<body><script type="text/javascript"> function setAttributeOnload(object, attribute, val) { if(window.addEventListener) { window.addEventListener('load', function(){ object[attribute] = val; }, false); } else { window.attachEvent('onload', function(){ object[attribute] = val; }); } } </script> <div id="navbar-iframe-container"></div> <script type="text/javascript" src="https://apis.google.com/js/plusone.js"></script> <script type="text/javascript"> gapi.load("gapi.iframes:gapi.iframes.style.bubble", function() { if (gapi.iframes && gapi.iframes.getContext) { gapi.iframes.getContext().openChild({ url: 'https://www.blogger.com/navbar.g?targetBlogID\x3d27708445\x26blogName\x3dWatchingTheHerd\x26publishMode\x3dPUBLISH_MODE_BLOGSPOT\x26navbarType\x3dLIGHT\x26layoutType\x3dCLASSIC\x26searchRoot\x3dhttp://watchingtheherd.blogspot.com/search\x26blogLocale\x3den\x26v\x3d2\x26homepageUrl\x3dhttp://watchingtheherd.blogspot.com/\x26vt\x3d8775860279176631146', where: document.getElementById("navbar-iframe-container"), id: "navbar-iframe" }); } }); </script>

Thursday, October 23, 2008

The Real Story on the Palin Selection

The October 27, 2008 issue of The New Yorker contains a story by Jane Mayer entitled The Insiders which provides a more detailed summary of the selection of Sarah Palin as the Republican Vice Presidential candidate. (#1) Die hard Republicans won't want to read it at all. Die hard Democrats may get some sort of train wreck schadenfreude from it. It's the undecided voters, the voters who aren't sure which party has come closer to recognizing the error of their ways and which party seems to be clinging to strategies that produced the current problems we face, who might get something out of the report.

The current established narrative for the rise of Sarah Palin from the obscurity of the frozen Alaska tundra to the hot lights of center stage in a Presidential campaign goes something like this:

1) relatively young woman advances from small town mayor to Alaska governor using "outsider" themes
2) relatively old Senator spends two years trying to convert from Republican Party loose cannon out of favor with its base to old-timey tax cuts and wedge issue Presidential front runner
3) the Senator manages to score the party nomination without truly securing the trust of the Republican base
4) despite nearly three months between securing the nomination and the convention, the nominee is unable to nail down a VP selection because the former Republican "outsider" has no friends on the "inside" of the Republican party and his only preference (Lieberman) is despised by the Republican base
5) with both the nominee and his party unable to find a single insider acceptable to both, McCain attempts to woo disaffected Hillary Clinton independents and revert back to "maverick" mode by choosing the relatively young Alaskan governor with a record as a "maverick"

If one believes that narrative and one views the latest polls on the overall race and specific polls about the drag Palin has become on the ticket, one would be likely to conclude the selection of Palin reflects horrendous political judgment on the part of John McCain. By implication, it might also reinforce a larger concern about McCain's tendencies to "go for broke" and make snap decisions. In this narrative, the core of the Republican Party had little input into the selection and was as surprised and initially concerned as America in general was, though they quickly warmed to Palin after seeing an initial spike in the polls for their ticket.

Mayer's story traces the events leading up to Palin's selection for the VP slot back to her election as Governor in Alaska. Upon taking the oath of office, a number of conservative writers and bloggers began beating the drum to consider her for the VP slot on the 2008 Republican ticket. Mayer cites writer Adam Brickley, who launched the Blogger site http://palinforvp.blogspot.com in February 2007, as a key force who got the buzz started. The idea was picked up by InstaPundit then The American Spectator.

Mayer also recounts the concerted efforts Palin herself made to raise her profile with the very "East coast media elites" she despises by meeting key conservative magazine columnists during stops on luxury cruises to Alaska in June 2007 sponsored by their publishers. Within the month, Bill Kristol was appearing on Fox News Sunday pushing Palin as a great political solution to securing women voters. By July 2007, The Weekly Standard put her on the cover with an "America's Most Popular Governor" story. In another comical anecdote, Mayer states that National Review writer Victor Hanson met with her and was impressed that she described herself as a "fan of history" and an avid National Review website reader. "Fan of history." Hmmmmm, somehow, I don't get that from listening to Sarah Palin.

The basic point of Mayer's story is that efforts to push Palin onto the national stage began as far back as February of 2007 and that Palin herself had her eye on the next rung the entire time. There's absolutely nothing wrong with ambition and anyone running for national office has to have ambition to spare to succeed. However, knowing of this ambition brings out two key points about not only Sarah Palin but the Republican party.

First, though her poll numbers are dropping, a bit of revisionist thinking has emerged that has assigned blame for the damage she has done to the ticket and the Republican Party to John McCain. This train of thought basically blames McCain for pulling a promising but unseasoned future star into the spotlight too early so he could try to pursue a desperate grab for a slice of disaffected Hillary Clinton supporting independents. It also faults McCain for trying to flip back from a position as Republican Party insider and heir apparent needed to win the nomination to his more comfortable (but equally false) "outsider" role. The fact that Palin was actively working for two years to advance up the ladder squashes this narrative entirely. We aren't seeing the campaigning of a candidate who until August 28, 2008 had no idea she had to be prepared for the scrutiny of a national campaign. We are seeing the campaigning and communication skills of someone who thought, and still truly thinks, she has what it takes.

Second, the selection of Palin was not solely the result of John McCain trying to distance himself from what he knew was a very unpopular neo-conservative, incumbent tainted Republican Party. Core portions of the conservative media had been actively pushing Palin and willingly polishing her "brand" for over a year before McCain selected her. That speaks volumes about the learning that has taken place within the right wing of the Republican party (NONE -- they pushed another fundamentalist know-nothing) and the inability of any remaining moderate Republicans to wrestle the control of their party out of the hands of the right wing that steered it into the ditch.

If undecided voters had any doubt before about whether Republicans have learned anything from the Bush years, Mayer's article on the selection of Palin should make it clear. The Republicans haven't learned a thing.


#1) http://www.newyorker.com/reporting/2008/10/27/081027fa_fact_mayer?currentPage=all

Tuesday, October 21, 2008

Taleb and Mandlebrot on the Markets

The October 21, 2008 edition of The NewsHour on PBS aired an interview of Benoit Mandlebrot and Nicholas Taleb and their thoughts on the worldwide economic picture. If the names don't immediately ring a bell, Mandlebrot is famous for his work on fractal geometry (remember those crazy, paisley / psychedelic looking images?) and chaos theory. Taleb is newly famous for his book The Black Swan about unexpected catastrophic events and how they arise from "normal" situations. It becomes apparent very quickly how the two areas of research intersect.

Chaos theory basically states that systems involving even a relatively small number of variable inputs which themselves all may behave according to well understood patterns within well-controlled bounds can produce wildly unexpected outputs. Engineers familiar with control system design or mechanical engineering are very familiar with the concept. That's how a suspension bridge facing a wind blowing laterally across the deck just so suddenly becomes "Galloping Girdy" and collapses into the river below. (#1) Taleb's black swan concept is his label for a pattern of thinking which slowly, systematically, over the course of years, decades or centuries, confirms the practical impossibility of an event occurring --- which then occurs.

The interview segment with Paul Solman will eventually be posted on their site here for viewing:


There have been a few signs that the immediate credit crisis is abating (like a reduced TED spread, slightly higher short term Treasury yields...) but the take of Mandlebrot and Taleb is decidedly pessimistic. DARK in fact.

Two things occurred to me listening to the two discuss their work and its application to the current financial situation. First, Taleb described the lack of "slack" in virtually every system in the financial markets and the larger economy. Paradoxically, this lack of "slack" is produced by the "efficiencies" produced by the incredible concentration of market share in both megabanks and corporations in general. Squeezing every ounce of profitability out of the supply chain -- whether you're making TVs, iPods, or financial instruments -- certainly funnels a huge amount of the overall profit to the firm at the top but leaves no room for error anywhere along the line for one missed delivery, one bad batch of LCD screens, or one bad bet on a currency bet in a hedge fund that's leveraged its assets by a 20x to 50x factor.

Sound familiar?

This is exactly the point made in a book published in 2005 by Barry Lynn entitled The End of the Line. See (#2) for a review.

The assumptions of chaos theory are also worth considering when looking at the current situation. The normal starting point for analyzing a system for chaotic behavior is analyzing its reaction to "normal" inputs, each of which vary in predictable patterns and likely vary in a "continuous" manner. From a mathematical standpoint, a "continuous" input means the rate of change in the value of the input is always finite / limited. Think of a sine wave instead of a square wave.

Worldwide markets are heavily influenced by computerized algorithms which monitor key data and generate trades when patterns of changes are detected in those inputs. These algorithms may be able to handle "square wave" changes in input values (price closed at $90.00 yesterday but opened today at $81.00 without going gradually from $90.00 to $81.00) but they likely assume that their outputs can vary based upon whatever scale the algorithm dictates. That's not a good assumption given circuit breaker mechanisms in markets. More importantly, the algorithms likely cannot accommodate a sudden change in regulation or government / central bank intervention as inputs. Even if they attempt to do so, they most likely cannot anticipate the impact of thousands of other automated traders all suddenly operating outside their original design boundaries and generating their own shocks into the system as inputs.

The gross, irresponsible, over-expansion of credit has produced one of the most frightening "IFs" to ever face our economy and society. The need to solve that problem in a world of highly inter-dependent economies, highly interconnected financial systems and highly computerized trading systems aimed at exploiting the smallest of anomalies in the system seems to remove the IF from the analysis and replace it with a WHEN.


#1) http://www.archive.org/details/SF121

#2) http://boards.fool.com/Message.asp?mid=23143009

Sunday, October 19, 2008

Another Republican Death Bed Conversion

The endorsement of Barack Obama for President by Colin Powell seems destined to be the headline of the day and week of October 19, 2008. I'm not sure what symbolic or practical value the endorsement has for Obama at this point in the campaign. As of October 19, Obama appears to have a seven to twelve point lead in the popular vote, he has turned several Republican states from the 2004 race into his camp and forced his opponent to compete in virtually every other swing state with limited remaining funds. Obama has reached this point by keeping his campaign on an even keel, formulating a 50-state strategy from the very beginning and sticking to that strategy.

The endorsement of Powell and its timing says much more about Powell himself and the Republican Party. Powell's actions as a member of the Bush Administration and after his tenure serve as a microcosm of everything that's wrong with the Republican Party. Numerous books have been written in the past few years about the Bush White House in general and the events leading up to the Iraq war. All of them include a common narrative that indicates Colin Powell was pretty much ignored, if not outright disrespected, from Day One of becoming Secretary of State. Despite his stature coming into the Administration as a former Chairman of the JCOS, he was IMMEDIATELY cut out of the loop by Cheney and Rumsfeld and it became readily apparent to him during the planning of the Afghanistan campaign and in the establishment of CIA-run secret prisons for terror suspects.

By the time the sales campaign kicked off for the Iraq war in Fall 2002, it was very clear to Colin Powell that the core power structure within the Bush White House was not only ignoring any input Powell might have had from a military perspective but withholding facts and decisions that directly affected his responsibilities as Secretary of State. Yet he stayed on.

After UN weapons inspectors publicly reported in January of 2003 they could find no signs of actual nuclear weapons or active development capabilities, the Bush Administration continued beating the drum for an invasion against a phantom threat. In February of 2003, when they needed a trusted face to present the bogus case for war to the United Nations, they selected Colin Powell for the role. Powell agreed to do the presentation, DESPITE knowing Cheney and Rumsfeld had been planning for an Iraq war since September 12, 2001 and DESPITE knowing United Nations weapons experts had failed to find any signs of active WMD programs.

When American forces raced across Iraq, toppled Saddam and had searched most of the country and AGAIN confirmed no signs of WMD stockpiles or any actual capacity to manufacture them, Powell said nothing. Powell said NOTHING at all about the fraud, the catastrophically flawed decision making of the Bush White House or his complicity in the fraud and stayed on as Secretary of State until AFTER the November 2004 election that gave Bush another four years in power.

Powell's endorsement of Obama for President is meaningless because Powell himself has absolutely zero political or moral credibility. Powell's conduct is the epitome of the Republican Way -- any mistake, any catastrophe, no matter how obvious or avoidable is acceptable as long as Republicans are winning and the blame can be shifted elsewhere. Powell is famous in part for his so-called Powell Doctrine -- avoiding the arbitrary, capricious use of American military forces for "soft" goals but going ALL OUT to ensure victory when American forces ARE used. Powell formulated that modus operandi based upon his frustration with the quality of leadership within the military and the government. How bitterly ironic. Powell's failure to recognize the beginnings of another failed American war of occupation and his failure to do the honorable thing after being used as a pawn to sell that failure using forged evidence to the American public and the world are classic failures of leadership and personal integrity. Failures that render his opinion on pretty much anything moot.


Friday, October 10, 2008

Volcker On the Essential Problem

Former Federal Reserve Chairman Paul Volcker appeared on the October 9 edition of Charlie Rose to comment on the international aspect of the ongoing financial crisis. During a larger point about one particular tactical decision involving banks in Britain and Ireland, Volcker actually identified the root problem facing any of the worldwide efforts to mitigate the problem.

He stated that one of the events that led to the realization among central bankers that more coordination was necessary was the decision by the government of Ireland to protect ALL bank deposits. This had the desired affect with depositors within Ireland, calming their fears and reducing withdrawals, but it induced panic with banks in England who worried about depositors transferring balances out of British banks into Irish banks.

That really epitomizes the entire worldwide problem in a nutshell. Think of the entire globalized world economy as a giant baking pan – a square mile in size – filled with one inch of water. The amount of water in the pan CAN go up over time with enough productivity across the world but competitive forces make it difficult for the depth of water in the pan to build up in any one corner without eventually spreading out to the rest of the pan. Now picture that pan sitting on top of a bar stool instead of the ground then imagine trying to pick up and MOVE that baking pan to the ground without temporarily causing all the water to slosh wildly from side to side or corner to corner or slosh over the side and leave the pan.

That’s the fundamental task facing central bankers across the world. In order to stabilize the banking system, each economy has to coordinate with the others to help move their corner of the pan at exactly the same time. The amount of leverage in all of the economies throughout the world is so great that any temporary imbalance in perceived risk or opportunity causes investors to rush towards the same corner or away from the same corner simultaneously.

Using that visual analogy, it seems unlikely that the central bankers of the world -- all operating with different political motivations and perceptions and different economic and financial biases -- will be able to repeatedly reach compatible tactical decisions on a moment’s notice over the coming months to allow the financial pan to be safely lowered to terra firma. More importantly, it requires participating economies and institutions to temporarily suspend their competitive instincts because any action that would normally "win" depositors or investors to their side could trigger a panic somewhere else and still collapse the entire system.

So let's review...

1) a massive worldwide problem
2) the solution requires frequent, perfect coordination among dozens of parties
3) the solution is ENDANGERED by forces normally thought to be good in markets

Yea. This will end nicely.

Sunday, October 05, 2008

BOOK REVIEW: The Dark Side

The Dark Side -- Jane Mayer, 335 pages ( 392 with notes and index)

Exactly two years ago, on October 5, 2006, I made the following comment (#1):

We cannot afford to become too fixated on any one disaster or political crisis with this administration in power. No matter how big the current problem may appear to be, you must continue watching EVERYTHING this administration does because they are ALWAYS capable of making even greater mistakes.

In the past week, Americans watched a politically crippled Bush Administration toss a horribly structured proposal for stabilization of the financial markets on the steps of the Capital for "emergency" consideration. The bill not only failed to pass but spooked the markets to the tune of about one trillion dollars and forced Congress to spend several more anxious days coming up with their own with an additional $150 billion of pork thrown in.

SURELY, that's about all we have to worry about, right? An ineffective war in Afghanistan that's failed to eliminate the Taliban who sheltered Bin Laden. A war in Iraq that has cost $559 billion and counting which hasn't improved stability in the region and has driven Iraq politically into the arms of Shi'ite aligned players in Iran. A $395 billion dollar prescription drug bill passed by lying to Congress and hiding an additional $100 billion dollars in cost from consideration. A reshuffling of domestic agencies under a new Department of Homeland Security that has neither saved money or improved homeland security for terrorist events or natural disasters. And a $850 billion sacrifice to the gods of financial wizardry as the coup de grace.

What else could the Bush Administration possibly do between now and Inauguration to make anything worse? PLENTY. After reading Jane Mayer's book The Dark Side, it would seem obvious that the President and his White House Counsel staff are likely very busy carefully reviewing their options for issuing Presidential pardons or special Executive Orders granting retroactive immunity to Administration personnel involved in America's "War on Terror" (TM) Based upon the information Mayer presents in her book, there would appear to be a large number of officials who will seek and/or require such protection.

Mayer's book is subtitled The Inside Story on How the War on Terror Became a War on American Ideals and the examples and supporting evidence provided state the case well. The chapters in the book provide details on systemic abuses involving:

* extraordinary rendition
* use of medical experts to perfect torture techniques (SERE in reverse)
* flawed legal opinions on torture rendered by the Office of Legal Counsel without consultation with career military or State Department legal experts
* an Abu Ghraib prisoner (Manadel el-Jamadi) who arrived healthy and died within 60 minutes due to mistreatment
* the rendition and torture of an innocent German citizen (Khaled el-Masri) with knowledge of Tenet and Rice
* repeated meetings of the Principals Committee in which Tenet provided explicit details of torture techniques and specific targets approved by Cheney, Powell, Rice, Rumsfeld and Ashcroft

Mayer also provides numerous details on officials in the Military, CIA and Administration who recognized these policies as inherently flawed and counterproductive who worked diligently to slow down and reverse the group think that produced them, despite overwhelming political and career pressure.

Implausible Deniability

In public, the Bush Administration went to considerable efforts to claim that while torture may have happened, it was rare, it CERTAINLY wasn't performed as a matter of policy, those that DID engage in torture did so because of local breakdowns in discipline, not because of any centralized direction. Mayer's book cites a mountain of evidence to the contrary. Most obviously, accounts of treatment from various suspects tortured in CIA black sites all over Eastern Europe and the middle east show REMARKABLE consistency, despite the fact that obviously none of the suspects ever spoke to each other after their capture. Descriptions of the techniques used are exact matches for techniques derived from the SERE manual created by the CIA to condition CIA agents for possible torture treatments they might receive. Those techniques were themselves reverse engineered from a more infamous bible of torture techniques known as the Kubark dating from the early 1960s.

Mayer also cites more potentially damming confirmation of direct knowledge and acquiescence of Cabinet officials of systemic torture. First, meetings chaired by then National Security Council head Condoleeza Rice as early as 2002 and attended by George Tenet, Dick Cheney, Colin Powell and John Ashcroft covered specific interrogation techniques in detail. Mayer writes (page 143):

Knowing how the Agency had been blamed for ostensible "rogue actions in the past, Tenet was eager to spread the political risk of undertaking "enhanced interrogations." However, some members of the group became irritated with Tenet's insistence upon airing the grim details. "the CIA already had legal clearance to do these things, " a knowledgeable source said, " and so it was pointless for them to keep sharing the details. No one was going to question their decisions -- there were the CiA -- they kknw more than anyone else about each case. It's not as if any of the principals were debating the policy -- that was already set. They wanted to go to the limit that the law reuired. But Tenet would say, "We're going to do this, this, and this.'" Ashcroft in particular took offense at discussing such distasteful matters inside the White House. "History will not judge us kindly," he reportedly warned.

On December 9, 2005, Condoleeza Rice publicly stated the following during a trip to Europe: (#2)

The United States does not permit, tolerate or condone torture under any circumstances. The United States does not transport and has not transported detainees from one country to another for the purpose of interrogation using torture. The United States does not use the airspace or the airports of any country for the purpose of transporting a detainee to a country where he or she will be tortured. The United States has not transported anyone and will not transport anyone to a country when we believe he will be tortured.

Where appropriate, the United States seeks assurances that transferred persons will not be tortured.

However, roughly two years prior, sometime in December of 2003, a German citizen named Khaled el-Masri was detained in Macedonia at gunpoint for thirteen days then transported via a CIA jet to Afghanistan where he was held and tortured for 149 days. Numerous officials in the field and within CIA headquarters objected to his detainment, knowing he was innocent, but were overruled by the chief of the Al Qaeda Unit within the CIA, a female who not only personally flew to the field to attend the water boarding torture of Khalid sheik Mohammed but also provided security briefings directly to President Bush.

Lower level CIA staffers convened a meeting with CIA head Tenet some time in May of 2004 and stated an innocent German citizen with a valid German passport was being held in a CIA black site in Afghanistan. Within days, Tenet met personally with Rice an later with Deputy Secretary of State Richard Armitage and explained the situation.

All of this transpired well before Rice's public statement on December 9, 2005. As I stated at the time in December of 2005 (#3)

In short, Condi's comments are the most simple, direct statements of the policy the US should have on torture. If they were true, I would applaud the administration for its moral clarity. In reality, there is concrete evidence the United States is knowingly, repeatedly, intentionally violating these principles. That means we have leaders of our government and military who:

* developed purposely vague policy directives regarding prisoner treatment
to provide the "gray area" that might provide cover from prosecution
* are aware of numerous incidents of torture
* continue to lie to the American public about the entire issue

Now that Condi has gone on record with such simple, declarative language, I can't think of an easier starting point at which to begin prosecuting these people. I would think a first-year law student could handle the evidence and legal issues in this case.

Systemic Legal Malpractice

Mayer does a particularly good job analyzing the communication and strategies of Dick Cheney, his aide David Addington, Donald Rumsfeld, Alberto Gonzales, John Yoo and their circumvention of correcting input from career staffers.

On January 18, 2002, Donald Rumsfeld sent a letter to the Joint Chiefs of Staff stating that field forces no longer needed to follow the Geneva conventions in the treatment of Al Qaeda and Taliban suspects and a day later rescinded an order issued by Tommy Franks that instituted Article 5 hearings for captured suspects to determine their status. Aiming to head off objections from Colin Powell, a legal opinion -- infamously labeling Geneva protections as "quaint" -- was prepared by David Addington supporting these decisions. That letter, which omitted references to existing guidelines and principles which COVERED detainees, resulted in a February 7 2002 policy statement by Bush which stated "As a matter of policy, the United States Armed Forces shall continue to treat detainees humanely and, to the extent appropriate and consistent with military necessity, in a manner consistent with the principles of Geneva." (#4)

Mayer effectively notes the language in the statement left loopholes big enough to drive a truck through. One loophole -- "as a matter of policy" means the guidelines are not deemed a requirement of LAW. Another loophole -- the policy applied to the "Armed Forces" which excludes CIA personnel.

Mayer also sheds light on the struggle between Congress and the Administration over the Detainee Treatment Act and its complete neutralization upon signing. The bill was introduced by John McCain and was intended to explicitly revert to guidelines in the Army Field Manual as the sole policy of the United States on the use of torture in all fields of operation. In the year after the abuses at Abu Ghraib became public, objections to American use of torture became widespread within Congress and McCain attached his language to a Defense spending bill in July of 2005. Congress and the Administration haggled over the proposal for months, eventually producing a veto threat by Bush which would have been his first in his Administration.

After other stories leaked out about the existence of CIA black sites throughout the world, the veto threat was removed and the legislation passed by an overwhelming vote. However, the bill did little good. Before Bush signed the law, Cheney's aide David Addington added a signing statement saying Bush would enforce the law "in a manner consistent with" his Constitutional role as Commander in Chief. That tied the rule to a legion of prior signing statements issued by Bush which consistently assert actions taken as Commander In Chief by definition are not subject to the review of Congress or the Courts since the Constitution grants control of the military solely to the President. (Parenthetically, Addington has been involved in the drafting of over 750 signing statements in Bush's tenure. The review of every one of those signing statements should reach the top of any new Administration's agenda.)

Fortunately for the players involved in our botched War on Terror (TM), the last things most Americans want to think about as their retirement money slips under the water are esoteric issues about misdeeds from seven years of anti-terrorism efforts. Unfortunately for America, one can bet that apathy is precisely what the Bush Administration will be counting on between now and January 20, 2009 as it works to keep people like Dick Cheney, John Ashcroft, Condoleeza Rice, Donald Rumsfeld, Alberto Gonzales, George Tenet, David Addington and John Yoo out of the docket. Make no mistake however. These people knowingly, actively and aggressively established a widespread program of illegal torture that not only hindered our immediate efforts at reducing terrorism but has harmed America's standing in the world for the next hundred years.


#1) http://watchingtheherd.blogspot.com/2006/10/who-needs-october-surprise_05.html

#2) http://www.pbs.org/newshour/bb/terrorism/july-dec05/policy_12-9.html

#3) http://boards.fool.com/Message.asp?mid=23412598

#4) http://en.wikisource.org/wiki/Humane_Treatment_of_al_Qaeda_and_Taliban_Detainees