Andrew Lisy's Blog

It's been a terrible month for user data security. Epsilon and Sony, both high-profile and data-rich companies, have been breached and revealed sensitive personal data to hackers. In Sony's case, the 77 million users affected weren't even notified that their names, addresses and potentially credit card data were compromised until six days after the attack. Many speculate that in the rush to get out new product features, Sony neglected to carefully think through their security model for protecting the valuable user data they they stored. Clearly, the current system of data storage and retrieval is broken. As today's New York Times reports, there is currently no U.S. federal law regulating data theft, penalties, and notification requirements, so states are left to determine their own protocols. Companies have little downside to collecting troves of information, since the penalties for losing it are unclear while the benefits to having it are potentially great. Meanwhile, consumers have little or no control over what happens to the increasing amount of personal information that they give or leave as they interact online and in person with well connected businesses.

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In many states, New York included, there is a $0.05 deposit on aluminum cans. The deposit is designed to provide an economic incentive to people so that they recycle their cans instead of just throwing them in the garbage when they're finished. The program works beautifully; however, like many such programs, the way it works isn't necessarily the way you'd immediately picture such a system to function. People that buy the cans and pay the extra $0.05 are rarely the people that end up collecting the nickel when they're done with it -- for them, the deposit is just an added tax on cans that they are still going to throw away. Instead, the people that benefit are those who are able to collect cans out of the garbage and off the street and then turn them in for the deposit. The economic incentive turns an otherwise difficult task -- collecting and sorting a city's worth of cans from the garbage -- into a task done readily by people that otherwise may have few other work alternatives.

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With the TARP severely limiting the pay that a Wall Street banker can expect to receive in the next 5 or so years, while at the same time increasing funding for research and science in the United States, the time has never been better for students graduating from top universities to choose careers in science or industry over careers in Wall Street. In the past 10 years, Wall Street firms have drawn increasing numbers of the best students in America with the allure of making millions of dollars very quickly trading financial products of questionable merit. However, times have changed, and they have changed quickly. Only four months ago, the Wall Street dream was still alive, albeit somewhat muffled by a poor economy. Things were bad, but everyone "knew" that we were simply in a cyclical recession that would be over in a few quarters. The landscape changed with the bankruptcy of Lehman Brothers and the near failure of other major financial firms. Today, even the most golden of Wall Street firms are borrowing billions of dollars from the government to stay afloat and keep themselves from suffering a similar fate at the hands of short sellers and ratings downgrades. Mighty Wall Street, who once all-but-dictated fiscal policy for the US, is now beholden to Uncle Sam for hundreds of billions of dollars. What does this mean? The most immediate impact that will be felt by bankers over the next few years is the evaporation of bonuses. At the end of 2007, the average employee at a major Wall Street investment bank received a bonus of $175,000, according to the New York Times. Considering that this number includes everyone from the assistants to the CEO, the payout is simply staggering. Up to that point, the firms had generated the returns to justify such compensation. However, in the last 12 months, decades of profits have been wiped out, and the government now has a hand in every bank. What this means, as news outlets have covered ad nauseum, is that bonuses are no longer being paid out of profits -- instead, they come out of government subsidies. Needless to say, taxpayers will not fund such compensation. It will take years to repay the billions borrowed, and even then, regulations will undoubtedly be put in place to remedy the compensation asymmetries that led to this situation. Therefore, the days of easy money on Wall Street have passed, at least for the foreseeable future. Contrast this with careers in the sciences and technology. Several billion worth of TARP funding is going towards research in areas like battery technology, fuel cell research and alternative energy. While all of these areas are extremely important and have a very bright future, alternative energy in particular is poised to become the next billion-dollar industry. Although the plunge in gas prices has taken the market-driven component out of ideas like fuel cell cars and biodiesel engines, the push from the government for technologies like this is bringing them closer and closer each day to the cost-effective level needed to supplant oil for much of our energy. Bloomberg News had an article yesterday titled Obama’s Billions for Energy Fuel Stanford, MIT Research Dreams where it highlighted the research labs that will benefit from TARP funding. The paragraph I found perhaps most interesting:

Balsara, a chemical engineer, has assembled a team of 15 scientists that applied for $25 million over five years from the U.S. Department of Energy to improve batteries by modifying their materials. Money for energy projects is part of an $819 billion stimulus, passed by the U.S. House of Representatives, that Obama says is critical to saving the economy.

$25 million, over five years is what it takes to get research for improved batteries on track at some of the top research institutions in the world! Why not triple it and fast-track these technologies. How much will a battery that lasts twice as long as current models contribute in revenues to our economy? I guarantee that you'll be hard pressed to find a better way to spend that money. This is one project -- there are a dozen more that all are starved for cash but once funded would be tremendously valuable to our economy if we got them moving. Ultimately, the great thing about technology is that it is by nature accretive and self-catalyzing. Discoveries that you make today are the basis for new developments tomorrow. The best example of this is microprocessors, which are created with sophisticated algorithms to lay out the circuits on the chips. More complex algorithms can create faster chips. But faster chips can run more complex algorithms! So the processor that you create today will run better software than last years model, and as a result you can keep ratching up your production because what you produce becomes an input to the system. Because of this positive-feedback, technology grows exponentially with time. Contrast this with investment banking or trading, where the deals or trades you did last year only contribute in a minor way to the trades or deals you do this year. Finance, therefore, grows linearly. In many ways, the doldrums of Wall Street will help to put our nation back on the same playing field with our competitors. If the events of the last six months had never happened, and our brightest minds continued to choose Wall Street over careers in technology, nations like India and China would quickly outpace us because the linear growth rate of finance would soon fall behind the exponential growth rate of technology. Therefore, although it will create much short-term pain, the current economic situation will ultimately help the USA by encouraging the smartest minds to seek out a variety of careers. By removing the short-term incentive of massive paychecks in favor of longer-term goals of progress and value creation, the recession will end up spurring a new generation of entrepreneurs who will develop the science and technologies vital to keeping the USA at the forefront of progress.