Coyote Blog

From the WSJ:

The European Central Bank’s corporate-bond-buying program has stirred so much action in credit markets that some investment banks and companies are creating new debt especially for the central bank to buy.

In two instances, the ECB has bought bonds directly from European companies through so-called private placements, in which debt is sold to a tight circle of buyers without the formality of a wider auction.

It is a startling example of how banks and companies are quickly adapting to the extremes of monetary policy in what is an already unconventional age. In the past decade, wide-scale purchases of government bonds—a bid to lower the cost of borrowing in the economy and persuade investors to take more risk—have become commonplace. Central banks more recently have moved to negative interest rates, flipping on their head the ancient customs of money lending. Now, they are all but inviting private actors to concoct specific things for them to buy so they can continue pumping money into the financial system.

The ECB doesn’t directly instruct companies to create specific bonds. But it makes plain that it is an eager purchaser, and it lays out the specifics of its wish list. And the ECB isn’t alone: The Bank of Japan said late last year it would buy exchange-traded funds comprising shares of companies that spend a growing amount on “physical and human capital,” essentially steering fund managers to make such ETFs available to buy.

Note that none of the criteria for the debt purchases is anything like, "the company has sensible plans for investing the money."  It is merely buying debt for debt's sake.  In the US, private companies are using most of their debt issues to buy back stock, a nearly pointless exercise that channels money from central banks to propping up equity valuations.  I wouldn't be surprised if European companies do the same.

Folks, it may not feel like it, but we are at the top of the economic cycle.   We have negative interest rates and central banks buying up every available debt issues in relatively good times, when these were formerly considered tools for the deepest point in a recession.  I am not a big believer in government stimulus, but these folks are.  What are they counting on in the bad times, when nothing will be left in the tank?

But now, we see central banks going one step further, encouraging private companies to lever up at the top of the business cycle.   Historically, this has been a formula for disaster.  The oil industry has been a preview of this.  Take ExxonMobil (XOM).  XOM, given its size, has never been very good at developing certain sorts of plays (e.g. the shale boom).  What it has done historically is use its size and balance sheet to swoop in during inevitable periods of low oil prices and producer losses to buy up developed fields at good prices.  But this time around, XOM has only had limited ability to do this, because it spent the boom years levering up its balance sheet and buying back stock.  Other large oil companies are in even more dire straights, facing real cash flow crises because, again, they levered up to repurchase stock when they should have been cleaning up their balance sheet.

This was an interesting profile of Trump featuring his ghostwriter on Art of the Deal.  Frequent readers will know that even years before he came on the Presidential stage, I was never taken in by the Trump-is-a-great-businessman meme  (most recently here).

In the New Yorker article, Trump's ghost says that Trump is not nearly as smart as he is made out to be, he is petty and childish and vain and self-absorbed.  He apparently makes promises he never keeps and has made a mess of a number of his businesses.  He has a short attention span and a shallow understanding of most issues.

Which all leads me to ask -- how does this make him any different from most other politicians, including the one he is running against for President?  Is he unique in these qualities or merely unique in his inability or unwillingness to hide them?  Does he have more skeletons in his closet, or does he just engender less personal loyalty so that more of his insiders speak out?

Don Boudreaux quoted a great bit from H.L Mencken the other day:

The state – or, to make the matter more concrete, the government – consists of a gang of men exactly like you and me.  They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office.  Their principal device to that end is to search out groups who pant and pine for something they can’t get, and to promise to give it to them.  Nine times out of ten that promise is worth nothing.  The tenth time it is made good by looting A to satisfy B.  In other words, government is a broker in pillage, and every election is a sort of advance auction sale of stolen goods.

I am serious about this.  We saw in an earlier story that the government is trying to tighten regulations on private company cyber security practices at the same time its own network security practices have been shown to be a joke.  In finance, it can never balance a budget and uses accounting techniques that would get most companies thrown in jail.  It almost never fully funds its pensions.  Anything it does is generally done more expensively than would be the same task undertaken privately.  Its various sites are among the worst superfund environmental messes.   Almost all the current threats to water quality in rivers and oceans comes from municipal sewage plants.  The government's Philadelphia naval yard single-handedly accounts for a huge number of the worst asbestos exposure cases to date.

By what alchemy does such a failing organization suddenly become such a good regulator?

Update:  On the topic of cyber security competence or lack thereof, there is this:

In mid-May, the Federal Bureau of Investigations lost control over seized domains, including Megaupload.com, when the agency failed to renew a key domain name of its own. That domain, which hosted the name servers that redirected requests for seized sites to an FBI Web page, was purchased at auction—and then used to redirect traffic from Megaupload.com and other sites to a malicious site serving porn ads and malware. Weeks later, those sites are still in limbo because somehow, despite a law enforcement freeze on the domain name, the name servers associated with Megaupload.com and those other seized sites were changed to point at hosts associated with a domain registered in China.

Yep, that is the lead government agency tasked with investigating hacking and cyber security breaches.

Last year at a charity auction I was able to win, at a substantially discounted price, passes for a weight-loss program I would not normally be able to afford.  My daughter and I will be attending this weekend in Las Vegas.  I will post a report next week.

From Valley Fever

As we noted yesterday, more than 40 Arizona state legislators have signed on to a bill that would make the Colt single-action Army revolver the official state firearm. Early this morning, the Senate Appropriations Committeevoted 9-4 to advance the measure to a full Senate vote.

Seriously?  What a complete waste of time.  If we are going to start naming official state _____ where the blank is a commercially sold product, could we at least auction the rights, like the Olympics does?  I understand that there are passionate 2nd amendment defenders that somehow think this is a statement they need to make, but I am a passionate first amendment defender as well and I see no need for an official state microphone or printing press model.

I have never really understand all the hatred directed at ticket scalpers.  They only make money because the original sellers of a scarce resource  (e.g. tickets to a concert) under-price their product.  Scalpers live on the difference between the list price of the ticket and the true market clearing price.  So they buy the tickets when they first come out for $80 and resell them for, say, $200.

Scalpers will never go away.  Even if there were not a mispricing problem, there is always going to be a secondary market for date/time specific products that are non-refundable  (just think how great it would be if there were a secondary market for airline tickets you could no longer use, though alas TSA and airline rules pretty much make this impossible).

But scalping would be a lot, lot smaller if concerts just sold the tickets originally at the market clearing price, or held some sort of auction for them.  Then the original price would be $200, not $80, and the margin for flipping the tickets goes away.

Which then presents us this irony for those consumers who whine about scalped ticket prices.  The fact is the higher market clearing price never goes away, even if it is achieved in some sort of black market.  In fact, what eliminating scalping really means is that instead of some people paying $80 and some paying a higher price, everybody pays a higher price.  There is no mystical low price, larger supply solution to the problem.  In fact, the lower price with scalping model really is a gift from bands and concert promoters -- the scalping margin really could be theirs if they wanted it.

I am reminded of all this by this notice to fans posted by the White Stripes' Jack White and linked by TJIC.  The subject in question is limited edition vinyl but the discussion is exactly similar.  White took some small steps as publisher to capture some of the scalper's margin discussed above, and apparently some fans freaked.

The Brits are selling an aircraft carrier via an internet auction.

A decade ago, I was an executive at an Internet startup named Mercata.  Mercata was one of a couple of entrants in a field we had named "group buying."   In practice, this meant there were limited time sales where the price of a product would fall based on the number of people who agreed to buy.   Obviously the volumes were not large enough to get economies of scale of any sort, so they main advantage of the approach was viral marketing -- once you had agreed to buy, you had an incentive to get others to join in as more buyers would reduce your price.

The company eventually folded.  The company was very professionally run for an Internet startup of the day, but it had a lot of overhead for its volume, and, as eBay would learn, a lot of people wanted to buy immediately rather than wait for some sort of auction to play out.

But it turns out that one of our biggest failures was timing.  Recently, a company called Groupon has taken advantage of social networking that did not exist 10 years ago and has been quite succesful building a business using a very similar model to Mercata's.  It appears that Google has just bought Groupon for $2.5 billion.  Sigh.

This is not, however, even my largest financial missed opportunity.  I still have in my desk a 1984 job offer from Microsoft, which I eschewed at the time because it paid less than my other offers and tried to compensate me in these crazy pieces of paper called "options."  I once calculated the current value of the options just in the offer letter (ie not including any future grants over time) and their value was well north of any conceivable net worth I might reach currently.

Unless you are from Mars, you probably know LeBron James is a free agent, being courted by a number of teams, ultimately deciding on Miami over his home town and former team in Cleveland.

This has been an odd auction for his services, because except for some tax issues (which certainly may have been a factor in going to Florida), price controls in the league effectively cap how much James can be paid.  And given his talent, it was clear that every team would be willing to pay him the max.  This has led to offers based mostly on non-monetary factors, with Cleveland mainly taking the Glenn Close approach from Fatal Attraction, basically saying it would have to commit suicide if LeBron breaks up with the city.

Many have commented on how much Cleveland, economically, had riding on James and that it may well get the biggest economic benefit, bigger certainly than Miami which has fairly indifferent and easily distracted fans, of any of the teams in the auction.  But with price controls, Cleveland lost because it was not able to bid for LeBron's services what he was really worth  (in fact, it was pretty clear that all the teams involved expected to have a huge consumer surplus from LeBron's acquisition, since his value to any team seems to be higher than the salary cap).

By the way, speaking of surplus or lack thereof, my belief is that New York has continued its tradition of offering long-term lucrative deals to disappointing players.  Having watched Amare Stoudemire for seven years, I can say that he is fully poised to be the next Stephon Marbery for the Knicks.  He can be brilliant, and he is very talented, but he has focus issues that are not going to be enhanced in New York and at times was thrown off-kilter by the media pressure in Phoenix where the press is a cupcake compared to New York.  He is not even much of an upgrade from David Lee, but he gets paid a lot more guaranteed money.

I was familiar with the dynamics of the all-pay auction (I always called it the Wargames auction -- the only winning move is not to play).  I had never thought of it as a good analog for lobbying expenditures, but it makes a lot of sense once David Zetland made the point.  Good video at the link.

It is a recurring theme on this blog:  Large corporations who currently dominate their industries generally accept, even encourage, government regulation.  Generally, as industry leaders, they have the opportunity to shape regulation to their liking, and most regulations preferentially help the large corporations over the small, and help incumbents over new entrants.

And here is yet another example, though it is one many of us have been expecting.  Contrary to campaign rhetoric, it appears that Obama's proposed cap-and-trade system will give CO2 certificates to current incumbents for free.  Only new entrants to the market, or those who wish to grow, will have to pay for them.  This in effect makes the system a federal tax on market share changes.  Laws like this are supported by industry leaders in the same way that sitting Congressmen always love campaign speech restrictions.

The next thing to watch for is whether there are provisions for carbon offsets.  Such offsets are an accounting nightmare, and a virtual Disneyland for rent-seeking.  More on cap-and-trade vs. carbon tax here.  More on offsets here.  And more on why this is all silly in the first place here.

Via a reader:

An auction that netted $7.5 million in bids on 56 distressed Utah properties fell through last week after the owners -- three banks and two private lenders -- decided they may get a better deal by holding out for the government's bailout plan.

"There were buyers, but we couldn't sell the homes because free enterprise has gone out of the market," said Eric Nelson, founder of Las Vegas-based Eric Nelson Auctioneering.

His company on Sept. 30 put up for sale 56 foreclosed properties and lots, most of which are in Utah County.

The auction, held in Salt Lake City, attracted thousands, including 200 bidders who bid between $275,000 and $615,000 for 10 luxury homes in Midway and Murray that were appraised at between $525,000 and $652,000. They bid between $26,000 and $100,000 for 44 custom lots in Mapleton, Elk Ridge, Lehi, Alpine, Ogden, West Haven and Willard that were valued between $112,000 and $290,000 a piece.

The most-expensive properties on the auction block included a $1.2 million unfinished home in Draper, which attracted the highest bid at $615,000, while a 62-acre parcel in Park City that's valued at $3.5 million, snagged the highest bid at $1.125 million, said Eric Taylor Nelson, the company founder's nephew.

But all those bids were rejected late last week...

"This has never happened before. In the 25 years we've conducted lender-owned auctions, we've consistently closed over 95 percent of all high bids," Nelson said.

"The stock market's historic drop last week and the bailout plan are some of the main reasons why the lenders rejected the bids," he said. "They're thinking, 'Why sell the properties for 50 cents on the dollar when they may get 75 cents or 80 cents through the bailout?' "

I thought Dale Franks has a really good post on why the bailout is a crock.  Its quite long, but here is one excerpt:

Banks that made bad mortgage choices get a buttload of money for their
bad MBS paper. Banks that charted a more reasonable course"”and yes,
there are quite a few"”get no reward.

In a real free market, of
course, the banks that made bad decision would have to take the hit.
They'd auction them off at whatever price the market would bear, and
they'd have to suck up the losses on the difference between face value
and sale value, even if that meant driving them out of business.
Meanwhile, the more rational banks would be able to pick up the MBS
paper at a discount, and make some cash off of the distress sale from
the incompetent banks.

And, of course, the incompetent banks would probably be driven out of business.  Which, after all, is how it is supposed
to work. But, the government seems entirely uninterested in letting the
market work this out, which brings me to my next point....

I keep hearing over and over again"”and I've even said it"”that no one
knows what these mortgage backed securities are worth. But let's be
clear here: the reason we don't isn't because the price is mystifyingly
unknowable. It's because they haven't even tried to sell them off yet.
We already know it's possible to find out what the price is, simply by
offering them up for sale. Indeed, we did it in July when Merril Lynch sold off its entire MBS portfolio.

The reason we're not doing it now is because the holders of MBS paper expect a government bailout, and they expect to
receive through it a price significantly higher than they would in the
secondary market. If it were otherwise, they'd already be auctioning
them off.

After all, we're talking about securities based on the
value of mortgage repayments. We already know that the default rate on
most of the MBS paper will be around 5%, with a maximum of probably no
more than 10%. Everybody already knows this. Now, just to turn the
screw, a buyer might want a discount of over"”perhaps well over"”50%.
after all, it's a fire sale, and everybody wants a bargain, right.

But there is a market-clearing price for these securities, and everybody on the street knows it.
What they also know is that they have an excellent chance of receiving
a much better price from the Feds, and that waiting for the bailout
gives them a better chance to stay in business, even if the Treasury is
a large shareholder in the company. And, after all, if the Treasury is
a shareholder, how likely is it that the government will let them fail, losing all that equity?

The
bailout doesn't solve the problem. It keeps the bad banks in business,
lets them escape the worst consequences of their malfeasance, and
prevents the better run banks from taking up the reins that would be
otherwise dropped when the bad banks went out of business.

So, apparently the US government is going to authorize up to $700 billion taxpayer dollars to purchase distressed financial assets.  I had an email today that said, to paraphrase, couldn't the government make money off these assets if they buy them for the right price?

My first thought was that this was theoretically possible, though my internal cynic found it unlikely in a pricing game run by elected officials between the taxpayer and powerful Wall Street interests that taxpayers would get the upper hand.

But then I realized there was no possible way this will end well for taxpayers.  Because the government cannot exercise discretion in day to day financial decisions.  It establishes rules and benchmarks and the typical bureaucrat is punished far worse for violating these processes and rules than he/she ever is for reaching a bad result.  So the government will establish rules and benchmarks for what price at which they will buy assets (this will be all the more true given the great rush everyone seems to be in).  And having set this in place, do you know what assets will be put to them?  All the ones that the current holders think are worth less than the benchmark.  This is the winners curse on steroids.

Update from Megan McArdle:

there's a gigantic asymmetrical information problem:  the owners of
these securities know much more about them than the Fed.  And there
isn't (obviously) a large liquid market for the Fed to check against.
So the Fed is likely to overpay, because there won't be a lot of
bidders in any one auction.

Megan, of course, reluctantly supports the bailout where I do not.  But she has her eyes open about what she is buying into. 

I could probably start a blog just featuring ridiculous government licensing practices.  As I have written before, licensing generally has little to do with the consumer, and more to do with protecting current incumbents from competition.  Via Radley Balko, this is one of the uglier examples I have seen of late:

Mary Jo Pletz was really, really good at eBay. But now the former
stay-at-home mother and gonzo Internet retailer fears a maximum $10
million fine for selling 10,000 toys, antiques, videos, sports
memorabilia, books, tools and infant clothes on eBay without an
auctioneer's license.

An official from the Department of State knocked on Pletz's
white-brick ranch here north of Allentown in late December 2006 and
said her Internet business, D&J Virtual Consignment, was being
investigated for violating state laws....

The 33-year-old opened her Internet business in 2004 so she could
stay home with her 6-month-old daughter, Julia, who was diagnosed with
a hypothalamic hamartoma brain tumor.

She cooperated when told it was illegal and works at dental offices
in Allentown, Bethlehem and Lehighton as a hygienist to help pay the
bills at home. Julia, whose health stabilized on medication, is
enrolled in day care. Pletz also has a son, Douglas, 7.

But the state has not dropped prosecution. It sent Pletz a complaint in
April and an amended complaint in December. The complaint says she
could be fined $1,000 for each violation of the state law. The April
complaint noted 10,000 sales. Pletz and her attorney, Joseph V. Sebelin
Jr. of Palmerton, did the math - $10 million in possible fines. The
second complaint does not list a number....

Because of the complaint, Pletz worries the state also could revoke
her dental hygienist's license, which she earned by attending community
college for seven years at night.

"I really wish that they will walk away from that one and prosecute
somebody else," said State Rep. Michael Sturla (D., Lancaster), who is
chairman of the House Professional Licensure Committee. "There is every
reason in the world that if she is found guilty, she should be
exonerated," he said.

This latter is the most outrageous of all, and it is a line taken by a number of public officials -- that the concept of prosecuting people who are selling things on eBay is just fine, but they should not have started with someone who has less sympathetic.  Maybe Exxon has an eBay arm.

Sturla has proposed the bill to create the electronic auctioneer's
license. The license would require the Internet seller to buy a $5,000
bond for about $40 a year. This would protect consumers, he said.

Bull.  This would protect competitors.  eBay has numerous controls in place to identify problem sellers.

D&J Virtual Consignment had 11,000 feedback comments on eBay
and 14 were negative, Pletz said, giving her a 99.9 percent
satisfaction rating.

I can say from experience that for some reason they must teach this in
government school -- when in doubt, make service businesses get a
bond.

This is not unique - Ohio tried to do the same thing.  But why is a person who sells on eBay an auctioneer at all?  Isn't eBay the auctioneer?  If I turn my stuff over to Christies to auction off, setting a reserve price in advance and having them take a sales commission, how is that any different than putting the same stuff on eBay.  In Ms. Pletz case, eBay is earning the auction commission.  She is just taking a retail margin.

TJIC points to an article in the local Boston news that planners are shocked -- SHOCKED -- that the carpool lanes they spent tens of millions of dollar on are going unused.  I thought this was the best line:

Amazing.

I would never in a thousand years have guessed that people, -
if they have the means - prefer to commute to work on their own
schedules, in their own cars instead of in some sort of communitarian
Charlie Foxtrot where they have to coordinate schedules with their
neighbors, and have no flexibility to do errands on the way home, and
must welcome other people into their private domain.

And it's not just me - no one at all thought that people might
prefer privacy, individualism and freedom over enforced contact,
compromise, and obligation.

Quite a while ago, I made a counter-proposal for using the carpool lanes:

Several years ago, I sent in a proposal to the Arizona
Dept. of Transportation for their new HOV lanes in the Phoenix area,
though I never got a response back.  I suggested that HOV lanes
probably did not really increase carpooling, since they probably just
shifted vehicles that would have already been carrying 2+ people into
the faster lane.  Why should I get this artificial subsidy of a
dedicated lane when I am driving my kid to a soccer game but not when I
am driving myself to do productive work?  Either way, the lane is not
changing my behavior.

Anyway, I suggested that instead, AZ DOT should create a
number of special passes for exclusive use of the HOV lane.  The number
of passes should be set as the largest number that could be issued
while keeping the HOV lane moving at the speed limit at rush hour.
Maybe 5000?  Anyway, they would have the stats to set the number, and
it could be adjusted over time.  I proposed that they then auction off
these passes in a dutch auction once a year.  I posited that the
clearing price might be as high as $1000, thus raising $5,000,000 a
year that could be used for other transportation projects.

I have friends that said I was crazy, that no one would
spend $1000.  Back then, I argued it in two ways.  First, thousands of
people in town spend not $1000 but tens of thousands of dollars, in the
form of purchasing a nicer-than-basic-car, to make their driving
experience better.  In those terms, to the Mercedes or Lexus owner,
$1000 was nothing and in fact the price might go higher.  Second, if
each pass holder saved 15 minutes per commute, or 30 minutes per day
over 250 work days, they would save 125 hours of their time each year.
Bidding just $1000 for this would mean that people would have to value
their free time (since commuting generally comes out of free and family
time) at $8 an hour.  I certainly value my free time at a MUCH higher
rate than this.

Unfortunately, it is behind the WSJ paid firewall and not on their opinion journal site, but Gary Kasparov has a very interesting editorial that confirms my fears about Russia:

Russia may not have much industry or democracy left, but we do have
massive amounts of oil and gas plus other natural resources. When
combined with our nuclear weapons, these resources are sufficient to
buy entry into the G-8 despite Mr. Putin's transformation of Russia
back into a one-party dictatorship. This newfound international sway is
also having serious repercussions inside my country. Many here would
like to believe that Mr. Putin is ushering in a return to our Soviet
superpower glory

He tells some pretty amazing tales of self-dealing by government officials on a massive scale. 

In perhaps the best example, the giant energy company Yukos was
dismembered and its chairman jailed. Next, Yukos assets were put up for
auction and the crown jewel, oil unit Yuganskneftegaz, was purchased at
a bargain price by the state-owned company Rosneft, which received
billions in mysterious loans. On July 14, Rosneft had an IPO in London
to sell these stolen assets and, of course, the money didn't go into
the treasury. This isn't nationalization, it's simple robbery. In
Russia the expenses are nationalized and the revenues are privatized.

That last line is a great one.  I for one have scratched my head at why Bush as consistently given Putin a pass.  My only guess is that he has prioritized his war with Muslim fundamentalism so high that he needs Putin as a potential ally in the area, though Kasparov presents evidence that Putin is likely exactly the opposite.  He concludes:

The West is making a terrible mistake by mixing realpolitik with a
battle of values. Drawing and defending moral lines is the first and
most essential step in combating extremism and there is no room for
double standards. If the West is keeping track of its friends, it's
time to take Mr. Putin off the list.

Were Sacco and Venzetti really guilty?  I you are like me, you hear those names and say - boy, those names sound familiar.  I am sure they came up some time in my US history class in high school...

Sacco and Vanzetti were early 19th century anarchists executed in Massachusetts for robbery and murder.  Fellow communist, anarchist and author Upton Sinclair helped to generate a lot of sympathy for the two, raising a storm of protest that the two were innocent of the crime and were being tried and executed for their political beliefs.  They have been heroes of the left and the progressive movement ever since.

Asymmetrical Information points to this article, which describes new papers that apparently belonged to Upton Sinclair that make it clear that Sinclair actually discovered that Sacco and Venzetti were indeed guilty:

Soon Sinclair would learn something that filled him with doubt. During his
research for "Boston," Sinclair met with Fred Moore, the men's attorney, in a
Denver motel room. Moore "sent me into a panic," Sinclair wrote in the typed
letter that Hegness found at the auction a decade ago.

"Alone in a hotel
room with Fred, I begged him to tell me the full truth," Sinclair wrote. " "¦ He
then told me that the men were guilty, and he told me in every detail how he had
framed a set of alibis for them."

Sinclair decided that, for the benefit of the "movement", as well as his sales, not to reveal the truth

"My wife is absolutely certain that if I tell what I believe, I will be called a
traitor to the movement and may not live to finish the book," Sinclair wrote
Robert Minor, a confidant at the Socialist Daily Worker in New York, in
1927.

"Of course," he added, "the next big case may be a frame-up, and my
telling the truth about the Sacco-Vanzetti case will make things harder for the
victims."

He also worried that revealing what he had been told would cost
him readers. "It is much better copy as a naïve defense of Sacco and Vanzetti
because this is what all my foreign readers expect, and they are 90% of my
public," he wrote to Minor.

This all resonated with me because I recently had an email exchange with a reader who reminded me of this quote:

We
have to offer up scary scenarios, make simplified, dramatic statements,
and make little mention of any doubts we have. Each of us has to decide
what the right balance is between being effective and being honest.

- National Center for Atmospheric Research (NOAA) researcher and global warming action promoter, Steven Schneider

No one knows better than a blogger that everyone picks and chooses the news they want to notice and the facts they promote and don't promote.  But at some point on the slippery slope you hit a transition to outright dishonesty.  It seems that this temptation to support your cause with a fake story was not invented by Mary Mapes.

Quite a while back, I suggested that a better use for HOV lanes would be to charge money for their use, thereby creating a new revenue stream to increase future freeway capacity and beginning to experiment with peak pricing.

Several years ago, I sent in a proposal to the Arizona
Dept. of Transportation for their new HOV lanes in the Phoenix area,
though I never got a response back.  I suggested that HOV lanes
probably did not really increase carpooling, since they probably just
shifted vehicles that would have already been carrying 2+ people into
the faster lane.  Why should I get this artificial subsidy of a
dedicated lane when I am driving my kid to a soccer game but not when I
am driving myself to do productive work?  Either way, the lane is not
changing my behavior.

Anyway, I suggested that instead, AZ DOT should create a
number of special passes for exclusive use of the HOV lane.  The number
of passes should be set as the largest number that could be issued
while keeping the HOV lane moving at the speed limit at rush hour.
Maybe 5000?  Anyway, they would have the stats to set the number, and
it could be adjusted over time.  I proposed that they then auction off
these passes in a dutch auction once a year.  I posited that the
clearing price might be as high as $1000, thus raising $5,000,000 a
year that could be used for other transportation projects.

I suggested that $1000 as the clearing price might be low.  For some workers and businesses, 20 saves minutes a day might be worth thousands of dollars a year.  Some wealthy people would buy it just because they can, or as a status symbol.  I observed that many people were buying hybrids in Washington DC solely so they could use the HOV lane, putting a price of at least $5000 (based on the hybrid's price premium over similar non-hybrids) on HOV lane use.  In this example, I posited an annual pass, rather than a toll, solely because we have not toll roads here and no infrastructure at all to support tolls and a customer based unused to paying them.

Apparently, Lynn Kiesling, the DC/Northern Virginia area may soon experiment with exactly this concept, charging a congestion-variable price for HOV lane use while giving a discount to carpools.  Apparently the idea already is in use in SoCal.

I wrote before of the cost that licensing imposes on the economy.  I love Milton Friedman's take on licensing and certification:

The justification offered is always the same: to protect the consumer. However, the reason
is demonstrated by observing who lobbies at the state legislature for
the imposition or strengthening of licensure. The lobbyists are
invariably representatives of the occupation in question rather than of
the customers. True enough, plumbers presumably know better than anyone
else what their customers need to be protected against. However, it is
hard to regard altruistic concern for their customers as the primary
motive behind their determined efforts to get legal power to decide who
may be a plumber.

Now, from Ohio (and via Cafe Hayek) comes this attempt to regulate auctioneers:

Besides costing $200 and posting a $50,000 bond,
the license requires a one-year apprenticeship to a licensed auctioneer, acting
as a bid-caller in 12 auctions, attending an approved auction school, passing a
written and oral exam. Failure to get a license could result in the seller being
fined up to $1,000 and jailed for a maximum of 90 days.

Keep Friedman's quote in mind.  Note that under this system, auctioneers have an automatic veto over new competition, since all potential competitors must find an existing auctioneer to take them on as an apprentice.  Imagine the consumer electronics business - "I'm sorry, you can't make or sell any DVD players until Sony or Toshiba have agreed to take you on as an intern for a year".  Yeah, I bet we'd see a lot of new electronics firms in that system - not.

It gets better, though.  The law is written in a way that it applies to Ohio residents trying to sell on eBay:

Here's the response offered by state Senator Larry
Mumper, author of the legislation: "It certainly will not apply to the casual
seller on eBay, but might apply to anyone who sells a lot," he said. "If someone buys and sells on eBay on a
regular basis as a type of business, then there is a need for
regulation."

This is the kind of regulation mentality that is killing us.  eBay has a great rating system, and while the system sometimes trips for small sellers (since they can just start a new account) but big volume competitors ruthlessly protect their reputation on eBay because it is so visible.

Todd Zywicki at Volokh has an interesting post on what is driving hybrid car purchases in certain cities.  While certain segments are driven by environmentalism and fuel economy, the real boom in certain cities has come with the legal change in some cities allowing single persons in hybrid cars to use the carpool lanes.

"'I'd say 95 percent of the people who buy a Prius say it's to get into HOV,'" said Jay Taye, sales manager at Ourisman Fairfax Toyota. "'They talk about the tax break and the HOV, and once in a while they say they prefer it for the gas mileage as well.'"

By the way, he links an absolutely dead-on article about public transit in the Onion here called --"Report: 98 Percent of Commuters Favor Public Transportation For Others"

The link between the Onion article and the Washington Post story referred to by Zywicki is that what people really want is a fast commute in their car, and they are willing to pay for it.

Several years ago, I sent in a proposal to the Arizona Dept. of Transportation for their new HOV lanes in the Phoenix area, though I never got a response back.  I suggested that HOV lanes probably did not really increase carpooling, since they probably just shifted vehicles that would have already been carrying 2+ people into the faster lane.  Why should I get this artificial subsidy of a dedicated lane when I am driving my kid to a soccer game but not when I am driving myself to do productive work?  Either way, the lane is not changing my behavior.

Anyway, I suggested that instead, AZ DOT should create a number of special passes for exclusive use of the HOV lane.  The number of passes should be set as the largest number that could be issued while keeping the HOV lane moving at the speed limit at rush hour.  Maybe 5000?  Anyway, they would have the stats to set the number, and it could be adjusted over time.  I proposed that they then auction off these passes in a dutch auction once a year.  I posited that the clearing price might be as high as $1000, thus raising $5,000,000 a year that could be used for other transportation projects.

I have friends that said I was crazy, that no one would spend $1000.  Back then, I argued it in two ways.  First, thousands of people in town spend not $1000 but tens of thousands of dollars, in the form of purchasing a nicer-than-basic-car, to make their driving experience better.  In those terms, to the Mercedes or Lexus owner, $1000 was nothing and in fact the price might go higher.  Second, if each pass holder saved 15 minutes per commute, or 30 minutes per day over 250 work days, they would save 125 hours of their time each year.  Bidding just $1000 for this would mean that people would have to value their free time (since commuting generally comes out of free and family time) at $8 an hour.  I certainly value my free time at a MUCH higher rate than this.

This article cited above effectively adds another data point to what people might pay.  To buy a Prius, they are spending at least $5000-$10,000 more than a similar car that can't go into the HOV lane, and probably even more when you consider features they may be giving up to have the car.   

Today, I would bet that the clearing price for 5000 such passes may be $3000-$5000, thus increasing the annual revenue to the city/state as high as $25,000,000.

By the way, though it is a bit different than what I am suggesting, the best related plan that I know of that has actually been executed succesfully is congestion pricing in central London.

UPDATE:  Dang, reading up further in Volokh, Zywicki anticipated my post with a similar one here.

Business Pundit has a post today about a new auction site named jittery. 

One thing BusinessPundit mentions is that the new site will have a

"Buy Offer" feature, which I believe gave him the idea in the first place. Basically, instead of buyers competing over an item and raising the price, buyers specify what they want to buy, which features are important, what prices they want to pay, and sellers compete to give them the best deal.

I am extremely skeptical that this would work.  As background, I ran the marketplace portion of Mercata, that similarly tried to bring a different, more buyer focused model to table and failed fairly spectacularly.  We found that you can be as innovative as you want, but you need a lot of traffic to your site, and building such traffic takes a lot of time or a lot of money or both.  You also need to provide a value proposition for both buyers AND sellers.

A LOT of people have tried some sort of reversal of the auction process, where buyers specify the goods they want and sellers bring them to the table, bidding against each other (ie lower and lower prices) to get the business. FreeMarkets made some hay with this in the B2B world, but from the beginning the auctions were never really the money maker, but were a Trojan horse for supply chain consulting, which helps to explain why they merged with Ariba. 

The only people to make this model work in the consumer area is Priceline.  However, what most people fail to realize about Priceline is that it fulfilled a real business need for SELLERS, even more than for buyers. 

Airlines have a classic fixed cost pricing problem.  They want to sell as many tickets at a high price as possible, but an incremental passenger costs them nothing, so if the plane is not full, getting even $50 for a passenger to fill an empty seat at the last minute is profitable to them.  The problem is somehow offering the $50 fare only to the passenger who would not fly otherwise, and not cannibalizing the customers who are willing to pay $300. 

The problem is, if they offer the $50 fare to anyone, they can't hide the fact very well.  The airline industry, as most know, have very transparent computer systems that let everyone know their prices on every route every minute of the day.  If an airline cuts prices on a route, everyone knows - so that competitors can match the cut immediately and customers can switch from the higher to lower fairs.  Airlines protect themselves somewhat with limited availability of certain fares and advanced purchase requirements - so that people, particularly business travelers, who need to maintain flexibility, have a reason to pay higher fares.

However, advanced purchase requirements were not providing enough protection.  What airlines really wanted was a way to cut fares for one person who might not have flown otherwise, and let no one else see them do it.   And Priceline was the answer.  Yes, airlines had to tell the Priceline computers what the lowest bid they would accept from a customer for a flight was, but this did not constitute an official price that went into the reservation systems.  So, the airlines could cut their price (via Priceline), but only the customer who got the price ever saw it.

In fact, the story is even better.  At the time Priceline came around, one airline had a particular problem they needed to solve.  When TWA got a loan from Carl Icahn, an almost unnoticed part of the deal was that a certain travel agency owned by Icahn, small at the time, would be guaranteed TWA tickets at a healthy discount off the lowest published fares.  This agency, with this boondoggle, grew to enormous size as Lowestfare.com.  TWA, beyond the reasons listed above, therefore had a second reason for not wanting to publish their lowest possible fare.  Normal limitations that most airlines could set on how many seats would be available at their lowest fare could not be enforced by TWA.  If they offered a new $100 fare, Lowestfare.com could blow out an unlimited number of tickets at $80 or less and TWA would have to accept it.  Therefore, by offering discounts unpublished via Priceline, TWA prevented the travel agency from getting inventory even cheaper.  And so, a huge portion of the early Priceline inventory was TWA.  (ironically, after the American Airlines acquisition of TWA killed the deal, the Lowestfare.com URL was bought by ... Priceline.

Anyway, I just don't see how reverse auctions can work in the consumer world, particularly if the customers are allowed to specify price and quality and features, etc.  The transaction costs for suppliers would be just too high wading through this stuff -- in fact, many companies in the B2B world, where transaction sizes are in the millions, have come to this same conclusion - for a variety of reasons, they are choosing not to participate in reverse auctions (here too).

Marketplaces must offer value to both buyer and seller.  If you don't offer honest value to sellers, then no products appear on the site and it will fail.

Basically, there are two gorilla's in the online marketplace arena - eBay and Amazon.  eBay had the head start in building a brand and community in the marketplace space, but Amazon has brought some really nifty technology to the table.

As a user of both, I welcome a new competitor, sortof.  I hope that there will be competitors who force eBay to adopt some overdue new features (e.g. auction sniping protection and better search features on past auctions) but I don't really want any to be successful enough to create a third or fourth or fifth major platform out there, because that just increases my search costs and time when I want to buy something.

UPDATE

I missed pointing out one bit of irony.  The Internet is generally attractive to consumers because it increases product information, and particularly increases knowlege about market pricing.  However, in this case, Priceline's attractiveness to airlines was that it decreased pricing transparency in the market.

UPDATE #2

Welcome Carnival of the Capitalists readers.  Have a look around, and check out our thoughts on replacements for Dan Rather.