamer perspective, that is the one to buy. The question is, will the more casual player be tempted to get an XBox instead because of the "life style" features packed into the Xbox? Or will they continue to just play games on their iPad and stream Netflix via Airplay, like they do now?

Xbox ONE

Not as anticipated as an Apple event, but Microsoft's XBox One launch was interesting, both for what they emphasized about their new console, and also what they did not mention.

If Microsoft was not in the console market today, I don't think they would choose to enter it. Windows, and the PC, is being assailed by Linux, iOS, Android, tablets, smart phones, etc. and Microsoft has not been able to defend it's home turf, or leverage Windows into these new worlds. These are they key existential threats to Microsoft, and they should take up all of the company's attention.

XBox One, therefore, should sort of be a B-team effort, with the A-players managing phones and tablets. But the presentation did not give that impression. We saw interaction experiences built from iOS deeply embedded into the console, in particular, voice command, gestural interface, instant task switching, and always-on service delivery. The whole thing feels like a bunch of apps.

In the last console cycle, HD graphics were the clear reason to get a console, and nothing like that exists today. I think some of MSFT's technology might generate legitimately better experiences, like good player matching, but overall there isn't any "must buy" feature for the hardcore gamer.

Actually, I think the ability to instantly task switch between TV's and games might end up being the most important feature for the marginal customer, because it makes it convenient to play console games more casually. Look for an XBox App store, with Free-to-play titles available for download and instant play soon. We'll know in February.

Yahoo! + Tumblr

In light of the $1B Tumblr acquisition by Yahoo!, I'd rather not comment on whether it was a good move by Yahoo! or not. From what I've heard, Tumblr was not making much money and was coming close to its fume date. Also, I've heard that growth of the platform was slowing.

That said, they could not have been in such difficult straights if they were able to negotiate a $1.1B all cash exit.

Acquisitions are hard. Turning popular (dare I say it, faddish) consumer platforms into real businesses is hard, and I wish everyone the best of luck.

I think it is worth looking at something Mark Suster wrote a few days ago which jives with my experience, and that is the downside of acquisitions for the existing team:

For the past 5 years or so Google, Facebook and a handful of tech industry giants have been quietly buying scores of early-stage startups for their talent. And to keep up with the Jones’s it seems that Yahoo! has now employed the same strategy.

And who cares, right?

How about if we look at it from the “rest of company” perspective.

You have been at Google, Salesforce.com, Yahoo! for years. You have worked faithfully. Evenings. Weekends. Year in, year out. You have shipped to hard deadlines. You’ve done the death-march projects. In the trenches. You got the t-shirt. And maybe got called out for valor at a big company gathering. They gave you an extra 2 days of vacation for your hard work.

And that prick sitting in the desk next to you who joined only last week now has $1 million because he built some fancy newsreader that got a lot of press but is going to be shut down anyways.

What kind of message does that send to the party faithful who slave away loyally to hit targets for BigCo?

The Tumblr faithful are in arms about the purchase, they are worried that Yahoo! will change Tumblr, and it will (it must) because while the service seems to be generating plenty of value, it is not capturing enough of what it has created, and it isn't creating enough new value any more to get a pass.

I will also add, that just when something seems like it cannot be made any simpler, it can (and does). Anyone else remember the early days of Dave Winer's blogging software, or Joel Spolsky's downloadable blogging solution? Then came Blogger, and it was simpler and better. Then Twitter. Then Tumblr. Twitter is technically simpler than Tumblr, but Tumblr is cognitively easier to get your head around.

Are we in a stock market bubble?

The S&P just breached 1600, an all time high. Are we in a stock market bubble?

(Please indulge me in a brief aside. This image of the S&P from the 1970s is depressing). Basically, the stock market has gone sideways from the internet boom of the mid-90s to today. In the last decade, there have been two brutal downturns, and the extreme volatility you see in the charts, against a backdrop of sideways drift, should make anyone wonder whether investors, as opposed to speculators, really have any business being in this HFT driven market. But I digress. Let me segue back to the point of this post and talk about whether we are currently in a bubble or not).

James Surowieki tackles this in his latest New Yorker post:

With the stock market setting new highs on a nearly daily basis, even as the real economy just slogs along, there seems to be one question on everyone’s mind: are we in the middle of yet another market bubble? ...

The bubble believers make their case with a blizzard of charts and historical analogies, all illustrating the same point: the future will look much like the past, and that means we’re headed for trouble... The bears admit that corporate profits are high, which makes the market’s price-to-earnings ratio look quite normal, but they insist that this isn’t sustainable... Today, after-tax corporate profits are more than ten per cent of G.D.P., while their historical average is closer to six per cent. That’s a vast gap, and it’s why bears believe that the market is, in the words of the high-profile money manager John Hussman, “overvalued, overbought, overbullish.”

All good points. Corporate profits are high, and labors share of income, which has been historically very stable in the US at about 70%, has fallen to just 60%. This is a big deal. Check out this chart, it begins in 1947. So a ratio which has been fairly stable in the US for over 50 years, has fallen off a cliff.


This is the source of rising corporate profits -- there is enough consumer demand to support flat or rising top lines, but a glutted labor market which means that companies can keep compensation costs in-line and increase their overall share of profit. Surowieki cycles through other explanations: corporations pay less in taxes, labor unions are weaker, S&P 500 earnings include overseas operations which are looking to grow, but I think the Labors Share of Income Chart from the Cleveland Fed tells the real story -- a dramatic and recent decrease in labor market strength is flowing through to the corporate bottom line.

So, why? James is coy:

The underlying issue is that in recent decades there’s been a shift in the U.S. economy: it’s become far more congenial to businesses and investors. The fundamental trends that have driven the profit boom are unlikely to be reversed. That doesn’t mean that companies are going to be able to keep slashing their way to profit growth. As Doug Ramsey, the chief investment officer for Leuthold Weeden Capital Management, told me, “It’s hard to see how companies can get profit margins much higher, unless they want to see massive labor strikes across the country.” But keeping profits where they are doesn’t look all that difficult, which makes stocks today quite reasonably priced. It’s still possible that investor hysteria could eventually inflate stock prices, or that investor panic could send them crashing, but there is no profit bubble and, for now, no stock-market bubble, either.

What is this shift which began when the internet bubble popped in ~2000, never recovered, and then took another dogleg down when the debt bubble popped in 2008? Quite simply, I'd say it's a weak labor market because the economy, as a whole lacks aggregate demand. This is not structural, and its congeniality to businesses and investors is accidental, I believe, not calculated. I think that the US Govt has been unwilling to take the necessary fiscal actions, through tax cuts or increased spending depending on your politics, to step in and restore the demand which never really recovered from the internet boom ending.

Whatever happened to Cyprus?

It seems that a few months ago, Cyprus was on the verge of imploding. What happened -- did it implode? Did the Germans relent and let the ECB write a big cheque?

I have no idea. A quick google search revealed these two articles, both of which are interesting, neither of which really catch me up.

Athanasios Orphanides blames it all on the Communists.

What was the role of decisions by Cyprus, decisions by Europe, and other factors in producing the crisis we see now?

A number of factors played a role. The global financial crisis and exposure to Greece made Cyprus vulnerable. But the outcome was determined by decisions taken by the previous government in Cyprus as well as the broader malfunction of the euro area over the past three years.

Two months after Cyprus joined the euro area [in January, 2008], there were presidential elections and the Cypriot public elected as president a communist, Demetris Christofias. The public was convinced he could solve the political problem we had with Turkey and reunify the island. The issue was not economic.

If one thing has become clear over the last five years in Cyprus, it is that the euro area, which is not just a market economy but a currency union with strict rules, is not compatible with a communist government. Why is this important? This government took a country with excellent fiscal finances, a surplus in fiscal accounts, and a banking system that was in excellent health. They started overspending, not only for unproductive government expenditures but also they raised implicit liabilities by raising pension promises, and so forth.

Well, never a bad move to blame communists (except maybe out loud) but you will note Orphanides never mentions the structural problems that an archipelago of currency users has when there is no issuer to back claims between them.

And on the latest plan?

Why, in your view, was the March 16 plan flawed?

The Cyprus parliament had passed a number of laws that influenced the current and future spending and pensions. And they were also in the process of finalizing how they would do privatizations of the semi public companies. So all the standard elements you'd expect in other programmes had been done or were being done.

Why did they attack retail deposits in this manner? This had never before been a requirement of any other programme. And why did the German government insist in the last three days that there should be a bail-in? The only logical explanation I could see is that Angela Merkel's government faces re-election in September of 2013 and the SPD [the Social Democratic party, the principal opposition to Ms Merkel's Christian Democratic Union] has made it an issue: it does not want to support a loan by the German government to Cyprus because, they claim, that would be like bailing out the Russian oligarchs. This is how Cyprus got caught up in the German election...

What will the implications be for Europe and the stabilization of the euro zone?
This is similar to the blunder in Deauville with PSI that injected credit risk into sovereign government debt. The governments have created risk in what before last week were considered perfectly safe deposits. This is going to have a chilling effect on deposits in any bank in a country perceived to be weak. This will mean the cost of funding will increase in the periphery of Europe and as a result, the cost of financing for businesses and households will increase. That will add to the divergences we already have and make the recession in the periphery of Europe deeper than it already is. This is really a disaster for European economic management as a whole.

OK, so it's not all the communists' fault, the Germans are also to blame. History rhyming.

I, however, still do not know, structurally, what happened in Cyprus. This second feed does not help, although it does have pictures of angry Spaniards.

So, did some debt deal go through? Was there any material outcome besides a worsening of living standards in Cyprus, and I assume Greece? International stock markets seem to have been fine, so maybe the ECB wrote a cheque after all?


If anyone can clue me in, I would be obliged.

The True Cost of (Equity) Capital

I know it's nice to discount any complaint or warning issues by bankers that some new regulation will negatively impact the economy, but I think when it comes to concerns around increasing (equity) capital requirements, they are correct. We should increase capital requirements anyway.

Kwak discounts the bankers' concerns with a number of assertions which are, factually, not true:

Some of the arguments against higher capital requirements are simply incoherent, like the idea that banks would be forced to set aside capital instead of lending it...

Some contradict basic principles of corporate finance, like the idea that adding more equity capital increases banks’ cost of funding.* Yes, equity is usually more expensive than debt (meaning that investors demand a higher expected rate of return) because it is riskier (the range of possible outcomes is greater). But as you add equity, both the debt and the equity become less risky (since the firm is less leveraged), which reduces the cost of debt and the cost of equity...

In the real world, debt has a tax advantage (interest on debt is tax-deductible, while cash that is paid to shareholders or reinvested in operations is not), so increasing debt can reduce the overall cost of financing. But that’s a government subsidy...

I'll be gentle and not cite the part where he brings up Modigliani-Miller. Kwak is likely familiar with some corp fin, but is not well versed in bank operations or regulation. A banks ability to lend is primarily constrained by capital requirements (not reserve requirements as many thing) which means there is a limit to how many loans it can extend, and the riskiness of those loans, based on how much equity it has. All else equal, the more a bank lends, and the higher an interest rate in can charge on those loans, the more money it makes.

Therefore, higher capital requirements limit how much a bank can lend, which impacts its ability to make money, and also causes economic harm to the extent that less bank lending is harmful to the non-bank economy.

Some important additional elements: We want bank lending to be prudent, which means putting private capital in first loss position against bad loans. The equity that investors put into banks is exactly the capital which should be in first loss position, so having more of it is not a bad idea as it will be able to absorb more loan writeoffs before the bank needs to go to the Government for a hand out.

Beyond that, the system can still be gamed by mispricing risk on the asset side -- if you can classify a risk asset as a safe one (as the banking system did with mortgages) you can end up undercapitalized on a risk adjust basis even with larger capital requirements. Higher thresholds deal with this in a crude way, but I'm not sure what better tools there are to model risk more accurately and make sure that this sort of covert leveraging is not allowed. Better to accept it's a black box and forbid securitization -- keep loans on the books of the originator and make those who invest in the originator have their necks on the line for performance.

The Problem with 401(k)s

A really nice post on the Vanguard corporate blog (really) about the problems with 401(k)s:

The film started with two misconceptions. The first is that most Americans aren’t prepared for retirement. That’s an over-exaggeration (see my previous post on this issue)..

The second misconception was about the old defined benefit (DB) pension system. The program suggested most workers had a generous DB pension, and that there were no risks to worry about. By comparison, 401(k) plans are a poor substitute—they’re too complex, too costly, and too risky for the average person.

All of this is equally untrue. About 4 in 10 private sector workers had pensions in their heyday, and the typical pension was modest. The system was full of risks. For example, you could spend your career at a company and find out at age 65 that the pension you were entitled to was inadequate. Or, if you changed jobs frequently, whether by choice or necessity, you often got little or nothing from the pension system. And few workers were aware of these risks.

I think that it is important to note how available defined benefit pensions really were, and that they were poorly suited for job mobility. But I think it is certainly true that the individuals who run those plans are far more able to make wise decisions than individuals. The 401(k) system really does force individuals to make decisions that they are poorly equipped to make.

That said, this point is critical:

- Savings. Strikingly, the documentary said nothing about savings habits and the culture of consumption in America. If only it had! The fundamental challenge facing all retirement investors, 401(k) or not, is saving adequately. Yes, low fees, better portfolios, and good legal regulation matter. But they are second-order concerns to the first-order problem of Americans consuming less today so they can have more tomorrow. We seem to have cultural amnesia about saving—and no one really wants to talk about it.

A friend of mine in the industry made the same point years ago. Picking the right stocks (or funds), taking care that fees are as low as possible, managing taxes well is all good, but the main thing you need to do is save enough, and people don't.

It may be better to lower taxes, make social security more generous, and abolish 401(ks) altogether. In fact, the tax advantaged nature of 401(k)s means you need to lower taxes (or increase spending) anyway to handle the demand drain that comes from the increased savings that those vehicles generate. Finally have social security without automatic COLA adjustments -- this should be another inflation control lever that is counter cyclical to the business cycle, not pro-cyclical the way COLA sets is up to be.

Commodity Entrepreneurship

One thing about Y Combinator plus its imitators is that it takes a truly commodity view of the entrepreneur, at least the entrepreneurial founder. After all, what does it really ask that the founder have? Not deep technical expertise in a horizontal discipline, nor in a vertical industry, just energy and the willingness to take a risk. And energy and a willingness to take risks are the commodity of youthful labor, which puts not-so-youthful capital in the position of price maker.

Unsurprising then that financial returns accrue to the capital:

If you add up the I.P.O. figures and the sale figures, this means about 33 percent of venture capital exits are in a position for the founders to earn a dime.

But it is probably lower than that. According to Sand Hill, 7.5 percent of the venture capital I.P.O.’s had exit values that were below the total venture capital investment. As for sales, the venture capital investors still need to be paid back their 8 percent accrued dividend. This probably puts the number of deals where the founder receives anything in the 20 percentile range. These numbers also do not take into account management or other fees paid to the venture capital firms.

The notion that entrepreneurs are the new labor is explored in more detail here.