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The reality for BDS is increased prices

The Federal Communications Commission, based on a review of its April 2016 order on tariffs and pricing methodology for business data services, doesn’t pay attention to pending decisions of its sister agency, the Federal Reserve. This Friday, Federal Reserve chairman, Janet Yellen, is expected to give a speech in Jackson Hole, Wyoming that may provide some signals on what the U.S. central bank may decide to do regarding its federal funds rate. The federal funds rate is the overnight rate banks assess each other when lending their reserves to one another.

The Federal Reserve has set a target federal funds rate between .25% and .50% and if there is to be a rate increase this year, it is expected to occur after the November general elections.  Raising rates, the theory goes, is a part of a central bank’s strategy for moderating the growth of a heated economy. Raising overnight rates incentivizes banks to keep their reserves in the Fed’s vaults thus limiting the supply of money. Following the laws of supply and demand, money gets more expensive because banks are lending less to the public.

What does this have to do with telecommunications services, particularly business data services? As a capital intensive industry, telecommunications providers will depend on the bond markets to finance the construction and deployment of facilities necessary for delivering future services. For example, Verizon, in its February 2016 10-K filing with the U.S. Securities and Exchange Commission, argues that adverse changes in the credit markets could increase its borrowing costs and access to financing. The company, as of December 2015, has $110 billion in debt. Verizon argues that an inability to retire debt could make it more difficult to access the additional financing necessary for obtaining working capital or making additional capital expenditures.

Placing restrictions on a telecommunications service provider’s ability to raise prices signals the markets that there is increased risk to the rate of return investors expect from selling money to telecommunications providers.  Pricing restrictions by the Commission combined with a Federal Reserve decision to raise the fed funds rate could work to reduce the supply of business data services, an outcome that runs counter to the Commission’s stated public policy of increasing choice for consumers of business data services.

The Commission should take the external economic environment into account, an environment heavily influenced by the Federal Reserve, when it considers going forward on regulating business data services prices.

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Media diversity may start with the Federal Reserve vs. FCC

I just finished reading a post by the Cato Institute’s Steve H. Hanke where Mr. Hanke argues that the Federal Reserve’s target of zero to one quarter of a percent federal funds rate is actually exacerbating the credit crunch still faced today by small and medium sized businesses. The federal funds rate is the rate banks charge each other for overnight loans. A bank may have some excess funds in their reserve accounts and lending out money to another bank helps bring in additional interest revenue.

At least that is how it was before the Federal Reserve embarked on its in-the-cellar federal funds rate policy. At rates scraping the bottom of the pond, banks find themselves in the federal funds rate trap where they have no incentive to lend their reserves overnight (There is no altruism in lending). If banks aren’t lending each other money, this means there are fewer funds available for a bank in need to lend to its customers, specifically small and medium sized business customers.

This is where the impact on minority and woman owned businesses come in. Almost no minority-owned businesses are publicly traded on Wall Street so access to equity financing does not exist. These firms have to go to the banks, but with the Federal Reserve refusing to start the ripple effect of lending by increasing its federal funds rate, minority-owned firms are foreclosed from an opportunity to access credit.

You may ask why would minority-owned firms want to borrow at an increased rate and my answer is they may not want to unless they are confident they will experience the returns to be profitable while paying back the loan. The market, specifically investors, want to see a money pricing system that reflects the risk involved in lending to smaller businesses that may also be low on collateral or other assets. A zero rate simply does not do that.

God don’t like waste

At 2:15 pm today, the Federal Reserve announced that it would be keeping the rate used by banks to lend to each other between 0% and .25%. The Federal Reserve will also continue U.S. Treasuries through the spring of 2011 in hopes that the demand for government paper will drive up bond prices, increase the value of other assets, while driving down interest rates through the economy. It is hoped that this policy initiative will spur employment and innovation.

I know. The two people who read my blog are saying to themselves, what does this have to do with telecommunications and does Drew want his readership to fall as low as Bernanke’s interest rates?

Bear with me.

Back at the Ponderosa, the Free Press posse has decided to round up 2 million signatures like so much cattle on a drive to Dodge City. Over the next two days they will physically deliver all 2 million signatures to the headquarters of the Federal Communications Commission. It is hoped that the display will sway Chairman Genachowski to promulgate “real” net neutrality rules.

The last time I saw that type of attempt at dramatic effect was when President Ronald Reagan brought hard copies of the U.S. budget and tax codes to a state of the union address back in the 1980s. Unfortunately for Free Press, this is 2010 and that type of display, much less disregard for one’s carbon footprint and a few trees, doesn’t carry much weight, especially given that you can put all that on a memory stick. It’s a waste.

And that is my main point. Given the slack in resource utilization (Fed speak for unemployment), cheap cost of money (more economist geek talk for interest rates), and a growing demand for electronic or digital content, why is Free Press wasting its time with this UC-Berkley display of 1960s democracy?

The reality is that an agency that helps regulate our commerce and economy is moved by only two things: politics and economics. Free Press has already lost the political debate. Congress opposes the draconian rules Free Press advocates and Mr. Genachowski is pushing his middle of the road approach. Most Americans have not heard of nor care about net neutrality.

What Free Press should be doing is putting their brain power to good use. Come up with an Internet product that Americans want. Take that plan to a bank. Drop a few names that they picked up from inside the Beltway and Silicon Valley on their bankers and build something. Something that can employ people.

I‘ve had enough of the 1960s rabble rousing and picket sign carrying. The “we shall overcome your broadband access network” just doesn’t get it. It just wastes time.