Unforeseen Contingencies

Well, it's the end of the decade, and we here at Unforeseen Contingencies have selected what we think is the top story of the decade, and - so far - that century.

Depressingly, it's the financial crisis. Even more depressing, it is questionable whether the story will ever be told correctly. Was it the private sector being victimized by the government, or was it the free market? Well, it was neither. Here's why.

Paul Krugman usually is not one of my favorite commentators, but he is almost right on target in this NYT op-ed in which he blasts the Republican members of the Financial Crisis Inquiry Commission for trying to remove all blame from Wall Street for the mess we are in. My one reservation is that Krugman calls the Republican position "free market fundamentalism," but it's not. It's protection of well-connected financiers with monopoly power -- exactly what Adam Smith called Mercantilism.

The financial crisis is in many respects an intentional looting of America. It was facilitated by the federal government, but "the gov't vs. the private sector" is a false dichotomy that serves mostly to confuse the public, and also the economists. Forget "gov't vs. private sector," it's a single band of crooks, with members who move back and forth between government and private sector. For example, the U.S. Treasury is practically a Goldman Sachs subsidiary, as we documented in an earlier post.

Or see this excerpt from Ezra Klein's "Wonkbook" today: "More government regulators are bolting to the industry they regulate, reports Zachary Goldfarb:'The president's recently departed budget director is joining Citigroup. The New York Federal Reserve Bank's derivatives expert is joining Goldman Sachs. And numerous investigators from the Justice Department and the Securities and Exchange Commission are joining Wall Street's top law firms. The vast overhaul of financial regulations and the renewed intensity of investigations into white-collar crime has been a boon for regulators, prosecutors and financial policymakers looking to cash in on their government experience and contacts...Lawyers making the move, who often were in the private sector before joining the government, can reasonably expect their income to go from less than $200,000 to $400,000 or more, legal recruiters say.'"

So keep in mind, the "gov't vs. private sector" story makes sense in some settings, but not when it's the same bunch of guys running both sectors.

How did these "Masters of the Universe" cook up the financial crisis? Here's the essence, stripped of niceties and technical details. They knowingly cooked up fraudulent mortgages (e.g. Fitch Ratings took a sample of subprime mortgages they'd already rated AAA and found that 100% appeared to involve fraud -- overwhelmingly on the part of the originator.) Then the banks sold them so they could be turned into mortgage backed securities that the designers themselves admit they do not understand. Then they sold all this toxic waste to unwitting investors, giving essentially phony prospectuses, and then took out hedges against the securities they'd sold. And then every crook involved paid themselves huge bonuses, effectively looting the shareholders of their respective firms, and also fired the risk assessment people after lecturing them they weren't contributing to the bottom line. And let's not forget plenty of cheap credit from the Fed to inflate the bubble. And finally, when it all fell apart, the most politically connected ones convinced the head of Goldman Sachs (oops, I mean ex-head) Hank Paulson to get the Dept. of Treasury and the "politically independent" Fed to bail them out. It's possibly the greatest scam in history, and it is still going on.

It's been facilitated by many, including efficient market hypothesis economists who claim it simply can't happen because markets are perfectly efficient; in part by supply-side economists who tell the lie that everything the private sector does is wonderful if the government would only get out of the way; and in part by progressive economists who spout the nonsense that is the natural consequence of a "deregulation" (that never happened) and the free market." The big debate is whether more power should be given to the band of crooks when they are wearing their private sector hats, or their government hats. It's inane. No one bothers to mention the crucial importance of individual rights, without which there's no free market. I wonder if anyone even understands that markets without protected individual rights are extremely dangerous, destructive things, just as are governments.

When the financial crisis broke into full public view in September 2008, economist Nouriel Roubini (who had warned early on it was coming) warned we were on the verge of becoming the USSR-America and correctly labeled Bush, Paulson, and Bernanke as American bolsheviks, in that they were trying to grab unchecked power and in doing so bail out their associates in the private sector by socializing the losses, i.e. passing them to the politically unconnected majority of us in the private sector. But the system really is not socialism so much as mercantilism. But whatever we call it, it's surely not the free market.

So that's the story of the decade, in our view. The damage is ongoing. May the next decade brings us something much, much better.

Happy New Year.

UC pays its respects to Richard Holbrooke. His politics really weren't ours, but we're sorry to see him gone. Why?

Richard Holbrooke seemed to have relatively decent objectives in mind, and was willing to pursue them in a realistic fashion. He was the key figure in the Dayton Accords that stopped the bloodletting in Yugoslavia. He later played a role in stopping Milosevic's butchery in Kosovo. His solutions weren't optimal, whatever that might be, but they were solutions that ended butchery and laid the grounds for a semblance of peace. It's too bad he couldn't have done the same for Afghanistan.

Rihard Holbrooke, R.I.P.

Unforeseen Contingencies wishes Richard Holbrooke a recovery, full and speedy. We're not big on bureaucrats, nor Democrats, but Holbrooke is clearly an intelligent and thoughtful man who has done some good for the world. May he return to work soon.

While I'd prefer to avoid discussions of current policy, America's present approach to policy is so noxious and "in your face" that it's hard to blog on anything else. Federal government power has greatly expanded of late, particularly under the Bush and Obama regimes; both have greatly expanded the government's ability to intervene in the economy and both have waged war on our civil liberties. The invention of the airport Gestapo (a.k.a. TSA) is a case in point.

A friend of mine worked for the TSA for a short time. He is an ex-USMC parachutist and ex-SWAT team member (from a very rough jurisdiction). He did a short term with the TSA, and quit in disgust. He told me he'd never worked for such a dysfunctional, corrupt, and useless bureaucracy. The TSA is the agency that decided it needed to x-ray or grope airline pilots, allegedly to make certain said pilots didn't put explosive into their underwear so that they could crash their airplanes. Good lord! Underpants bombs are extremely ineffective at best, and if a pilot really wants the aircraft to crash, I think we all can understand that s/he has much more effective methods... like simply crashing the plane. There's no reason at all to scan pilots, if the purpose is ensuring safety.

I don't believe that Janet Napolitano, or Michael Chertoff before her, are really so stupid as to think such scanning makes sense from a security standpoint. So why do they develop such inane policies? Most critics call the TSA's shenanigans "security theatre," meaningless activity designed to make people think TSA is doing something. In this view, such "security theatre" satisfies the public demand for "something to be done" about terrorism, and also helps justify the $8 billion devoted to TSA (and $43 billion spent on DHS) this year.

I'm not so sanguine. I lived in the former Soviet Union; a fair amount of the old ways of doing things remained in place, and I experienced firsthand some of what the Soviets did to cow and control their populace. Subjecting people to warrantless ID checks and searches, humiliating them, and controlling their ability to travel is the essence of the Soviet system, not the gulag. America is becoming increasingly Soviet. I'm inclined to think this is all about controlling citizens, not terrorists.

Does any of this security theatre make us safer? Security expert Bruce Schneier has an eloquent analysis that suggests the new TSA measures are utterly useless for security. He discusses the technical aspects of detecting explosives, the inanity of the new TSA measures, and then observes:

"The truth is that exactly two things have made air travel safer since 9/11: reinforcing cockpit doors and convincing passengers they need to fight back. The TSA should continue to screen checked luggage. They should start screening airport workers. And then they should return airport security to pre-9/11 levels and let the rest of their budget be used for better purposes."

Schneier also has a word for us, the America people: "We have a job here, too, and it's to be indomitable in the face of terrorism. The goal of terrorism is to terrorize us: to make us afraid, and make our government do exactly what the TSA is doing. When we react out of fear, the terrorists succeed even when their plots fail. But if we carry on as before, the terrorists fail -- even when their plots succeed."

We should indeed be indomitable in the face of terrorism, and in the face of intimidation as well...including intimidation from our own government. Schneier doesn't go far enough. The TSA should be abolished. As my friend suggested, it's already a sclerotic bureaucracy. We need to wipe out its "institutional memory" and move to a system compatible with individual liberty. If we need a baggage screening service, let's abolish TSA and start from scratch. But mostly let's just abolish TSA.

Nice video, sad story.



For more details, see this article.

Postscript: For a time, the video didn't work, but seems functional now. But if you cannot access it here, you can get it on the NYT link.

This supposedly is of one the two first things Josef Stalin learned to say in English. It's a good question, especially today.

What goes on here? Evolution, that’s what. Or so suggests Kardeshev theory.

I have blogged little of late, and the little that has appeared here is not up to standard, I think. In part, this blog has come to focus a little too much on current events, and trying to comment of the current world shenanigans has not seemed a very attractive proposition. Too much is happening, and too much of this too much seems very dark for liberty. The Iranian and North Korean nuclear programs advance. Afghanistan is a shambles. Europe is a financial mess. China seems to be on the rise (as well as enjoying the greatest real estate bubble in history). Israel is on the verge of war with its neighbors, who in fact fear Iran more than Israel but can’t admit it. Western Europe is bankrupt. The United States are simultaneously bankrupt and the world’s financial "safe haven." The Republican party and conservatism, destroyed forever in 2008, are now fully in charge, and the Democrats and Progressivism, the unstoppable wave of the future, are now destroyed forever … or at least until 2012. After Senator Mitch McConnell declared that replacing Barack Obama would be the primary goal of the Republicans, Mr. Obama has allied himself with the Republicans and lashed out at his Democrats. Dick Cheney is facing prosecution in Nigeria for corruption. (A nice irony, that.) And Wikileaks is preparing to make public everything that was ever said by everyone.

Trying to comment on all of these is a hopeless task. But as the year is winding to an end, I think it is a nice point for "us" to return to "our" roots.

"Unforeseen contingencies" well describes much of what has gone on of late. The financial mess and the quagmires in Afghanistan and Iraq do not surprise me. But it strikes me that currently the world situation is unusually unstable, unpredictable, and in flux. It’s always possible to make conditional predictions, but guessing at what tomorrow’s conditions will be, even roughly, seems essentially impossible. The unforeseen, unpredictable, unimagined, and unguessed at prevail.

There is a larger sense, though, in which none of this is a surprise. As I’ve mentioned before, as part of the USSR’s SETI program, astrophysicist Nikolai Kardeshev developed a classification system for civilizations, based on level of technological development. In the course of this, he also developed theory concerning necessary institutional underpinnings and transitions from one level to another. In the Kardeshev system, a Class I civilization is one that can control energy resources at the planetary level. He also argues that the transition to Class I is particularly difficult; it is fraught with difficulty as the species in question wrestles with new found power. It's a time when a proto-civilization is most tested: it has an enormous potential to make a sharp advance, and also is most vulnerable to self-destruction.

This is us.

Our primary difficulty is that we are developing technology that puts us on the verge of Class I. But it's less clear that our institutions, formal and especially informal, have advanced as well. Our ethics remain mired in mysticism and faith. Our politics too often is based on the premise that our fellow humans are prey. And we’ve failed to absorb the lessons of our one genuine social science, economics, and have tended to substitute rent-seeking and party lines for it.

Advanced technology in the hands of mercantilists, rent seekers, religious fundamentalists, totalitarians, and anyone else who does not respect the rights of the individual is dangerous. Power in the hands of the malevolent (or the stupid) is a bad idea. Individual rights - property rights, properly understood - are the fundamental constraint by which we must bind ourselves if human civilization is to advance any further. Talk of an alternative model, such as a Chinese-style authoritarian market system, is claptrap. Perhaps something like this works for social insects, but not for a race of individuals.

"We" at Unforeseen Contingencies can’t guess how the near future will unfold. Kardeshev theory predicts rougher times ahead. Humans have evolved this far, and our belief is that we'll successfully make the transition to being a civilization. We'll see what we can say that might help. As ultrarunners, we recognize that even a tiny step forward counts. As aficionados of contingencies unforeseen, we'll enjoy the surprises as they unfold. It beats boredom.

Photo: Russian physicist Nikolai Kardeshev.