Monday, March 31, 2008

If Only Hillary Had More Experience...

Jonathan Alter makes the interesting case that Hillary's best move may be right into the governor's mansion. I agree that it would be nicer than returning to the Senate to face all of her colleagues that she thinks deserted her, but I am not sure how helpful it will actual be to her political career though. In general, I think executive experience is a wonderful thing and is nearly essential for any would be presidential candidate, but Hillary has already run an entire campaign on the experience card and we have all seen how that is working out. It turns out that experience loses out to hope every day of the week. America doesn't care about a candidate's resume or past. They care about what the candidate promises to do in the future. All that the move to Albany will do is add governor to the things that America can ignore. In other words, political experience is the last thing that Hillary needs.

Who Knew MAD Magazine Did Serious Commentary?

Twenty-three fold-ins from almost fifty years of MAD magazine.

Relive a bit of your childhood and realize how prescient Al Jaffee is. The more things change the more things seems to have stayed the same. A lot of the issues that America was facing back then it still seems to be facing. I'm not sure if it that is a good thing or bad thing.

Entertaining Article on High School Social Life

Why Nerds are Unpopular

Great Response to Hot Zone's Last Post

Courtesy of Scott Adams, writer of Dilbert:

One of the reasons I like my job is that the worst mistake I can make is to offend someone, and I enjoy that too. I would never want to be a NASA engineer, for example, knowing that one wrong calculation lands the Space Shuttle on the Sun. And I really, really, really, wouldn’t want to be one of the engineers working on the Large Hadron Collider, no matter how sure I was that it was safe. There’s always that little chance of annihilating the universe, and it’s exactly the sort of mistake I would make.

On the plus side, no one would say, “I told you so.” I guess that would take some of the sting out of it.

I don’t know how you ever get comfortable with any level of risk of destroying the universe. If you were to do an expected value calculation, multiplying the tiny risk times the potential cost, it would still come out infinitely expensive.

And who exactly ran the numbers to decide it wasn’t that risky? After all, the whole point of the Large Hadron Collider is to create conditions that are not predictable. If someone already predicted what would happen using nothing but his laptop and Excel, and determined it was safe, I don’t think we’re getting our $8 billion worth.

I can’t see the management of this project spending $8 billion, realizing it was a huge boner, and then holding a press conference suggesting it be turned into a parking garage. I’ll bet a lot of people in that position would take at least a 5% risk of incinerating the galaxy versus incinerating their own careers. I know I would.

If the lawsuit succeeds, imagine trying to get another job with that project failure on your resume.

Interviewer: “So, you spent $8 billion dollars trying to build a machine that would either discover something cool or destroy the universe. Is it fair to say you are not a people person?”

Oh Pew, You Incarcerate Me!

In an op-ed in the LA Times today, James Q. Wilson argues that the recent pew report regarding incarceration rates in the United States actually misinterprets the benefits of imprisoning criminals (he says that higher rates are indicative of a more criminal society AND that imprisonment actually decreases those rates). I'm hosting grad student prospectives for the next two days so I'll be slow on posting a more in-depth response, but start your engines.

Some initial thoughts I have are skepticism about the comparative case work between the U.S. and Britain (it seems somewhat simplistic to draw a single causal variable relationship to the rise/fall of crime in the two countries, namely prison time).

I also think that his public policy approaches are wiser than just making the less-dangerous spectrum of drugs legal - it would give users the ability to rehab without going into jail (preventing them from becoming more dangerous during the prison socialization process) without condoning behavior that is often associated as a slippery slope (associated with greater drug use, more serious drugs, and an increase in the propensity to commit more crime).

Saturday, March 29, 2008

Hillary "John Rambo" Clinton

This one was sent to me by Stootz Gottlieb. Enjoy:

If Chicken Little had a Little Bit of Physics Knowledge

The Chicken Little of the Twenty-First Century. How is this on the front page of the New York Times' webpage? Is there nothing else happening in the nation? The article is unfortunately very respectful to both sides giving the public the sense that Mr. Wagner and Mr. Sancho have a legitimate claim when it really should have berated the two of them.

Mr. Wagner and Mr. Sancho acknowledge that the suit has no authority since they filed in Hawaii and, CERN is, you know, international. Mr. Wagner tried to stop the use of the Brookhaven National Laboratory in 1999 and 2000. Clearly, Mr. Wagner was right because the world came to end due to scientists using Brookhaven. Wait, that didn't happen.

On one hand we have quite literally hundreds of scientists with PhDs in physics saying it is safe versus Mr. Wagner who has an undergraduate degree in physics and Mr. Sancho who is an author and researcher on "time theory." Who do you think has a better grasp of the science behind the Large Hadron Collider. Trust me, the scientists don't want the world to end either under any circumstance.

Furthermore, the LHC is going to have collisions in the 10^12 electron-volt range. There are natural collisions that happen up to the 10^20 electron-volt range. That is a 100,000,000 electron-volt range difference of magnitude. These are natural processes that we are recreating but at a much lower power. We can't even get close to the numbers that nature throws at us normally.

Black holes seem very scary. There are two facts that are rarely mentioned that make them much less scary. Hawking radiation and Schwarzschild radius. Black holes naturally release thermal radiation over time. If the black hole absorbs more than it radiate it grows the opposite if vice versa. In fact, smaller black holes produce more Hawking radiaton than larger ones accelerating their demise. In the unlikely situation that the LHC does make a black hole it will only be a micro black hole that will evaporate in nanoseconds.

The Schwarzschild radius is the radius where anything that enters that radius will be unable to escape the gravitational field of the black hole. If a black hole had the mass equivalent to mount everest its radius would be less than a nanometer. The black holes formed from the LHC would have a radius smaller than a proton or an electron. It would not even be able to pick up one of these sub-atomic particles making it impossible to grow any larger.

So remind again now. Why was this even published?

Friday, March 28, 2008

Garbo - I'm Looking At You Here

On ABC's The View this morning, Obama had the following exchange with Barbara Walters:
BW: Had the Reverend not retired, were he still there, would you then have left the church, or said 'I just can't have anything to do with him?'

BO: Had the Reverend not retired, and had he not acknowledged that what he had said had deeply offended people and were inappropriate and mischaracterized what I beleive is the greatness of this country, for all its flaws, then I wouldn't have felt comfortable staying there at the church.
Two weeks ago, in his highly praised speech on race, Obama said
I have already condemned, in unequivocal terms, the statements of Reverend Wright that have caused such controversy. For some, nagging questions remain. Did I know him to be an occasionally fierce critic of American domestic and foreign policy? Of course. Did I ever hear him make remarks that could be considered controversial while I sat in church? Yes. Did I strongly disagree with many of his political views? Absolutely – just as I’m sure many of you have heard remarks from your pastors, priests, or rabbis with which you strongly disagreed.
Maybe its just me, but if Obama has heard him say controversial remarks, and knew of his criticisms of US policy, then doesn't his statement this morning imply that he should, in fact, have left the church?

I'm not sure how to reconcile these statements. If Wright's publicly expressed views were so out of bounds that they would have caused Obama to leave the church if Wright were not retiring, then why didn't Obama leave the church? The retirement answer explains why he is not now leaving the church, but Wright's retirement is recent. This leaves wide open the question of, if Obama was aware of Wright's views, why was he there for the past 20 years?

To me, the two possible answers that would have made sense are a) his views aren't too extreme, there's some justification to them, and I don't find them so deplorable that they merit my leaving the church; or b) I didn't know how nutty Reverend Wright was, but had I known about all of this, I would have left the church. I think it seems he's trying to play it both ways, but they seem mutually exclusive, no?

Pentagon Papers Redux?

Read this story, and then check out the reactions I've linked to at the bottom of this post.

An excerpt from NY Times reporter Eric Lichtblau's upcoming book, in which he discusses why the NY Times first sat on the NSA wiretapping story for a year, and why it eventually published the story.

For 13 long months, we'd held off on publicizing one of the Bush administration's biggest secrets. Finally, one afternoon in December 2005, as my editors and I waited anxiously in an elegantly appointed sitting room at the White House, we were again about to let President Bush's top aides plead their case: why our newspaper shouldn't let the public know that the president had authorized the National Security Agency, in apparent contravention of federal wiretapping law, to eavesdrop on Americans without court warrants. As New York Times Editor Bill Keller, Washington Bureau Chief Phil Taubman, and I awaited our meeting, we still weren't sure who would make the pitch for the president. Dick Cheney had thought about coming to the meeting but figured his own tense relations with the newspaper might actually hinder the White House's efforts to stop publication. (He was probably right.) As the door to the conference room opened, however, a slew of other White House VIPs strolled out to greet us, with Secretary of State Condoleezza Rice near the head of the receiving line and White House Counsel Harriet Miers at the back.

For more than an hour, we told Bush's aides what we knew about the wiretapping program, and they in turn told us why it would do grave harm to national security to let anyone else in on the secret. Consider the financial damage to the phone carriers that took part in the program, one official implored. If the terrorists knew about the wiretapping program, it would be rendered useless and would have to be shut down immediately, another official urged: "It's all the marbles." The risk to national security was incalculable, the White House VIPs said, their voices stern, their faces drawn. "The enemy," one official warned, "is inside the gates." The clichés did their work; the message was unmistakable: If the New York Times went ahead and published this story, we would share the blame for the next terrorist attack.

More than two years later, the Times' decision to publish the story—a decision that was once so controversial—has been largely overshadowed by all the other political and legal clamor surrounding President Bush's warrantless wiretapping program: the dozens of civil lawsuits; the ongoing government investigations; the raging congressional debate; and the still-unresolved question, which Congress will take up again next week, of whether phone companies should be given legal immunity for their cooperation in the program. Amid the din, it's easy to forget the hits that the newspaper took in the first place: criticism from the political left over the decision to hold the story for more than a year and from the right over the decision to publish it at all. But the episode was critical in reflecting the media's shifting attitudes toward matters of national security—from believing the government to believing it less.

After all, the fear and trauma that gripped the country in the months and years after 9/11 gripped the media, too; the country's outrage was our outrage. Coverage of 9/11 and its aftermath consumed all else for reporters in Washington. As federal officials scrambled to avert the much-feared "second wave" of attacks, reporters likewise scrambled to follow any hint of the next possible attack and to put it on the front page—from scuba divers off the coast of Southern California to hazmat trucks in the Midwest and tourist helicopters in New York City. One example of the shift: On Sept. 12, 2001, another major newspaper was set to run a story on the extraordinary diplomatic maneuverings the U.S. Secret Service had arranged with their Mexican counterparts to allow Jenna Bush, then 19, to make a barhopping trip south of the border. (She had just been charged with underage drinking in Texas.) A few days earlier, a scoop about a presidential daughter's barhopping trip getting special dispensation from the Secret Service and a foreign government might have gotten heavy treatment. But the story never ran, and the Secret Service's maneuverings remained a secret until now. In the weeks and months after 9/11, there was no longer an appetite for such stories.

At the same time, in the first few years after 9/11, stories that have now become frequent front-page fodder—about water-boarding of terrorism detainees and other aggressive interrogations tactics, about CIA "black site" prisons overseas, or about covert eavesdropping or other surveillance programs that stretched the limits of the law—simply didn't get written by most of the mainstream media. If we had known about them, which in most cases we didn't, there would have been a reluctance to publicize them in those early days of the war on terror.

I wasn't immune to the shifting in attitudes after 9/11. In early 2003, then-Attorney General John Ashcroft appeared at a congressional hearing I was covering and announced, with dramatic aplomb, the unsealing of indictments against two Yemeni men, including a radical cleric accused of personally delivering $20 million to Osama Bin Laden. There was more: The cleric, Ashcroft revealed, said he had received money for jihad from collection at the notorious al-Farooq mosque in Brooklyn. I didn't wait for a break to rush out the door of the hearing room and call our assignment editor, who would soon be preparing the story list for the next day's front page. "This is big," I told the editor. "Ashcroft says Bin Laden was getting money from a mosque in Brooklyn."

Sure enough, the story ran at the top of the front page of the next day's paper. But among my colleagues in the paper's New York metro section, there was much less enthusiasm: The story, our Brooklyn reporter thought, was overblown, the evidence of an actual link between the Brooklyn mosque and al-Qaida thin. His skepticism was borne out: While the Yemeni cleric was ultimately sentenced to 75 years in prison on terrorism charges related to his support of Hamas, the sensational charge that the Brooklyn mosque was used to raise money for al-Qaida and Bin Laden had melted away to all but nothing by the time the case concluded.

For me, the story about the Brooklyn mosque, along with others, like the justice department's wobbly case against "dirty bomber" Jose Padilla, were eye-openers. By 2004, I had gained a reputation, deservedly or not, as one of the administration's toughest critics in the Justice Department press corps; the department even confiscated my press pass briefly after I wrote an unpopular story about the FBI's interest in collecting intelligence on anti-Iraq war demonstrations in the United States. To John Ashcroft and his aides, my coverage reflected a bias. To me, it reflected a healthy, essential skepticism—the kind that was missing from much of the media's early reporting after 9/11, both at home in the administration's war on terror and abroad in the run-up to the war in Iraq.

That shared skepticism would prove essential in the Times' decision to run the story about Bush's NSA wiretapping program. On that December afternoon in the White House, the gathered officials attacked on several fronts. There was never any serious legal debate within the administration about the legality of the program, Bush's advisers insisted. The Justice Department had always signed off on its legality, as required by the president. The few lawmakers who were briefed on the program never voiced any concerns. From the beginning, there were tight controls in place to guard against abuse. The program would be rendered so ineffective if disclosed that it would have to be shut down immediately.

All these assertions, as my partner Jim Risen and I would learn in our reporting, turned out to be largely untrue. Jim and I had already learned about much of the internal angst within the administration over the legality of the NSA program at the outset of our reporting, more than a year earlier in the fall of 2004. Still, the editors were not persuaded we had enough for a story—not enough, at least, to outweigh the White House's strenuous arguments that running the piece would cripple a vital and perfectly legal national-security program. It was a difficult decision for everyone. I went back to writing about more mundane terrorism and law-enforcement matters, poking around discreetly to find out what had happened to the NSA's eavesdropping program. Risen went on sabbatical to write a book about intelligence matters. Then, one night in the spring of 2005, he called me out to his home in suburban Maryland and sat me down at his computer. There on the computer screen was a draft of a chapter called simply "The Program." It was about the NSA's wiretapping operation. "I'm thinking of putting this in the book," he said. I sat and stared at the screen in silence. "You sure you know what you're doing?" I asked finally. He shrugged.

Risen spoke with our editors about what he was contemplating, and so began weeks of discussions between him and the editors that ultimately helped to set the story back on track. Risen's book was a trigger, but we realized we weren't in the paper yet. We still had to persuade the editors that the reasons to run the story clearly outweighed the reasons to keep it secret. We went back to old sources and tried new ones. Our reporting brought into sharper focus what had already started to become clear a year earlier: The concerns about the program—in both its legal underpinnings and its operations—reached the highest levels of the Bush administration. There were deep concerns within the administration that the president had authorized what amounted to an illegal usurpation of power. The image of a united front we'd been presented a year earlier in meetings with the administration—with unflinching support for the program and its legality—was largely a façade. The administration, it seemed clear to me, had lied to us. And we were coming closer to understanding the cracks. By the time we met with White House officials in December 2005, Keller had all but made up his mind: The legal concerns about the program were too great to justify keeping it out of public view. The only real question now was not whether the story would run, but when.

That decision was helped along by a chance conversation I had soon after our White House meeting. The administration, I was told, had considered seeking a Pentagon Papers-type injunction to block publication of the story. The tidbit was a bombshell. Few episodes in the history of the Times—or, for that matter, in all of journalism—had left as indelible a mark as the courtroom battle over the Pentagon Papers, and now we were learning that the Bush White House had dusted off a Nixon-era relic to consider coming after us again. The editors in New York had already decided they would probably print the story in the newspaper for that Friday, Dec. 16, 2005, but when word of the Pentagon Papers tip reached them, they decided they would also post it on the Internet the night before. That wasn't routinely done at that time on "exclusive" stories because we would risk losing the scoop to our competitors, but the editors felt it was worth the risk. The administration might be able to stop the presses with an injunction, but they couldn't stop the Internet.

Phil Taubman called us into his office to hear the official word: We were publishing the story, Keller told us. Smiles washed over the room. Rebecca Corbett, who edited the story and had been a strong champion of it, inquired about the play it would get. There'd been talk of a modest one-column headline on the front page. She wanted to know whether we might be able to get two columns, maybe even three. This seemed like a story that would have legs. Keller demurred. He wanted the story to speak for itself; we would be discreet without looking as if we were poking the White House in the eye with a big, screaming headline about NSA spying. This wasn't the moment to quibble over the size of the headline. After all this time, after all the White House's efforts to derail it, we were happy to see the story in the paper at all; in the back of the A section, among the bra ads, would have been fine.

The Reporter as Dramatic Hero: Some Skepticism

There May Be Hard Cases But... The FISA Story Isn't One of Them by David Barron, Harvard Law School

The Times: Not Heroic. Simply Doing Its Job by Marty Lederman, Georgetown Law School

Reply to David Regarding The Times and the NSA Program by Eric Posner, Univ. of Chicago Law School.

NYT? What's Bush's Excuse for Keeping Law violations Secret?
by Dawn Johnson, Indiana University School of Law - Bloomington

Good Disclosures and Bad Ones
by Orin Kerr, George Washington University School of Law

Reply to Marty on NSA Program and The Times by Eric Posner

Defending by "Devotion to the Forms of Legality." "Verging on Fanaticism" by Marty Lederman

The Times, They Are aChangin by Deborah Pearlstein, Woodrow Wilson School for Public and International Affairs at Princeton

More on Marty, the NSA and The Times by Eric Posner

Eric's Surprising Argument for Why Bush Acted Irresponsibly in the FISA Case
by David Barron

Should the Bush Administration Have Sought to Enjoin Publication of the NSA Wiretapping Story? by Eric Posner

A Few Thoughts

I will hopefully write more about this tomorrow or this weekend, but I want to quickly address a few points:
  • Individuals should be held responsible for their decisions, but many homebuyers and homeowners did not have a decision beyond bad mortgage or no home. That is not a decision, but a reflection of the inability of the market to address the needs and concerns of all segments of society. The one who did have a choice, those who invested in real estate in order to profit, should be differentiated from those who did not. Self-help fails when individuals are unable to help themselves.
  • Lang gets at a fundamental issue when he discusses the power differential between borrowers and lenders. The Lochner era of the Supreme Court, named for the 1904 decision Lochner v. New York, was characterized by the adherence to the idea of right to contract. Individual workers were assumed to have the same leverage and power as their employers, thus any legislation to regulate the hours, wages, conditions, etc. of labor was seen to interfere with a worker's right to dictate the contents and terms of his (but not her) contract. The result of this mistaken application of the Due Process Clause of the Fourteenth Amendment was damaging not only to individual workers, but to unions and the long-term health of the economy. When this changed in 1937 under West Coast Hotel v. Parrish, the government gained the ability to bridge the gap between workers and employers. This ensured that the 1935 Wagner Act (among other legislation) would remain constitutional and it paved the way for the Fair Labor Standards Act in 1938. What was true of workers and employers is also true of borrowers and lenders. To paraphrase Lang, borrowers lack the knowledge, expertise, and experience to gauge the market with anywhere near the accuracy with which lenders should be able. Even borrowers who may possess such specialized knowledge simply do not have anywhere near the same resources as the average bank, to say nothing of a Citigroup or a Goldman Sachs. As such, government should step in to help bridge that gap. It is not a double standard to hold those capable of a certain behavior accountable while not doing so for those incapable of such otherwise regulated behavior.
  • Government non-intervention works both ways. In the 1890's, unions were among the most critical of government intervention in the economy because government would invariably intervene on behalf of management in any labor dispute. Today's situation parallels this grievance. Bear Stearns was bailed out (for all intents and purposes), but individual homeowners are not. This reinforces the structural inequality between massive institutions and individuals as well as the need for government to actively stand for those individuals.

“It is an easy thing for men to be deceived by the specious name of Liberty.”

Well, if we’re going all CC on each other…
“During the time men live without a common power to keep them all in awe, they are in that condition called war; and such a war as if every man, against every man… To this war of every man against every man, this is also in consequent; that nothing can be unjust. The notions of right and wrong, justice and injustice have there no place. Where there is no common power, there is no law, where no law, no injustice. Force and fraud are in war the cardinal virtues.”
Thomas Hobbes, Leviathan

EBL, I think you miss the point of Garbo’s original post. It seems to me that it was an argument for the need to reregulate the financial industry, while your response focused largely on the merits of a federal government bail out (of both lenders and borrowers). I think the following line from Garbo’s follow-up clearly states the original point, which you don’t address: "the ultimate goal was not retribution or even the reimbursement of funds lost through speculation, but the formation and structuring of a sound banking system." Yes, Garbo’s post did assign blame for the current crisis, but by focusing on that, you miss the crux of his argument. It was meant to be a forward-looking discussion, regarding how we can avoid the same mistakes that were made.

To address your argument regarding a bail out, however, I disagree with much of what you said. You wrote that
“The problem with Garbo’s argument is that, at best, it only singles out half of the reason for the predicament and as such doesn’t necessarly address the greater issue of Americans procuring more than they can afford”
but this imposes a false equivalency between lenders and borrowers. As financial professionals, lenders were in a position to better know the market, to understand what houses should be worth, and what borrowers would actually be able to pay. Clearly, buying a house is the largest investment most people will ever make, but regardless, most people don’t spend years researching housing markets. They haven’t received training, either through advanced schooling or through their employers, designed with the explicit goal of providing them with an understanding of housing and financial markets. While they are parties to these deals, they aren’t as well prepared to bear the burden of investigating and understanding the deals intricacies. Lenders are, and are often (rightly or wrongly) thought of by borrowers as acting in the borrowers best interests. They are clearly in the more powerful position in this relationship; their standing aren’t equivalent and should not be thought of as such.

You go on to state that

“One could argue that the crisis itself right now is its own best future medicine and overly zealous homeowners who purchased a home with no equity have suffered pain and won’t engage in the same behavior again. But that doesn’t mean it won’t happen in the future when they either forget or are offered an enticing bill of goods”

While Garbo retorts that “When you assert that this crisis may perhaps be its own medicine, you imply that the market somehow could be self correcting, but it is not.”

There are a couple of problems with this line of reasoning.

First, the crisis has already been stopped from playing itself out. For better or worse, the Fed and Bush Administration (read: Treasury Secretary Paulson) have already intervened, with Wall Street rabidly cheering them on. By opening its discount window to non-commercial banks and pushing the JP Morgan-Bear Stearns buyout, the government has effectively announced that a bailout of the financial players is necessary. The question is no longer whether or not the government should interfere with the private market at all (which EBL seems opposed to), but whether it should do so on both sides. As Martin Wolf wrote,

“Systemically important institutions must pay for any official protection they receive. Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large must be restricted… An unregulated, but subsidized, casino will not allocate resources well. Moreover, that subsidization does not now apply only to shareholders, but to all creditors. Its effect is to make the costs of funds unreasonably cheap. These grossly misaligned incentives must be tackled.”

This highlights the real problem with the “Bank X is too big and important to fail” argument: the bank’s profits are accrued privately by the banks, its employees and shareholders, while the costs of investments gone awry are being nationalized.

Second, pain now won’t serve as an effective deterrent to repeating the same mistake.

1) People who aren’t currently in the housing market aren’t effected by the pain. If they aren’t paying attention now, the current problems give them no incentive not to do the same things in 10 years time.

2) Even people who are being hurt now may misremember or misinterpret what led to their predicament when looking back on it later.

3) As noted in my original post, “experts” always manage to rationalize why this time, its different and it isn’t a bubble. Again, look at what people were saying during the housing boom, the dot-com boom, and pretty much any bubble since the advent of academic economics. Every time, you’ll find people explaining why this case is different because something has fundamentally changed the market. Sometimes its true, most of the time its not. Either way, each bubble is different from the last, and has provided little guidance to those in the midst of it to allow them to realize whats actually happening around them.

Letting the system work itself out will also hurt many innocent people, while failing to adequately punish many of those responsible. For the extreme examples, think of Merrill Lynch’s E. Stanley O’neal. Yes, he eventually lost his job as a result of Merrill Lynch’s losses, but before the bubble burst, he also made hundreds of millions of dollars, which he now gets to keep. In the long-term, the interests of financial institutions and borrowers converge – nobody benefits from a borrower defaulting on a mortgage. In the short term, however, finance executives can reap massive rewards while setting their institutions up for an eventual fall. There is a large misalignment between finance executives, and the financial companies that they run.

The solution to all of this is regulation. Prevent the bubbles from being created and getting out of hand in the first place. By definition, bubbles burst; better not to let them inflate in the first place.

UPDATE: Emphasizing my point regarding Merrill Lynch's E. Stanley O'Neal, this morning's NY Times contains the article Down $900 Million or More, The Chairman of Bear Sells:
Only a year ago James E. Cayne’s stake in Bear Stearns was worth more than $1 billion. But on Thursday, Mr. Cayne, the chairman of Bear, disclosed that he had sold all of his shares in the troubled investment bank this week for just $61 million.

While he has not yet moved into his new apartment at the Plaza, which he bought for about $26 million this month, people who have spoken with him say he still has plans to do so, as soon as he sells his current residence on Park Avenue.


Mr. Cayne, unlike many lower-level Bear executives who had large portions of their net worth tied up in stock, also had the benefit of receiving large portions of his yearly compensation in cash. So, he has certainly accumulated enough to live out his retirement years in comfort.

While he lost an absurdly large amount of money in the past few weeks as Bears' stock plummeted, he also walked away having made millions over the past few years, while leading Bear to its eventual fall. I'm curious what his actual net worth is at this point, but given that Plaza apartment, it seems hes not suffering too badly.

UPDATE II: Charlie Munger, co-founder of the law firm Munger, Tolles & Olson and Warren Buffett's Vice-Chairman in Berkshire Hathaway, once wrote that

We [should] heed the general lesson implicit in the injunction of Ben Franklin in Poor Richard's Almanack: "If you would persuade, appeal to interest and not to reason." This maxim is a wise guide to a great and simple precaution in life: Never, ever, think about something else when you should be thinking about the power of incentives...

One of the most important consequences of incentive superpower is what I call "incentive caused bias." A man has an acculturated nature making him a pretty decent fellow, and yet, driven both consciously and subconsciously by incentives, he drifts into immoral behavior in order to get what he wants, a result he facilitates by rationalizing his bad behavior [like a salesman who harms her customers by selling them the wrong product because she gets paid more for selling it, versus the right product -- see, e.g., the mutual fund industry].

...Another generalized consequence of incentive caused bias is that man tends to "game" all human systems, often displaying great ingenuity in wrongly serving himself at the expense of others. Antigaming features, therefore, constitute a huge and necessary part of almost all system design.

...Military and naval organizations have very often been extreme in using punishment [the inverse of reward] to change behavior, probably because they needed to cause extreme behavior. Around the time of Caesar, there was a European tribe that, when the assembly horn blew, always killed the last warrior to reach his assigned place, and no one enjoyed fighting this tribe.

To which can be derived the following lesson, the last section of which is directly relevant to what I discussed above:

The design of tactical incentives -- e.g. bonuses -- is a whole topic in and of itself, and is critically important as your company grows. The most significant thing to keep in mind is that how the goals are designed really matters -- as Mr. Munger says, people tend to game any system you put in place, and then they tend to rationalize that gaming until they believe they really are doing the right thing.

I think it was Andy Grove who said that for every goal you put in front of someone, you should also put in place a counter-goal to restrict gaming of the first goal.

So, for example, if you are incenting your recruiters on the number of new employees recruited and hired, you need to also give them a counter-goal (and tie it to their compensation) that measures the quality of the new hires three months in. Otherwise the recruiters are guaranteed to give you what you don't want: a lot of mediocre new hires.

One of the great unwritten Silicon Valley skewed incentive stories was a major datacenter vendor in the late 90's that incented its salespeople based on bookings of long-term datacenter leases, without sufficient counter-goals tied to revenue collection or the customer's ability to pay. Sure enough, soon the company's reported bookings were heading straight up, revenue was flat, and cash headed straight down, resulting in a truly spectacular bankruptcy. The salespeople got paid, though, so they were happy.

More recently, skewed incentives in the mortgage industry -- mortage issuers getting paid based on quantity of mortgages issued, versus ability to pay -- caused many of the current catastrophic Wall Street financial meltdowns you get to read about every day.

Thursday, March 27, 2008

RE: Garbo's new posting about a responsible plan to end the war:

Sign me up!

As a fun historical parallel - remember in Sept. 2007 when Democratic PACs (I think it was 527s but I could be mistaken) nicknamed General Petraeus 'General Betray Us?' in the Times?

Well, they did the same thing with Eisenhower during World War II when he was supreme Allied commander.

Instead of General Eisenhower, it was 'General Lies and Power'. I'm a particularly big fan of text below the picture


Senator Obama makes an excellent point about diplomacy:

“If FDR can meet with Stalin and Nixon can meet with Mao and Kennedy can meet with Khrushchev and Reagan can meet with Gorbachev, then the notion that we can’t meet with some half-baked dictator is ridiculous.”

When asked specifically about Ahmadinejad, he declared:

“I’m not worried about losing a propaganda war with Ahmadinejad. That guy opens his mouth and I think people see there are problems there.”

More Fuzzy Math

In case you weren't tired of all the shenanigans happening on Wall Street there is plenty of bad math happening with health care too. The theory goes that by adding more patients to an underfunded and understaffed system everything will be fixed. Oh yea, also by having medicare reimbursements so low as to be practically covert doctor taxes more primary care doctors will be trained. Someone needs a desperate lesson in economics and incentives.

A Responsible Plan

It is time to end the Iraq War.


Though I have yet to read his speech in its entirety, Senator Obama's statement, "we need to regulate institutions for what they do, not what they are," distills, I believe, a sentiment underlying my previous post. I take issue with banks or corporations not because they are banks or corporations, but instead for their abuses of a system that is woefully unregulated. Even where regulation does exist, it is un- or under-enforced.

What Glass-Steagall did was not single out banks for punishment or admonishment, but lay out rules for the proper functioning of the financial sector. Commercial banks taking deposits could not serve as investment banks or underwrite insurance. Why? Speculation by unscrupulous bankers and banks had led to widespread lack of confidence in the financial sector. Despite the heated rhetoric of the congressional debate, bankers were not distrusted because of their identity per se, but because of their behavior. Thus, the law set out not to punish them for their past acts, but prevent them from occurring in the future. It set up safeguards to limit what bankers could and could not do for their clients and investors. It provided insurance for investors through the Federal Deposit Insurance Corporation. The ultimate goal was not retribution or even the reimbursement of the funds lost through speculation, but the formation and structuring of a sound banking system.

The government has a similar responsibility to homeowners caught in the mortgage crisis. Not every one of them should be offered a lifeline, but some, if not most, should. The speculators and the gamblers, who sought to get rich quick through "flipping houses," must be separated from the middle-, lower middle-, and working-class individuals and families who wanted to become, or wanted to continue to be, homeowners. The latter should have access to subsidized home loans and greater housing security, such as that proposed by Senators Obama and Dodd.

For Now...

I'll post more in response to EBL in a bit, but I thought that these two articles I came across yesterday might also provide some insight into the current economic crisis, and its relation to the regulatory state.

First, Martin Wolf in the Financial Times: The Rescue of Bear Stearns Marks Liberalisation's Limit
Remember Friday March 14 2008: it was the day the dream of global free- market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Josef Ackermann, chief executive of Deutsche Bank, that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits.

Mine is not a judgment on whether the Fed was right to rescue Bear Stearns from bankruptcy. I do not know whether the risks justified the decisions not only to act as lender of last resort to an investment bank but to take credit risk on the Fed’s books. But the officials involved are serious people. They must have had reasons for their decisions. They can surely point to the dangers of the times – a crisis that Alan Greenspan, former chairman of the Federal Reserve, calls “the most wrenching since the end of the second world war” – and the role of Bear Stearns in these fragile markets.

Mine is more a judgment on the implications of the Fed’s decision. Put simply, Bear Stearns was deemed too systemically important to fail. This view was, it is true, reached in haste, at a time of crisis. But times of crisis are when new functions emerge, notably the practices associated with the lender-of-last-resort function of central banks, in the 19th century.

The implications of this decision are evident: there will have to be far greater regulation of such institutions. The Fed has provided a valuable form of insurance to the investment banks. Indeed, that is already evident from what has happened in the stock market since the rescue: the other big investment banks have enjoyed sizeable jumps in their share prices (see chart below). This is moral hazard made visible. The Fed decided that a money market “strike” against investment banks is the equivalent of a run on deposits in a commercial bank. It concluded that it must, for this reason, open the monetary spigots in favour of such institutions. Greater regulation must be on the way.

The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity, after this crisis is over. They may succeed. But, intellectually, their position is now untenable. Systemically important institutions must pay for any official protection they receive. Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted. This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidised, casino will not allocate resources well. Moreover, that subsidisation does not now apply only to shareholders, but to all creditors. Its effect is to make the costs of funds unreasonably cheap. These grossly misaligned incentives must be tackled.

I greatly regret the fact that the Fed thought it necessary to take this step. Once upon a time, I had hoped that securitisation would shift a substantial part of the risk-bearing outside the regulated banking system, where governments would no longer need to intervene. That has proved a delusion. A vast amount of risky, if not downright fraudulent, lending, promoted by equally risky finance, has made securitised markets highly risky. This has damaged institutions, notably Bear Stearns, that operated intensively in these markets.

Yet the extension of the Fed’s safety net to investment banks is not the only reason this crisis must mark a turning-point in attitudes to financial liberalisation. So, too, is the mess in the US (and perhaps quite soon several other developed countries’) housing markets. Ben Bernanke, Fed chairman, famously understated, described much of the subprime mortgage lending of recent years as “neither responsible nor prudent” in a speech whose details make one’s hair stand on end.* This is Fed-speak for “criminal and crazy”. Again, this must not happen again, particularly since the losses imposed on the financial system by such lending could yet prove enormous. The collapse in house prices, rising defaults and foreclosures will affect millions of voters. Politicians will not ignore their plight, even if the result is a costly bail-out of the imprudent. But the aftermath will surely be much more regulation than today’s.

If the US itself has passed the high water mark of financial deregulation, this will have wide global implications. Until recently, it was possible to tell the Chinese, the Indians or those who suffered significant financial crises in the past two decades that there existed a financial system both free and robust. That is the case no longer. It will be hard, indeed, to persuade such countries that the market failures revealed in the US and other high-income countries are not a dire warning. If the US, with its vast experience and resources, was unable to avoid these traps, why, they will ask, should we expect to do better?

These longer-term implications for attitudes to deregulated financial markets are far from the only reason the present turmoil is so significant. We still have to get through the immediate crisis. A collapse in financial profits (so significant in the US economy), a house-price crash and a big rise in commodity prices are a combination likely to generate a long and deep recession. To tackle this danger the Fed has already slashed short-term rates to 2.25 per cent. Meanwhile, the Fed also clearly risks a global flight from dollar- denominated liabilities and a resurgence in inflation. It is hard to see a reason for yields on long-term Treasuries being so low, other than a desire to hold the liabilities of the US Treasury, safest issuer of dollar- denominated securities.

“Some say the world will end in fire, Some say in ice.” Harvard’s Kenneth Rogoff recently quoted Robert Frost’s words in describing the dangers of financial ruin (fire) and inflation (ice) confronting us.** These are perilous times. They are also historic times. The US is showing the limits of deregulation. Managing this unavoidable shift, without throwing away what has been gained in the past three decades, is a huge challenge. So is getting through the deleveraging ahead in anything like one piece. But we must start in the right place, by recognising that even the recent past is a foreign country.
Second, from The Fed Bank of Minneapolis's Region magazine, an excerpt from a fictional interview with Senator Carter Glass (of Glass-Steagal) fame from December 1997 (emphasis mine):

REGION: It's too bad you needed a banking crisis to get that legislation.

GLASS: It is nearly impossible to get banking reformation in this country without a crippling national emergency, and even then, bankers tell us to wait for better times because their situation is precarious and reform will break them. But when better times arrive, they tell us to wait yet awhile, because reform will upset their fragile prosperity. Bankers and their myrmidons and hired pigwidgins always threaten a torrent of disasters. They think the time is always right to reform others and the time is always wrong to reform them. Furthermore, if Congress waits as bankers instruct and gives some new villainy time to take hold and become familiar, bankers then defend the practice as if it were a birthright of finance handed down to them from Justinian by way of the Medicis and Alexander Hamilton himself, with which it would be impious and disruptive for the government to interfere.

In this fog of selfish rhetoric, all a poor member of Congress can do is keep a list of needed improvements and bide his time until a financial catastrophe gives him his chance, and then he must legislate at once or wait for the next debacle. This is a wasteful, unscientific process. It delays useful remedies until the banking system is racked with infection, and it brings in desperate cure-alls, quack nostrums and overdoses that may be worse than the disease and, though meant to be temporary, often continue for decades after the fever breaks...

Second Thoughts - A Libertarian Response

"Populate the territory uniformly, extend the same rights everywhere, spread abundance and life all over. In this way the state will become simultaneously as strong and as well governed as possible," - Rousseau, The Social Contract, Bk.III, Chpt.XIII

Rousseau's classic statement of communitarianism might seem an overly strong way to begin a response to Garbo's posting, which, on its face, seems moderate in its advocacy that Americans should not prostrate themselves before the pin maker. Like Lang, I agree that the repeal of Glass-Steagal during the Clinton administration, leading to the fall of the barrier between commercial and investment divisions in financial firms, was problematic. The reason, however, is not only because these firms could now engage in high-risk bets with commercial mortgage backed securities, but also because individual home owners were unresponsive and ignorant to their own financial situations. As a result, individuals were financing property they could not afford and the financial firms were packaging and swapping these bad properties while making them look like attractive investments. These two factors - irresponsible investment by firms and individuals over-extending themselves, have primarily led to the current crisis.

The problem with Garbo's post is that he quickly moves the assignment of responsibility to both parties only to the investors. Though claiming he is attacking the idea that money should come before society, his target is not that notion generally, but rather the leaders of financial firms who share only half the responsibility. For example, he asserts that advocating greater personal responsibility will not do; rather the key is a significant amount of new regulatory legislation. However, regulatory legislation is usually not imposed on individual consumers, such as home owners, but rather on the financial firms that lend to them. Lang is asserting that the way to rectify the problem is to deal with the financial firms party to the current crisis, not by imposing or increasing prudence on the part of the individual home/property owners. A closer look at his language illustrates this focus:
“The leaders in the banking world in the United States have not only been forgetful and neglectful of their responsibility to the public but they have forgotten their own best interests, and many of them are reaping now in the distress that confronts them the legitimate results of their own folly and short-sightedness.”

Though this statement by Representative Henry Steagall (D-AL) is nearly 75 years old, it applies no less today than it did during the Great Depression. The Glass-Steagall Act which bears his name along with that of Senator Carter Glass (D-VA) should never have been repealed. It was a short-sighted plan motivated by unmitigated greed and the desire for “greater efficiency.” Call me crazy, but I don't think he is referring to individual home owners when he condemns unmitigated greed and the desire for 'greater efficiency'. This is why I bring in the quote from the Social Contract - Garbo isn't arguing against money dictating terms to society, he's arguing against the rich dictating terms against the poor (and hence for a shift towards communitarianism). Once we reach this point - the argument becomes something more akin to classic liberalism (e.g. libertarianism) versus modern liberalism, an debate that has been hashed and rehashed in far greater detail and with far more eloquence than I can do here.

The problem with Garbo's argument is that, at best, it only singles out half of the reason for the predicament and as such doesn't necessarily address the greater issue (certainly in terms of population) of Americans procuring more than they can afford. If Garbo really wants to deal with the issue, then this other half requires addressing (though I will grant a little bit of ground in terms of the interaction effects between CEO's of financial firms and the idolization effect they have on everyday Americans, e.g. because middle-class Americans idolize the wealth of top CEO's, going after those top CEO's and eliminating their prostration might have second-order effects on reducing the prostration of the majority of the population).

Where then does that leave us? How should we go about facilitating a more prudent individual? One could argue that crisis itself right now is its own best future medicine - that overly zealous homeowners who purchased a home with no equity have suffered pain and won't engage in the same behavior again. But that doesn't mean it won't happen in the future when they either forget or are offered an enticing bill of goods. I'm interested to see what ideas you guys have on that question.

Religion Claims Another Victim

This is just fucked up:

The aunt of a sick Wisconsin girl whose parents trusted in faith rather than medicine pleaded for authorities' help in a 911 call obtained by the Wausau Daily Herald.

The girl, 11-year-old Madeline Neumann, died Sunday from a treatable form of diabetes.

Emergency personnel responded to Neumann's home Sunday after receiving a 911 call from Neumann's aunt, Ariel Gomez. In the call, Gomez pleaded for help because Neumann's mother "believes in faith instead of doctors," the Wausau Daily Herald reports.

"My sister in law is, her daughter's severely, severely sick and she believes her daughter is in a coma. And, she's very religious so she's refusing to take (Neumann) to the hospital, so I was hoping maybe somebody could go over there," Gomez said.

Though I think that this reaction seems slightly off:

With apologies to similar believers everywhere, my first reaction to this is, Wow, these people are some kind of crazy. My second reaction: time to consider a little court-negotiated sterilization.

Seriously. This is America, so people should be allowed to be as religiously crazy as they wanna be--until their beliefs begin endangering other folks, most definitely including their young children. At that point, since you can't practically compel people to give up their beliefs, you need to start thinking about limiting the number of other people they can harm. In this case, that means limiting the number of children these faith-healers can control.

At this point, criminal charges have yet to be filed. But assuming they do, and that jail time becomes a possibility, my argument would be to put sterilization on the table as an alternative. These people clearly didn't go into this with the intent to harm their child. But it's also clear that neither member of this couple is to be trusted with offspring. Ever. And unless they wind up locked up forever--which seems unlikely--you can't trust them not to do something irrational--and lethal--again.

Yeah, I know sterilization carries ugly baggage. But my argument for semi-voluntary snip snip snipping is similar to the one I made (lost somewhere in the archives) back during the saga of Andrea Yates, the post-partum-psychotic mom who brutally drowned her five kids in the bathtub. Since Yates was clearly insane, I could see not sending her to prison forever. But authorities also needed to make damn sure she could never have another kid. Thus the choice: incarceration or sterilization. (As things turned out, of course, Yates' murder conviction was overturned and she wound up in a low-security mental health facility. We can only hope no one is stupid enough to set her free until her child-bearing years are behind her.)

In no way am I suggesting this Wisconsin couple is psychotic. Nonetheless, if early reports are even close to accurate, Mom and Dad just let their child waste away for a month and die--from an easily treatable ailemnt--in the name of faith. (Shouldn't the coma have been a tip off that the prayer-only course of treatment needed some sort of supplement?) So we can argue about religious rights and parental rights and reproductive rights from now until Jesus returns. But, I'm sorry, these people should not be allowed to procreate again.

First Thoughts on Garbo's First Post

Garbo writes "During times of plenty, perhaps we do not need such regulation, but without it how can we prevent the slide into recession or depression?"

During 'times of plenty' is precisely when we need regulation the most. Those are the times when bubbles form, when people begin to believe "No, this time its really different. Technology/ new management techniques/ globalization/ insert-new-buzz-word- here has changed whats possible." Those are the times that lead people to write books with titles like Dow 36,000: The New strategy for Profiting from the Coming Rise in the Stock Market, written right before the dot-com bubble burst (FYI, the Dow Industrial Average peaked at around 14,000 last October,and, as of now, is back to about 12,000); or Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade - and How to Profit From Them, published in 2005 (and updated in 2006, with the new, perhaps even less prescient title, Why The Real Estate Boom Will Not Bust - And How You Can Profit From It.)

It was precisely this type of "irrational exuberance," to borrow Alan Greenspan's description of the dot-com boom, that oversight and regulation of financial markets is meant to curb. Remember the words of William McChesney Martin, Chairman of the Federal Reserve under Truman through Nixon: The job of the Fed is to "take away the punch bowl just as the party gets going."

Lastly, as of yesterday, it seems Treasury Secretary Henry Paulson has come around to the same view, saying that "This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions. These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability." He also said, of giving companies such as Lehman Brothers and Bear access to the Fed's funds, that "Certainly, any regular access to the discount window should involve the same type of regulation and supervision [as the fed has over commercial banks]."

UPDATE: Apparently I may have misread those statements by Paulson. The NY Times puts them in a different context than the above articles.

Wednesday, March 26, 2008

"Restoration Calls...Not For Changes in Ethics Alone"

The economy should be society’s servant. Society should not prostrate itself before “the rulers of exchange of mankind’s goods.” The precipice of economic disaster upon which the United States now rests challenges our nation to again “apply social values more noble than mere monetary profit.” It requires us to re-examine our roles as citizens and the role government may have in the economy. But far from a call to moderate speculative behavior through voluntarily acts of greater responsibility, the economic straits in which we find ourselves require a more demanding set of changes to rectify that which unfettered and unregulated, unmanaged and unfeeling markets have wrought.

The continued deregulation of our economy, particularly the financial sector, has caused enormous harm to the well-being of the United States and its citizens. In this environment:

“The leaders in the banking world in the United States have not only been forgetful and neglectful of their responsibility to the public but they have forgotten their own best interests, and many of them are reaping now in the distress that confronts them the legitimate results of their own folly and short-sightedness.”

Though this statement by Representative Henry Steagall (D-AL) is nearly 75 years old, it applies no less today than it did during the Great Depression. The Glass-Steagall Act which bears his name along with that of Senator Carter Glass (D-VA) should never have been repealed. It was a short-sighted plan motivated by unmitigated greed and the desire for “greater efficiency.”

What it gave us, less than 10 years later, was speculation, recession, and now, in the wake of the Bear Stearns debacle, actual failure. This was legislation designed to protect the interests of the people of the United States—the savers, the depositors, and the investors—and in doing so it made many well-off, if not rich. It regulated the activities of the banks, restricting them from gambling with their investors’ money, be it in dotcom stocks, developing economies, or subprime mortgages. Most of all, this act helped inspire confidence not as a piece of legislation, but because it worked, perhaps not perfectly, but enough to prevent financial disasters caused by public lack of confidence. The repeal of Glass-Steagall and the resulting financial crisis may be separated by a decade, but they point toward a larger issue. During times of plenty, perhaps we do not need such regulation, but without it how can we prevent the slide into recession or depression?

Government ownership is not the answer. Robert Reich contends that even if it were, the fact remains that it is “not even OUR government that's holding the strings.” Continued deregulation obviously offers us no way out. We need a return to responsible and effective regulation, much as we had during the post-war years. Even if behavior were to change, the structures which reward irresponsibility and exacerbate inequality remain because the markets will not regulate themselves. Far from perfect and far from efficient, unregulated markets reinforce inequality and do nothing to correct exploitative, reckless, or otherwise negligent behavior without doing harm to the master of the economy: society. An unregulated economy serves only itself, but a regulated economy can serve us all.

Way To Stay On Message

From an interview with Harry Reid:
Question: Do you still think the Democratic race can be resolved before the convention?

Reid: Easy.

Q: How is that?

Reid: It will be done.

Q: It just will?

Reid: Yep.

Q: Magically?

Reid: No. It will be done. I had a conversation with Governor Dean (Democratic National Committee Chairman Howard Dean) today. Things are being done.
Remember all those complaints of party leaders ignoring what the voting public actually wanted through a brokered convention? It turns out we don't even need to wait for the convention for the fix to be in.

Well thank god we've gotten past the days of smoke-filled back room deals...

Tuesday, March 25, 2008

Medellin - As Entertaining and Certainly More Perverse than Entourage

I'll post the link to Convictions because the debate is too long. However, my first reaction to this ruling is that, while I support States rights, even my Jeffersonian side wouldn't take it this far....

Why Touting Conventional Wisdom Pays Off, Even When You're Wrong

Krugman writes:
Reading some of today’s news, it suddenly struck me: we’re living in the age of the anti-Cassandra.

Cassandra had the gift of prophecy — she saw, correctly, what was coming — but was under a curse: nobody would believe her.

Today, our public discourse is dominated by people who have been wrong about everything — but are still, mysteriously, treated as men of wisdom, whose judgments should be believed. Those who were actually right about the major issues of the day can’t get a word in edgewise.

What set me off was the matter of Alan Greenspan; as Dean Baker like to remind us, news analyses of the housing and financial crisis almost always draw exclusively on “experts” who first insisted that there wasn’t a housing bubble, then insisted that the financial consequences of the bubble’s bursting would remain “contained.”

It’s even worse, of course, on the matter of Iraq: just about every one of the panels convened to discuss the lessons of five disastrous years consisted solely of men and women who cheered the idiocy on.

Now, none of this is entirely new. Consider what Keynes said in 1931:

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.

Still, it seems especially extreme now. And think of the incentive effects. What’s the point of taking the risk of challenging conventional wisdom if, even after you’re proved right, only the guys who were wrong get invited to opine on Charlie Rose?

To which Alex Tabarok responds:
I think the fact is correct so what is going on?

The answer is media incentives. It wasn't just the experts who were wrong, the majority of the American people got Iraq and housing wrong. The war was popular in the beginning and people continued to buy houses even as prices rose ever higher. So what does the American public want to hear now?

The public wants to hear why they weren't idiots. And who better to explain to the public why they weren't idiots than experts who also got it wrong?

Henry Farrell, in response to Tabarok, also chimes in:
It’s an interesting argument, but one that I’m highly skeptical about. One of the golden rules of survey research is that questions that ask about the political views that respondents held in the past are likely to get highly inaccurate replies. The reason is that people’s memories are quite malleable, so that they often reshape their recollections of what views they held in the past so that they accord better with the views that they hold today. I’d be prepared to bet a significant amount of money that the number of people who believe that they supported the war back in 2003 is far lower than the number of people who actually did support the war back in 2003. Indeed, I suspect that the number of people who believe that they supported the war back in 2003 is a minority of the US public. Since the Cassandra-backlash effect that Tabarrok is talking about is contemporaneous, and presumably depends on people’s current beliefs about what they thought in the past, this makes me think that something else is going here (and that this something else has to do with the desire of elite actors in the commentariat to hold onto their privileged position in the public discourse).

Monday, March 24, 2008

The Subprime Primer

A brilliant synopsis of why our economy is screwed. Enjoy.

The wisdom of a split presidency

From Slate, Akhil Reed Amar has an interesting plan for how the Democratic presidential candidates can stop their internecine conflict - by using the 25th amendment to switch the President and Vice President in the middle of the administration. It's an interesting idea but the question I think needs to be asked (and the which Amar mostly avoids) is how important the role of contiguity intra administrations is to achieving political/policy objectives. I'll post my thoughts more extensively in a bit, but here's the link:

Saturday, March 22, 2008


Three weeks ago, the Pew Center on the States released a report highlighting an appalling achievement recently reached by the United States: with 2.3 million people behind bars out of a total adult population of roughly 230 million, the US has become the first and only modern country to imprison more than 1% of its adult population. To put these numbers in context, not only does the US lead every other country in the world in percentage of adults in jail, but we lead in absolute terms as well. China, with a population of 1.3 billion citizens, had the second largest number of imprisoned adults, with 1.5 million.

Our absurdly high incarceration rate (so much for "land of the free"…) is due in large part to the disastrous War on Drugs. As of December 2007, roughly one in every five inmates in jail is there for a drug offense. In addition to the cost of jailing drug offenders, untold hours are wasted by law enforcement officers, as epitomized by the time spent on making 740,000 arrests for marijuana possession in 2006 alone.

Despite its financial costs and its myriad failures (a subject deserving of its own post), thethe ongoing presidential campaign. The lone exception seems to have been the Democratic debate at Drexel University on October 30th, in which the candidates were asked their views on decriminalizing marijuana. While Sen. Chris Dodd criticized the War on Drugs for "filling our jails with people who don't belong there," both Senators Clinton and Obama expressed opposition to decriminalizing marijuana. Of all ofthe Democrats to oppose decriminalization, Obama and Clinton are a particularly ironic duo: if the United States had been more successful in pursuing drug offenders, odds are that neither Senator would be where they are today. War on Drugs has largely been absent from

Neither Bill Clinton nor Barack Obama have made any secret of what their supporters now write off as youthful indiscretions. In his 1992 campaign, Clinton admitted that in the late 1960s, he "experimented with marijuana once or twice," though he infamously denied inhaling. In Barack Obama's first book, he discussed his own history of substance abuse, admitting that while in high school, he indulged in underage drinking, marijuana, and "a little blow when [he] could afford it." (To be sure, experimenting with drugs is not a phenomenon found solely among young Democrats: on the other side of the aisle, George W. Bush has denied using illegal drugs since 1974, and it is rumored that he was arrested for cocaine possession in 1972.)

Rather, Senators Obama and Clinton represent one of the War on Drugs' few redeeming qualities: the fact that its execution has been half-assed since its inception. Despite theof thousands of Americans now serving time in prison for drug offenses, and thethe years, only a tiny fraction of those who have actually used, bought, sold, or transported illegal drugs have actually been caught. No drug enforcement official could claim with a straight face that those behind bars are a majority ofthe unfortunate ones that were caught. hundreds millions more who have been arrested over drug offenders; they are just

While many have attacked the War on Drugs for the financial burden it imposes on the law enforcement and corrections agencies, a less noted though equally important problem is its opportunity cost. Had either Bill Clinton or Barack Obama been caught, it is impossible to say where they, or Hillary Clinton, would be today. (While I vehemently disagree with the theory that Hillary's success is attributable solely to her marriage, it is indisputable that if Bill Clinton has been jailed in his early 20s, Hillary Clinton's life would have been different than it is today.) The country is then faced with an unanswerable question: how many Barack Obamas and Bill Clintons were caught in the War on Drugs? How many now sit in prison due to a drug conviction? How many potential presidents, senators, governors, CEOs, star athletes, captivating entertainers or brilliant academics never were, because at some point their lives were derailed? Remember the numbers: 740,000 arrests in 2006 alone, just for marijuana possession.

December 5th, 1933
, Franklin Delano Roosevelt signed into law the 21st Amendment, officially ending our nation's experiment with the prohibition of alcohol (which President Roosevelt promptly followed by declaring "I think this would be a good time for a beer"). We should honor its 75th anniversary by having an open, honest and frank discussion about what the economic and personal costs of the War on Drugs have been. I'm not advocating for the immediate, unregulated legalization of all drugs, but I do believe that our country needs to reexamine its policies. Our national leaders were once able to admit that Prohibition wasn't working, and that they had made a mistake. Are today's leaders capable of the same?

Friday, March 21, 2008

The beginning of intellectual warfare

Ok that's a little harsh. This blog is being started to keep a group of friends-cum-intellectual aspirations debating, arguing and in contact. The goal is to debate at least 2 separate issues per week, with 1 person taking responsibility for posting an interesting topic in rotation. We'll start by more clearly delineating the rules/topics, so let's do a little brainstorming