Bitter Lemons

From Paul Murphy, writing at the Financial Times Alphaville blog (h/t and lifted bodily from Krugthulu).

Big depositors in Cypriot banks stand to lose circa 40 per cent of their money here, which has drawn plenty of fury and veiled threats from Russia.

But what exactly can the Russians do about this? Sell euros? Tear up double taxation agreements? Murder Cypriot bankers? Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why.

Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable.

The choice is obvious.

Forgive me if I’m just too dense to live, but isn’t this how capitalism is supposed to work?  Yo! Russian travelers:  that citrus you just sucked may be bitter indeed, but you put a bunch of money at in play, and sometimes you lose it.  That has a lot to recommend to our banking sector, of course, but really, if we are ever to have a financial sector that does what it is supposed to do (allocate capital within the real economy and hedge –insure — risk) then we kind bankers to actually bank, and not view themselves as money lenders and casino operators.  I’ve sat in on quant conference tasks (ever want to learn how to trade on derivatives of volatility measures?  Me either), and it’s all fun and games until someone loses an eye.  Cyprus and naughty Russians are just far out enough on the periphery to stand at ocular risk.  But I do think we would be better off if our galtian overlords had just a bit of healthy fear back-crossed into the breed.

Image:  Victor Dubreuil, Barrels of Money, c. 1897  And yes, I have used this one before.  Works here too.

“A Tradition Of Service”

That would be the motto for the Los Angeles County Sheriff’s Department. And it contains your full USDA recommended level of irony for the day.

Via BoingBoing’s Xeni Jardin, we learn that the murder (so far) of three people by an ex-cop, which sparked a remarkable outbreak of shooting of folks accused of DWDBT (Driving While Driving A Blue Truck) is not the only news to come out of LA law enforcement this week. Get your heads around this:

Seven Los Angeles County sheriff’s deputies have been notified that the department intends to fire them for belonging to a secret law enforcement clique that allegedly celebrated shootings and branded its members with matching tattoos, officials said.

The Times reported last year about the existence of the clique, dubbed the Jump Out Boys, and the discovery of a pamphlet that described the group’s creed, which required aggressive policing and awarded tattoo modifications for police shootings.

Investigators did not find that the seven had actually, you know, killed anyone with their arquebuses whilst on night patrol…

…but I can’t say anyone who might be on the receiving end of “aggressive policing” would feel much comfort on that:

One member, who spoke to The Times and requested anonymity, said the group promoted only hard work and bravery. He dismissed concerns about the group’s tattoo, noting that deputies throughout the department get matching tattoos. He said there was nothing sinister about their creed or conduct. The deputy, who was notified of the department’s intent to terminate him, read The Times several passages from the pamphlet, which he said supported proactive policing.

“We are alpha dogs who think and act like the wolf, but never become the wolf,” one passage stated, comparing criminals to wolves. Another passage stated, “We are not afraid to get our hands dirty without any disgrace, dishonor or hesitation… sometimes (members) need to do the things they don’t want to in order to get where they want to be.”

…”We do not glorify shootings,” he continued. “What we do is commend and honor the shootings. I have to remember them because it can happen any time, any day. I don’t want to forget them because I’m glad I’m alive.”

The only good news out of this is that the Sherrif’s department does seem serious enough to actually fire these guys. I suppose you could file that impulse under “damage control,” but hell, I’ll take it.

I’ll add one more thing: being a cop is a terrifically hard job. It’s made harder by the unbelievable availability of firearms for any bad guy (or gal) to wield — which is why so many in law enforcement favor gun control.

But that job becomes harder, IMHO, not easier, the more you militarize the civilian act of policing. Such militarization doesn’t merely include weaponization, tactics and all that; it’s a culture too. And cultures can go very bad.

So I’m not calling down snark and thunder on everyone who does law enforcement. I am saying that as in so much else humans undertake, being a good cop, or department is a matter of eternal vigilance and all that.

Image: Rembrandt van Rijn, The Company of Frans Banning Cocq and Willem van Ruytenburch, known as the ‘Night Watch’, 1642

Just In Case Anyone Was Worried About A Sudden Shortage…

…one more thought on Truth-Vigilante-gate.

I certainly agree with what seems like every front pager at my other bloggy home  Balloon Juice (some more than once!)* feels about the ludicrousness of anyone even having to ask whether or not it might make sense to call out lies in print.  But it still seems to me that for all the fun at the expense of the Grey Lady, one key element in the story has been underplayed.

That would be that covering politics today is actually a genuinely different and more difficult task than it was back when folks like me (folks I knew) first got into the business at places like the Times.

The problem is really simple.  The current Republican elite simply has no problem lying.

In this short post I’m not going to retail even a tithe of the examples available, instead outsourcing just a taste of the tsunami of bullshit that constitutes GOPster public argument to Steve Benen, who himself confines his review to the bullshit spewed by the current frontrunner, that 3-dimensional caricture of Eliot’s trope, one Willard Mitt Romney.

He/they lie all the time.  About anything.  But — and this is the key — for all the “politics ain’t beanbag” and “they all do it” reflexes, this really is a new (ish) phenomenon.

Now, I’m not saying that American politics hasn’t included a lot of lying for a very long time.  But the difference now is that it’s not just the agents — John Adams’ rumoristas or the Swift Boat scum — but the principals themselves who are now willing to retail and repeat direct falsehoods into microphone after microphone.

That’s hard to confront, even for experienced hacks:**  most of us don’t think people will flat out lie to our faces — especially when the lie is easily checked.  When I got started as a reporter, I was certainly trained to expect sources to spin, dissemble, shape their accounts.  But the idea that they would default to flat out lying, as opposed to retreating to it when pressed — that really wasn’t the expectation.

The goal was to write a story in which the spin was unwound.  If you could do that — demonstrate through the totality of your reporting how, say, jobs lost to downsizing were either corporate raiding at its worst or the best outcome for what would otherwise be a bankrupt business — then you’d done your job.

So, yes:  to the question of whether the Times or any journalistic operation should become  “truth vigilantes,” the answer is, obviously, yes.  Still, it’s important to remember that the Times  and its reporters face this problem specifically because the Mitt and his merry men have made the gap between what they say and what actually is so deep and so wide.

I’m not trying to absolve anyone here.  But it is important to condemn the greater sin as well as the lesser. It is genuinely difficult for the individual journalists tasked with the job of covering the election this year to do that job well  because a forty+ year campaign to derange our politics has come to full flower in the Romney campaign.  (Not to mention in GOP politicking and governance across the country.  Think Scott, Daniels, Kasich, Walker, Perry, and all the rest.)

Root causes matter.

*Plus, it seems, all those others on ‘branes in the bloggy multiverse.  I’m not even going to bother to link; throw a rock in this quarter of Blogistan and you’ll hit something relevant on every bounce.

**I’m using the word here in its Fleet St. sense, with love.

Image:  Henri de Toulouse-Lautrec, In the Cafe, 1898

It Really Is A Village

Via Bloomberg (h/t TPM):

Federal employees whose compensation averages more than $126,000 and the nation’s greatest concentration of lawyers helped Washington edge out San Jose as the wealthiest U.S. metropolitan area, government data show.

The key fact to extract from the data:

In recent years Washington has attracted more lobbyists and firms with an interest in the health-care overhaul and financial regulations signed into law by President Barack Obama, according to local business leaders.

“Wall Street has moved to K Street,” said Barbara Lang, president and chief executive officer of the DC Chamber of Commerce, referring to the Washington street that’s home to prominent lobbying firms. “Those two industries clearly have grown in our city.”

Which isn’t to say that the concentration of high end civil service and appointed jobs doesn’t have an impact: 

Update (see the explanation below):  Bloomberg also suggests that well paid (is the suggestion overpaid?) civil servants help drive DC’s rise to the top of the wealth tables:

Total compensation for federal workers, including health care and other benefits, last year averaged $126,369, compared with $122,697 in 2009, according to Bloomberg News calculations of Commerce Department data. There were 170,467 federal employees in the District of Columbia as of June.

Update: As several commenters at the mirror post at Balloon Juice have pointed out (with the usual BJ reticence) this is a red herring, the more so for the conflation of benefits with salary to come up with a compensation figure.

A ruling elite economically and emotionally disconnected from the reality that most Americans recognize.  Which is one of the reasons that both policy and the coverage of and discourse coming out of the center of government is so unbelievably bad.

Update: As noted, several commenters at Balloon Juice pointed out that the reference to highly paid civil servants is a red herring at best, and a slander at worst.  And I agree with that, or at least with the notion that such an implication could be drawn from the above.  What I meant to do by including that last block quote was to include the survey results, but not to suggest that the GS14 working at the Dept. of Commerce is screwing up policy or its presentation to the American people.

The real point I think this very coarse bit of data allows us to draw is that it has become exceptionally lucrative to buy and sell influence…to the point that it becomes very hard to see how to construct a disinterested policy apparatus.  When your exceptionally good living depends on not knowing stuff, or knowing things that ain’t so…well, we’re living with how that ends.  And when the decision makers — Congress, and senior staffers there, and top folks at the agencies, top “journos” (scare quotes to indicate the distance such folks have traveled from actual journalism) — all know exactly how it’s possible to live in this policy-making/policy-influencing nexus, you get a Village with both experience and skin in the game that disconnects them from everyone and everywhere else.

Image:  Simon Vouet, Wealth,  between 1635 and 1640.

Pretty Boy Floyd Had Nothing On These Guys

Towards the end of last week, John pointed out the clueless sociopathy of Jay John Carney’s view of insider trading as a victimless crime.  (Here, the string “Jay John Carney” should be read as “your liberal media at work.”) [Update:  oops.  Apologies to the distinguished White House press sect'y.  How do you spell brain bubbles, anyone?]

I just want to add that John’s reaction — that someone using private information to gain an advantage in a two-party trade has got a victim all lined up — is not merely obvious; it’s been studied.

That is: you can imagine a hand waving argument that because each party has their own reasons to enter a transaction, then even the “outsider” on an insider trade gains what he or she desires from the exchange, otherwise they wouldn’t make the deal.   Since that motivation is untouched by the knowledge that the counterparty possesses and they do not, what’s the problem?  That’s my rough approximation of the glibtard case, at least.*

The problems with this crayon-level argument are pretty plain, I’d say, the most glaring, to me, is that assumes that each choice exists only within the narrowest possible slice of time.  Or, as an economist friend of mine put it in response to Carney’s “reasoning” (sic!):

The argument that trades are voluntary so everyone benefits is clearly only true ex ante – that is to say on the basis of the original biased information.  The guy who gets stiffed clearly wouldn’t have made the trade if he’d had the same information as the insider.  You might as well make this argument to justify dodgy second hand car sales or street trading swindles.  The guy who buys a lemon from the dealer who has hidden its faults expected to make a gain but that doesn’t mean he actually does or that the dealer isn’t a crook.

Beyond any mere ridicule of the rich-people-can-do-no-wrong that defines the Village view, the point I think John was making is that insider trading has both individual victims — those who were cheated out of what they would have gained had there been full knowledge of what was going on for both parties to a trade — and systemic costs that we all bear.

Surprise! That turns out to be something people actually know something about

I’m not going to claim that the clutch of papers I turned up in a swift surf through the literature  is anything remotely like an authoritative review of the current state of research on insider trading.  But what struck me is how easy to come up with a bunch of different angles on the problems insider trading produces for markets as well as individual investors.  Here’s an old analysis — it dates from 1991, which amounts to not much more than a mathematical formalization of a penetrating glimpse of the obvious:

In the absence of insider trading, and as long as managers’ salaries arepositively corelated with their firms results,managers will make such choices efficiently, and consequently such choices have previously received little attention, we show that, in the presence of insider trading, managers may make such choices inefficiently…More generally, the analysis of this paper suggests that the extent to which insiders may trade in their firm’s shares has considerable effects on the agency problem in corporations….

…ya think?  Snark aside, the important point is that an insider’s actions don’t begin and end with the transaction. One set of victims in an insider trade are those who hold some share in whatever enterprise or instrument is being traded.  It’s not just that insiders have more information than a counterparty, but that they have power to affect what their companies do — which means their incentives no longer align with everyone else connected to that enterprise.  In other words:  direct victims of insider trades include not just counterparties, but shareholders (or analogous parties-of-interest) in any given setting.

Then there’s this study from 2003.  Here, Julan Du of the Chinese University of Hong Kong and Columbia’s Shang-Jin Wei report on the impact of insider trading on market volatility — basically how insider trades affect how fast (and how much) prices change on a market.

They conclude:

More insider trading is found to be associated a higher market volatility even after one controls for the volatility of the real output growth, volatility of monetary and fiscal policies, and maturity of the stock market. Moreover, the quantitative effect of insider trading on market volatility is also big when compared with the effect of the volatility of other fundamentals.

But who cares, or who should?

All of us. Wild changes in prices driven by insiders taking advantage of their privileged position undermine the entire purpose of capital markets.  Du and Wei again:

Market volatility affects the incentive to save and to invest. In almost any model with a representative agent maximizing utility under uncertainty, the more volatile the asset market, holding the average return constant, the less the agent will save, and hence the less the investment will be. A certain degree of market volatility is unavoidable, even desirable, as one would like the stock price fluctuation to indicate changing values across economic activities so that resources can be better allocated. However, precisely because stock prices are supposed to serve as signals for resource allocation, excessive volatility that is not related to economic fundamentals would diminish the signaling function and impede resource allocation.

Or, to translate out of econ-geek speech:  markets are supposed to allocate capital, sending investor cash to support productive investment.  Mess with that, and the sorting function of the market, “the invisible hand,” to steal a phrase, starts to fail.  Investment decisions are distorted and we end up with a less productive economy as a whole than we would have without the thumb on the scales applied by greedhead wealthy corporate insiders seeking yet more loot than they already possess.

__

All this is the long way ’round of saying that when our Galtian overlords f**k with market mechanisms in any of the splendid variety of ways they have schemed innovated, there are certainly individual losers involved.  But the more consequential reality is that messing with the financial markets threatens the real economy — and that’s where all of us live.  The foreclosure crisis begins as a financial disaster.  It brings us to ruin because now 15 million actual homes are underwater in cities and towns across the United States…and that guts the whole damn country.

It’s not that eleven years in jail is too much for one misunderstood genius.  Rather: just one financial felon behind bars is orders of magnitude too few.

*Here’s that case from the horse’s ass mouth — which would be Jay John Carney himself, from the piece to which John originally linked:

But are they [insider trader Raj Rajaratnam’s opposite numbers) really harmed? Of course not. No investor was ever induced by Rajaratnam to sell a stock. Stock market transactions take place impersonally, without regard to who is on the other side of a trade.

Saying that investors wouldn’t have sold if they had Rajaratnam’s information doesn’t make the sellers victims of Rajaratnam’s trading. Even if Rajaratnam hadn’t bought the stock, they still would have sold while being in a position of relative ignorance compared to him.

Oy.

Images:  Francisco de Goya, Robbery, c. 1794

Jan Provoost, Death and the Miser, before 1529.

…Til It’s Gone

(Cross-posted at Balloon Juice)

This is a follow up to John Cole’s Thug Nation observation.

He’s right, of course: we’ve allowed our fears, and the cynical manipulation of those night sweats, to lead us to surrender rights and values that a decade ago we might have thought untouchable.

It is funny – in a tragic kind of way — that someone like the odious Ken Cuccinelli can claim that a mandate to purchase health insurance is an assault on liberty, while actual, unequivocal, physical and mental tyranny passes without comment.

Which is not to say that I am unsurprised that the Big Lie party plays in that particular sandbox.  Rather, it is the fact that we don’t deny such folks the regard of civil society just shows how far we’ve sunk.

That is:  horrible as the story of Private Bradley Manning’s incarceration is, it should come as no surprise to anyone.

I say so so baldly because of a meaningless coincidence.  Just yesterday, I happened  to finish Dave Eggers’ remarkable book Zeitoun, a work I recommend to anyone reading this.

There, Egger tells the story of one family’s experiences during Katrina.  The title character, Zeitoun, a Muslim from Syria moved to New Orleans, where he met and married Kathy, a convert to Islam, and with her, put together a successful business as a painter, contractor, and property owner/manager.

When Katrina came, Kathy and their children left the city before the storm, eventually reaching friends in Phoenix.  Zeitoun stayed, feeding abandoned dogs, rescuing those he could with a canoe he’d bought at a yard sale, checking on his property around town – until he was arrested without warning or explanation, denied a phone call, and disappeared into a makeshift prison system set up by FEMA, in which all normal recourse to courts and process disappeared.

Here is Egger’s description of the first makeshift outdoor prison in which Zeitoun found himself, set up withing  a couple of days after Katrina hit in the New Orleans train and bus station:

…The parking lot, where a dozen buses might normally be parked, had been transformed…

Chain-link fences, topped by razor wire, had been erected into a long, sixteen-foot-high cage extending about a hundred yards into the lot.  Above the cage was a roof, a freestanding shelter like those at gas stations.  The barbed wire extended to meet it…

It looked precisely like the pictures … [Zeitoun had]seen of Guantánamo Bay.  Like that complex, it was a vast grid of chain-link fencing with few walls, so the prisoners were visible to the guards and each other….

The space inside [each] cage was approximately fifteen by fifteen feet, and was empty but for a portable toilet without a door.  The other object in the cage was a steel bar in the shape of an upside down U….

[Prisoners] could stand in the middle of the cage.  They could sit on the steel rack. They could sit on the ground.  But if they touched the fence again there would be consequences….

The men were not given sheets, blankets or pillows…They asked [the guard] where they were supposed to sleep. He told them that he didn’t care where they slept, as long as it was on the pavement, where he could see them.

It gets worse from there.  With Zeitoun’s arrest, the rest of the book reads as if Kafka met Cormac McCarthy in some dive in the French Quarter.

As Eggers documents, Zeitoun was both a witness to straight physical torture, and, if being forced to dig out an infected splinter with the shards of a broken Tobasco bottle counts, was a victim of it too.

The kind that leaves less marks — that too.  Certainly, if you run the simplest of tests:  what would one say of such treatment if it were documented in Iran, say, or North Korea, then what Zeitoun suffered- along with hundreds of others, American citizens and legal residents — was a gross violation of basic human rights.

And all of this was done through a “system” that most closely resembled the arbitrary exercise of the state monopoly on violence we associate with tinpot dictatorships.

Which is to say is that the transformation of America into anything  but a shining city on a hill has been unfolding for a while.

It was happening right in front of us back their in the Big Easy, when an incompetent and often criminal administration sought to mask their grotesque failures in fights against a mythical terrorist threat along the levies.

It was happening before that, when the GOP fought the 2002 election on the “with us or with the terrorists” platform.

It is sure as hell with us now.

I drove home tonight through the pleasant neighborhood in which I am privileged to live.  I looked at the quiet streets, the trees, the lights in ground floor windows as folks got ready for dinner.  And I thought of a friend of mine who lives a few blocks from me, a rich guy, who told me recently that he was moving a significant chunk of his money to Canada – that he actually went to Montreal in person to open the account – because as an old Jew whose dad had raised him in the memory of the ‘30s and ‘40s, there was the whiff of those times coming round again.

Travelling along these streets, there’s no visible sign that my friend might be right, that the banks may continue to go sour; that some crazy act in New York or Chicago or Dallas might set off another round of Hunt The Other; that passports might not work so well; or, as Eggers writes of Zeitoun, that men and women in black vests may burst into your own building and heave you down a hole into which you simply disappear.

But it could happen here.  To anyone, to any of us.  We know it can.  It already has.

Images: Fra Angelico, St. Lawrence before Emperor Valerianus, 1447-1450

Gustave Doré, Newgate Exercise Yard, 1872

Master E. S., Temptation of Despair, c. 1450.

A Nation of Secrets

(Cross posted at Balloon Juice)

So, Wikileaks tells us that Arab nations don’t like Iran very much.  That Qadhafi likes blondes. That Putin and Berlusconi don’t mind stacking up some green together.  There is more serious stuff there too, of course, (e.g. Red Crescent gun running; North Korea/Iran putting the ballistic missile evil in that “axis of evil” stuff) and no doubt, more to come.

I’m hearing the arguments we all could predict.  Larry Sanger, one of the founders of Wikipedia, has written of his view that the global dump of diplomatic secrets is (a) dangerous to individual lives and to teh project of making sound policy in a dangeraous works (b) so indiscriminate that it can’t be seen as attempt to bring transparency on specific government misdeeds being covered up. Rather, Sanger argues, this is what enemies of the United States do, in what seems to him to be a transparant assault on US capacity to do anything for good in the world.

Josh Marshall, less explosively, says something similar, writing

I don’t recognize what Wikileaks is doing here as some righteous act of government transparency. It’s more like an attack, albeit one with consequences which can easily be overstated.

Me — I think “attack” is one of those words that’s easier to write than to defend.  My impression, supported by only one quick conversation with someone with actual experience in the national security apparatus, is that this is less an attack than relatively harmless vandalism — but that’s not a position I can defend with any vigor.  I just don’t know.

__

But what I do know is that this leak is a reminder of what it means to live in a national security state.  Not in the sense that these particular documents impinge on my civil liberties or yours.  Rather, it’s the combination of sheer volume — that quarter-of-a-million cables number — and the banality of so much of what’s come to light so far.  (I guess I’m glad to know that “nurse” is a euphemism in Libya too…but still.)

We live enmeshed in secrets.  The Harvard historian of science Peter Galison has been digging into the empire of unknowing that our government now rules, and I just reread this remarkable paper, written all the way back in 2004.  Consider this:

The number of carefully archived pages written in the open is large. While hard to estimate, one could begin by taking the number of items on the shelves of the Library of Congress—one of the largest libraries in the world: 120 million items carrying about 7.5 billion pages, of which about 5.4 billion pages are in 18 million books…

…Some suspect as many as a trillion pages are classified (200 Libraries of Congress). That may be too many. 2001, for example, saw 33 million classification actions; assuming (with the experts) that there are roughly 10 pages per action, that would mean roughly 330 million pages were classified last year (about three times as many pages are now being classified as declassified). So the U.S. added a net 250 million classified pages last year. By comparison, the entire system of Harvard libraries—over a hundred of them—added about 220,000 volumes (about sixty million pages, a number not far from the acquisition rate at other comparably massive universal depositories such as the Library of Congress, the British Museum, or the New York Public Library). Contemplate these numbers: about five times as many pages are being added to the classified universe than are being brought to the storehouses of human learning including all the books and journals on any subject in any language collected in the largest repositories on the planet.

Galison in this piece focuses on the irrationality of the classification scheme, and it’s voraciousness.  Secrecy breeds secrecy; knowledge disappears from view on a data-level invocation of the one-drop rule.  Galison tells us that there aren’t that many people empowered to imprison information in the classification gulag:

…Just over 4000 for the whole of the United States—who bear the title of Original Classifiers. Only this initiated cadre can transform a document, idea, picture, shape, or device into the modal categories Top Secret, Secret, or Confidential. And of these 4132 or so Original Classifiers, only 999 (as of 2001) are authorized to stamp a document into the category Top Secret.

Those few people are the unmoved prime movers of the classified world—it is they who begin the tagging process that winds its way down the chain of derivative classification. For every document that subsequently refers to information in those originally classified gains the highest classification of the documents cited in it. Like the radio-tagging of a genetic mutant, the classified information bears its mark through all the subsequent generations of work issuing from it. More numbers: in 2001 there were 260,678 original classifications (acts that designated a body of work classified) and 32,760,209 derivative ones. A cascade of classification.

All this (and more — really, go read the whole thing) leads up to the point that returns us to the depressing glimpse of the way we live now produced by the Wikileaks dump. That would be Galison’s depiction of the actual impossibility of rational secrecy. What we get instead of security, he argues, is the dystopia Thomas Pynchon saw in The Crying of Lot 49:

…a universe so obsessed with concealment and conspiracy, with government and corporate monopoly control of information, that the causal structure and even the raw sequence of events hovered perpetually out of reach…Secret societies with private communication desperately tried to counter the monopoly on information—Pynchon’s world crawls with disaffected engineers trying to patent Maxwell’s demon, would-be suicides, and isolated lovers all seeking to break the out-of-control monopoly of knowledge transmission.

Galison has a number of targets in this piece.  But the biggest one, or at least that which resonated now as I read this essay again, is that once you set out down a road where each unknowable fact needs its hedge of other secrets to preserve the original wall of ignorance and so on…you end up in a position where it becomes impossible for the governed to give informed consent to their governors.

There is the obvious problem, of course:  bits of knowledge that disappear into the nothingness of the security apparatus, not because of any danger they pose, but because they impinge on the autonomy of the state.  Things that if we knew them we’d react badly to, the sweetheart deals or the unobservered f**k ups that it’s just easier (for some) if hoi polloi don’t know.

But those are probably the easy misdeeds to correct:  if the catastrophes are obvious enough, then there are threads to pull if we had more McClatchy’s and no Foxes on the job.  The deeper issue is that of the paternalistic state, one in which secrets are kept simply because everything runs so much more smoothly if we don’t know precisely what is being done, to and for whom.  Here’s Galison again:

In the end, however, the broadest problem is not merely that of the weapons laboratory, industry, or the university. It is that, if pressed too hard and too deeply, secrecy, measured in the staggering units of Libraries of Congress, is a threat to democracy. And that is not a problem to be resolved by an automated Original Classifier or declassifier. It is political at every scale from attempts to excise a single critical idea to the vain efforts to remove whole domains of knowledge.

That’s right, if unsatisfying. I see no sign that things will change soon; the national security state has too many layers of justification (many classified, of course, but trust us….) to suggest that the ratio of classification to declassification is going to change anytime soon.

Which, by the long road home, leads to Wikileaks.

__

I understand the view that unfiltered dumps of classified documents about anything can be reckless, or worse.  But at the same time if Wikileaks did not exist, it would be invented.  When we make more secrets than knowledge we can share, that ever-growing Fort Knox of unknowing will inevitably draw its safe crackers.  And if we are horrified when those crackers actually steal something we care about, we might want to look again at how we decide how much we think it wise not to know ourselves.

Images:  James Jacques Joseph Tissot, “The Harlot of Jericho and the Two Spies,” c. 1896-1902.

Diego Velázquez, “Las Meninas,” 1656–1657.

Lest We Forget: How The Banks Are REALLY Screwing Us In The Foreclosure Mess

Everyone, and I mean everyone you ought to be reading, has been working through the mechanics and the meaning of the foreclosure fraud being performed on the nation by our biggest banks.  For a quick overview, head on over to Rortybomb, just read your way down, and check out Naked Capitalism as well.  I promise you, once you start down the trail of links, you’ll have days of infuriating study ahead of you.

But for all the justified outrage at the simple disdain for the concept of property rights and the rule of law* there’s something else being missed here, something that astute observers have commented on, but that seems to be a bit obscured as we all, understandably, rubberneck in horror at the trainwreck that the major banks have made of the foreclosure process.

And that is that the entire foreclosure endeavor is in fact a huge imposed cost on American homeowners and our economy; it almost certainly runs against the long-term interests of the financial system as whole, whatever the incentives may be for individual companies (and it may well be a long term fail for many of the short-term beneficiaries as well).  Foreclosure as it is being practiced now is likely to be a net negative for homeowners now, to the point that subsidizing in some way those who got into trouble is economically rational, even if it might be galling to those who’ve paid up and gone about their business.

At least, that’s how I read this paper by John Campbell and Stefanio Giglio and my MIT colleague Parag Pathak, “Forced Sales and House Prices.”  It uses an ingenious trick to isolate the implications of forced foreclosure sales for prices of both the foreclosed home and nearby properties by tracking such sales in comparison with other forced sales, like those that follow the death of an owner.

Their results are of a sort fairly common in applied or empirical economics:  quantifications of the seemingly obvious.  Foreclosed properties sell at a deep discount to their local markets and in doing so, drive down the values and sales prices of nearby homes.  Money quote:

We find that foreclosures predict lower prices for houses located less than 0.25 mile, and particularly less than 0.1 mile away. Although foreclosures and prices are both endogenous variables, the fact that foreclosures lead prices at such short distances does reinforce the concern that foreclosures have negative external effects in the housing market. Our preferred estimate of the spillover effect suggests that each foreclosure that takes place 0.05 miles away lowers the price of a house by about 1%.

Not the sexiest prose in the history of styli and tablets, I’ll admit, but the point is clear enough: this study found that foreclosures sell at 27% discount to the unforced sale price, and that the loss to the seller (the foreclosing banks) is compounded by a loss to every homeowner in the neighborhood.

As foreclosures mount, that loss grows — and, the study found, such effects are often concentrated in lower-priced neighborhoods, which is to say that when scum like those dispossessing Kirk use fraud and deceit (advising him to skip a payment to start up the loan modification process, only to use the action taken on that advice to begin the process of seizing Kirk’s home) — and thus maximize their short term return by dragging out a foreclosure process, they are imposing a charge on every homeowner and every bank lending on homes in Kirk’s neighborhood.

Expand your view to the country as a whole and you see that over the last decade, the banks lent recklessly, leveraged insanely, and then resorted to a range of unsavory-to-illegal manouvers to limit exposure to the consequences of decisions that, taken altogether, effectively bankrupted the US and much of the world’s financial system.

They have received enormous sums to prevent an overt bankruptcy, and in response have pursued tactics that do untold harm to thousands, perhaps millions of American citizens as they foreclose on the properties they recklessly exposed themselves to over the last several years.  As they pursue those foreclosures, those banks have both deceitfully tripped some homeowners into default (see Kirk, above) while performing multiple frauds and failures to proceed in a legal fashion in a sequence of actions that looks suspiciously like a fee-maximizing game of delay.

In  so doing our financial lords and masters harm us all by slashing yet further the value not only of homes in default, but those of hundreds of thousands, maybe millions of homeowners who had nothing to do with either the bad loans in the first place or the foreclosure fiasco now taking place. This is effectively not so much as a tax as a taking — one that reduces the wealth of millions of Americans who don’t have scratch to spare thank you very much

Duncan Black (can’t find the link in haste…will try to dig it up) among many others have been screaming for years that the appropriate policy from both a social and an economic point of view has been mortgage cramdown — I’d add you’d need a (non-kangaroo) court-supervised dispositions of the properties too far underwater to permit any reasonable mortage adjustment to save the day.  But whatever the details, there is a growing body of work that suggests it would be cheaper for our country, if not for an individual bank or holder of an ill-begotten MBS, to keep people in and maintaining their homes while not imposing what amounts to a huge fine on every nearby homeowner who has kept their property out of default.

And that is not just this DFH talking.  This is the clear implication (expressed in a rather different language than the authors of the original work would use, no doubt) of the soberest of sources, two Harvard and one MIT economist, as respectable a set of oracles as you could possibly hope to find.**

One last thought:  There are those (as noted below — see the Wall St. Journal) who argue that the foreclosure documentation mess is merely a matter of trickery and delay on the part of those who shouldn’t have bought houses in the first place, and that,in the words of the Journal,  ”the bigger damage here is to the housing market, which desperately needs to find a bottom by clearing excess inventory and working through foreclosures as rapidly as possible…”

If, however, you live in the reality based community, and not in the ideological bubble chamber that is the Journal’s — and the modern GOP’s — true home, then you would read things like the paper cited above, and maybe think twice before suggesting that the best outcome for America (and maybe the banks too, in fact) is to accelerate a process that destroys value for homeowners who are not in arrears, in the process of depressing the country’s real estate market for years, at least.  Just a thought, you know.

*One of the weirdest things about the whole housing mess to me has been the wholesale abandonment by the alleged “conservatives” among us of any commitment to — or even basic understanding of — the idea of property rights, contract law, and the roles and duties of parties to contracts governing real property.  We have McArdle outraged that folks who got their sums wrong walk away from mortgages — as if the banks did not have a full, contractually specified recourse, to take possession of property they were supposed to have exercised proper caution in evaluating.  We have the Wall St. Journal dismissing as mere sloppy paperwork sustained, widespread and long-lasting fraud by the major banks in their attempt to pursue contractual remedies to which they are not entitled.  It seems to me that there is nothing more likely to produce a long-term threat to the American real estate market than confirming the belief that one of the biggest risks in home purchasing is that your lending will f**k you over.  Yet the Wall St. Journal thinks it appropriate to dismiss criminal conspiracies by banks as mere high spirits.  Astonishing — but worth remembering the next time that paper opines on the sanctity and infallibility of “free” markets.

**I hope it is obvious, and if it is not, let me make it so here: every interpretative statement and every conclusion not drawn from a direct quote from Campbell, Giglio and Pathak is mine and mine alone.  If I’ve made analytical errors, they are mine, not theirs; if you dispute my characterizations or conclusions, your beef is with me, not them.  To give you just another taste of their reasoning however, here’s one more passage from the concluding section of the paper cited above:

Our results cannot be definitive on the causality from foreclosures to house prices, but the combination of timing effects (stronger from lagged foreclosures than from future foreclosures) and geographical effects (stronger at extremely short distances) suggests that there is reason to be concerned about spillovers from foreclosures to neighboring houses…

The authors are cautious writers.  They make it clear, however, and they quantify their reasoning, that foreclosure does damage to the sales price of both the defaulted property and the neighborhood.  As I say, a quantified glimpse of the obvious — but it is often necessary to prove what you know, both so you can say so with authority, and because every now and then the obvious is false.  Just not this time.

Images:  Winslow Homer, “The Camp Fire,” 1877-78

Dorothea Lange, “Migrant family from Arkansas playing hill-billy songs. Farm Security Administration emergency migratory camp. Calipatria, California” 1939

Too Busy To Post, Too Enraged Not To Note The Latest Bit of Fraud/Nonsense–Mortgage Backed Securities/Foreclosure disaster edition

On multiple deadlines today, but I couldn’t resist this juxtaposition.

First, this, from two weeks ago (h/t LegalForesicAuditors.com):

NEW YORK — JPMorgan Chase has temporarily stopped foreclosing on more than 50,000 homes so it can review documents that might contain errors.

JPMorgan’s move Wednesday makes it the second major company to take such action this month, underscoring a growing legal problem. The issue could stall an already overloaded foreclosure process.

…..

JPMorgan acknowledged Wednesday that its employees signed some affidavits about loan documents without personally verifying the files. These affidavits verifies the accuracy of the loan information, including who owns the mortgage.

….

In some states, lenders can foreclose quickly on delinquent mortgage borrowers. But 20 states use a lengthy court process for foreclosures. They require documents to verify information on the mortgage, including who owns it. Florida, New York, New Jersey and Illinois are the biggest states with this process. 

Christopher Immel, a Florida lawyer who represents homeowners, said people who already have lost homes could sue their lender, alleging errors in documents.

In August, a judge in Duval County, Fla., ruled that JPMorgan could not foreclose on two homeowners. The reasoning was that Fannie Mae carried the mortgage on its books and JPMorgan Chase only collected payments on the loan. JPMorgan Chase had identified itself as the owner of the loan.

….

More lawsuits could come soon.

In May, JPMorgan employee Beth Ann Cottrell said in a deposition that she and her staff of eight signed about 18,000 legal documents a month without reviewing every file. In a similar testimony, GMAC employee Jeffrey Stephan said he signed 10,000 documents a month without personally verifying the mortgage information.

And then there’s this, hot of the intertubes via NYTimes.com:

JPMorgan Chase kicked off what was expected to be a mixed quarterly earnings season for big banks on Wednesday with a 23 percent increase in third-quarter income.

After powering ahead for the last year on the strength of its trading operations, JPMorgan topped investor expectations with the help of improvement in its credit card business and a gain from money it had previously set aside to cover possible losses from bad loans.

Net income rose to $4.42 billion, from $3.58 billion a year earlier. Earnings were a $1.01 a share, handily topping analyst forecasts for 88 cents. Earnings were 82 cents a share in the period a year ago.

The Times piece does note the fact that the bank faces significant costs and potential liability as it confronts the failure of its foreclosure process, and it quotes JPMorgan’s new CFO trying to discount the implications of this issue, saying “The whole mortgage issue costs us so much money now, to me it [the foreclosure SNAFU] is incremental.”

Just two quick thoughts:

1:  Given the different avenues through which JPMorgan is exposed to potential liability (as holder of delinquent loans, and through its role in the making of the market in mortgage backed securities affected by flawed documentaton — see this excellent series for more), the confidence expressed by the CFO in question, Mr. Douglas Braunstein, reminds me of this moment of assurance:

2:  What justification can anyone provide for the ongoing employment and wealth of the management of the major US banks/investment houses?

And to add just one more query in the spirit of honest curiousity:  what rationale is left for avoiding a modernized version of Glass-Seagall?  Commercial lending is a public utility, and needs to be both regulated and guaranteed as such.  Everything else can be at one’s own risk — but the two activities have to be kept separate, not just by alleged Chinese Walls, but institutionally, at the level of holding of capital and the existence of public insurance/guarantees.

Tell me, anyone, why this is wrong.

All of which is to say that before the Obama adminstration or Congress starts immunizing the big Wall St. firms from the consequences of what appears to be a decade of profiteering on real estate fraud, we gotta take the current structure down to the foundations.

Carthago Delenda Est.

Image:  Vincent van Gogh, “The Cottage,” 1885.

Sunday Post on Crypto, Trust, and Political Action on the Web — Outsourced to David P. Reed

I’m a lurker (mostly) on a listserv for MIT’s Center for Future Civic Media (C4), which pops up some fascinating discussions about news, social networking, and political life on and through the web.

Recently, there was a flurry of posts on the announcement from the Haystack that work on the system designed to encrypt and obscure the source of internet communications in Iran had halted.

That announcement was followed by the effective end of the project, which had aimed at providing political dissidents secure ways to communicate.

That sequence of events led to considerable back and forth among the C4 community, in part looking at the perennial problem of hype in the tech/software world outpacing reality.

The more significant strand to the convesation (it seemed to me) focused on something else: the underlying issue of whether or not it is possible to produce a genuinely secure set-up that could enable the kind of sunlight the Iranian dissidents sought (and needed) and their supporters outside Iran hoped to provide.

That’s something of obvious (again, to me) importance, especially in the context of the broad privacy-for-connection trade-off we are all committing ourselves to these days.

In that vein, MIT (and much elsewhere besides) computer scientist  David Reed weighed in with the crucial observation, which he kindly gave me permission to post below.

The shorter, just to get you going: computer/information security depends on two factors: the technical/technological and the human.  The strength or lack thereof of one factor does not alter the qualities of the other.  Therefore, no technological approach to information security (on which, in the Iranian case and many besides, lives depend) can provide genuine safety.

Key quote (from David’s conclusion):

Here’s the problem, then: we can’t even *talk about* the technology clearly, because we want to impute properties of perfection, goodness, morality, etc. to it.

And now to the whole thing:

Poking around a bit more on the [Haystack] controversy, let me suggest that it has roots back to anon.fi (the original “Swedish” anonymous remailer).  I (not so publicly) questioned crypto-activist friends promoting anon.fi at the time regarding their promotion of use of that service, given that their was no way they could *personally* assure us that anon.fi was not a trap placed carefully by one or more government or quasi-government agencies.

The response I got was that it was based on public key crypto, and the guy operating it was a “good guy”.

In other words – the crypto (which was undoubtedly strong, and open source) and the “goodness” of the guy were given equal weight, and both had to be working to ensure privacy of communications.  Despite most of these friends, who were well-known political activists, never having met this guy personally!

Here’s the problem, as I mentioned in part in my invited talk at USENIX Security this year:

Humans are prone to the “fallacy of composition”.  That is, there are certain properties of systems that don’t pass from the parts to the whole.  (the parts may all have X, but the system as a whole does not, OR the system as a whole can have X, when none of the parts have X).  Yet it is common for the brain to reason: “because one or more of the parts have X, the whole has X”.

Security is a set of qualities that are not composable.  They just aren’t.

We buy into the fallacy of composition because we (Hilary Clinton, the press, …) want to believe that we can fix a problem merely by using some wonderful “part” – in this case Haystack.

So where I’m going with this is that perhaps before we start trying to find “blame” in this hype-fest, we start by asking the question:
is it possible for someone to supply “security” in the form of an Internet service OF ANY KIND (open source or not, tested or not) that meets the goals?

Because security is not composable, the answer is NO.

So why are we beating up Haystack?  It can’t do the job, and one can tell just by looking at it from the outside – recognizing that any such system entails the fallacy of composition in many, many ways.

Is Tor better?  Not really.  If it had been reported like Haystack, it probably would have been “exposed” in the same way to have weaknesses that are honestly expressed by its own developers.  Would the developers have succumbed to the temptation to provide the “money quotes” supporting the hype?

What if Tor had been used by Iranian dissidents?   Given the weaknesses, surely they were putting their lives at risk due to its weaknesses, just as if Haystack were used.

I’d suggest that there is very little light, and a lot of heat, in the blogosphere and the press about this technology-centric view of political action.

There’s something broken in a world where someone can say with a straight face the phrase “liberation technology”!   Technology cannot be measured in that dimension in general, and if we are talking about the “fallacy of composition”, it applies hugely to the dimension of “liberty” (which has become a right-wing word) or “liberation” (the left-wing word).

Here’s the problem, then: we can’t even *talk about* the technology clearly, because we want to impute properties of perfection, goodness, morality, etc. to it.

To put all this another way, there is an old spook joke about secrecy and security:

How can you tell if a secret is safe?  If only two people know it…

…And one of them is dead.

My thanks to David for his willingness to share these thoughts to an audience beyond the C4 gang.

Image:  Henri Regnault, “The Spy,” 1880.