Gas Math

I am lucky to live close to where I work. It's not totally luck. I used to live very far from where I worked, and all changes (changing where I live or where I work) since then have reduced this distance. I am also luck to drive a fuel efficient vehicle, a 2006 Volkswagen Passat. There are two ways for me to get from home to work. The first is to take surface streets (Meridian Avenue to Hamilton, in case you want to stalk.) This is a five mile drive, with lots of red lights along the way. My car gets an average of 21 mpg for this trip. The other way I can go is to take freeways (CA-85 and CA-17 for the stalkers.) This is a seven mile trip, but my car gets around 29 mpg. It is also about 5 minutes less time. So which way do I go?

The surface route consumes 0.23 gallons of gasoline. The freeway route consumes 0.24 gallons of gasoline. That's a difference of 0.01 gallons. If I drive this twice a day, 250 times a year, that is 5 gallons of gasoline. So anywhere between $10 to $20 difference, depending on the ever volatile price of gas. It is also an extra 200 miles on my car. Given the way the IRS expenses miles, that is about $242. So let's say it costs me $260/year to take the freeway. But at 5 minutes each way, that is 41+ hours of my time. So is my time worth $6.24/hour? Yeah, I'll take the freeway.

Wall Street Deserves Its Bonuses

All of America is upset about Wall Streets bonuses. Even The President is pissed. Guess what. All of America, including President Obama, is wrong. It's easy to say oh these already-super-rich CEOs are just lining their own pockets with taxpayer money, but that's a knee jerk reaction with no thought behind it. All of those billions in bonuses did not just go to CEOs. They went to tens hundreds of thousands of American workers. They went to traders and portfolio manager and secretaries and HR people. It was money that was promised to those workers as part of their compensation. It was money that many probably used to pay for their kids college tuition or pay off their credit card bill from Christmas or maybe just for the basic staples of life. Maybe they used it to pay their mortgages. If you just think a little, then maybe you won't be so outraged. Maybe you'll realize that it shouldn't even be any of your business.

But of course it is everyone's business because of the government bailouts of the banks. Worse we have all been brainwashed into blaming things on the greed of Wall Street. That is the great red herring of this depression. Politicians want you to think that all of our problems are the result of the greed of Wall Street. If you have a scapegoat to blame things on, then you do not have to take any responsibility.

So if it's not Wall Street's fault, then whose fault is it? There is an easy and a hard part to that. The easy part is that it is the government's fault. It is the fault of the Federal Reserve for using its unconstitutional power to amplify business cycles. The Fed created a climate of malinvestment by fixing interest rates at unsustainably low levels. And guess what, they continue to do this. The seeds of the next recession are already being sown today.

That's the easy answer. The harder answer is that its your fault. Its the fault of every American who bought houses they could not afford. Its the fault of every American who constantly refinanced their house to "cash out" their equity. This carpe diem approach has lead to historically low savings in America, historically high debt, and historically high rates of loan default and foreclosures. Those are the real reasons why any bank would be a fool to loan out money right now. No matter how much money the government gives them, it will never make any sense to loan it out. The people who would borrow are not likely to be able to pay it back.

Back to reality. Nobody is going to accept personal responsibility. It's the government's job to saves us from ourselves, right? I actually thought for awhile that maybe people would (rightfully) blame the government, but that has not happened either. The politicians have cleverly manipuated the masses to put the blame on banks and Wall Street greed. Now we are pissed that those banks are paying the salaries of their employees instead of lending money. It's obvious what is next. We take over those banks and force them to lend money to everybody. Then we will get what we deserve.

How To Fix The Economy

I like to fix things. This should be no surprise, as I am an engineer. Of course some engineers prefer to only build new things, and do not like to fix existing things, but not me. Sometimes this works against me. Whenever I encounter a problem, my first reaction is to try to figure out how to fix it. Sometimes that is not appropriate, and sometimes the problem just cannot be fixed. That is a tough thing to admit: that a problem cannot be solved. Even tougher is to spot such problems without first repeatedly failing to solve it.

What does this have to do with the economy? The economy is a problem that cannot be fixed. There is no one thing or series of things that can fix this problem. Giving money to banks has already proved to be ineffective, as has eliminating interest rates. Now some folks want to take even more drastic measures. But it is not going to work.

We like to think that we are so smart that we can understand anything, and thus solve any problem. But we are not that smart, not even close. Some things are too complex and macroeconomics are too complex. If it was possible to understand macroeconomics enough to control it, then the Soviet Union would still be running along smoothly. The Great Depression would have only lasted a few years. You get the idea.

Not convinced? Look at the causes of the Great Depression. The Fed was established the Federal Reserve Act in 1913. It really got to work after the end of World War I. Starting in 1921, The Fed used a variety of "levers" to increase the total money supply by more than 60%. The Fed made the "boom" part of the business cycle extra "boomier", but the result was an even bigger bust. Banks were incentivized to make malinvestments. When they could not cover the malinvestments that failed, a "run on banks" ensued.

Does this sound familiar? The Fed did the exact same thing in this past decade. There was no "run on banks" this time because of FDIC (more on that in a minute.) Instead there was a run on other investment instruments, and the result was equivalent : insolvent financial institutes. Only things are worse this time. Why? FDIC.

Smart people back in the 40's thought that the Depression was caused by the run on banks, not recognizing that as symptom of the sickness, not the cause. So they tried to prevent bank runs by enacting FDIC. If the government insures your deposit, then you should not freak out and pull your money out of the bank, right? Of course this creates a moral hazard because it removes some of the risk of investment. So what do we do? Regulate.

What happens? The regulation becomes dated as new types of investments are invented that are not subject to the regulation. One could argue that the reason for these new investment was to avoid paying the tax of regulation and thus give a higher return. However, the moral hazard is even worse. Even though these instruments are not insured by the government, the precedence has been set. Investment banks know that the risk will be absorbed by the government. Meanwhile the Fed once again inflates the money supply, as the government needs a big "boom" to help pay for wars, and like clockwork, we get another dramatic bust.

Do we admit that FDIC didn't work? Nope. Instead we think that the problem was that we didn't regulate those pesky new investment instruments! This is coming from a Nobel Prize winner, so it has to be The Truth, right? While the specter of government force looms as the ultimate "fix."

So am I just proposing that we roll over and do nothing? Well ideally this would be an opportunity to do things that are generally good for the economy: reduce taxes, reduce regulation, increase trade. However when most of the experts propose well-meaning solutions that would often do just the opposite, maybe the status quo is all we can hope for?

Does this mean that banks fail, businesses fail, and people lose their jobs? Yes, it does. Everyone wishes there was some magic button to push that would prevent these awful things from happening, but there is not. None of the dramatic (and unconstitutional) actions of The New Deal succeeded in fixing that mess. Maybe they prevented things from getting worse in some cases, but they also drastically prolonged The Depression and laid some of the seeds for today's problems.

Of course FDR was re-elected three times and that is all that matters to politicians. So get ready for a lot of fixes, and get ready for a long depression. Let's just hope that this economics meltdown doesn't end like the last one.

Recession and The Valley

Are you a programmer who recently moved to Silicon Valley? Are you nervous about what things will be like now that the greater economy has gone pear shape? Then listed to this old man tell you all about his experiences in the last recession in the Valley.

I moved to the Bay Area in 2000, right as the last great recession was getting started. Like this recession, it was happening in an election year and it really hurt the incumbent party. I started off working at a very small start-up in San Francisco called InternetElements. They had a cool idea. Allow any bank or even large organization provide the tools to their members to buy and sell stocks. Remember that back then the stock market was really hot, much more so than it has gotten in the last few years. New companies sprung up all the time and went IPO. Everybody bought into the IPO and made crazy money. It was great.

Anyways, once the stock market started tanking and IPOs disappeared, nobody had much stomach for InternetElements' idea. I was employee #4 there. Our CEO basically told us that we had cash in the bank to make payroll up until a certain date. This was about a month before that date. There were talks going on to get us either some more money or do a merger with another company that had more money, but neither of those worked out.

I started looking for a new job. This was fall of 2000, so things weren't too bad just yet. I didn't have much experience, but I had a degree from a (among the tech world) well known school. So that opened doors for me. I found a new job two weeks before the old one was set to die, and started at the new one on the Monday after InteretElements stopped promising to make payroll. The two founders of the company continued on trying to salvage their company, but there were no hard feelings at all.

My next company was called RMX. I would work there for the next two years. It was also a start-up, but was sort of a spin-off from Chevron. I was there throughout the recession. When I first started, we were expanding pretty quickly. They had hired a lot of consultants to build the initial site and needed to replace them with full-time employees. There was also a grand vision of a big company with an large and intricate org chart.

That vision died pretty quick. Soon the hiring stopped, and then some layoffs started. Tech companies everywhere were struggling. We knew there would be no additional rounds of funding. So we had to become profitable to sustain ourselves. Our management were great. They explained everything in detail at all times. We met as a company every Friday morning. Management talked about how much money we had in the bank, what our burn rate was, and what kind of sales prospects we had.

We worked really hard at RMX. We closed deals with new customers. We drastically cut costs by replacing licensed software with either open-source or in-house built software. By the spring of 2002 we were profitable with about $4M in the bank still. Everybody felt pretty good about themselves. We had survived the recession, even when it got amplified by the aftermath of 9/11. Or so we thought...

In May of 2002, our board of directors voted to shut us down. The reasoning? Even though we were profitable, the recession had changed the landscape they thought. Our ceiling was much lower, even though our risk was also now very low. We weren't a worth investment, so decided to liquidate us.

Half of the company was laid off within a week of that. The other half was kept around. We had customers and contracts with those customers that required us to help them transition to not using our service. Basically each customer got a copy of our code so they could run our service for themselves, on their own hardware. So all of the engineering folks were needed for the transition, but obviously sales and marketing folks were not.

Everybody laid off got one month's pay as severance. Everybody who was not laid off and staid until the end got one month's pay severance, and got a bonus for staying to the end. I was one of those folks. It was a pretty good deal in some ways. I had a job, while it was understood that I would look for a new job. However it was pretty depressing. Half the folks in the company were gone, including a lot of friends. Everybody still working knew their own end was in sight. The closer it got, the more stress people felt.

I wound up staying until the very end. We had a big party on the last day. It was nice, but it was pretty upsetting for me. After two years with a start-up, I had a lot of emotional investment. I was too shook up by it to even say proper good-byes to everyone.

The next week I went on unemployment! I had COBRA papers ready to file when my health insurance ran out. And I did a lot of job hunting. I felt a lot of desperation to find a new job and took the first offer that came my way. That was a mistake in hindsight. I wound up only going one week without a job.

The new job was a contract and it was doing code in C#. I was intrigued about learning a new language, as I had only done Java, Perl, and a little C++ previously. I was a total gun-for-hire at this job, and I was not used to that. I had been an integral part of a start-up for the three years prior to that, and I did not adjust well. Luckily after four months, I found a job at Yet Another Startup: KeepMedia, now MyWire.

The worst of the recession was over in 2003, but things were not peachy. I started working at KeepMedia in February and we launched that summer. It was a great company, and I was back in the kind of role I liked. Things did not take off like we wanted. I think that had more to do with the business plan then the economy, but who knows. We never had any layoffs or anything like that there. But we did everything on the cheap, and I do mean cheap. Our biggest expense was an Oracle database. We were scared to put people's credit card numbers in a MySQL database.

Anyways, that was an interesting experience too. It was a stat-up that started in a recession. What was a little different about KeepMedia is that we were funded by a single person, Louis Borders. We did not have a certain amount of money in the bank and there were no plans to seek VC funding. That would have been tough to get anyways at that time. But there was still huge emphasis on saving money at all costs. We were very creative at doing that. I learned a lot of valuable lessons by having such constraints placed on the systems I built.

I wasn't at KeepMedia very long. That's a long story in itself, and I hated to leave. However, by the time I left, the recession was officially over in The Valley. Let me summarize some lesson that I learned back then:

1.) Start-ups are still start-ups. They are no better or worse just because there is a recession going on.
2.) However, if you are at a start-up, it becomes even more important to know what the heck is going on.
3.) You should still be picky about your job. Don't let the recession force you into a job you hate. Now the recession can force you into that situation, i.e. you are running out of money, etc. But don't put yourself into that situation artificially.
4.) If you do find yourself in a bad position, don't be afraid to make a change.

That covers the professional side of things for me. When it comes to personal things, honestly the last recession did not affect me negatively. Rent prices dropped a lot during that recession, mostly because they were way too high before it. I never took a pay cut and I never had any money in the stock market other than my 401K. So in many ways my buying power actually increased during the recession. Now if I had been unemployed for a long stretch... well obviously that would have been a lot different.

Will this recession be even worse? I actually don't think it will be worse for The Valley, just because the last one was so bad. This one looks like it will be worse for the country at large, and maybe it will last longer. The last recession was four years solid in The Valley, though maybe less elsewhere.