The Great Net Neutrality Debate

What is Net Neutrality ?
It is simply that governments and Internet service providers (ISPs) should not place any restrictions on the Internet’s content or means of accessing that content. Internet users should be in control of what content they view and what applications they use on the Internet. The Internet has operated according to this neutrality principle since its earliest days and the big broadband carriers like AT&T, Verizon and Comcast for example, should not be permitted to use their market power to discriminate against competing applications or content. The telephone companies mentioned are not permitted to tell consumers who they can call or what they can say; Net Neutrality proponents say the same telephone companies and other broadband carriers should not be allowed to use their market power to control activity online.However, Google and Verizon put forward a proposal to the Federal Communications Commission to essentially retain this net neutrality on the public Internet but to allow broadband operators and network operators to offer new services that might be discriminatory in terms of their price and speed. They are proposing that broadband providers can allocate bandwidth for such projects, working with other application or service providers as they see fit. They mentioned a few specific examples to help illustrate this, such as health care monitoring, advanced educational services, or new entertainment and gaming options. Basically, they proposed that they be permitted to create a two-tier system whereby network capacity could be sold to companies willing to pay for that service, in turn to provide a higher quality service to their users.

Verizon said it has no intention of selling bandwidth from the ‘public’ network, it wants to make certain it could provide dedicated bandwidth-based services to third parties if it wanted to. Verizon CEO, Ivan Seidenberg said: “Verizon is standing tall. We said we agree that there should be no paid prioritization of traffic over the public Internet. Google (and others) will continue to innovate, and we have to feed that cookie monster. All we have asked is that we are allowed to offer services like Fios.” Fios is a bundled home communications service Verizon offers that makes use of an end-to-end fibre optics network, offering Internet, telephone and television. Verizon cannot offer it over the Internet, given neutrality requirements, so it is offered as a network separate from the Internet.
Those in favor of net neutrality clearly don’t like this at all, as creating a two-tier system, even if it means legislating neutrality in one of the tiers, results in the fragmentation that they fear and still discriminates in their eyes. Given that Google’s unofficial motto is ‘Do no evil’, the backlash in some quarters has been brutal. On the ominous Friday the 13th of August, internet users from across the Bay Area converged outside Google’s offices in protest. The rally was organized by ColorofChange.org, Credo Action, MoveOn.org, Free Press and the Progressive Change Campaign Committee. SavetheInternet.com summarized the sentiment as follows: “Google previously had been a champion of policies such as Net Neutrality — the fundamental principle that keeps the Internet open and free from discrimination. Its decision to team up with Verizon, long an opponent of such policies, has drawn the ire of public interest advocates.”

What is the scorecard? Many Internet giants are proponents of net neutrality, and also supporters of the U.S. government’s involvement in regulating it to ensure the Internet stays ‘open’. The likes of Amazon, Craigslist, Google (kind of), Facebook, Sony, IAC, and Twitter fall into this camp. President Obama himself does too: “I am a strong supporter of net neutrality … What you've been seeing is some lobbying that says that the servers and the various portals through which you’re getting information over the Internet should be able to be gatekeepers and to charge different rates to different Web sites… And that I think destroys one of the best things about the Internet — which is that there is this incredible equality there … Facebook, MySpace, Google might not have been started if you had not had a level playing field for whoever’s got the best idea and I want to maintain that basic principal in how the Internet functions. "As president, I am going to make sure that that is the principle that my FCC commissioners are applying as we move forward.”

In the against-net-neutrality camp are a number of large hardware and telecommunications firms, who would invariably benefit from being allowed to redefine the way the Internet works as they control the means of accessing it. In addition, opponents also include heavyweights such as Bob Kahn (inventor of TCP — “net neutrality is a slogan that would freeze innovation in the core of the Internet”) and Professor David Farber (“The Internet needs a makeover”). Robert Pepper, senior managing director of global advanced technology policy believes all the pro-net neutrality hype, is just that, hype.

What does the law say?
The law that affects net neutrality differs globally. In the U.S. there is considerable debate around the topic, with the FCC being involved in trying to legislate around this area, and sometimes not by choice. For instance, a court case against Comcast was the first to seriously touch on this aspect, with Comcast was accused of unlawfully throttling BitTorrent traffic in a class action suit. Comcast settled for $16 million, with the FCC stating Comcast needed to comply with transparent network management practices.

Are we truly net neutral today and if so,
How long can it be sustained?
There are a number of central arguments used in opposition to any kind of net neutrality legislation. Firstly, that the ability to charge users/sites different rates for differing levels of access will provide the revenues to ISPs and other network operators necessary for them to recoup their investments in broadband networks. Verizon has said there is no current incentive for it to develop and deploy advanced, super-fast fibre optic networks if it can’t charge more for access to such networks. Verizon and a number
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C. Cohn
The Cohn-Reilly Report

Small Businesses: Good things come to those who Wait.

The small business community was left out of the Bail Out, as I pointed out in a previous article “Too small To Succeed”, small banks and businesses were left to sink or swim. Sadly many small banks and businesses have met an untimely end. It’s too bad that help is on the way nearly 2 years later. You may be thinking it’s too little too late, but I say, better late than never.

Last Month Timothy Geithner paid a visit to New York to convey his message to the financial industry, bankers in particular that the new Regs are good for business. His objective was to communicate to Wall street that finance reform would ultimately be the “foundation of a stronger economy”. His NYU audience was told that the Obama administration seeks to strike a balance with safeguarding Businesses, while protecting consumers. Geithner likely new that the Administration had a plans to unveil a kind of incentive package for banks to make loans to small company to spur business.

This week the U.S. Senate passed the bill valued at $30 billion to be utilized to encourage lending, and approximately $12 billion earmarked to provide much needed tax breaks for small businesses. Still to be approved by the Senate, the law is expected to create 500,000 jobs according to estimates by the Democrats. Amid a firestorm of criticism, with midterm elections threatening to curtail the democratic reign on Capital Hill, the administration is refocusing its efforts to try and make a dent in the unwavering unemployment rate, and spur economic development.

K. Reilly
Cohn-Reilly Report

Range Bound Markets Await Direction

Over the last six sessions the Dow traded in a narrow 200 point range and the S&P followed suit, trading within a 25 point spread; not surprising due to the number of people on vacation this time of year resulting in low daily volume and a lack of direction.

The economic news did not help this week, which was mixed and lackluster. On Monday there was a bright spot as consumer personal income in July posted a 0.2 percent gain, following no change at all in June. More importantly, the wages and salaries component rebounded 0.3 percent after slipping 0.1 percent in June. The Fed is depending on the consumer to counter a faltering housing sector - Bernanke and Company got its wish at least for July. Overall personal consumption increased 0.4 percent, following a flat number in June. How did the market react? The Dow sold off by over 140 points anyway; obviously traders didn’t think the numbers were good enough. Since the PCE (Personal Consumption Price Index) rose by .02, which is slightly inflationary, that should have been looked at as a good thing, since there has been so much worry about deflation. But no – it had no affect.

Today was a roller coaster, affected by reports showing an increase in home prices for June, a weak consumer confidence index and a mixed picture from the Fed minutes released at 2:00 PM. The result was a close with little change in the markets.

Interestingly, the Fed minutes pointed to the widespread differences between the Fed governors on what should be done to affect the state of the economy. Some feel we are doing just fine, while others are ready to take more stimulus action and still others are sounding the alarm for disinflation – a slow deflationary decline in prices. No wonder the public is confused. They can’t decide amongst themselves what the next course of action should be.

Anyway, let’s see if the ADP employment report, jobless claims and the national unemployment report on Friday will have better luck in moving the markets.

C. Cohn

Cohn-Reilly Report

America to Obama:Time Is a Luxury We do Not have

The country couldn’t be more divided on the key issues like finance reform, and healthcare. Could it be the media, or the tea party rallies, or could it be the voters, who overwhelmingly voted President Obama into the White House on the platform of Healthcare and finance reform, are having a change of heart? Something just does not add up, there has got to me more to this crusade than meets the eye. There is one camp that feels that Obama can do no wrong (with ever declining members) and another camp that feels that Obama can do nothing right. Either side of the fence seems a bit extreme. The fiscal policy, bailouts and stimulus measures implemented by the previous and current administrations have had some impact on stabilizing the economy and avoiding catastrophic collapse of the markets, but we are now faced with slow growth and high unemployment some 18 months later. Patience is what is needed, given the breadth of the problems the President had sitting on his desk on his first day in office. Nevertheless, time is not on his side, with midterm elections around the corner, it seems almost destined to be an upset. The Democratic majority is in serious jeopardy of swinging back to the Republicans.

From my perspective, the fullness of time is required before evidence of the wise and unwise movements of the administration is ultimately revealed. In the meantime, we are hearing from the "so called" experts Obama’s popularity is swiftly eroding, and his administration, though productive in many respects, not in the areas of concern. The wars, new jobs, and now the BP oil disaster. It will take a high profile republican scandal to damper the outcome of the upcoming elections.

K. Reilly
Cohn-Reilly Report

SEC: Keeping the Bond Market Churning

To beat the potential stand-still in bond offerings, the SEC opted to temporarily allow bonds sales to proceed without providing credit ratings in Official Statements, which are deal documents distributed to brokers, and investors that provide full disclosure of issuers' financials - particularly, balance sheet, cash flow, total debt outstanding, credit rating, use of funds and debt service.
It appears that the SEC is intent on keeping the flow of deals moving to help financial “supply chain” generate money including, investment banks, issuers of debt, lawyers and financial advisors. Perhaps their mindset is that this will trickle down to impact the economy as a whole. And so it goes....the SEC is bending the rules to indirectly help keep the Economy moving in the right direction, by way of the Bond sales.

On the heels of the securitized mortgage and subprime housing debacle, the last thing we need are credit raters that are gun shy about rating bond offerings. Okay, let's break this down.... credit rating agencies, are in fear of rating?. You're thinking, "Isn’t that like a Chef being afraid of cooking?" Nevertheless, this comes as an unintended backlash from the Financial Reform Bill. It was reported in the Wall Street Journal that raters’ want to avoid exposure to liability, therefore the top three rating agencies; Moody, S&P and Fitch, won’t allow their ratings to be included in the public disclosure documents (Official Statement) that would normally accompany bond sales. To be clear, they will continue to rate bonds, but apparently do not want their rating to be the basis of any investors’ decision to purchase the bonds - thereby eliminating liability in the event of default.

Well I know many of us market watchers, analyst and economists were all prepared for backlash from the tightened regulations handed down by lawmakers. As the smoke clears, and the dust settles on the Reform Bill, more and more instances of backlash will emerge. Capital Hill will be compelled to press the “reset” button, and then it’s back to the drawing board with revisions and addendums until they get it right.

K. Reilly
Cohn-Reilly Report

___________Comments

John T. said......
I am very very concerned that the bond market is the next bubble. We have basically been in a 25+ year bond bull market, and rates are darn close to zero. Every scared person out there is jumping at bonds and bond fund managers are holding their noses and scooping up everything they can......with the exception of Bill Gross who knows this is coming and is probably already clearing out his offices.......

As soon as we get a couple of good jobs numbers and confirmation that yes, we are in recovery.......and the Fed says "ok, let's raise 1/4 pt".....it's over....and everyone who has bond funds is going to watch the NAV deteriorate, perhaps for many years to come. And those who bought long term bonds for yield will find the prices will erode and they will be forced to hold to maturity........and maybe even watch a 1 year 5% CD float by as they can't do a darn thing about it.

I feel bad for the elderly. They're going to get hit from this when it comes.

Katherine said...
You make a very good point John T. It seems that investors now have the responsibility (self preservation)to project into the future and decipher whether or not the worst case scenario is something they can bare. In today's market there is no such thing as a secure investment. Bonds were always a good bet for long term, but there are so may unusual factors playing into the market that it's next to impossible to anticipate. Veteran analysts and fund managers may have the benefit of experience to navigate through these times, but what about the fund managers who have only 3-5 years experience.

Where is the Economy Headed?

Two of my favorite financial commentators are Jim Rogers, currency trader extraordinaire, hedge fund pioneer and former partner with George Soros, and Dr. Mark Faber – creator of the GloomBoomDoom report, a former managing director of Drexel Burnham Lambert and an international investor with the uncanny ability to predict market direction. I thought it would be interesting to take a look at what their current thinking is about the economy and the markets.

Mr. Rogers cautioned that when another downturn takes hold "the world is going to be in worse shape because the world has shot all its bullets"; meaning that due to the extraordinary measures already adopted by central banks and governments around the world, the arsenal of available tools to combat the next recession is somewhat lacking. Speaking in an interview with business television channel CNBC, the septuagenarian investor said that "since the beginning of time" there has been a recession every four-to-six years, and that means another one is due around 2012.

Rogers has long been a proponent of abolishing the Fed. His point is that America survived and prospered without a central bank for long periods and can do so again. "We don't need the Fed. The Fed is making our lives miserable," the famed financier says. "The Fed is printing huge amounts of money, which we'll have to pay for sometime. The Fed has borrowed gigantic amounts of money on their balance sheet...the numbers are so staggering that this is going to have ramifications before too much longer." "Is Mr. Bernanke going to print more money than he already has? No, the world would run out of trees" Rogers says.

Mr. Faber comments “The Fed doesn't pay any attention to asset bubbles when they grow. That's their official policy. But they flood the system with cash when bubbles burst. They only care about bubbles when they crash. It's a very asymmetric response and it has many unintended consequences. In a credit-addicted economy, you don't need credit to actually fall for there to be problems. All you need is a slowdown in the growth rate, and you get big problems. Now, the government and the Fed are aware of this, so they are creating debt through fiscal deficits and monetization. That creates a hugely volatile environment. “

In 2008, government credit creation was inferior to private credit contraction, and asset markets tanked. In 2009, government credit creation was higher than private contraction, and asset markets went ballistic. Lately, government credit creation has slowed, and asset markets have gone down. Now, the Fed is aware of this, and it's only a matter of time before it throws more money into the system. I guarantee this.
I'm a believer that the stock market lows of March 2009 will not be revisited. You have people like Robert Prechter who think the Dow will collapse to 700 because of debt deleveraging. Debt deleveraging could happen, but the Dow will not fall because of monetary policy. The Fed will keep everything inflated in nominal terms. And if the Dow does go to 700, you'll have more to worry about than your investments. All the banks will be bust. The government will be bust. You don't want cash if massive deflation happens. On the contrary: It will be worthless. You have to think very carefully about hardcore deflation.”
Both Mr. Rogers and Dr. Faber share a good degree of the same pessimism. Both sound the alarm for the real threat of a deflationary spiral, due to the zero rates and the printing press actions of the Fed. Deflation is correlated with recessions including the Great Depression, as banks defaulted on depositors. Additionally, deflation may cause the economy to enter the liquidity trap, a situation where monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply. Deflation discourages investment and spending, because there is no reason to risk on future profits when the expectation of profits may be negative and the expectation of future prices is lower. Consequently deflation generally leads to, or is associated with a collapse in demand. Without the "hidden risk of inflation", it may become more prudent just to hold on to money, and not to spend or invest it.

Sobering thoughts on a hot summer July afternoon, as the market sputters back and forth from gains and losses trying to figure out what will happen next.

C. Cohn
Cohn-Reilly Report

______________Comments

Erin Thak said...
This is very scary stuff. I can't imagine what was going through the minds of the the general public during the great depression, but I can certainly say that I know this past three years on the economic and financial market front will be a significant part of our history. One that will be analyzed for decades.

August 20, 2010 7:54 AM

Katherine said...

I will have to agree with you on that Erin. I feel I am living in fascinating times. Don't get me wrong, it is definitely extremely difficult times for the majority of the the population, including myself, but I can't help but recognize the importance of what is taking shape.....for better or worse.

Reform Bill Signed ..and the Sky is Not Falling

The Bill was finally signed by President Obama on Wednesday July 21st, marking the most extensive financial reform legislation since the great depression. In addition to tougher regulations and fees for large banks, the bill outlines new processes and steps to be taken to address troubled companies, which would break down the business units and sell them off, rather than bail them out. The bill is being heavily criticized for what appears to be the government’s increased role of power and control. Further, despite what we’ve heard from the President and democrats on Capital Hill, the bill does contain language that suggests that the Federal Government still retains the authority to bailout troubled companies. Bloggers are going bonkers over this issue. I, on the other hand, feel otherwise. In all likelihood, the government’s authority is restricted to last resort options, or special circumstances. Let’s face it, no one could have predicted the turn of events in ’08 and ’09. Therefore, to close the door to any alternate options that may save the country from another “never before seen” economic turn of events, would not be wise.

As anticipated, the large financial institutions will be subject to increased oversight. Unfortunately, my understanding is that the Securities and Exchange Commission is going to be the watchdog. Are you kidding me? Now this is a real concern! The SEC, in all due respect, is the very same group that ignored countless warnings about Madoff, slept as the high risk sub-prime were securitized with “A” ratings, while spending thousands of office hours porn surfing. I am not encouraged by this at all.

I'm sure you've heard the "sky is falling!" type reports surrounding the passing of this bill, where market journalists, analysts and self proclaimed finance geniuses speculate that the bill will have a harsh impact on banks, which will stall or reverse the economic recovery. Sure there will be some initial impact, but banks have always found ways and means of navigating around the Regs and pulling out their multi-billion dollar profits. Time will tell, my friend times well tell. In the meantime, I shall remain open minded until I get more information about this historic bill might impact the economic recovery.

K. Reilly
Cohn-Reilly Report

___________Comments

Charlie said......
I agree with you about the SEC. The problem is that companies are concerned about how the financial regulations will affect their businesses going forward, along with the impact of health care reforms. As a result, firms are sitting on trillions of dollars in cash, reluctant to commit to hiring the still 9.5% of the population that is unemployed.

I speak to recruiters frequently and they confirm that employees are still working long hours to make up for the lack of staff in their departments. Hiring managers have numerous open requirements for employee spots to be filled, but until senior management can get over this uncertainty, we still will have major hurdles in putting America back to work.
JULY 23, 2010 6:25 AM

Katherine said......
You're right, Charlie. We don't disagree. Except from my standpoint, the Reform Bill is a key contributor, but there are other factors that come into play with respect to companies sitting on cash, and still reluctant to hire. Overall, the concerns are valid: How stable is the market?, How tight will the banks be with distributing credit? , and Will there be liquidity?, These are significant issues where the corporations are concerned, particularly the small companies, who depend on credit to purchase inventory, and make payroll. I definitely get it. Nevertheless, reform was absolutely necessary. We all know the financial industry was out of control, and now we all have to suffer for it. My old boss used to say "This too shall pass". Corporate America will adjust, survive, and eventually thrive again. Yes the economy may stagnate, but it will prevail.

No doubt there will need to be some changes in the Reform Bill – a few nips and tucks before we can strike a balance between consumer protection and keeping the banks motivated.
JULY 23, 2010 7:35 PM


Anonymous said......
Hey....nothing like a healthy debate, right? You both make solid arguments, but I’m more of the wait and see type. These are scary times, but I hear they don’t compare to the great depression – we have it easy. Look. - it’s not going to be the same no matter what we do, so why whine about it. Let’s just man-up and wait it out. Banks are never going to satisfied, and the Wall Street high rollers are moaning because we're raining on their parade. Wall Street and Main Street will never see eye-to-eye. So how do you write legislature that reflects the concerns of both sides. You Don't!