Berin recently encouraged me to re-read Thomas Sowell’s The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy, which I hadn’t looked at since I first read it back in 1995 or 96.   I’m glad I did since Sowell’s work has always been profoundly influential on my thinking (especially his masterpiece, A Conflict of Visions) and I had forgotten how useful The Vision of the Anointed was in helping me understand the reoccurring model that drives ideological crusades to expand government power over our lives and economy.

“The great ideological crusades of the twentieth-century intellectuals have ranged across the most disparate fields,” Sowell noted in the book.  But what they all had in common, he argued, was “their moral exaltation of the anointed above others, who are to have their different views nullified and superseded by the views of the anointed, imposed via the power of government.” (p. 5)  These elitist, government-expanding crusades shared several key elements, which Sowell identified as follows:

1. Assertion of a great danger to the whole society, a danger to which the masses of people are oblivious.
2. An urgent need for government action to avert impending catastrophe.
3. A need for government to drastically curtail the dangerous behavior of the many, in response to the prescient conclusions of the few.
4. A disdainful dismissal of arguments to the contrary as either uninformed, irresponsible, or motivated by unworthy purposes.

You can see this model at work on a daily basis today with our government’s various efforts to reshape our economy, but I think this model is equally applicable to debates over social policy and speech control.  In particular, the various “technopanics” I have been writing about recently fit this model. (See 1, 2, 3, 4, 5).  For example, consider how this plays out in the debate over online social networking:

1. Assertion of a great danger to the whole society [online sexual predators], a danger to which the masses of people are oblivious.
2. An urgent need for government action [online age verification or the Deleting Online Predators Act] to avert impending catastrophe.
3. A need for government to drastically curtail the dangerous behavior of the many [must stop kids and adults from being online together on same sites], in response to the prescient conclusions of the few [state Attorneys General].
4. A disdainful dismissal of arguments to the contrary as either uninformed, irresponsible, or motivated by unworthy purposes [basically, child safety researchers and others are told that their research is meaningless and that they should just buzz off].

And I think you can see how the model has played out in other debates, such as efforts to regulate “excessively violent” video games and television.

Or consider how this model plays out on the privacy front:

1. Assertion of a great danger to the whole society [amorphous privacy violations], a danger to which the masses of people are oblivious.
2. An urgent need for government action [“baseline federal privacy regulation”] to avert impending catastrophe.
3. A need for government to drastically curtail the dangerous behavior of the many [stupid people who share information online!], in response to the prescient conclusions of the few [handful of over-zealous privacy advocacy groups].
4. A disdainful dismissal of arguments to the contrary as either uninformed, irresponsible, or motivated by unworthy purposes [basically, any suggestion that the issues are being overblown and that most information-sharing is socially beneficial is dismissed out-of-hand].

Again, it’s all blatant elitism when you get right down to it.  And facts are usually the first casualty of the war.

By Adam Thierer, Berin Szoka, & Adam Marcus

As noted in the first installment of our “Privacy Solution Series,” we are outlining various user-empowerment or user “self-help” tools that allow Internet users to better protect their privacy online-and especially to defeat tracking for online behavioral advertising purposes.  These tools and methods form an important part of a layered approach that we believe offers an effective alternative to government-mandated regulation of online privacy.

In some of the upcoming installments we will be exploring the privacy controls embedded in the major web browsers consumers use today: Microsoft’s Internet Explorer (IE) 8, the Mozilla Foundation’s Firefox 3, Google’s Chrome 1.0, and Apple’s Safari 4. In evaluating these browsers, we will examine three types of privacy features:

(1) cookie management controls; (2) private browsing; and (3) other privacy features

We will first be focusing on the default features and functions embedded in the browsers. We plan to do subsequent installments on the various downloadable “add-ons” available for browsers, as we already did for AdBlock Plus in the second installment of this series.

In this installment, we’ll be taking a look at the privacy-related features in the most popular browser in use today, Microsoft’s Internet Explorer. Specifically, we’ll be examining the most recent version of the browser, IE 8, Release Candidate 1. We’ll make it clear which features are new to IE 8 and those which are shared with IE 7.

Basic Background

Microsoft’s Internet Explorer browser was launched in 1995 and quickly became America’s most popular web browser, displacing Netscape’s Navigator browser. In recent years, IE has faced new challenges from the Mozilla Foundation’s “Firefox” browser, Apple’s “Safari”, the open source “Opera” browser, and others. (For an excellent history / timeline of web browsers, click here.) Despite these new challenges, IE still commands over 70% of the browser market. Like most other web browsers, Internet Explorer is free. So too are the features we are describing here.

Before we get further in the discussion of privacy controls, it’s important for readers to understand the difference between “first-party” and “third-party” content on webpages. Many webpages today contain a combination of content from many different websites, which enables powerful “Web 2.0” functionality like an interactive Google map displayed along with an address or a “Digg This” link in a blog post. Third-party content can also be used to track users across websites and to serve up advertising. All content loaded from the same domain as is displayed in the Address bar is first-party content. All content loaded from other domains is third-party content. Internet Explorer has a “Privacy Report” function that can show you the source for all the different content elements in the current webpage. To access it, select Webpage Privacy Policy from IE7’s Page menu or IE8’s View menu.

Basic Cookie Management Controls

To access Internet Explorer’s basic cookie management and privacy settings, open the “Tools” menu, click “Internet Options,” and then click on the “Privacy” tab to display the following options:

Users can configure the slider on the upper left-hand side of the window to establish their preferred level of cookie privacy. There are 6 options on the sliding scale from which to choose. Starting from the top of the slider bar:

(1)   ” Block all cookies” — Blocks IE from receiving any new cookies and blocks websites from reading any existing cookies on your computer. (Of course, that would greatly inconvenience users that regularly access websites that require information from the user, such as a Web-based email site that requires users to log in every time they access the website.)

(2)   ” High” — Blocks all cookies from websites that do not have a P3P compact privacy policy or that have a compact privacy policy which specifies that personally-identifiable information is used without your explicit consent. Cookies already on your computer can only be read by the site that created them.

(3)   ” Medium High” — “Blocks third-party cookies that do not have a compact privacy policy,” “Blocks third-party cookies that save information that can be used to contact you without explicit consent,” and “Blocks first-party cookies that save information that can be used to contact you without your implicit consent.”

(4)   ” Medium” — This setting “Blocks third-party cookies that do not have a compact privacy policy,” “Blocks third-party cookies that save information that can be used to contact you without your explicit consent,” and “Restricts first-party cookies that save information that can be used to contact you without your implicit consent.”

(5)   ” Low” — This setting “Blocks third-party cookies that do not have a compact privacy policy” and “Restricts third-party cookies that save information that can be used to contact you without implicit consent.”

(6)   ” Allow all cookies” — This setting allows all cookies from any website.

A P3P compact privacy policy is a machine-readable summary of the full P3P specification, which is a standardized method for explaining a website’s privacy policy. So when IE states that it will “block[] third-party cookies that save information that can be used to contact you without your explicit consent,” it means that the cookie will be blocked unless the site has a P3P compact privacy policy that either indicates that only non-identifiable (NOI) information is collected, or that for every data collection PURPOSE and every type of RECIPIENT that the website shares collected data with, the site’s policy is that the user must opt in (“explicitly consent”) to the practice.

When the slider bar is set anywhere other than the “High” and “Low” levels, users can also click the “Sites” button and then specify different cookie security levels for individual websites. The advantage of this approach is that it lets users create their own personal “white lists” and “black lists” of sites for which they either never want cookies blocked, or for which they always want cookies blocked. This increases the privacy-configurability of the browsing experience. For example, the following screen shows two sites that have been whitelisted and two hypothetical sites that have been blacklisted.

In addition, if the user wishes to manually delete their cookies, web browsing history, form data, personal passwords, or other stored information, they can do so on the “General” tab under the “Browsing History” section. Or, in the new IE 8, they can do so under the new “Safety” drop-down menu (in the Command toolbar) under the first option, “Delete Browser History.” They can also configure IE 8 so that all of this data is deleted each time the browser is closed (essentially converting “persistent cookies” into “session cookies,” concepts Adam Marcus has explained previously). The following screen shows how this user is choosing to delete just their temporary Internet files, cookies, and browsing history. Favorite websites are websites the user has bookmarked.

Using these controls, a particularly privacy-sensitive user who only trusted two or three sites-say, their bank and their employer’s website-could allow cookies for only those sites and block cookies for all other websites. Again, this assumes that they do not mind the potential hassles associated with logging-in to many other sites each time they visit or losing custom preferences that would otherwise be stored in a cookie.

Advanced Cookie Management – “InPrivate Filtering”

Microsoft explains its InPrivate Filtering feature as follows:

Today websites increasingly pull content in from multiple sources, providing tremendous value to consumer and sites alike. Users are often not aware that some content, images, ads and analytics are being provided from third party websites or that these websites have the ability to potentially track their behavior across multiple websites. InPrivate Filtering provides users an added level of control and choice about the information that third party websites can potentially use to track browsing activity.

InPrivate Filtering is off by default and must be enabled on a per-session basis. To use this feature, select InPrivate Filtering from the Safety menu.

In “Automatically Block” mode, InPrivate Filtering will automatically block a site if IE finds that site’s content embedded in more than a user-specified number of other sites (the default is 10) visited by the user.  You can also manually control which sites are blocked, and import and export your list of white/blacklisted sites to share that list with others.

The beta version of IE8 included a subscriptions feature that would have allowed users to automatically receive updated white or blacklists from others-much like the subscription feature in AdBlock Plus that we discussed previously. However, this functionality was removed in the “Release Candidate 1” version of IE8 (released Jan. 26, 2009) for unspecified reasons.  While we recognize that not every beta feature makes it into final releases because of challenges in implementation, we very much hope Microsoft will ultimately add the subscription feature to Internet Explorer 8.  InPrivate Filtering goes a long way in empowering truly privacy-sensitive users to take more granular control over their own privacy, but a subscription feature would allow less sophisticated users to rely on groups or other individuals they trust to help them avoid specific sites according to their concerns about privacy or security.  Indeed, we hope that other browser manufacturers consider incorporating such tools into their browsers.  Perhaps the privacy advocates who currently focus on inventing one-size-fits-all regulatory or legislative solutions could channel their enthusiasm about user privacy into actually developing whitelists and blacklists.

Private Browsing

Another new privacy-related feature in Internet Explorer 8 is called InPrivate Browsing mode (akin to “Incognito” mode in Chrome), which protects so-called “over the shoulder” privacy, although that’s a somewhat misleading term. By not saving any record of your web browsing while InPrivate Browsing mode is turned on, this feature ensures that others with access to your computer will not know what websites you have accessed. Some people like being able to refer to their browser history and don’t want to delete all of their cookies, but want to hide all traces of some of their browsing activities-such as shopping online for a surprise gift, searching for information about a medical condition you don’t want to disclose and, most obviously, enjoying pornography).

When the InPrivate Browsing mode is enabled, none of the varieties of “browsing history” data is saved-but none of your previous history is deleted, either. This comes in handy because, if someone with direct access to your computer is monitoring your browser history to see what you’ve been up to, deleting all of your browsing history would suggest that you’ve been doing something you wanted to hide. But InPrivate Browsing mode allows you to surf anonymously when desired-without making it obvious that you’re doing so. Parents who are concerned about their kids using the InPrivate Browsing mode can use the parental controls in Windows Vista to disable it. But there does not appear to be a way to disable InPrivate Browsing on Windows XP.

Below is a screenshot of the InPrivate Browsing mode-which, again, can be enabled by clicking on the new “Safety” drop-down menu in IE 8 and selecting “InPrivate Browsing.”

While InPrivate Browsing is active, the following takes place:

• New cookies are not stored:
  • All new cookies become “session” cookies
  • Existing cookies can still be read
  • The new DOM storage feature behaves the same way
  • New entries will not be saved to the browsing history
• New temporary Internet files will be deleted when the Private Browsing window is closed
• The following data will not be stored:
  • Form data
  • Passwords
  • Addresses typed into the address bar
  • Queries entered into the search box
  • Visited links

Other Privacy Features

• SmartScreen Filter – Called “Phishing filter” in IE 7, this feature monitors and blocks links to malicious downloads. In IE 8, it also monitors links distributed via email and instant messaging (assuming IE is the default Web browser).
• Cross Site Scripting (XSS) filter – Cross-site scripting attacks allow hackers to “inject” malicious scripts into trusted websites, which can then steal the account credentials of users who access these websites. XSS attacks are dangerous because everything looks fine to users and the attackers can gain almost complete access to users’ computers. The XSS filter in IE constantly scans the data received from websites to determine if there is a likely XSS attack and re-writes the data to neutralize the attack.
• ActiveX Opt-In – By default, ActiveX Opt-In disables most ActiveX controls. When a Web page tries to run an ActiveX control, the following text is displayed in an Information Bar: “This website wants to run the following add-on ‘ABC Control’ from ‘XYZ Publisher.’ If you trust the website and the add-on and want to allow it to run, click here …” The user can then choose whether or not to run the ActiveX control.
• Per-Site ActiveX – If a website tries to access an installed ActiveX control that is not permitted to run on the website, this new feature in IE 8 gives the user the option of blocking the attempt, allowing the ActiveX control for the current site, or to allow all websites to access the ActiveX control.
• Domain Highlighting – The domain name of the site you’re viewing is highlighted in the address bar. By making it clearer to the user which website they’re accessing, this feature serves to protect users against phishing attacks from domain names that look like trusted domain names (e.g., www.paypal.com.hax0r.net, which is not PayPal’s actual website).

Additional Reading / Links

• Download Internet Explorer 8
• IEBlog: IE8 and Privacy
• IEBlog: Privacy Beyond Blocking Cookies: Bringing Awareness to Third-Party Cookies
• Jesse Ruderman’s blog post on new security features in IE 8 – Has links to the first five IEBlog posts about new security features in IE 8.
• Wikipedia entry on Internet Explorer

“Damn their lies and trust your eyes. Dig every kind of fox!” I here sing one for the freedom to mix it up as you and your honey alone see fit:

“Hapa” means “mixed race” in Hawaiian. Skin-tone mash ups have profoundly enriched my life, first with the Honolulu Hapa herself and then with our own little hapas. Honolulu Hapa celebrates coloring across the lines, knocks racism, and gives a shout-out to Loving v. Virginia, 88 U.S. 1 (1967)—the case where the U.S. Supreme Court struck down anti-miscegenation laws as unconstitutional restraints on personal liberty.

As with the prior four songs I’ve posted in this recent series (Take Up the Flame, Sensible Khakis, Nice to Be Wanted, and Hello, Jonah,), Honolulu Hapa comes with a Creative Commons license that allows pretty liberal use by all but commercial licensees, who have to pay a tithe to one of my favorite causes. Honolulu Hapa aims to help Creative Commons, an organization that helps all of us to mix—and remix—it up. Unlike those other songs, however, Honolulu Hapa adds a special ‘unrestricted use” term effective on June 12, Loving Day.

With Honolulu Hapa, I conclude my recent series of freedom-loving music videos. Like it or not, though, I’ve got more music-making plans. Next, I’ll record some good studio versions of those (and perhaps some other) songs. Eventually, I’d like to release a fundraising CD, one that might help out some good causes. Silly? Yeah, I guess so. But it does add another data point in support of my hypothesis: Freedom has more fun.

[Crossposted at Agoraphilia and Technology Liberation Front.]

Tim Lee has been taking some heat here from Richard Bennett and Steve Schultze about various aspects of his new Net neutrality paper. I haven’t had much time this week to jump into these debates, but I did want to mention one important portion of Tim’s paper that is being overlooked. Specifically, I like the way Tim took head-on some of the silly free speech arguments being put forth as a rationale for net neutrality regulation. As Tim notes in the introduction of the paper:

Concerns that network owners will undermine free speech online are particularly misguided. Network owners have neither the technology nor the manpower to effectively filter online content based on the viewpoints being expressed, nor do profit-making businesses have any real incentive to do so. Should a network owner be foolish enough to attempt large-scale censorship of its customers, it would not only fail to suppress the disfavored speech, but the network would actually increase the visibility of the content as the effort at censorship attracted additional coverage of the material being censored.

I think that’s exactly right and, later in his paper (between pgs 22-3), Tim nicely elaborates about the “Herculean task” associated with any attempt by a broadband provider to “manipulate human communication.” Not only is it true, as Tim argues, that “no widescale manipulation would go unnoticed for very long,” but he is also correct in noting that the public and press backlash would be enormous.

Again, I agree wholeheartedly with all these sentiments, but I think Tim missed another important angle here when discussing the unfounded fears about corporate censorship and the misguided attempts to use free speech as a justification for imposing net neutrality regulations.

In his paper, Tim is essentially making an argument about the practicality of broadband providers acting as speech regulators — and he demolishes that assertion. But Tim fails to make an argument about the principle of the matter that is at stake here. Namely, some net neutrality supporters are attempting to convert the First Amendment into an affirmative grant of state power to regulate private entities, something it was clearly never intended to do.

Indeed, when Net neutrality supporters like the “Save the Internet Coalition” make statements like “Network neutrality is the Internet’s First Amendment,” I sometimes wonder if they are reading the same Constitution that I am. After all, the language of the First Amendment could not be more clear when it says, “Congress shall make no law…” It doesn’t contain any caveats or footnotes. And the First Amendment most certainly was not intended as a tool for government to control the editorial discretion of private individuals or institutions. It was about restricting the power of the government to curtail speech and expression.

Beginning in the 1960’s, however, a handful of liberal legal theories began concocting a new theory of the First Amendment that eventually came to be known as the “media access” school of thought. George Washington University law professor Jerome A. Barron’s 1967 Harvard Law Review article, “Access to the Press — a New First Amendment Right,” as well as the work of Yale University law professor Owen Fiss, gave rise to this new intellectual movement. Its goal, in essence, was to convert the First Amendment into a club to beat demands out of private media providers. Basically, these theorists wanted to expand “Fairness Doctrine”-like right-of-reply notions to newspapers, and simultaneously grant the government more leeway to use the First Amendment to alter media structures and outputs. As Fiss argued in a 1986 law review article, under the “media access” approach, a proper reading of the First Amendment requires “a change in our attitude about the state” such that we learn “to recognize the state not only as an enemy, but also as a friend of speech… [that should act] to enhance the quality of public debate.” (Iowa Law Review, Vol. 71, 1986, p. 1416).

Other left-leaning intellectuals and activists groups would come to integrate that logic into their work and public policy proposals. Now you know, for example, where the Media Access Project gets their name! But many other regulatory-minded groups — like Free Press, MoveOn.org, New America Foundation, and others — trace much of their intellectual heritage back to Barron, Fiss, and the other media access theorists. [Read my lengthy debunking of media access theory here.]

Here we see how the seeds of misguided intellectual thinking sometimes spring into wild gardens in which the weeds slowly take over everything in sight. This twisted conception of the First Amendment is so thoroughly ingrained in leftist media policy thinking today that even an abundant medium like the Internet is not exempt from potential regulations based on it. And that’s how we get to the point we are at today in the net neutrality regulatory debate, with many policymakers and activists groups painting private broadband operators as the supposed real Big Brother problem that the First Amendment must address.

Consider, for example, the comments Sen. Hillary Clinton made in 2006 regarding why she supports net neutrality regulation: “Each day on the Internet views are discussed and debated in an open forum without fear of censorship or reprisal.” As I noted at the time, when I read her statement I practically fell off my chair. It’s not just that Sen. Clinton is asking us to believe in some asinine conspiracy theory about how broadband companies are supposedly out to censor our thoughts or engage in reprisals. (”Reprisals”? For what?) No, what really blew my mind here was the fact that Sen. Clinton had the chutzpah to declare that the private sector was somehow the real threat to online speech. After all, as I inventoried in that old essay, Sen. Clinton has led several notable efforts over the past decade to expand government regulation of television, video games, and even the Internet.

And yet she and many other Net neutrality advocates insist that it is the private sector, not the government, that is the real threat to our free speech rights. Again, Tim Lee is correct to point out in his paper that, practically speaking, these advocates of Net neutrality regulation have little to fear in this regard. It is almost impossible to believe that any Internet operator could limit speech or expression in the ways these regulatory advocates fear. Unlike the government, which possesses the coercive power to completely foreclose all speech under threat of fine or imprisonment, the private sector lacks the ability to use force to bottle up speech or speakers. And even if private operators tried it, there would be hell for them to pay with the press, industry watchdogs, and their even subscribers. More importantly, there’s just no good business angle to censorship; they make more money by delivering more bits, not fewer. Finally, any attempt by one actor to stifle something becomes a prime incentive for another to offer it.  So, Tim is right on all those grounds.

But the principle of the matter is important, and we can’t let regulatory advocates get away with their effort convert the First Amendment into something it isn’t. As Jonathan Emord, author of the brilliant Freedom, Technology and the First Amendment, argued back in 1991, “In short, the [media] access advocates have transformed the marketplace of ideas from a laissez-faire model to a state-control model.” The real danger of this twisted conception of the First Amendment, he noted, is that, “It fundamentally shifts the marketplace of ideas from its private, unregulated, and interactive context to one within the compass of state control, making the marketplace ultimately responsible to government for determinations as to the choice of content expressed.”

That philosophy and regulatory approach is completely at odds with a proper understanding of the First Amendment, and yet that is exactly what many Net neutrality regulatory advocates are asking us to accept today.  The state — not the private sector — remains the true threat to our liberties. And, most horrifyingly of all, empowering the state to use the First Amendment to regulate private actors will almost certainly backfire and result in more, not less, regulation of speech online.

The Federal Communications Commission began a broad inquiry of intercarrier compensation in 2001 and now it may finally be getting around to acting on it on Nov. 4 while everyone’s thoughts are on something else.

This is about 12 years overdue. Congress in 1996 foresaw that implicit phone subsidies were unsustainable and ordered the FCC to replace them with a competitively-neutral subsidy mechanism. Due to political pressure, regulators have failed to complete the job.

Intercarrier compensation refers to “access charges” for long-distance calls and “reciprocal compensation” for local calls. A long-distance carrier may be forced to pay a local carrier more than 30 cents per minute to deliver a long-distance call, but local carriers receive as little as .0007 cents per minute to deliver calls they receive from other local carriers.

Once upon a time, before fiber optics, there were significant distance related costs. Now distance isn’t a major factor.

The high access charges remain only because the recipients, typically small and mid-size phone companies serving sparsely populated areas, have successfully lobbied regulators and legislators to keep them.

Thanks to outdated regulatory classifications, wireless and VoIP services pay far less when the connect to the legacy phone network.

This is the reason a small phone company named Madison River Communications attempted to block its customers from accessing VoIP services, however the FCC intervened. As a result of that episode, Moveon.org and others have argued for imposing common carrier regulation on broadband providers under the guise of net neutrality. Regulation truly tends to beget more regulation.

Reducing the hidden subsidies for local phone service would put incumbent phone companies in a better position to attract private investment to expand their broadband offerings and ought to be a key item in any agenda for promoting broadband deployment.

Otherwise, investors face a choice between investing in one category of broadband providers whose broadband profits may be forced to subsidize plain old phone services, and another category who get to reinvest 100% of their broadband profits or distribute them as dividends.

Reducing access charges would also remove a perverse disincentive which may be inhibiting some providers of legacy phone service in rural areas from updating their networks. If they offer wireless or Internet phone service, they are deprived of the generous compensation they currently receive for handling long-distance calls.

It may no longer be politically correct to criticize regulation, but intercarrier compensation is an example of harmful regulation which distorts competition. It needs to be eliminated and replaced with something which does not harm competition.

The FCC ought to just allow the carriers to negotiate these rates. The small and mid-size carriers would be afraid of that, and even the big carriers might prefer a reasonable FCC-set rate to endless bickering with 1,400 other carriers.

Either approach would be a huge improvement and is long overdue.

Barack Obama argues that John McCain “hurt everyday workers with his longtime support for deregulation,” according to Politico .

Thomas Frank adds,

There is simply no way to blame [the failure of several large financial institutions], as Republicans used to do, on labor unions or over-regulation. No, this is the conservatives’ beloved financial system doing what comes naturally. Freed from the intrusive meddling of government, just as generations of supply-siders and entrepreneurial exuberants demanded it be, the American financial establishment has proceeded to cheat and deceive and beggar itself — and us — to the edge of Armageddon. It is as though Wall Street was run by a troupe of historical re-enactors determined to stage all the classic panics of the 19th century.

But as Steve Forbes points out, the “easy-money” policy of the Federal Reserve helped financial institutions pile up debt and bad assets.

 According to former FDIC Chairman William M. Isaac,

The biggest culprit is a change in our accounting rules that the Financial Accounting Standards Board and the SEC put into place over the past 15 years: Fair Value Accounting. Fair Value Accounting dictates that financial institutions holding financial instruments available for sale (such as mortgage-backed securities) must mark those assets to market. That sounds reasonable. But what do we do when the already thin market for those assets freezes up and only a handful of transactions occur at extremely depressed prices?

The answer to date from the SEC, FASB, bank regulators and the Treasury has been (more or less) “mark the assets to market even though there is no meaningful market.” The accounting profession, scarred by decades of costly litigation, just keeps marking down the assets as fast as it can.

This is contrary to everything we know about bank regulation. When there are temporary impairments of asset values due to economic and marketplace events, regulators must give institutions an opportunity to survive the temporary impairment. Assets should not be marked to unrealistic fire-sale prices. Regulators must evaluate the assets on the basis of their true economic value (a discounted cash-flow analysis).

If we had followed today’s approach during the 1980s, we would have nationalized all of the major banks in the country and thousands of additional banks and thrifts would have failed. I have little doubt that the country would have gone from a serious recession into a depression.

Easy money and mark-to-market are not deregulatory policies. They are examples of government intervention with unfortunate consequences.

The nature of unfortunate consequences is always unpredictable; the inevitability of unfortunate consequences, never so.

Easy money was supposed speed the transition from the dotcom and telecom bubbles to prosperity, and mark-to-market was so we would not have to suffer from similar speculative bubbles in the future. Yet here we have another burst speculative bubble.

According to Frank,

Thanks to the party of Romney and McCain, federal work is today so financially unattractive to top talent that it might as well be charity work. It’s one of the main reasons — other than outright conquest by the industries they’re supposed to be overseeing — that our regulatory agencies can’t seem to get out of bed in the morning.

France attracts its best and brightest to government service, but most of us don’t want to be like France — at least not in all respects. Although it is hard to fail in France, it is also hard to succeed.  

Maybe blaming the regulators is like the blame the messenger proverb. Perhaps the problem isn’t the regulators; it is regulation itself.

Although regulation always seems brilliant in theory, it usually fails in practice. Either it doesn’t work, it spawns corruption or both.   Or it backfires, as it did here.

TCS Daily on June 18 ran an essay by me on regulatory policy. I excerpt thus:

In a sense, both models – market and regulatory — are flawed. But there is a difference. For every theory contending that markets fail, there is usually an answering argument that they tend to self-correct. Once, economic theory worried that markets would fail to fund “public goods” like lighthouses—until more careful economics revealed markets doing exactly that. More theory pointed to the evils of monopoly. But in reality a monopolist reaping substantial profits is a big target, with every entrepreneur looking for a substitute good or service. Many of the markets’ self-correcting mechanisms are simple Darwinism. Poor investors and badly run businesses lose (their own) money until they go under. Technology and other factors that bring change keep even established firms on their toes. In contrast, self-correction is not a common response to regulatory failures. There is no good explanation for how an agency or a system of rules can be designed to systematically succeed or self-correct.

I can’t let the week end without calling attention to  a Bloomberg article on Republican outrage over the FCC’s cession to Google’s petition for “gaming” the spectrum rules.

At Tuesday’s House Energy and Commerce Subcommittee on Telecommunications and the Internet, Molly Peterson reports that:

Rep. John Shimkus (IL) asked whether Google had “duped” the FCC by bidding primarily to trigger the open-access rules. FCC Chairman Kevin Martin said the agency wasn’t duped, adding that the rules weren’t designed to prevent any company from bidding. “My goal was to make sure that whoever won the C-block had an open platform,'” Martin, a Republican, told the House telecommunications subcommittee.

The 463 blog smartly caught the irony of a company playing the game too successfully:

The only right thing for Google to do is to begin to shut down it’s overly effective Washington operation. They are clearly operating on a level that is unfair to all those telecom giant DC neophytes.

But here’s the real takeaway. Google’s public policy pitch was a crafty and bold maneuver. By asserting public interests, Google convinced the FCC to skew the spectrum rules to favor Google’s ad-based business model over competitive models that receive revenue from monthly subscriptions or operating networks.

Although lobbying for open access makes sense for Google, it had other options besides lobbying the FCC. It could have bid for the auction without FCC strings attached, just as other carriers have bid at prior spectrum auctions. It also could have negotiated partnerships with winning licensees after the auction. Instead, Google took the political route, and government regulation now forecloses some of the ways that a wireless operator can run its business.