Relevant and even prescient commentary on news, politics and the economy.

To compare or to contrast

Dahr Jamail and Michael Totten are reporting on the same war, the same groups of people, the same country, the same armies. Both are also photographers.

Can both be reporting true things? Yes.
Can both be offering a perspective that has some value? Yes
Can both be useful in our personal evaluation of the occupation? Partly.

Can both be unbiased in reporting…ahhh, now that is hard to answer. Since we all filter information a second before reading information, how does one avoid shooting oneself in the foot with ‘knowledge’ filtered for our own persuasions (survival imperatives) and self-interest? Out of billions of bits of data, we tend to notice only a few at a time, one at a time.

Best not to talk to one’s own reflection all the time.

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O’Reilly says about Edwards

Bill laments the lack of moral spine of the Far Left.

Remember, no coerced interrogation, civilian lawyers in courts for captured overseas terrorists, no branding the Iranian guards terrorists, and no phone surveillance without a specific warrant.

His statement brought to mind this quote:

A person will worship something, have no doubt about that. We may think our tribute is paid in secret in the dark recesses of our hearts, but it will out. That which dominates our imaginations and our thoughts will determine our lives, and our character. Therefore, it behooves us to be careful what we worship, for what we are
worshipping we are becoming.

– Ralph Waldo Emerson:

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Qwest for the truth

CEO Nacchio of Qwest has a write up in WAPO:

A former Qwest Communications International executive, appealing a conviction for insider trading, has alleged that the government withdrew opportunities for contracts worth hundreds of millions of dollars after Qwest refused to participate in an unidentified National Security Agency program that the company thought might be illegal.

Former chief executive Joseph P. Nacchio, convicted in April of 19 counts of insider trading, said the NSA approached Qwest more than six months before the Sept. 11, 2001, attacks, according to court documents unsealed in Denver this week.
Details about the alleged NSA program have been redacted.

The newly released court documents say that, on Feb. 27, 2001, Nacchio and James Payne, then Qwest’s senior vice president of government systems, met with NSA officials at Fort Meade, expecting to discuss “Groundbreaker,” a project to outsource the NSA’s non-mission-critical systems.

The men came out of the meeting “with optimism about the prospect for 2001 revenue from NSA,” according to an April 9, 2007, court filing by Nacchio’s lawyers that was disclosed this week.

But the filing also claims that Nacchio “refused” to participate in some unidentified program or activity because it was possibly illegal and that the NSA later “expressed disappointment” about Qwest’s decision.

“Nacchio said it was a legal issue and that they could not do something that their general counsel told them not to do. . . . Nacchio projected that he might do it if they could find a way to do it legally,” the filing said.

Mike German, policy counsel for the American Civil Liberties Union, said the documents show “that there is more to this story about the government’s relationship with the telecoms than what the administration has admitted to.”

Kurt Opsahl, senior staff attorney for the Electronic Frontier Foundation, said: “It’s inappropriate for the government to be awarding a contract conditioned upon an agreement to an illegal program. That truly is what’s going on here.”

The foundation has sued AT&T, charging that it violated privacy laws by cooperating with the government’s warrantless surveillance program.

Thinking about the issue raises several possiblities for me if reasonably true:

1. Efforts against terrorism were already underway before 9/11 and have come to light to bolster the Administration’s reputation.

2. The wiretapping is part of a different plan not yet revealed and was begun coincidentally with the terrorist threat as an extra incentive or cover.

3. It takes a crook to catch a crook.

4. Secret programs can be coercion, collusion, or a way to gain market share without the opportunity costs normally associated with new programs.

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Rules of the Markets = Free?

Rules of the market is the mantra I have always advocated, rather than lumping everything together as ‘free’.

Cost reduction was the key benefit claimed by privatization. We conduct a meta analysis of all published econometric studies of water and waste production in cities since 1965. Little support is found for a link between privatization and cost savings. Cost savings are not found in water delivery and are not systematic in solid waste collection. Theoretical expectations for cost savings arise from the benefits of competition and the incentives of private ownership. However, empirical results show the importance of market structure, industrial organization of the service sector, and government management, oversight and regulation.

Most of the academic literature shows government contracting is a sensitive business that requires diligence, planning and management resources, and that it may be unsuited to certain goods and services. Additional rules for overseeing contracting processes may be necessary to ensure agencies prepare properly for contracting, and weigh all options for service provision. In Massachusetts, for example, a commission evaluates proposals for using private contractors prior to implementation.
In a separate paper, Sclar found the commission saved money in Massachusetts by preventing inefficient contracting. He concluded:

The privatization law has created an atmosphere where state agencies are forced to think like private firms as opposed to assuming that a private provider working under contract will automatically solve any problem at a lower cost. It compels state agencies to think through the pitfalls that lie ahead and prods them to be sure they are making the highest and best use of scarce resources in difficult fiscal times. It avoids the squandering of public funds on untested ideas that has plagued privatization efforts in so many other places.

When agencies do not take it for granted that contracting is always efficient, they should be better prepared to manage contracts and may be more willing to reform service delivery systems by more effective means than privatization. At the very least, this research shows that policymakers have good reason to examine the cost-efficiency of the rapidly expanding federal contracting industry — which has doubled in size in the last five years. Any review of contracting practices should determine the conditions under which privatization is a viable way of improving government performance.

A businessman uses rules of the market only, except when selling a product to increase volume of sales. Then he may rely on marketing, which is devised to sell anything. What or who is preventing rationality in government buying, even if one removes from the table the product is worth buying? No one appears able to tackle the issue?…or is it that procurement procedures are well insulated and protected? And why is this not more of an issue from all sides of the partisan divide?

Update:
A GAO analysis of DOD medical service consolidation includes the following:

However, based on the working group’s methodology, the group intended to conduct a more detailed cost-benefit analysis of whichever of the three options senior DOD leadership selected, but the group’s work ceased once the fourth option was formally approved. While DOD approved the fourth option, DOD has not demonstrated that its decision to move forward with the fourth option was based on a sound business case. Based on GAO’s review of DOD’s business case, DOD has described only what it believes its chosen option will accomplish. The business case does not demonstrate how DOD determined the fourth option to be better than the other three in terms of its potential impact on medical readiness, quality of care, beneficiaries’ access to care, costs, implementation time, and risks because DOD does not provide evidence of any analysis it has performed of the fourth option or a sound business case justifying this choice.

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Slow arm of the law

The slow arm of the law in relation to the grand scale of privitization of government bureaucracy stands in sharp contrast to rules about wiretapping and such. Some of this is understandable, but I have seen no proposals. If this is to be the practice, are’nt we a little slow?

As recently as Oct. 3, Defense Secretary Robert M. Gates indicated that no decision had been made on how to apply the new language. In other statements, Pentagon officials have suggested that they would apply the military code to Defense Department contractors. That could leave contractors working for other agencies, such as Blackwater, outside military law.

Neither the Pentagon or the U.S. Embassy in Baghdad responded to requests for comment.

In any case, military lawyers have yet to determine how to put the new language into effect. Among the questions they are wrestling with are these: What categories of crimes should it cover? How should it treat employees who are not American citizens? What are the chances that the provision would be upheld by the Supreme Court?

“There’s also a very open constitutional question about whether we can try civilians in military courts,” said Laura Dickinson, a professor of law at the University of Connecticut and an expert on laws that govern private contractors in conflict zones. Traditionally, there has been resistance to doing so, but Ms. Dickinson said she believes a case could be made that private security contractors authorized to use force would be covered by the code of military justice.

The options under civilian law are little better. The most likely way to prosecute would be through the Military Extraterritorial Jurisdiction Act, which allows the extension of federal law to civilians supporting military operations. Mr. Horton, the Columbia lecturer, said he believed that “a sound basis” existed for using the act to prosecute security contractors.

However, trying a criminal case in federal court requires guarantees that no one has tampered with the evidence. Because a defendant has the right to cross-examine witnesses, foreign witnesses would have to be transported to the United States.

Robert Litt, a former federal prosecutor and deputy assistant attorney general in the Justice Department’s criminal division, said that if anything like the Blackwater shootings occurred in the United States, “within minutes you would have police there securing the crime scene, interviewing witnesses.”

“You’ll have a secure chain of evidence,” he added. “All that requires people on the scene almost simultaneously.”

Several legal experts said that evidence gathered by Iraqi investigators and turned over to the Americans, even within days, would probably be suspect.

Another law that might be applicable is one covering contractors in areas that could be defined as American territory, such as a military base or the Green Zone. But the Blackwater security contractors in the Sept. 16 shootings were in neither place.

It appears the Blackwater ‘issue’ makes for a small proxy skirmish for Maliki, and a possible wedge to actually gain some independence for the sovereign government. Tactical moves for them, but what of US law and order?

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Free market demands rational choice making

WebMD carried this warning about certain foods.

Oct. 10, 2007 — Check your freezer for Banquet or generic store-brand turkey or chicken not-ready-to-eat pot pies with “P-9” printed on the side of the package.

If you have any those pot pie products, the U.S. Department of Agriculture (USDA) says to throw them out or don’t eat them as health officials investigate a multi-state salmonella outbreak.

Salmonella bacteria can cause diarrhea, fever, and abdominal cramps. Most people recover within a week without treatment, but serious complications can occur. Infants, elders, and people with weak immune systems are more likely to become severely ill from salmonella.

The USDA, CDC, and state health officials are investigating at least 139 cases of salmonella in 30 states that were reported this year and that may be related to the pot pies. At least 20 people have been hospitalized in connection with the outbreak, according to the CDC.

There have been shouting headlines about recalls in the press concerning various products. Assuming we are in a trickier environment now in determining safety of products, how is information to be handled to help the consumer know a problem exists?

Home Depot advertizes eco-products but also had to recall spray product that stayed on the shelves after the company recalled product because of the link to respitory problems when used as directed, and accepted the supplier (American) claim it had re-configured the active ingredient, which was actually not accurate. But old product also remained on shelves. Other examples include oscillating fans.

So inventory safety can be tough to monitor even within the US. What of global markets when the same product could have been made in two or three counties (generic drugs).

My apologies to Home Depot for picking on them. This is a global issue.

Not every recall is earth shattering news, but how is a consumer in a free market economy to make the rational decisions to conform to the rational behavior that market theory demands?

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Crunch time ahead?

American Prospect has published an article by Robert Kuttner on parallels between 1929 and 2007.

In researching the book, I devoted a lot of effort to reviewing the abuses of the 1920s, the effort in the 1930s to create a financial system that would prevent repetition of those abuses, and the steady dismantling of the safeguards over the last three decades in the name of free markets and financial innovation.
Your predecessors on the Senate Banking Committee, in the celebrated Pecora Hearings of 1933 and 1934, laid the groundwork for the modern edifice of financial regulation. I suspect that they would be appalled at the parallels between the systemic risks of the 1920s and many of the modern practices that have been permitted to seep back in to our financial markets.
Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials – excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence.
The most basic and alarming parallel is the creation of asset bubbles, in which the purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.
There is good evidence – and I will add to the record a paper on this subject by the Federal Reserve staff economists Dean Maki and Michael Palumbo – that even much of the boom of the late 1990s was built substantially on asset bubbles. [“Disentangling the Wealth Effect: a Cohort Analysis of Household Savings in the 1990s”]
A second parallel is what today we would call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank – e.g. Morgan or Chase – as a proxy for the soundness of the security. It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks – part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed’s discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.
Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s – lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn’t paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction – assuming perpetually rising asset prices – so in a credit crisis they can act as net de-stabilizers.
A third parallel is the excessive use of leverage. In the 1920s, not only were there pervasive stock-watering schemes, but there was no limit on margin. If you thought the market was just going up forever, you could borrow most of the cost of your investment, via loans conveniently provided by your stockbroker. It worked well on the upside. When it didn’t work so well on the downside, Congress subsequently imposed margin limits. But anybody who knows anything about derivatives or hedge funds knows that margin limits are for little people. High rollers, with credit derivatives, can use leverage at ratios of ten to one, or a hundred to one, limited only by their self confidence and taste for risk. Private equity, which might be better named private debt, gets its astronomically high rate of return on equity capital, through the use of borrowed money. The equity is fairly small. As in the 1920s, the game continues only as long as asset prices continue to inflate; and all the leverage contributes to the asset inflation, conveniently creating higher priced collateral against which to borrow even more money.
The fourth parallel is the corruption of the gatekeepers. In the 1920s, the corrupted insiders were brokers running stock pools and bankers as purveyors of watered stock. 1990s, it was accountants, auditors and stock analysts, who were supposedly agents of investors, but who turned out to be confederates of corporate executives. You can give this an antiseptic academic term and call it a failure of agency, but a better phrase is conflicts of interest. In this decade, it remains to be seen whether the bond rating agencies were corrupted by conflicts of interest, or merely incompetent. The core structural conflict is that the rating agencies are paid by the firms that issue the bonds. Who gets the business – the rating agencies with tough standards or generous ones? Are ratings for sale? And what, really, is the technical basis for their ratings? All of this is opaque, and unregulated, and only now being investigated by Congress and the SEC.
Yet another parallel is the failure of regulation to keep up with financial innovation that is either far too risky to justify the benefit to the real economy, or just plain corrupt, or both. In the 1920s, many of these securities were utterly opaque. Ferdinand Pecora, in his 1939 memoirs describing the pyramid schemes of public utility holding companies, the most notorious of which was controlled by the Insull family, opined that the pyramid structure was not even fully understood by Mr. Insull. The same could be said of many of today’s derivatives on which technical traders make their fortunes.
By contrast, in the traditional banking system a bank examiner could look at a bank’s loan portfolio, see that loans were backed by collateral and verify that they were performing. If they were not, the bank was made to increase its reserves. Today’s examiner is not able to value a lot of the paper held by banks, and must rely on the banks’ own models, which clearly failed to predict what happened in the case of sub-prime. The largest banking conglomerates are subjected to consolidated regulation, but the jurisdiction is fragmented, and at best the regulatory agencies can only make educated guesses about whether balance sheets are strong enough to withstand pressures when novel and exotic instruments create market conditions that cannot be anticipated by models.

A last parallel is ideological – the nearly universal conviction, 80 years ago and today, that markets are so perfectly self-regulating that government’s main job is to protect property rights, and otherwise just get out of the way.

We all know the history. The regulatory reforms of the New Deal saved capitalism from its own self-cannibalizing instincts, and a reliable, transparent and regulated financial economy went on to anchor an unprecedented boom in the real economy. Financial markets were restored to their appropriate role as servants of the real economy, rather than masters. Financial regulation was pro-efficiency. I want to repeat that, because it is so utterly unfashionable, but it is well documented by economic history. Financial regulation was pro-efficiency. America’s squeaky clean, transparent, reliable financial markets were the envy of the world. They undergirded the entrepreneurship and dynamism in the rest of the economy.

What caught my eye is also what I have found in Adam Smith.
“Regulated, transparent, and reliable” markets. Even if he met self-regulated, he was a moral philosopher as well.

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Angry Bear Nominations List

National Council of Teachers of English
gives awards for double-speak, an Orwell, just like an Oscar only better.

The NCTE Public Language Award Committee is now seeking nominations for this year’s Doublespeak Award, which is given to a glaring example of deceptive language by a public spokesperson. The words must originate from an American.

While I was not going to use this just yet because I was looking for better sourcing than provided at the NCTE site, I changed my mind because of some of the recent posts.

I propose a collection of economic double-speak, providing some sort of award from Angry Bear, as cool as the one on Dancing for the Stars. No invectives allowed since we are family oriented. This is an undeveloped idea, so is rather primitive, but maybe as an initial trial ballon it is okay. All econ schools allowed.

Some of the award restrictions would include rules about:

1. Transcripts that have been edited, instead of accurate.
2. Links with the quote to help establish context.
3. Extra point for some reasonable background material as links.
4. Name calling must be done on the margins, not the text.

I realize no one listens to English teachers in or out of school, but an Angry Bear nominations list is fun to think about.

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Watch the media reactions

I have read that American Conservative magazine published by Pat Buchanan will release this issue Oct. 8 on General Patraeus.

Whether or not it actually is published this way, this is just an alert for readers to watch what happens in the media when General Patraeus is named with no respect. Sort of a random caveat. No prediction from me.

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