Affordable Housing Institute : US

[Continued from yesterday's Part 2 and the preceding Part 1.]

 

By:David A. Smith

 

Yesterday’s post of the Financial Times‘s scenario of a Greek exit had reached the point of concluding that not only is Greece doomed to exit the Euro, there’s a better than even chance Greek will wind up with a military dictatorship, even if ‘temporarily.’

 

Here to stabilize things for you

 

[As I write this from Heathrow Airport, the British papers have suddenly sprouted stories about 'will your holiday survive the coming meltdown'. Inevitability is taking effect. A new Greek election is scheduled for June 10, but things will be moot by then.  – Ed.]

 

Indeed, as I have been writing this one can feel the sands shifting.

 

5. Is Greek business ready for an exit?

 

Answer: No, but they’ll be the miner’s canary.

 

The blunt warning this month from Evangelos Mytilineos to shareholders offered a rare insight into the thinking in the boardrooms of Greek businesses with international operations. The chief executive of Athens-based industrial group Mytilineos said that the headquarters of Metka, a subsidiary that builds power plants in Eastern Europe and the Middle East, may be moved abroad. “Our Greek background is not very helpful when it comes to competing internationally,” Mr. Mytilineos said.

 

Any company with significant Greek assets, capital, or key personnel will be quietly but swiftly moving them out of the country.  I will be absolutely astonished if, by the time you read this, there hasn’t been a flight of assets from Greece.

 

Has the shepherd been frightening the goats again?

 

Remember, ‘panic’ is a Greek word, and ostracism comes from the Greek for ‘judgment by pottery shards.’

 

While some large businesses have prepared contingency plans in case of a “Grexit”, medium-sized companies are waiting to see what happens, say Athens-based consultants.

 

Not any more, they won’t be.

 

“I think it’s too early to start thinking about drachma-isation,” says a Crete-based hotelier, citing the wildly diverging exchange rate estimates for a new currency.

 

What else can he say?  He cannot move his real estate.

 

Last year he rejected a contract amendment proposed by Tui, a German travel operator, relating to financial obligations in the event of the return of the drachma.

 

And we are out of here

 

That was then.  He won’t get the same concession this time.

 

Even those not planning to move are making sure any money earned abroad stays there.

 

No matter how much money the European governments may think about putting into Greece, if the business community wants to keep money outside the country, the government bankers will be filling a sieve.

 

Keep pouring, ladies

 

“[One basic lesson of the crisis] has been to make sure that your receivables are not brought back to Greece,” says one exporter. “I keep almost all my funds abroad.”

 

Markets move faster than [democratic] government.  Markets move on perception.  Government is thus guaranteed to lag action, and government’s lumbering attempts at surprise only scare the money away faster.  (The only form of government that can surprise markets is a dictatorship or military junta, and that’s not a reassuring thought.)

 

Businesses serving the domestic market are downsizing after two years of trying to keep costs down amid a dramatic plunge in sales.

 

They have to – they realize people will not have money to buy – and the result will be an acceleration of the fiscal crisis in Greece.

 

“We’re planning to close half of our outlets by the end of the year,” says the general manager of one retail chain. “If we go back to the drachma we’ll keep only a flagship store in Athens.”

 

This will be tricky, as if there is a Greek collapse, there will be ire against multinationals and banks, and from ire to looting is but a small step that needs only a demagogue.

 

You rang?

 

Solon Molho, an analyst, says the disastrous consequences of leaving the euro are not yet fully appreciated.

 

Pay attention to a Greek guy named Solon

 

That’s for sure.  Everyone in Greece has been acting as if default is impossible, and being previously unthinkable does not mean impossible – in fact, unthinkability may be a precondition of a Minsky Moment.

 

You never saw it coming, did you?

 

“You would most likely decide to shut down operations, sell the business if you could find a buyer, and perhaps leave the country altogether.”

 

Watch for foreigners tiptoeing out of the country.

 

Leaving? I’m not leaving, just shifting my position

 

Dear reader, if you are in Greece, leave now.  I am not kidding.  You do not want to be there for the next few weeks.

 

Fleeing? Me, fleeing?

 

6. Can the eurozone contain the contagion?

 

Answer: Not completely, but they may be able to amputate it.

 

This is the biggest unknown. If the eurozone authorities could persuade investors and the public that Greece was a special case, the effects of an exit could be contained. If not, a Greek exit would soon become a disorderly break-up of the euro project.

 

How can Europe’s fiscal leaders persuade their creditors they mean it?  First of all, they will have to cut off Greek aid, and be seen as having adhered to a principle – which heretofore they have categories not done.

 

The inevitable question after a departure is: “Who’s next?”

 

Have no fear

They can’t wipe us out for at least five years!

 

Lehman proved to be the first and only massive collapse, because those before and after Lehman either changed their behavior or had it changed for them.

 

Eyes would turn rapidly to Portugal, which followed Greece into the more-money-borrowing club.

 

[And Portugal has been frantically issuing 'We're not Greece' statements recently – Ed.]

 

Investors would sell Portuguese bonds, seek to extract money from the country’s banks and take euros across the border for fear of an exit and devaluation.

 

Just as the Spanish Civil War – sorry for the conflict-laden analogies – was the off-Broadway tryout of World War II, so too will Greece’s economic collapse be the lab test for other nations.

 

Madrid, 1936

 

Horror grips us as we watch you die

All we can do is echo your anguished cry

Stare, as all human feelings die

We are leaving, you don’t need us.

– Crosby Still & Nash, Wooden Ships

 

In America, we must take a lesson from this.  Unsustainable deficits eventually lead to hyperinflation or economic collapse.  Wisdom is seeing that the future ends in tears and then taking action to avoid it.  We had best do so.

 

Currency risk has been evident in the European banking system since late last year, but the incentives to move deposits into German banks from those in Portugal, Ireland, Spain and Italy would be clear.

 

That’s an understatement.

 

 

The stakes are high – extremely high. 

 

If the political will to hold the single currency together exists, the eurozone has a big weapon in its arsenal to contain the contagion: unlimited action by the ECB.

 

Translation: The sovereign can print the sovereign’s money.

 

It could restart bond-buying at very high levels to limit rises in sovereign bond yields and offer unlimited liquidity to peripheral-nation banks to offset a run on deposits.

 

Out of this rubble, the ECB will emerge with vastly strengthened powers over the nations that remain in the Euro.  The difference between ECB-Yes and ECB-No will be all too clear.

 

 

Or will it?  One nation, one unquestionably sovereign, holds a veto:

 

This would worry Berlin, which feels the ECB has already gone too far in underwriting bank and sovereign debt in peripheral countries.

 

It has.

 

But the alternative is worse, as the EU has no other sufficiently powerful defense against a systematic bank run in such nations.

 

It doesn’t.

 

The answer, therefore, is that the eurozone could limit contagion, but it is highly uncertain whether it would. If it did not, the end of the euro would be nigh.

 

The Financial Times is even more worried than I am, for it is envisioning that unless Germany is satisfied, then Germany would pull out of the Euro, and without its spine, the body would indeed collapse.

 

At least one of us has a spine

 

In either case, the outlook for the European economy is highly risky. After the Lehman collapse in 2008, it was not a dearth of bank lending that plunged the region into its worst recession since the Second World War, but a collapse in confidence and spending as households and companies decided simultaneously to tighten their belts in fear of what might happen next.

 

Unless the European authorities are extremely skilful in ring-fencing Greece, a similar scenario would be a severe danger.

 

Translation: If Greece goes, so goes the southern Euro.

 

Choose one or the other, but not both

 

Once Greece collapses – and in my opinion it is no longer an If but a When – then Italy and Spain may be shocked into action.

 

Let’s hope they are, anyhow.

 

Now, this will either cure you or kill you

[Continued from yesterday's Part 1.]

 

By:David A. Smith

 

Yesterday’s post using the Financial Times as a reference point had reached the conclusion that, bluster from Alexi Tsipras notwithstanding, the Eurozone’s financial leadership will not write another enormous open-ended check:

 

“The future of Greece in the eurozone lies in the hands of Greece,” Guido Westerwelle, German foreign minister, said on Friday. “If Greece strays from the agreed reform path, then the payment of further aid tranches won’t be possible. Solidarity is not a one-way street.”

 

With the Greek electorate’s broad-based rejection of any austerity, then the crockery will fall and break – Greece will exit from the Eurozone.

 

So much for union

 

Against accusations that it is imposing, in the words of Mr. Tsipras, “barbarous” demands, the core of the eurozone is already positioning itself to ensure any exit is seen as a sovereign decision.

 

You see, the inevitability effect is already having its inexorable impact. 

 

It’s inevitable that the effect will come into play

 

This will be extremely messy.

 

The answer’s in one of these EU policy directives

 

3. What would exit from the eurozone entail?

 

Answer: Fiscal chaos in Greece, severe financial repercussions in European government banks.

 

In a game of brinkmanship, neither Athens nor the rest of the eurozone would want to take responsibility for a Greek exit from the single currency. Recriminations would fly.

 

Recriminations will be the least of everyone’s problems.

 

Your fault!  No, your fault!

 

Slippage against the agreed EU and IMF agreements would probably be accepted for a period, so the trigger for exit would be a deliberate rejection by a new Greek government of the requirements for austerity and structural reform in the existing agreement that Athens signed with the “troika” of the European Commission, the European Central Bank and the IMF in February. “It would be more of a case of Greece walking than of Greece being pushed out,” says Willem Buiter of Citigroup.

 

Skeptical Dutchman being skeptical

 

 

Such political finger-pointing will be solely for domestic consumption – Chancellor Merkel cannot very well go to the Bundestag and explain that the money she persuaded Germans to shovel to Greece was a fool’s investment from the start, so she’ll have to claim that the Greeks have lost their minds.

 

Open for business!

 

The FT then states the obvious:

 

Exit would occur because, without disbursements of additional loans, the government would run out of money to pay social security and public sector wages.

 

We have become so used to bankruptcy reorganization and sovereigns borrowing ever more against their future that we have forgotten one can truly and literally run out of money, and have to be reminded.

 

No money to pay the poor tax

 

In addition, the ECB could withhold needed funds from Greek banks, bringing them down. At this point Athens would need to:

 

The sequence of steps is critical, so let me expand it out.

 

A.    Pass a new currency law

B.    Redenominate all domestic contracts in a new drachma

C.    Impose exchange controls

D.    Secure the borders to limit capital flight

E.    Take steps to introduce a paper currency.

 

All of this, by the way, is largely indistinguishable from a military coup, which Greece has had before – and which is increasingly likely as fallout.

 

They rolled in 1967, will they roll again in 2012?

 

The reason is simple: exchange controls and securing borders are police functions and the only police force large enough to work in a whole country is its military. 

 

Printing and distributing new notes would be no easy feat. In 2003 the US-led coalition managed to do it in Iraq in less than three months. But that required the efforts of De La Rue, a British specialty printer, a squadron of 27 Boeing 747s and 500 armed Fijian guards to ease the process.

 

In fact, I suspect there would be a period of a couple of weeks when there was little or no accepted Greek currency.  (I expect Turkey to close its border against Greece very soon.)  All the banks would close on a Friday evening, the Euro exit/ drachma conversion would be announced nationwide, and when the banks reopened on Monday morning they would be forbidden to accept new deposits in Euros, or to pay out deposits in Euros.

 

Close on Friday, and maybe you reopen on Monday

 

After exit, Greece would have to negotiate continued EU participation. The EU treaties have a provision for leaving the union, but not just the eurozone. That negotiation would be all the more difficult if new Greek authorities defaulted on debt to the European Financial Stability Facility, the ECB and the IMF.

 

It wouldn’t be a negotiation, it would be a pure breach.

 

Ready to negotiate now?

 

If the country defaulted on its IMF debts, it would join a small ignominious club of nations – including only Zimbabwe, Somalia and Sudan – that have overdue financial obligations to the fund.

 

We’re ready to secure Greece, if you pay cash

 

4. What economic effects will Greece suffer?

 

Answer: Isolation from the world’s capital markets, and a plunge in living standards.

 

In any exit scenario, the new drachma would depreciate rapidly.

 

Everyone would wake up one morning, suddenly realizing that the entire nation of Greece had become an unreliable counterparty.  No one outside Greece would accept drachmas for anything, so Greece will be thrown back on its own resources – and as we know, Greece’s resources are horribly less than its contractual and pension obligations.

 

How far cannot be predicted but the IMF estimates Greece needs at least a 15-20% devaluation against the eurozone average – and considerably more against Germany – just to achieve a current-account balance.

 

And that’s before pricing in counterparty risk, which with a bankrupt nation will go through the roof.

 

Something like that

 

Currency moves tend to overshoot, and US investment bank Goldman Sachs has estimated that to stabilize Greece’s international debts at a reasonably low level – needed to ensure the country can insulate itself against the risk of capital flight – a devaluation of 30% is needed compared with the rest of the eurozone, and more than 50% with Germany.

 

Translation: Everyone in Greece will be 30-50% poorer than at present, and feel lucky if that’s the sole collapse in Greek living standards.

 

Such a devaluation would restore competitiveness, but it would be far from the end of the story. A new administration would probably repeal a law that prioritises debt interest over other forms of government spending.

 

Yes.  In for a penny, in for a pound – and once cut off from the capital markets, it makes no sense whatsoever to send any money out of the country.  In short words, Greece will have thrown itself into bankruptcy, and will act as its own bankruptcy trustee, and prime its citizens over all creditors.

 

A new default would occur on the remaining private sector debt and on official sector debt owed to European institutions and the IMF.

 

Now this is the suicide vest Mr. Tsipras believes he is wearing.

 

Prepared to commit financial suicide, but not to be photographed?

 

Even if all interest payments were stopped, additional austerity would still be needed for a period because Greece’s tax revenues still fall short of its public spending – a primary deficit.

 

And that’s; why Mr. Tsipras’s threats are merely throwing gasoline on a fire.  Even if all of Greece’s current debt were eliminated, the country is still insolvent.

 

 

Again I return to the observant herd: the Eurozone cannot rescue Greece at this point, because it would be rewarding the worst possible behaviors, and that way lies madness.

 

The IMF estimates that even if there is no exit there will be a primary deficit of 1% of national income in 2012, a figure that would almost certainly rise in a recession deepened by uncertainties surrounding exit and a bust banking system.

 

Worse and worse.

 

There are two plausible scenarios.

 

Ugly but cheerful?

 

In the brighter one, a responsible government is able to restart the banking system, run a balanced budget and persuade the public to accept sharp declines in living standards as import prices rise quickly.  After a period of deep austerity, rapid growth might be possible.

 

Can you see any democratic government doing this, after having had the Greek populace so firmly reject austerity?

 

 

Under the alternative scenario, a government takes office that seeks to use its new powers of monetary autonomy to offset the effects of devaluation and spend its way to prosperity. The danger is that hyperinflation after short-term relief would be followed by further currency depreciation and money printing.

 

As far as I can tell, dictatorships end in hyperinflation or war.  Zimbabwe, in fact, reached the point where it could no longer print money because the paper cost more as paper than the value of the notes being printed.

 

One’s worth more than the other, and both are perishable

 

It will be truly ironic if, as their exercise in democracy, the Greeks have voted themselves into a military junta.

 

Where will that leave the rest of Europe?

 

Run away! Run away!

 

[Continued tomorrow in Part 3.]

By:David A. Smith

 

Nobody can see the cracks, can they?

 

After having wasted a perfectly good betrayal, after having winkled the Eurozone’s triumvirate out of several hundred million Euros of new financing, and after having shifted the Greek default risk from private banks (who have already learned that some animals are more equal than others) – after having had three last chances, the Greeks have by their election evidently decided to make no decision and either be completely bailed out with no end in sight, or barrel over a cliff

 

We sure showed them!

 

And that, as reported in the Financial Times, has meant a Greek exit has gone from unthinkable to inevitable.

 

With an exit looking possible, policymakers and investors are shifting focus to the consequences.

 

Once one starts contingency planning for a likelihood, the inevitability effect will take over.

 

It’s inevitable that the effect will come into play

 

The idea of a Greek exit from the eurozone is no longer fanciful.

 

Personally, I thought it was inevitable six months ago, when I wrote:

 

Here is the plain reality:

 

You can’t lend your way out of a solvency crisis.

 

If the ECB keeps pumping money in to the debtor nations, then the whole Euro will deflate.  Chancellor Merkel and President Sarkozy are going to have to choose between forcing political union, where France and Germany in effect take over the southern governments wholesale, or economic disunion, where the northern economies cut themselves free of the their southern albatross.

 

You stay the course even after I’m gone, okay, Angela?

 

The Euro is over.  Either that, or European democracy is.

 

Well the Greek voters, bless their vocal addled brains, have chosen their own anarchy over Brussels’ rigidity:

 

After 70% of voters in elections on May 6 supported parties that rejected the terms under which €174bn of international bailout loans were offered to Athens, many investors now see a fissure in the 17-member eurozone as increasingly likely.

 

Repeat after me: financing cannot solve a feasibility crisis, it can only solve a liquidity crisis.

 

While still urging Athens to stick to its agreements on austerity and reform, European governments are furiously thinking through the various scenarios.

 

This isn’t going to be pretty

 

If those hopes are dashed and Greece goes, what happens next?

 

As we’ll see, the short answer is broken crockery.

 

Whoops

 

1. Is Greece serious about quitting the eurozone?

 

Answer: No, because it is burying its head in the sand.

 

‘Greece’ doesn’t have to be serious, because ‘Greece’ is an abstraction, a personification of 12 million people, most of whom are financially clueless and fiercely angry.

 

Who knows? Opinion polls showing 80% of Greeks in favor of staying in the euro combine with the election result to offer a scene of confusion.

 

It’s fairly simple.  They believe anyone preaching austerity is lying or bluffing.

 

I sense you’re full of it

 

Greece’s European partners say Athens cannot have it both ways.

 

Athens cannot – unless the rest of Europe decides to give the Greeks a free ride, and that absolutely will not happen.

 

Everybody rides free!

 

But the siren call from the radical left coalition Syriza, that Greece is safe in the eurozone with its creditors poised to ease the harsh bailout, is music to the ears of hard-pressed citizens.

 

C’mon, Odysseus, that fiscal discipline is too, too hard tomaintain

 

Popular anger is running high at the prospect of three more years of austerity while Athens implements the rest of the reform program agreed with the EU and International Monetary Fund. “We desperately need a break … If my pension is cut again, I might as well commit suicide,” says Angelos Syrigos, 85, whose modest income has been slashed by 30% in the two years since the bailout began.

 

In effect, the whole continent of Europe has been on a defined benefit plan, and in the US, all of us in the private sector found out forty years ago they don’t work, and those of us in the public sector are discovering now that they don’t work.

 

Alexis Tsipras, Syriza’s charismatic 37-year-old leader, who emerged as a kingmaker following his party’s surge to second place at last Sunday’s inconclusive general election, is gaining in support. Opinion polls published at the weekend showed Syriza would win first place in a second election, with 20-25% of the vote.

 

I don’t have to be right, I just have to be the vote-winner

 

To be precise, in any Greek election, the winning candidate will be None of the above, and that’s a prescription for default, because it violates the basic principles of being a good delinquent borrower.

 

Mr. Tsipras insists Brussels and Berlin will not force Greece out of the euro because of the contagion effect this would have on Portugal, Ireland and Spain.

 

Especially if not punished

 

Never play showdown poker with a woman with a gun, Mr. Tsipras.  You might make her mad.

 

You won’t like me when I’m angry

 

Or you might make her make an example out of you, pour encourager les autres.

 

He has demanded a reversal of salary and pension cuts imposed by the bailout, as well as the hiring of 100,000 new public sector workers to reduce the impact of a 21% unemployment rate.

 

Well, neither of those things can happen while Greece is in the Eurozone.

 

Middle-aged Greeks are afraid of a eurozone exit, fearing a further collapse in property values, the crumbling of the banking system and high unemployment.

 

Unlike what you have now?

 

Now we see the violence inherent in the system!

 

“The gravity of the situation isn’t appreciated. Some people believe Syriza will change its tune, others that the Europeans make empty threats,” says Takis Michas, a political commentator. “The only thing that will focus minds is when the money to pay pensions and salaries just doesn’t arrive.”

 

That’s already happened in Alabama.

 

2. Is Europe ready to jettison one of its own?

 

Answer: Yes.

 

You’re just surplus costs

 

Eurozone officials had prepared contingency plans for a Greek exit – or “Grexit” as some have called it – after George Papandreou, then prime minister, proposed a national referendum in October on euro membership.

 

As they said in Broken Arrow (one of the great cheesy movies of modern times), “It’s bad enough we’ve lost a nuclear weapon, what’s worse is that we have a name for it!”

 

I wish we didn’t have a name for this

 

Indeed, Wolfgang Schauble, German finance minister, actively urged the referendum to halt the endless questioning once and for all, according to one senior European official.

 

Be sensible or I’ll mind-meld your head

 

Mr. Schauble, a sensible German, undoubtedly expected the Greeks to be sensible Germans too.  But they weren’t.

 

Even then, such officials were uncertain whether the rest of the currency union could survive the shockwaves unleashed by a return of the drachma – particularly in bailed-out countries such as Portugal and Ireland, where bank runs and market panic could follow on the assumption that others could follow Greece out of the eurozone door.

 

It could happen to you

 

But now, with a new, permanent €500bn rescue fund backed by the strength of an international treaty with multiple tools to buy sovereign bonds on the open market and inject capital into eurozone banks, some officials believe the contagion could be contained – much as it was after Athens finally defaulted on private bondholders last month.

 

Here is where Mr. Tsipras miscalculates because he fails to understand triage and the observant herd. 

 

“Two years ago a Greek exit would have been catastrophic on the scale of Lehman Brothers,” says a senior EU official involved in discussions about Greece’s future. “Even a year ago, it would have been extremely risky in terms of contagion and chain reaction in the banking system. Two years on, we’re better prepared.”

 

 

I hope that is true – but for Greece and the Eurozone, what matters is not whether it is true, but whether Europe’s leaders now convince themselves it is true.  After having convinced themselves for years that the problem would sort itself out, to convince themselves only one nation will go down should be easy enough.

 

The new eurozone firewall – now backed with additional resources for [sic: from] the IMF – is not the only reason some officials are becoming increasingly sanguine about losing Greece.

 

‘Sanguine’ is not a good word for your prospects, Mr. Tsipras.

 

So what? Sanguine is a French word

 

Spain and Italy, they say, have taken huge steps to put their economic houses in order, enabling them to bounce back quickly if credit markets suddenly dry up and their banks wobble.

 

If one has a limited supply of vaccine to contain a potential outbreak, one hoards it for those who behave well and may survive, rather than wasting it on those who not only may die, but who have brought out their sick condition.

 

Still, uncertainty over how Europe’s banks would be affected has continued to be the primary concern. Witnessing Greek bank customers suddenly having their euros turned into drachmas overnight, depositors in other peripheral banks might suddenly withdraw their cash and place it in seemingly safer euro accounts in Germany or elsewhere.

 

I expect they would, so more than likely the other European countries with wobbly Euro prospects will impose currency controls of their own. 

 

Such a massive run could destroy much of the eurozone periphery’s banking sector. “The ball is genuinely in their court,” says the EU official. “Those who understand the situation realize their room for maneuver is extremely limited. We simply have to wait.”

 

So Greece is almost certain to crack out of the Eurozone.  What then?

 

Must … read … blogs …

[Continued tomorrow in Part 2.]

By:David A. Smith

 

A threat to the established order?

 

All invention comes from building blocks, whether it is nature inventing amino acids out of atmospheric molecules, bloggers inventing posts out of words, or children inventing phantasms and improbably structures out of pieces like Tinker Toys:

 

Go, speed racer!

 

Lincoln Logs:

 

Castle Skull, in Lincoln Logs

 

Lego bricks:

 

Spilling my guts for you, once every business day

 

All of these are wonderful building blocks of the imagination, and yet each is limited – one can invent only within the vocabulary permitted by the manufacturer.  So if we innovate only within the creator’s limits.  Yet if we wanted to be truly creative, we’d be able to leap from Lego to Lincoln Logs to Tinker Toys, because to a child they’re all building blocks and they often wind up in the same big plastic bin anyway.

 

We’re monstrous, and ain’t that cool!

 

That brings us to a wonderful visual metaphor of both the proprietary nature of program design and the disruptive benefits of entrepreneurs, as illustrated by this children’s parable from Forbes:

 

Last year Golan Levin’s son decided to build a car. Aside from the minor inconvenience of being 4 years old, the younger Levin faced an engineering challenge. His Tinkertoys, which he wanted to use for the vehicle’s frame, wouldn’t attach to his K’Nex, the pieces he wanted to use for the wheels.

 

All children are born entrepreneurial: they want what they want and they don’t want to be told what they want is impossible.  And boys in particular, like adult entrepreneurs, love nothing better than trying to ram incompatible things together, which makes them the natural counterpart of governments, whose programs are building blocks.

 

Littler blocks lead to bigger visions

 

It took his father, an artist, hacker and professor at Carnegie Mellon, a year to solve that problem. In the process he cracked open a much larger one: In an age when anyone can share, download and create not just digital files but also physical things, thanks to the proliferation of cheap 3-D printers, are companies at risk of losing control of the objects they sell?

 

The boldfaced phrase irritates me beyond all reason.  Once the company sells the objects, then I own them and I can do what I want with them.  If I can find a way to play with them in unexpected ways, that’s my right. 

 

I don’t know what it is, but it’s interesting!

 

In March Levin and his former ­student Shawn Sims released a set of digital blueprints that a 3-D printer can use to create more than 45 plastic objects, each of which provides the missing interface between pieces from toy construction sets. They call it the Free Universal Construction Kit.

 

The sparks resulting from banging together incompatible things spontaneously ignite creativity and invention, and gives new life to old tools and blocks:

 

The tens of thousands of consumers who now own devices such as MakerBot’s $1,100 Thing-O-Matic can download those files and immediately print a plastic piece that connects their Lego bricks to their Fischertechnik girders, their Krinkles to their Duplos, or half a dozen other formerly incompatible sets of modular plastic blocks, sticks and gears.

 

Not a transporter, but not bad either

 

That’s exactly what we want to be doing in public policy – downloading patches that enable us to make (say) Medicare and housing work together, or New Markets Tax Credits and residential historic rehabs. 

 

One blog called it the “ultimate nerd dad triumph.” But as the project’s unprintable acronym implies, Levin and Sims are out to raise hackles—particularly those of intellectual property lawyers. “This isn’t a product. It’s a provocation,” says Levin.

 

Carnegie Mellon Professor Golan Levin with a pile of 3D-printed adapters between construction toy sets.

 

Of course he’s right.  Programs are designed in splendid isolation from one another, and certainly with blissful ignorance of what may come after, either in changing markets, new political imperatives, or new policies (nobody expected LIHTC).  Innovation is continuously required, and that means recombining old tools and using them alongside new ones in unexpected ways.

 

“We should be free to invent without having to worry about infringement, royalties, going to jail or being sued and bullied by large industries. We don’t want to see what happened in music and film play out in the area of shapes.”

 

If one cannot copyright the alphabet, one should be likewise unable to copyright a shape.

 

Uncopyrightable, and hence perfectly replicable

 

Levin and Sims didn’t just make near replicas of the commercial toys, they used a measurement tool called an optical comparator to copy the toys’ dimensions to within 3 microns.  Then they published those models on the Web.

 

Information wants to be free – and as Woody himself said, toys want to be played with.

 

Object + Animating spirit = Invention

 

“Our lawyers were a bit concerned,” admits Levin, so much so that the pair initially planned to release the project anonymously.

 

The patents on all the toys integrated in their kit expired years ago. But a copyright lasts many decades longer than a patent, and that’s the cudgel lawyers are using against downloadable objects.

 

Unfortunately, some of those running companies appear to be thinking far too much like bureaucrats:

 

A Lego spokesperson says the company has no problem with Levin and Sims’ work but is keeping an eye out for printed objects that infringe on its brand.

 

If I were running Lego or Tinker Toys, I’d embrace the kit with both arms, because increasing interoperability increases the utility of my pieces. 

 

Neither Hasbro nor any of the smaller companies that sell construction toys responded to requests for comment. So far the pair haven’t received a cease-and-desist letter.

 

Nor should they.  Rather they should be applauded, just as someone who finds how to interoperate Medicare and housing should be feted, not criticized.

 

Recombinant DNA, coming to a 3-D printer near you

 

As long as Levin and Sims stick with functional objects rather than aesthetic ones, they should be able to steer clear of copyright and trademark law, says Michael Weinberg, a lawyer with the nonprofit Public Knowledge who advised on the project. “You probably can’t stamp the name Lego on them, but if you don’t it’s hard to imagine what rights the companies could assert,” he says.  “The real lesson is the vast majority of physical things aren’t protected by intellectual property law.”

 

Free hardware from its chains!

 

Nor should they be.

 

Even so, Levin calls his project a “shot across the bow” of any company that wants to limit and control how their physical designs are copied, remixed or improved in the future. “Yes, it’s just a toy. But it’s also a harbinger of what’s to come. Things are going to get complicated.”

 

More likely, they’re going to get creative.

 

Just keep playing

By:David A. Smith

 

As China ages at warp speed, old notions of intergenerational family structure are giving way to economic pragmatism, and as shown in a recent article from the Economist (April 21, 2012), that is creating intriguing business opportunities that might just change the political ecosystem:

 

Social problem or housing opportunity?

 

Eighty-nine-year-old Zheng Jixuan is thrilled with the place where he will live out his dotage: a small but comfy room in the newly built wing of an old-people’s home in the city of Hangzhou, 180km (110 miles) south-west of Shanghai.

 

Hangzhou, on the Yangtze, river full of fish

 

Though Mr Zheng’s son lives in the same city, he does not have time to care for his father –

 

Not having time is, of course, a question of priorities.  Granted that Mr. Zheng’s son is probably sixty, and nearing the sunset of his prime earning years, his action probably makes overall intergenerational sense, though it is nevertheless revealing of a quiet sea change in Chinese attitudes toward the elderly.

 

– so old Mr Zheng has moved into the Hangzhou City Christian Nursing Home. As a retired doctor, he cheerfully tends to the minor ailments of other residents.

 

When it comes to elderly housing, I’ve often wondered why we haven’t yet developed a management or social model that will enable residents to pool their individual pre-retirement skills and hence both to enliven the community and add rental value.

 

The home is “better than in America,” he says, and good value at just $250 a month, paid from his pension.

 

Certainly sounds cheap enough, even adjusted for China’s cost of living.

 

Prices in comparison between sister cities

 

Mr Zheng’s nursing home draws together within its walls two profound changes in urban China:

 

[1] The growing number of old people whose children cannot or will not take care of them

[2] A government willingness to allow religious groups to take on the task.

 

As we saw in Old before rich?, China is facing a demographic inversion without precedent in human history, a population turning gray-heavy so rapidly that the question is not whether it will transform society, but how comprehensively.

 

The Hangzhou home enjoys a subsidy [inferentially, of the capital cost, not ongoing operations – Ed.] from the local government of 10,000 yuan ($1,600) for each new bed.

 

Funding has also come from Christian donors –

 

Aside from faith, religion has its uses, including promotion of charity. 

 

As far as I can tell, the connection between faith, home, and charity dates back to nomadic times.  One category was overnight accommodations for pilgrims. 

 

A wayfarer’s inn at every stop

 

Christians walking the Way of St. James to Santiago de Compostela stopped at abbeys strung along the major routes.

 

Did you Google the next abbey for a bed?

 

Caravanserai dotted the Arabian peninsula to aid Muslims on hajj.

 

Out of the sun and dust, and with a well or fountain contained within

 

Closely related to pilgrims’ housing were the almshouses, about which I’ve written before, some reserved for the destitute, others for the elderly – and hospitals arose out of the faith-based injunction to care for the sick. 

 

Religion has always been one way people form tribes across cultures, languages, and races, and so the duty to shelter or care for the traveler or the beggar becomes inculcated into practice.  That’s also how cultural or religious minorities make their way in a society that tolerates them without welcoming them.

 

– and the deputy director, Zhou Wenjie, says any new resident must be a Christian or at least open to becoming one. {Couldn’t require that in America! – Ed.]

 

Religious or faith-based charity can also bridge the gap between familial support (the extended family or clan) and government support (the municipality, province, or nation), and as they are private institutions, they have the mission entrepreneurial capacity to experiment.  In fact, a tradition of alms makes experimentation easy, since if the business fails, it was nevertheless charity.  Hence we should note surprised that they are growing, as evidently they are:

 

Non-government institutions account for about 20% of the 33,000 beds for the elderly in the city, says Sun Xiaodong, deputy director of another nursing home, the government-run Hangzhou Social Welfare Centre.

 

It’s both revealing and more than a little discouraging that when shifting from apartments to nursing homes, the unit of measurement (and of revenue) changes from apartments to beds, signaling the shrinking of horizons and closing in of the psychological frontier.

 

The ‘semi-private’ room:

Clean and serviced, but neither private nor quiet

 

But, he says, supply cannot keep up with demand.

 

Faith-based charitable housing is hugely needed, though the elderly are often the slowest adopters:

 

When Mr Sun’s nursing home opened in 1999, the first phase of 500 beds took four years to fill.

 

It was new and unfamiliar.  It was unproven.  More importantly, it went beyond the family, and asked the elderly to live with strangers.  The first who went had to have been unusually brave.

 

Then the herd observed:

 

Now, with a total of 1,400 beds, it has a waiting list of more than 1,000 names. Another 2,000-bed home is already being built, and there are plans for one that will house 5,000 pensioners.

 

Growing effective demand and replicable visible examples converge:

Shifting attitudes to the elderly in China’s cities have created a huge market opportunity. Mark Spitalnik, an American who runs China Senior Care in Hangzhou, began forming a business plan five years ago for a nursing home that would charge nearly $5,000 per month.

 

Aligned according to feng shui, or so they say

 

He did his market research on the golf course. (“Any guy that’s playing golf in China is in my target market, right?”)

 

I think I hit Mom crossing the fairway

 

As long as he has parents, he is.

 

Other American care-providers are now rushing in too.

 

Ironic, isn’t it?  We have more experience with elderly housing and nursing homes than the Chinese do.

 

Because the need is so great, Mr Sun, the care-home director, believes the government should encourage more private nursing homes, including those run by religious charities.

 

One senses the authorities are worried about religious charities as fomenters of dissent – but they need the housing. 

 

In late February the government issued a document that seemed to encourage religious groups to do charity work. The proposal applies only to officially-approved religious organisations, and the Communist Party remains cautious about the influence of religious groups.

 

Though the Party is suspicious of any gathering of believers that it does not control, if China wants to become nationally rich, rather than a plutocracy, it has to allow people to congregate, especially if the resulting congregation helps China address an exploding need.

 

Now you take the pictures of Benjamin Franklin out of daddy’s wallet …

 

Mr Spitalnik [the Hangzhou elderly home developer] says that if he told his Chinese golfing partners the idea for his business on the first tee, they would say it did not make sense, because China’s tradition of filial piety requires children to look after their parents. He says he could usually persuade them otherwise by the sixth tee.

 

Today, he says, such persuasion is no longer necessary.

If the emperor plays, all may play: Ming emperor Xuande, playing what appears to be golf