Jeff Sachs has made a fascinating transition over his career from Chicago School radical to radical humanist. He's the economist who proposed capitalist "shock treatments" for the economies of Bolivia (great if you were rich, terrible if you were not), and post-Communist Poland (modestly successful), and Russia (unmitigated catastrophe). To his credit, he learned from his mistakes, and by a decade ago was one of the most articulate advocates out there for focusing on how to bring the bottom two billion people in the world into an era of peace and justice. His current gig is one of the best academic institutions out there at the intersection of development and environment. Against my initial better judgment, I have come to respect him as someone who generally knows what he's talking about.
When Sachs says that nukes and carbon sequestration are our only hope, he does not say that because he thinks that's the best answer, or even a good answer, or even a realistic answer. In this talk, he is hanging the fate of humanity on two unproven, incredibly expensive, dangerous, and ambitious technology choices because we have already overshot our chance to fix global climate the easy way. It is a Hail Mary play. It says that deep down, Sachs thinks we are hosed.
I'm not there yet, because I still think that the cure of nukes and failed carbon sequestration is worse than the disease, for a lot of reasons. But when somebody like Sachs starts talking this way, you know we've got an elemental problem.
The potential diversification benefits of more complicated securities appear to be outweighed by the information they destroy.
Information was the first casualty of the electric industry deregulation debacle of the Clinton era, and Enron was the direct result. The twisting of global copyright law to serve Disney and Fox, with collateral damage that is destroying access to information everywhere, is part of the same pattern. The generation or more that it will take the United States to undo the damage it has done in its insane response to 9/11 is a direct result of a two generation long Republican fixation on dabbling with global totalitarianism, in secret. When information disappears, very bad things consistently happen.
The whole reason that capitalism is supposed to work is because the relative value of things to each other can be determined by a dynamic, fast-moving flow of uncoerced and unconstrained information. The tension arises because in the mass chaos of billions of prisoner's dilemma exchanges that define human culture and exchanges of value every day, privileged or missing information gives an advantage. When powerful players are allowed to used privileged or missing information to advance their agenda, the system collapses.
It's not just about collective delusion, or about bubbles. It's also about looting the public trust. We can talk about how social capital and institutional stupidity can create a powerful delusional force field that repels any kind of corrective reality. But that delusion is incubated and enforced by a culture that permits economic and political power to act out of malice and greed on a global scale, without taking responsibility for the consequences of their actions. Dismantling that culture is the biggest single challenge that humans face today.
Well, the Waxman-Markey climate train has left the station. I'll be talking at length about the massive failure that this legislation represents in a future post. But right now, I'm thinking about whether we can salvage anything from the wreckage. Given that we are going to lose this one, the shift should be towards demanding some small-bore concessions that might ease the pain of losing the big fight to implement an effective carbon reduction regime. Just off the top of my head:
Explicitly allow states to impose additional carbon fees, standards, and protocols: The Federal government has not been a leader in this area. Federal legislation should be the floor, not the ceiling. And, states need the money. Just because the Feds are giving away the store, states shouldn't have to as well.
Retain EPA regulatory authority: soon after passage, it will become abundantly clear that this legislation fails to do the job of effectively reducing US carbon emissions. When that happens, we will need the regulatory option that Waxman-Markey seeks to gut.
Kill zombie coal plants: Specify that coal plants that are exempted from BACT requirements under the Clean Air Act are not eligible for free carbon credits. They shouldn't even be alive. There is no reason to give them yet another subsidy.
Kill end-of-life coal plants: Specify that coal plants that have reached the end of their book life (official economic value of zero, fully amortized) are no longer eligible for free carbon credits. It is an elegant, zero-cost way to encourage coal plant owners to move on.
Limit new damage: ban new coal construction that does not include sequestration. Alternatively, set a mandatory maximum new plant emission standard equivalent to a simple cycle gas combustion turbine.
Set a minimum price: the minimum reserve price for carbon credits is $10/ton in 2012, rising by $2/year through 2032. In effect, if carbon markets fail (as they have repeatedly in markets that make the same mistakes we are about to make), we automatically revert to a partial carbon tax. This sets a predictable floor under long-term infrastructure investment decisions, reducing risk and increasing cost-effective carbon reduction implementation.
Fix offsets: offsets from countries that have not implemented verifiable carbon reduction standards are discounted by 80%. Offsets from countries that have implemented verifiable carbon reduction standards (including the US) that have not agreed to subtract those offsets from net allowable carbon emissions are discounted by 50%. All other offsets are discounted by 20%. This reduces the impact of fraudulent and ineffective offsets, and encourages direct, verifiable reductions.
Require fully allocated carbon reduction value for public development of efficiency and renewable resources: public entities that finance and acquire resources that reduce the carbon footprint of recipients of free carbon credits can demand surrender of those displaced credits at full market value. This prevents the subsidized high carbon utilities from free-riding on independent acquisition of carbon reducing technologies. Restricting this to public entities assures that all of the benefits of this modification flow to society at large.
Require fully allocated system benefit value for all aggregated non-utility load shaping and reduction: the reversal of energy production economies of scale will increasingly drive distributed energy production and load shifting by larger customers in a partial reversion to the early days of the grid, a century ago. The critical difference is that these small-to-medium resources are on an a well-integrated grid that can directly benefit from that reversal of scale. To the grid, a synchronized non-utility network of PV/coldwater storage systems reliably delivering dispatchable reductions in baseline daily peaks is indistinguishable from a reliable, fully dispatchable gas turbine at the point of load, with instantaneous system stabilization and transmission reliability ancillary services thrown in. As such, it is an incredibly valuable resource, and should be compensated as such. Embedding this reality in legislation would advance disintermediation of the current, dysfunctional, monopoly regulated utility system by allowing competitive markets for efficient low-carbon energy services to work. If private entities synchronize with public entities, this can be combined with carbon credit transfers.
Ummm... this is not going to make it better:
The Pakistani army's assault against Islamic militants in Buner, in northwest Pakistan, is flattening villages, killing civilians and sending thousands of farmers and villagers fleeing from their homes, residents escaping the fighting said Monday.
"We didn't see any Taliban; they are up in the mountains, yet the army flattens our villages," Zaroon Mohammad, 45, told McClatchy as he walked with about a dozen scrawny cattle and the male members of his family in the relative safety of Chinglai village in southern Buner. "Our house has been badly damaged. These cows are now our total possessions."
Mohammad's and other residents' accounts of the fighting contradict those from the Pakistani military and suggest that the government of President Asif Ali Zardari is rapidly losing the support of those it had set out to protect.
OK, let's review. Our favorite Khmer Rouge wannabe guerrilla army moves heavily armed, battalion-sized units to within 100 km of the Pakistani capital, unchallenged by the Pakistani Army. The Pakistani government orders local residents, who have bravely fighting these guys for weeks, to lay down their weapons and submit to their new overlords. The US panics. Three weeks later the Pakistani army moves in using forces trained to ravage the Indian army in set piece battles and ravage their own unarmed citizens instead, leaving desolation in their wake. The Taliban wander up to the surrounding mountains and watch it all go down from a safe distance. Meanwhile, rumors swirl around the burning question of whether the next US-installed puppet President will be a religious and corrupt wingnut, or yet another clueless and corrupt General.
This is not going well.
Social capital and economic collapse, together at last!
Abstract
I develop a model of (individually rational) collective reality denial in groups, organizations and markets. Whether participants’ tendencies toward wishful thinking reinforce or dampen each other is shown to hinge on a simple and novel mechanism. When an agent can expect to benefit from other’s delusions, this makes him more of a realist; when he is more likely to suffer losses from them this pushes him toward denial, which becomes contagious. This general “Mutually Assured Delusion” principle can give rise to multiple social cognitions of reality, irrespective of any strategic payoff interactions or private signals. It also implies that in hierachical organizations realism or denial will trickle down, causing subordinates to take their mindsets and beliefs from the leaders. Contagious “exuberance” can also seize asset markets, leading to evidence-resistant investment frenzies and subsequent deep crashes. In addition to collective illusions of control, the model accounts for the mirror case of fatalism and collective resignation. The welfare analysis differentiates valuable group morale from harmful groupthink and identifies a fundamental tension in organizations’ attitudes toward free speech and dissent.
For extra credit, there's a great appendix of examples:
1. Preposterous probabilities.
Feynman’s simple reasoning cited in the introduction makes clear that NASA management’s risk estimates —one thousand times lower than those of their own engineers— made no statistical sense. The housing-related bubble and buildup to the current financial crisis abound in even more extreme statements of confidence —nothing short of probability one. In an August 2007 conference with analysts, Joseph Cassano, head of A.I.G. Financial Services, asserted “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions...”.
As late as 2008, in a meeting with investors,“Lehman’s chief financial officer, Erin Callan,... exuded confidence... With firms like Citigroup and Merrill raising capital, an investor asked, why wasn’t Lehman following suit? Glaring at her questioner, she said that Lehman didn’t need more money at the time —after all, it had yet to post a loss during the credit crisis. The company had industry veterans in the executive suite who had perfected the science of risk management, she said. “This company’s leadership has been here so long that they know the strengths and weaknesses... We know when we need to be worried, and when we don’t.”
2. New paradigms: this time is different, we are smarter and have better tools.
Every case also displays the typical pattern of hubris, based on claims of superior talent or human capital. For A.I.G.’s Joseph Cassano, losses being simply unimaginable, “The question for us is, where in the capital markets can we gain the best opportunity, the best execution for the business acumen that sits in our shop?”.
What Feynman termed “fantastic faith in the machinery” is also often vested in computer models and statistical data. Subprime lenders and the banks purchasing the derived CDO’s could thus rely on “a wealth of information we didn’t have before” (Countrywide), fed to sophisticated computer programs:
“ ‘It’s like having a secret sauce; everyone had their own best formulas,” says Edward N. Jones, CEO of ARC Systems, which sold [underwriting and risk-pricing] technology to HSBC... and many of their rivals.”
Closely related is the argument that previous rules of accounting, risk management or economics no longer apply, due to some radical shift in fundamentals. Shiller (2005) documents how such “new era thinking”, variously linked to railroads, electricity, internet, demography or deregulation, was involved in nearly all historical episodes of financial bubbles and manias.
3. Escalation, failure to diversify, divest or hedge.
Wishful beliefs show up not only in words but also in deeds. Enron’s CEO Ken Lay resisted selling his shares throughout the long downfall, pledging other assets to meet collateral requirements, even buying stock back later on and ending up ruined well before his legal troubles began. The company’s employees, whose pension portfolios had on average 58% in Enron stock, could have moved out at nearly any point, but most never did. At Bears Stearns, 30% of the stock was held until the last day by employees —with presumably easy access to diversification and hedging instruments— who thus lost their capital together with their job. CEO James Cayne alone owned an unusually high 6% and went from billionaire to small millionaire in the process (spending most of the intervening months away playing golf and bridge). The pattern is similar at Lehman Brothers and other financial institutions.
4. Information avoidance, repainting red flags green and overriding alarms.
The most literal case of willful blindness occurred after the Columbia mission sustained a large foam strike to its wing’s thermal shield:
“At every juncture of [the mission], the Shuttle Program’s structure and processes, and therefore the managers in charge, resisted new information. Early in the mission, it became clear that the Program was not going to authorize imaging of [damage to] the Orbiter because, in the Program’s opinion, images were not needed. Overwhelming evidence indicates that Program leaders decided the foam strike was merely a maintenance problem long before any analysis had begun.”
Similar “head-in the sand” behavior was extensively documented at the Securities and Exchange Commission, even before its decade-long ignorance of Bernard Madoff’s giant Ponzi scheme was revealed. The Inspector General’s Report (S.E.C. (2008)) thus states:
“The audit found that [the Division of] Trading and Markets became aware of numerous potential red flags prior to Bear Stearns’ collapse, regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of Basel II standards, but did not take actions to limit these risk factors.”
Instead, as reported in Labaton (2008), “the commission assigned [only] seven people to examine [the major investment banks] —which last year controlled... combined assets of $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox [the SEC chairman] more than a year and a half ago.”
5. Normalization of deviance, changing standards and rationales.
How do organizations react when what was not supposed to happen does, with increasing frequency and severity?
“This section [of the report] gives an insider perspective: how NASA defined risk and how those definitions changed over time for both foam debris hits and O-ring erosion. In both cases, engineers and managers conducting risk assessments continually “normalized” the technical deviations they found... Evidence that the design was not performing as expected was reinterpreted as acceptable and non-deviant, which diminished perceptions of risk throughout the agency... Engineers and managers incorporated worsening anomalies into the engineering experience base, which functioned as an elastic waistband, expanding to hold larger deviations from the original design. Anomalies that did not lead to catastrophic failure were treated as a source of valid engineering data that justified further flights... NASA documents show how official classifications of risk were downgraded over time.”
The same pattern of normalizing close calls with disaster shows up as a precursor to corporate scandals and financial meltdowns. Several years before Ken Lay failed to heed V.P. Sherron Watkins’ urgent plea that he and the CAO “sit down and take a good, hard, objective look at what is going to happen to Condor and Raptor [ventures] in 2002 and 2003”, lest the company “implode in a wave of accounting scandals”, he had refused to fire two high-revenue-generating oil traders after learning that they had stolen millions from the company and forged financial documents to hide it. A year later, those very same “rogue” traders used again falsified books to make huge unauthorized bets on oil prices, which went sour and exposed the company to several hundred millions dollars of potential losses (Eichenwald (2005)). In a near repeat scenario, in 2004 AIG Financial Services caused the parent company to be fined $126 million for helping clients engage in tax and accounting fraud. Yet the same manager (J. Cassano) remained in charge and was even put on the newly formed committee in charge of quality and risk control —until his unit blew up the company four years later.
6. Reversing the burden of proof.
At the Beech-Nut Corporation in late 1970’s, tests by the main food scientist suggested that the apple concentrate from a new (and cheaper) major supplier was probably adulterated. Top management responded by telling scientists that the company would not switch suppliers unless they could absolutely prove that it was. At the same time, they made it more difficult for them to conduct inspections. Similarly, at NASA, “When managers... denied the team’s request for imagery, the Debris Assessment Team was put in the untenable position of having to prove that a safety-of-flight issue existed without the very images that would permit such a determination... Organizations that deal with high-risk operations must always have a healthy fear of failure — operations must be proved safe, rather than the other way around. NASA inverted this burden of proof...”
Similar reversals of evidentiary standards and shifting rationales were also documented in the decision process leading to the second Iraq war, particularly on the issue of weapons of mass destruction.
7. Malleable memories: forgetting the lessons of history.
The commission investigating the Columbia accident was struck by how the same patterns had repeated themselves six years after Challenger:
“The Board found that dangerous aspects of NASA’s 1986 culture, identified by the Rogers Commission, remained unchanged... Despite the constraints that the agency was under, prior to both accidents NASA appeared to be immersed in a culture of invincibility, in stark contradiction to post-accident reality. The Rogers Commission found a NASA blinded by its “Can-Do” attitude... which bolstered administrators’ belief in an achievable launch rate, the belief that they had an operational system, and an unwillingness to listen to outside experts.”
In the financial and regulatory worlds, the lessons of LTCM were also quickly forgotten, as were those of the internet bubble a few years later. Such failures of individual and collective memory are recurrent. They were even pointed out (and then forgotten) by a key observer and participant:
“An infectious greed seemed to grip much of our business community... The trouble, unfortunately, is that the shock of what has happened will keep malfeasance down for a while. But human nature being what it is —and memories fade— it will be back. And it is important that at that time appropriate legislation be in place to inhibit activities that we would perceive to be inappropriate.” (Greenspan (2002))
Just in case you were thinking that what Israel and the US are calling Palestine actually looks like a coherent country...
Click to view the full-sized version. Map created by Bill Raymond for The Long War Journal.
Pushing deeper into Pakistan, Taliban militants have established effective control of a strategically important district just 70 miles from the capital, Islamabad, officials and residents said Wednesday.
The fall of the district, Buner, did not mean that the Taliban could imminently threaten Islamabad. But it was another indication of the gathering strength of the insurgency and it raised new alarm about the ability of the government to fend off an unrelenting Taliban advance toward the heart of Pakistan.
Buner, home to about one million people, is a gateway to a major Pakistani city, Mardan, the second largest in North-West Frontier Province, after Peshawar.
“They take over Buner, then they roll into Mardan and that’s the end of the game,” a senior law enforcement official in North-West Frontier Province said....
...“They are everywhere,” one resident of Daggar, Buner’s main city, said by telephone. “There is no resistance.”...
...The Taliban began their assault on Buner in early April, when a battalion of the Taliban militia with heavy weaponry crossed over the hills from Swat to Buner, according to an account in the newspaper Dawn that appeared on Saturday.
You may recall that by early last year, the Taliban was openly operating in company-sized to battalion-sized units in the mountains north of Peshawar, successfully overrunning military outposts that had been in place since the British occupation in the nineteenth century. By fall, Taliban forces were routinely disrupting the primary overland link between Pakistan and Afghanistan, forcing the United States to negotiate a new overland route to supply NATO forces through Russia and Kazakhstan, at considerable logistical and political cost.
In February, the Pakistani government surrendered Swat district to the Taliban, and formally sanctioned Sharia law in the region in an effort to reach a stable truce. Less than two months later, the Taliban has moved heavily armed, battalion-sized units into Buner and taken control, positioning their forces for new strategic moves against Peshawar and Pakistan's capital. The Pakistani military has yet to effectively intervene anywhere in northwestern Pakistan. Meanwhile, cyborg attacks by US military drones have been killing 49 innocent civilians for every individual Taliban operative they successfully target since the beginning of the year, again with the tacit approval of the Pakistani government. This is not a good way to build popular support.
Long War Journal has an excellent run-down on the infrastructure of the new Taliban-al Queda alliance.
There's an excellent little piece in the current Atlantic about just how much trouble we are in economically, complete with spiffy interactive graphics. Did you really think that the $800 billion stimulus package is the big ticket item? That's the little rainbow circle in the lower left.
While the nation looks on in horrified fascination at the slow-motion collapse of an economy being systematically looted, the rest of the world continues to deal with the legacy of the Bush regime's global project of making the world safe for penny-ante totalitarianism. Here's McClatchy's latest take on how that project is going in Pakistan:
A growing number of U.S. intelligence, defense and diplomatic officials have concluded that there's little hope of preventing nuclear-armed Pakistan from disintegrating into fiefdoms controlled by Islamist warlords and terrorists, posing a greater threat to the U.S. than Afghanistan's terrorist haven did before 9/11.
"It's a disaster in the making on the scale of the Iranian revolution," said a U.S. intelligence official with long experience in Pakistan who requested anonymity because he wasn't authorized to speak publicly. Pakistan's fragmentation into warlord-run fiefdoms that host al Qaida and other terrorist groups would have grave implications for the security of its nuclear arsenal; for the U.S.-led effort to pacify Afghanistan; and for the security of India, the nearby oil-rich Persian Gulf and Central Asia, the U.S. and its allies.
"Pakistan has 173 million people and 100 nuclear weapons, an army which is bigger than the American army, and the headquarters of al Qaida sitting in two-thirds of the country which the government does not control," said David Kilcullen, a retired Australian army officer, a former State Department adviser and a counterinsurgency consultant to the Obama administration.
"Pakistan isn't Afghanistan, a backward, isolated, landlocked place that outsiders get interested in about once a century," agreed the U.S. intelligence official. "It's a developed state . . . (with) a major Indian Ocean port and ties to the outside world, especially the (Persian) Gulf, that Afghanistan and the Taliban never had."
"The implications of this are disastrous for the U.S.," he added. "The supply lines (from Karachi to U.S. bases) in Kandahar and Kabul from the south and east will be cut, or at least they'll be less secure, and probably sooner rather than later, and that will jeopardize the mission in Afghanistan, especially now that it's getting bigger."
The experts McClatchy interviewed said their views aren't a worst case scenario but a realistic expectation based on the militants' gains and the failure of Pakistan's civilian and military leadership to respond.
It's worth reading the while thing. Many people who disagree with this assessment of where Pakistan is heading point out that the vast majority of Pakistanis are far more interested in being a modern democracy than they are in becoming a pre-industrial totalitarian theocracy. Those people are correct, but that's beside the point. There is a power vacuum in Pakistan. It is a nuclear-armed failed state, in part because of the military fixation on India as an elemental threat, in part because of the spectacular corruption and venality of Pakistan's ruling class, but mostly because the US seems to be doing its level best to discredit the forces within Pakistan who say that engagement with the world is a good thing.
