The former regional USDA official was forced to resign from the Department of Agriculture for seemingly racist comments that were clearly taken out-of-context and very much contradict the point of her anecdote.

The story she related was a confessional of her journey–of how she grew to treat fairly someone of a different race–of how she overcame her prejudices. In addition, she was describing events that happened in 1986, which is nearly one quarter of a century ago, and she was likely exaggerating the extent of her (initial) irresponsibility and unresponsiveness as a rhetorical device. She wasn’t under oath, for Pete’s sake.

Imagine that one day you are driving home, and you receive a call to resign your position because something that you said had been taped and was edited to be taken completely out-of-context. Jeez, just about everyone who is not self-employed could be fired any day, and we could have been fired for every single MBA class that we taught. (We suspect that a few of our duller former students would have readily agreed with that judgment and sentence.)

Further imagine your erstwhile, nearly-anonymous life–like most of ours–suddenly becomes the near-constant focus of cable news, and all because you tried to do the right thing by explaining how, through personal experience, you grew-up and became a better person.

Regular readers of our site know that we have no difficulty criticizing and upbraiding fools, shallow-thinkers, and other attention-seekers, but Ms. Sherrod seems to be none of those. She seems to be just like any of us, but as of yesterday, she has worse luck than most of us.

So, we ask you, dear reader, to say a prayer for Ms. Sherrod–that her very-public nightmare end quickly and that if she is religious, she find peace with the Lord.

Her predicament is another fine example of St. Francis de Sales’ observation that “the road to hell is paved with good intentions,” and reminds us of the expression, “there, but for the grace of God, go I.”

Good luck, Ms. Sherrod, and God Bless.

And you douche bags out there, just leave her alone. Right, left, or center, shame on you!

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As is our style, the post title is tongue-in-cheek but true, too.

Like almost every other reasonable person, we’re sick of hearing how every problem that the Obama administration can’t manage is former President Bush’s fault.

Some problems certainly were of President Bush’s making. For example, his administration’s panicked response to the rapid deterioration in the creditworthiness of certain financial firms in the fall of 2008 exacerbated the crisis-in-confidence and deepened the recession. However, other tragedies, like the Gulf Oil leak and the Obama administration’s cynical, yet feeble, response to it, clearly have nothing to do with our former president.

Both President Bush and Obama, however, have permitted illegal immigration to flourish, and that has had to have had a deleterious effect on the nearly 10% unemployment rate among citizens of the United States.

A Few Caveats

We can’t blame anyone for trying to live in the U.S.A. and we wish the legal immigration policies and quotas were far looser. Drive almost anywhere across this country, and you will realize that it is huge, and there is plenty of space for a lot more people. In addition, we try to have as much compassion as possible for illegal immigrants, and in some ways, don’t blame them for seeking the American dream. Had roles or birthplaces been reversed, we would likely be one of them. That’s why we have proposed a reasonable solution to the problem of illegal immigration. Finally, we’re not much for zero-sum games in economics, and believe that, ceteris paribus, bigger populations (as well as good sharing rules) create more wealth. In other words, we’re willing to give up a percentage of the pie, if our sacrifice motivates others to increase the size of the pie so that we have a smaller share of a much bigger pie, but we don’t think that is the case, here.

A Few Facts

However, let’s consider a few facts.

• There are approximately fifteen million “unemployed” Americans–those looking for work but can’t find jobs.
• There are another two or three million adults, who are able to work and don’t have jobs, but have given up looking for work; so, they no longer qualify as being “unemployed.”
• There are approximately ten million illegal aliens in the United States. Not all of those illegal aliens work, but let’s say that 70% are here to work. (The reader can argue with our estimates and perform sensitivity analysis to see that while the numbers might change, the conclusion won’t.)
• The unemployment rate for white teenagers (16 – 19) is about 25%.
• The unemployment rate for black teenagers is about 45%.
• For all races, there are about 2.6 million unemployed teenagers.

There are professional, regional, and other differences that we are ignoring for the sake of brevity and time, but there are many jobs, especially positions that would normally employ teenagers, that are taken by illegal immigrants, including jobs at fast-food restaurants, landscaping, and child/household care.

Because the western Pennsylvania economy was never vibrant enough to attract them, there are still few illegal immigrants here, and many tasks like landscaping are still performed by local teenagers and others seeking relatively low-pay, relatively unskilled, seasonal work.

We do understand that there are jobs that create less value than $7.25 per hour, and there illegal aliens willing to work for less than $7.25; however, there are teenagers and other legal residents who are also willing to work for less than $7.25 per hour but can’t do so because it is illegal.

That being said, wealth is created–albeit illegally–when someone earns, say, $5 per hour and creates $6 of value per hour in the underground economy. Of course, whether income above or below $7.25 per hour benefits anyone in the U.S. besides the worker and his family depends upon where the money is spent.

Multiplier Effects and Sending Money Home

Some may argue that, yes, illegals do take jobs from citizens, but there are no negative economic consequences because they, illegals, spend money just like legal residents, but that’s not true if the earnings are sent home (to a foreign land), and that seems to be the case when the illegal worker’s entire family is not (illegally) in the United States. So, we don’t think that it is a “wash,” and that illegal workers are just as beneficial as legal ones who spend in the U.S.A.

How Many Americans Are Unemployed Because of Illegal Workers,

Or what percentage of the unemployment rate is due to illegal immigrants?

So, for the nation, there is no inherent advantage to employing illegals instead of the 17 million-or-so out-of-work Americans. Clearly, removing seven million illegal workers from the labor force won’t create 17 million jobs, but how many of our neighbors, friends, and children might be employed if our borders were secure and there were no illegal workers?

Let’s take our estimate of seven million illegal workers, and suppose that two million work in the underground economy, and those jobs only exist because the employers knows that the workers are illegal.

That means that five million jobs that are performed by illegal workers could be performed by citizens or legal residents. Now, there is a regional and professional matching problem–that labor is not perfectly fungible; so, not every unemployed person is qualified (or willing to accept) every job, but many of the states with the highest unemployment rates also have the highest concentrations of illegal workers.

So, let’s suppose that due to matching and coordination problems, only 80% of jobs currently taken by illegals could be replaced by citizens or legal residents.

That means that four million more Americans could be working who aren’t working now. (Let’s suppose that 75% would come from the “unemployed” and 25% would come from those who gave up looking.) So, the total of those looking for work and/or employed would increase by one million, and total working would increase by four million; so, the unemployment rate would decrease about 2% percentage points to about 7.5%.

Summary

So, what we did (1) was take a frequently heard estimate of the number of illegal aliens at 10 million. We then (2) guestimated that 70% of those aliens worked. We (3) assumed that two million of the seven million were jobs that would evaporate if not performed by illegals, which is rather conservative for our purposes. We (4) assumed that of the remaining five million jobs, only four million could be filled with legal workers. Finally, we assumed that 75% of those positions would be filled by those who are technically unemployed, and 25% by previously discouraged workers. (That last one is quite a conservative estimate.)

Given that about 15 million citizens are unemployed, including about three million teenagers, and another couple million have given up looking for work, it seems possible that four million of the 17 million-or-so could find those jobs (and begin to pay taxes).

Given that Presidents Bush and Obama had/have similar non-enforcement policies, it seems reasonable to conclude that one could justifiably blame their policies for about 21% of last month’s 9.5% unemployment rate, i.e., 2% overall.

Et. al.

Here are a few points that we don’t have time to expand upon today:

1. Subsidizing the housing bubble – in many Sun-belt states, during the housing bubble, a lot of home construction was performed by illegal immigrants. All else equal, lower marginal cost means higher supply, and especially for long-lived assets like homes, that means depressed prices–for a lot longer.
2. Subsidizing incompetent foreign government – Many dollars sent “home” by illegal workers, subsidize inefficient and incompetent foreign governments, thereby allowing them to linger and persist…
3. Border security – if a foreigner wished to enter this country and harm our great nation, why would any smart one be concerned with airport security and “do not fly” lists. Wouldn’t it be easier and a lot safer just to do what hundreds of thousand (if not millions) of others do every year–just walk into it.

Again, we are strongly in favor of expanded legal immigration and have proposed reasonable–neither amnestying nor overly-punitive–solutions to the problem of illegal immigrants, but if one would like to consider a structural component to last month’s 9.5% unemployment one need look no further than the Bush and Obama administration’s policies on illegal immigration, which we would classify as a “three wise monkeys’ policy.” See no evil, hear no evil, speak no evil, which is otherwise known as irresponsible negligence.

Like many of our longer posts, we will likely edit this one within the next few days.

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• And They Wonder Why We Don’t Trust Them
• A Solution to the Illegal Immigrant Problem
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We had planned to write separately about (1) Armando Galarraga’s imperfect perfect game and (2) about the federal government’s very lame response to the massive oil leak and spill in the Gulf of Mexico.

However, after reading Peggy Noonan’s column this morning, it seems best to combine the two seemingly disparate topics into one post. Ms. Noonan doesn’t make the connection that we do, which is the juxtaposition between those who play children’s games for a living acting who act like adults and those who are supposed to be the nation’s leaders playing childish games, rather than being adults.

The Good

Ms. Noonan’s weekly column in The Wall Street Journal is entitled, Nobody’s Perfect, but They Were Good: A blown call occasions a lesson in civility and honesty, and the  subtitle captures the essence of her essay. In it, she notes that both Mr. Galarraga and mistaken umpire, Jim Joyce, behaved like grownups and gentlemen in the aftermath of the blown call.

At least publicly, Mr. Galarraga accepted the consequences of Mr. Joyce’s error and seemed to be both forgiving and gracious, and Mr. Joyce apologized for blowing “the biggest call of my career.”¹

So, one of the guys plays a game for a living and the other officiates a game for his living, yet both act more mature, professional, and serious than President Obama and his administration’s response to the crisis in the Gulf of Mexico.

The Bad and the Ugly: Shame, shame, shame

Rather than an eagle, perhaps the oil-drenched pelican to the left should symbolize our government.²

Now, the principals of Spero Consulting are definitely “small government” types. That’s due to our observations of the ineffectiveness and inefficiency of large government, our disdain for funding large governments and bureaucrats via high taxes, our further disdain for socialism, and our love of freedom, independence, and responsibility.

That being said, when we see a threat to multiple states from something outside of the country–in this case a blob of oil–we see a role for the federal government to act to defend the nation, its land, and its resources. (This is a real threat, not an imagined one, like carbon dioxide.)

Given its failure to respond to the leak, it seems fair to judge the federal government’s response to the oil spill as an abject failure.

So, beyond the obvious, how has the federal government and the Obama administration, in particular, failed with respect to the Gulf Oil Crisis?

Let’s consider two quotes: one older and one newer, and put them into context. Recall Rahm Emanuel’s quote from November, 2008: “Never let a serious crisis go to waste…,” and Interior Secretary Ken Salazar’s quote from early May, 2010: “Our job basically is to keep the boot on the neck of British Petroleum to carry out the responsibilities they have both under the law and contractually to move forward and stop this spill…”

As we see it, President Obama and his minions had no serious strategy to (1) stop the flow of oil or (2) protect the nation’s coasts and flora and fauna.

His and their initial responses seemed only to be cynical tactics to castigate a multi-national corporations–those darn, greedy capitalist, corporations–while shielding themselves from criticism and posturing to curry favor with environmentalists.

Now, as it turns out, their posturing and delays will lead to horrific damage to the coastal way of life, economy, ecosystem, and wild-life. There’s no reason for anyone to be happy, let along environmentalists.

We often ask: cynical or ignorant? Nothing precludes an action from being both, and so it seems in this case.

Ironically, the folks who (seem) to want a “big-government” response to every small problem, wanted a laissez-faire, “private” solution to arguably the nation’s biggest, exogenously-caused crisis since 9/11.³

Clearly, after the initial explosion, there seems to have been no serious scenario analysis to estimate a worst-case outcome. Instead, it seemed that the administration concluded that BP or some other grown-up engineers could and would quickly stop the leak, and the Obama administration could may political hay–in an environmentally-friendly way–while sun shined and the oil flowed: to use another metaphor, to have-their-cake-and-eat-it, too.

In other words, per Rahm Emanuel, it attempted to take advantage of the crisis to advance its political objectives.

Of course, had the leak been plugged quickly, the President and Mr. Salazar would have taken credit for inducing BP to act with the government’s clubbed foot “on the neck of BP.” C’mon, its BP’s oil spilling forth and it’s BP’s reputation that shrinks as it’s liabilities and obligations grow with the sludgy blob of tar and goo. Does any serious grownup believe the Ken Salazar’s admonitions motivated BP to act any differently than it would otherwise have? We suspect the only difference he made was to induce thousands of BP employees and others to utter, “what a douche!”

Speaking of which, the Attorney General travels to the Gulf to investigate possible civil and criminal cases against BP. We’re sure that opportunism will motivate BP to fully disclose all of its private information. Bad outcomes don’t have to involve criminal activity, and not getting what you want doesn’t mean that those who prevented it are evil.

So, we view the administration’s unserious response to the leak to be a childish, clumsy attempt at gamesmanship; one that has seriously back-fired, which has had both political, but more importantly, tragic implications; and as we watch lifestyles, ecosystems, and greasy small animals die, we ask, “why can’t our nation’s leaders act like professional athletes?”

A Few Other Things

1. For this catastrophe and many others, we continue to wonder why the President must “visit the scene.” Other than to waste money and increase the federal deficit, what exactly does that accomplish? What information could be gained walking on the beach that couldn’t be gained from the White House? The guy’s a lawyer for goodness sakes, and not any type of engineer or natural scientist. It’s completely different that visiting lower Manhattan after 9/11 when many in the nation and New York City were dazed and confused and looking for leadership and hope and inspiration. (Yeah, we recall all of the new faces in Church that month.) So, again, what does strolling on the beach looking at globs of oil accomplish, and is anyone positively swayed  by such photo-opportunism? We doubt it.)
2. “Did you plug the hole yet, Daddy?” If Malia Obama actually asked that question of her father, then we apologize for our skepticism and comments. However, we’ve known and know quite a few twelve-year-old girls, and we’ve not known one who would ask such a question unless it somehow involved said tween. We’ve known ones who would ask: “can I have more cake” or “can we go to the mall” or “can I have my cell phone back” or “do I have to clean the pool today” along with a host of other, rather self-centered questions. Asking about an oil spill that wasn’t in the driveway is beyond our scope of experience. In fact, no tween that we’ve known had or has such a high level of consciousness and social awareness; so, we’re sorry, but it does not ring true. Early morning questions tend to involve issues like, “how does my hair look” or “can I have more waffles” or “can I have Cocoa Krispies instead of healthy cereal?” Unless, of course, Mrs. Obama, said something like, “you can’t go to the mall unless your Dad stops the leak.” Then, and only then, we could imagine a twelve-year-old girl asking, “Did you plug the hole yet, Daddy?” with reference to an oil leak in the Gulf of Mexico and not something in the White House. Shamefully tone-deaf. We suspect whoever told him to say that doesn’t have kids.

Footnotes:

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There’s an interesting article in today’s edition of The Wall Street Journal with the title, Overhaul Puts Bank Ratings at Risk.

The article explains how the version of the financial industry regulation bill that was passed by the Senate significantly weakens implicit government support for banks that were or may still be presumed to be “too-big-to-fail.” If that version of the bill becomes law “TBTF” will have been transformed to “NTBTF,” depending upon the whims and fears of the regime in charge at the time.

In this post, we’re not arguing about the efficacy and/or fairness of such guarantees. Regular readers already know our position. Instead, we wonder whether bank boards and regulators have required bank managements to consider such scenarios in enterprise-wide scenario analyses?

We’ve written in the past about the role for survivalists and depressives in risk management; however, we–like everyone else–have likely understated the need for imagination and creativity in uncertainty management. Those traits are essential to developing effective scenario analyses–not just because those particular events might occur, but because planned reactions to considered and analyzed negative events may be robust enough to handle unconsidered ones, too.

We suspect that, at best, some firms calculate the direct, one-time shock of a rating drop; that’s quite easy to do. However, we doubt if they include the indirect effects–on, say, revenue–or long-term effects in “dynamic” multi-period scenario analyses.

Moreover, we doubt that firms or regulators have required scenarios where the government backs away from the implicit guarantee.

If our hunch is correct, then it’s necessary to ask: “why haven’t they?” As arbitrary and capricious as the government has been to back certain firms, but not others, it could just as easily leave a firm without explicit support–with or without a change in control of the legislative and executive branches. Similar, it could change the basis of which firms it is implying that it would save.

So, someone at each of these firms should be thinking: what would happen if we are on our own? Moreover, since deposits are still guaranteed, one would think that most regulators would be interested in the answer to that question, too. Or, perhaps they lack curiosity.

And another thing: mark-to-market silliness

We haven’t read either the House or the Senate version of the bill, but we doubt if the Senate version eliminates the ability of banks to recognize (unrealized) gains for the diminished value of their debt due to the lose of the implicit guarantee. (How ironic!)

No implicit guarantee means riskier debt, riskier debt means lower value, and higher interest rates. (It’s worth mentioning that despite the calculations used to model values and prices, and the way people talk, it’s not: more risk implies higher interest rates which imply lower debt values. It real life, it is the other way around; (1) it’s riskier, (2) I no longer want it (or want less of it), (3) I’m going to try to sell it, (4) ceteris paribus, if no one else wants it, prices decrease and implied yields increase.)

Unfortunately, under current accounting standards, lower values of debt mean accounting (income statement) gains.

So, consider the bizarre outcome of eliminating the implicit guarantee. While variable-rate debt and new issuances will have (prospective) increased interest costs associated with them, fixed-rate debt will decrease in value…thereby increasing the value of owners’ equity, and per current rules, increasing net income.

Does that make any sense?

Rather than rewrite our prior criticisms of that stupidity, we’ll point new readers to our post The Bank’s Mark-to-market Gains on Debt from last May.

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We are support the protection of the nation’s borders to eliminate illegal immigration and find it ridiculous that the nation does little to protect them. We also support the substantial expansion of legal immigration for all classes of folks, not just professionals. Peasants, like our ancestors, deserve a chance, too.

It’s a big country, and there is plenty of room.

However, those two issues of border protection and immigration quotas are relatively simple compared to the problem of dealing with the illegal aliens already in the country.

In January, 2009, we proposed a reasonable path to (earned) citizenship.

Amnesty is a horrible policy that only induces additional illegal behavior, and deporting millions of people is both infeasible and, more importantly, quite inhumane.

However, providing a reasonable way for such individuals to earn and pay their way to legal status is possible. No free ride: both  substantial penalties and contributions are required. Read about it in: A Solution to the Illegal Immigrant Problem.

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Who is Mark Critz? He is the Democratic candidate in the special election to replace the late John Murtha in Pennsylvania’s 12th Congressional District. (Checkout this fine example of gerrymandering at http://en.wikipedia.org/wiki/File:Pa12_109.gif.)

Why would the Republican National Committee attempt to link him to Ms. Pelosi? Well, she being a “San Francisco Democrat,” we suspect Ms. Pelosi’s favorability rating among Democrats in the the 12th District is no higher than her rating among Republicans. In those out counties of Western Pennsylvania,  it is probably in the single digits and may round to zero.

Mr. Critz claims to be both pro-life and pro-gun, and that may be true, but it is impossible for him to disassociate from Ms. Pelosi and her liberal agenda because in November, he could be the marginal Congressman that keeps her as the Speaker of the House. That’s likely his biggest problem.

That’s interesting to us because in mid-March, we wondered about our own Congressman, the Democrat Jason Altmire, and his vote on the health-care bill. At that time, we concluded that if he voted against the bill, he would have a very good chance of re-election. (Mr. Altmire voted against, but the bill still passed, and became law–at least temporarily.)

We wonder, however, if we drew the wrong conclusion about Mr. Altmire’s health-case vote? Why? Because, for his seemingly reasonableness on many issues, he could be that marginal Congressman that keeps her as the Speaker of the House, and that’s likely his biggest problem, too.

So, in a region where the earth under much of the 4th and 12th Congressional districts have been hollowed out by mining, we wonder if Mr. Critz is the proverbial “canary in a coal mine” for Mr. Altmire? We guess we’ll see on May 18.

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It seems that many folks, particularly those on the right, view Mr. Clinton’s statements–as well as the statements of others on the left–as mere cynical and rhetorical attempts to portray conservatives and the Tea Party movement and its members as something threatening, dangerous, and extremist. (As cynical as the statement “It depends on what the meaning of the word ‘is’ is,” was.)

We disagree. We think they are terrified.

We think those on the left clearly view the Tea Party movement for what it is: an existential threat. BUT, that threat isn’t to the nation nor is it a threat of violence; instead, it is a very dangerous threat to left, itself. In fact, for the aging protesters of the 60′s, it is a biggest threat that they have ever faced–far being than the one posed by Ronald Reagan and the conservative movement of the 1980′s.

We suspect that, in fact, the left is far more threatened and scared by the growing Tea Party movement than it is by any and all domestic terrorist or militia groups, which seem microscopic. Many are probably more terrified of the Tea Party than of foreign terrorists who really are actively attempting to physically harm them.

So, while many of the statements are over-blown and hyperbolic, we think the underlying fear on the left is real and heartfelt and palpable.

That fright and terror–combined with a lack of discipline and reflection and self-criticism–means the verbal attacks will continue, which means that the Tea Party movement will…continue to grow.

We don’t attend rallies, but the folks who we know that do, were some of the most apolitical individuals in our acquaintance. In fact, quite a few were liberal in their youth, but have subsequently been mugged by reality (and their seemingly-insatiable local, county, state, and federal governments). They’re normal, regular, everyday people–if you live in a normal, regular, everyday place like Western PA. (We certainly don’t think she is perfect and don’t know that we would vote for her, but we’ve written several times that the left hates Sarah Palin, not for being Sarah Palin, but because she is representative of normal, regular, everyday people like suburban and exurban friends and neighbors.

Accusing such folks of extremism gains no favor among their neighbors and coworkers–even those sympathetic to causes on the left–and will only strengthen the movement.

Yes, your federal government was able to take relatively happy, successful, and hard-working citizens and turn them into energized, enthusiastic, organized, and committed protesters. Good job! (With the internet, decentralized organization is so much easier nowadays, isn’t it? That probably only adds to the fear, i.e., “how could something grow so big, so quickly, and so successfully without the assistance of the federal government?” They just don’t understand it, which is quite scary!)

That’s quite a change. In fact,  that’s change we can believe in, and it gives us hope for the future of our nation.

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1. We Didn’t Deregulate by Veronique de Rugy (not on-line, yet)
2. Break Up The Banks by Arnold Kling
3. Resolve to Reform by Stephen Spruiell & Kevin D. Williamson (not on-line, yet)

All are worth reading but for slightly different reasons.

Ms. de Rugy does a very nice job of summarizing the misconception that there was general deregulation of financial firms in recent years. She also makes the point that certain policies and responses exacerbate current and future problems, particularly the moral hazard problem in banking associated with individuals and firms sharing in gains and being shielded from losses. (We write about moral hazard a lot, particularly with respect to the financial crisis.)

The title explains Mr. Kling’s article. He criticizes the size of large U.S. banks and the related politicization of banking and regulation. There’s not much to argue about, but we think he misses the point about why bigger isn’t necessarily better.

Yes, banks that are too-big-too-fail exacerbate moral hazard problems and excessive risk-taking, and, yes, as it becomes more closely related to government, the industry becomes overly political (no surprise there) to the point that such relationships can be described as “crony capitalism.”

However, even if those issues could be costlessly eliminated there is still a good reason to limit the size of banks: given the idiosyncrasies (read irrationalities) of decision-makers, as they control and allocate more and more assets, those idiosyncrasies and biases become systemic; so, otherwise idiosyncratic risk becomes systemic risk. If such decision-makers were perfectly rational and if assets values and probability distributions were perfectly known–if such well-mannered distributions exist–then it would not be an issue, but none of those conditions holds; so, it is.¹ For that reason alone, it is worth limiting the size of banks and other financial institutions.

We don’t agree with everything that Messrs. Spruiell & Williamson propose, but at first glance, their insistence that large banks have prepackaged bankruptcy plans seems to make sense. (Actually, we have to think a bit more about it, because in certain social situations, more information isn’t necessarily better. It can be wealth-destroying for a number of reasons. See Kanodia, Singh and Spero for an example.)

One weakness in all three articles is the discussion or implicit acceptance of capital ratios as something useful: Ms. de Rugy mentions Fannie and Freddie’s $100 billion in net equity compared to $5 trillion in home loans; Mr. Kling mentions the banks’ desires to skirt capital requirements rules; and Messrs. Spruiell & Williamson mention capital ratios and propose that ratios should be dynamic–increase in good times and decrease in bad.

The problem with all of that is that net worth or net equity or capital is not cash and is not liquidation value, and that’s what causes the runs in the first place. (Counter-parties know the assets are worth less than book value, but they don’t know how much less because “markets” have frozen, or more precisely because they are not really markets, trading has stalled.)

Equity (or net equity) is the difference between assets and liabilities, which have very precise accounting definitions. An asset is an item of expected value from a past transaction or event that is controlled by the entity. A liability is an item of expected future sacrifice from a transaction or event. Ignoring the obvious difficulties related to measurement, both definitions are much, much broader than cash or a cash-equivalent.

For example, Fannie and Freddie’s actual financial conditions were much worse than stated because the $100 billion in net equity mentioned by Ms. de Rugy was equal to total assets (of at least $5 trillion) minus total liabilities of ($100 billion less than the book value of assets).

Ignoring everything else, there is no feasible way to liquidate or sell $5 trillion of mortgages–let alone at their face or book value–to pay liabilities. So, the $100 billion represents nothing more than an accounting fiction: the net result of applying a variety of accounting rules and procedures and treatments to assets and liabilities that were accumulated through time. Some those claims for and against were marked to “market” and some were not. (The scare quotes around market signify that such illiquid assets are usually marked to some “model” or calculation that usually falls apart when trading activity freezes.)

What would be more useful is to know the amount of cash and readily-marketable securities that could either be sold or used for collateral. In other words, one may have $100 billion in net assets and no cash, or $100 billion in net assets and $500 billion in cash. Knowing only the “capital” or equity is not helpful when trying to determine whether a firm can meet its margin calls.

We recall arguing with a chief credit officer twenty years ago that net worth was a useless notion–that it didn’t represent liquidation value because it included a host of illiquid assets and their values did not represent normal or distressed sales prices; he held to the view that it was a “cushion” of some sort, but couldn’t explain how or why.

We argue that his was the perfect example of irrationality that permits idiosyncratic risk to become systemic risk.

P.S. If you are interested in this post, you may also be interested in Marking Debt to “Market” or Addition Through Subtraction.

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We like it for a couple of reasons, including the fact that Mrs. Palin deserves to be defended from her critics on both the right and the left.

While we don’t always agree with her–see Dick and John Are Homographs for instance–she is very much like us and many people that we know in the suburbs and exurbs of Western Pennsylvania; you know, “bitter, gun-totin’ and God-fearin’.”

We wrote about something similar back on September 13, 2008, in Don’t Worry, They Hate You, too. In that post, we noted that very few of her critics could possibly hate her for personal reasons. At the time, almost no one knew her well-enough to despise her due to first-hand knowledge or personal interactions. What they did know was what (or more precisely, who) she represented: people like us, the conservative middle-class that generates enough income (to pay enough taxes) to compensate for foolish, misguided, and ignorant social experiments.

In the past, that conservative middle-class was sufficiently patient and indulgent and well-mannered to allow such silliness–even on relatively large scales. (We think that’s over now for a couple of reasons. First, the large scales are getting too big and will consume/destroy much of that wealth and will attempt to confiscate much of that income. Secondly their patience has worn out because it is much easier for those outside of D.C. to see massive government failures and waste than it is for the blinded inhabitants of the Imperial City. ) The left, and possibly some of the right can pretend that Tea Partyers are a bunch of nuts, but they are not; many were “ordinary” apolitical citizens who are so fed up that they have overcome their inertia to complain only to family and friends and have taken to protesting. (We predicted the Tea Party movement–against both Democrats and Republicans–on October 4, 2008, in What Monster Hath They Wrought?)

Mr. Podhoretz points out that some on the right criticize Mrs. Palin’s intelligence. Like others, we doubt that Mrs. Palin would win an IQ contest, but when has IQ, alone, been sufficient for success in anything except, possibly, IQ tests? (Even that requires effort and the luck that the questions relate best to ones own intelligence.)

Much of politics involves generating and allocating scarce resources, and on that dimension, we suspect that Mrs. Palin has better work experience than almost all of her critics. We wrote about that on Halloween, 2008, in Scary Thoughts on the Lack of Size and Humor and repeated it vis-a-vis our own experiences in The Fallen Nature of Parents & Kids’ Sports. At issue is whether Mrs. Palin is bright enough to have learned from her experiences. Given her policy recommendations, we see no indication that she is not bright enough and has not learned.

That being said, we don’t think that it is necessary to be as bright as Mrs. Palin or even her critics to see the folly of the Obama administration’s policy and many other public servants’s attempts to socialize our nation. One need only possess a little common sense and knowledge of human nature to understand (or at least intuit) such folly. A few recent examples:

• A law that’s 600 – 700 times longer than the Constitution of the United States and requires numerous new agencies and thousands–if not hundreds of thousands of pages of new regulations–will save resources? How exactly does that work?
• A law that requires 17,000 new IRS agents will save resources? What?
• “Stimulus” programs that create few jobs, and those few jobs that are created cost hundreds of thousands of dollars each: divide size of stimulus package, by an optimistic estimate of number of jobs created.
• Berating and browbeating friends like Israel while kowtowing to our nation’s enemies will win international respect? Did those folks spend no time on a school playground? By the way, exactly what is the use or value of “international respect.” We’d prefer that the fools and thugs fear the U.S.A.
• Voting or approving a bill because your own mother had breast cancer–some Congressman from Ohio–or because a particular person lacked insurance (but not necessarily care) justifies attempting to control another 17% of the economy? Those non sequiturs are curious justifications.

It’s likely that those on the right who are proud that they are smarter than Mrs. Palin–and remember that is a self-perception–are probably too obnoxious to be elected to public office. Rather than focusing on the single dimension where they may exceed her, they may want to weigh more heavily the skill and the nerve and the confidence and the energy required to shout into a strong, dessert wind while rallying Tea-Partyers in Harry Reid’s home town like she did on Saturday. Or the may wish to weigh more heavily the many other talents and characteristics she has exhibited since entering the national political scene. You know, those traits and positions that drive the left crazy.

Is she perfect? Of course not, but her critics on the right should take the preceding paragraph as a longer and more polite way of saying that they should grow up.

Related posts:

• The G20 Meeting or Mowing?
• Being Green Isn't What It Used To Be
• They’re Terrified of the Tea Party!
• Peggy Noonan vs. Dorothy’s Scarecrow
• Talent Recruitment

It about interest rate swaps, and provides more reasons to despise politicians. Are they stupid, willfully ignorant, or morally-challenged? Short answer: many are all three.

A Very Short Primer

All things equal, banks make variable-rate loans because they don’t want to bear the risk of interest rates changing. If a bank makes a loan at a fixed rate, and subsequent rates rise, then the loan loses value. At least for that moment, the bank is worse off and the borrow is better off as the bank can’t make the most of its capital at that point in time. So, there is an opportunity cost, although it’s not exactly that straight-forward.

More precisely, banks prefer to sell rate protection or insurance as a separately-priced product.

Regardless, borrowers can contract for protection against changing interest rates in the forms of interest rate swaps and swaptions and basis swaps. Like any other legal contract, swap contracts require certain obligations from the parties involved.

• Interest rate swaps: one party agrees to pay a fixed rate of interest and the other party agrees to pay a variable rate. Every period, say, every quarter, the difference between the fixed and variable rates (multiplied by some notional amount) is paid or received. Also, the remaining, (estimated) streams are discounted (at current forward rates), and cash or collateral can be exchanged for the differences in “market value.”

If you thought rates were going up, you would want to pay the fixed rate and receive the variable rate. If you thought that rates were going down, you would want to pay variable and receive fixed.

Not everyone can calculate the conventional value of a swap, but the basic notion seems simple enough, doesn’t it?

• Interest rate swaptions: a swaption is a combination of an interest rate swap and an option. At some future point, one of the (two) parties can exercise the option to start an interest rate swap, where that party either receives or pays a fixed rate or receives or pays a variable rate. So, if you had the option to pay a fixed rate, then you could exercise the option if variable rates went above the fixed rate. Not quite that simple to calculate, and there is a fee that must be paid for having the option. The party doesn’t have to exercise the option (and enter the swap) but it can if it wants to.

• Basis swaps: there is not just one type of interest rate or money market. Basis swaps allow a party to bet (or “hedge”) the difference between two different kinds of floating interest rates. If the rate that you receive increases vis a vis the rate that you pay, then you gain the difference. Otherwise, you lose.

Now our primer is very short, but anyone with a rather low-level command of English should be able to infer from those three definitions that there are risks associated with interest rate swaps: fluctuating rates can move for or against you and the difference between different types of rates can increase or decrease, which may help or harm you, depending upon your commitment. No, let’s rephrase that: depending upon your legal commitment.

It’s not very clear from the article, but given the circumstances, we infer that municipalities and states wanted to convert floating-rate debt to fixed-rate debt; so, they agreed to enter into interest rate swaps where they would pay a known fixed rate, and receive a variable, “market” rate. Let’s say that they agreed to pay a fixed 7%, regardless of how rates changed. (Note we are being particularly vague about which rate, but just go with it for now.)

In that case, the government entities would be protected from rising rates because they will be able to pay 7% regardless of how much rates increased.

The only problem is that there is a down-side to a swap, too. If rates fell, they would still have to pay 7% rather than the now-lower variable rate, and presumably, some of the “losses” can be attributed to that situation. Rates may have been much higher when the swaps were started. So, we have politicians complaining that the interest rates they pay haven’t dropped as much as they “should” have–had they not committed to such swaps, but they did.

Now, that downside risk could have been eliminated if the government entities had purchased swaptions instead. In that case, they could have agreed to a pay fixed rate, but only if variable rates increased. Of course, they would have had to pay a fee to be provided with that opportunity, and presumably, they didn’t want to spend the money.

Lastly, we were vague about which specific rate we had in mind in our short example. It is quite possible that the entities entered into basis swaps, too. For example, if they agreed to pay the rate on a riskier asset class and receive the rate on a safer class, then if those spreads increased, the basis swap would move against them. Given the large decline in Treasury rates and the increase is credit spreads, that seems possible, too. (Alternatively, if they had the opposite position, they could have lost if spreads narrowed.

So, were they tricked? That’s unlikely. It’s more likely that they don’t like being on the losing end of a long-term bet, but that’s the gamble they took or the “hedge” they made, and that’s life.

So, in sum, what do we recommend? We would encourage our elected representatives–our public servants–to read the “fine print” and understand what they read before agreeing to something that may be (or may appear to) complicated.

Oops, given this morning’s health care vote, our advice seems to be several hours too late.

Related posts:

• Interest Rate Swaps and Stupidity, II
• Fathers Against Stupidity
• Valuation, Risk & Modeling
• Financial-overhaul, Bank Ratings & Scenario Analysis
• Calculating Counterparty Credit Reserves

Mr. Altmire doesn’t seem to be a bad chap. As we mentioned in December, 2008 when we proposed a drastic solution to end the federal bureacracy, we saw him at a non-partisan, charity fundraiser in August of that year. He he was actually very funny–who would have thunk it–and far, far wittier than his opponent at the time, Melissa Hart, who was dreadfully, painfully, abjectly lame, and, unfortunately, a very poor candidate to boot.

He represents a rather conservative district where many of us are bitter (or at least grumpy), have guns, and believe in God. He’s often portrayed by those on the right as Speaker Pelosi’s lap dog, and we’ll see if that is true; however, we’re sure he is facing tremendous pressure from House leaders and the White House to be a good follower and do what he’s told.

We have only a few small observations today, but we think they are worth making. We suspect that Mr. Altmire wishes the vote were a bit later in the spring. If that were the case, he could better predict (or know for certain) his Republican opponent in this fall’s campaign, and base his vote on the likelihood of beating that person.

That being said, if he follows Ms. Pelosi’s orders and votes for the take-over, there is one reasonable inference to draw. He has concluded that he could beat any of the announced Republican candidates, including or especially, the most famous–or infamous–name of the list: Mary Beth Buchanan.

He has to know that a “yes” vote on health-care would make him extremely vulnerable to a strong candidate, or even an unknown one, but might not be sufficiently damaging to preclude a victory against someone with high negatives like Ms. Buchanan.

We think that’s where the Tea-Party and conservative activists can make a difference, and see no reason a third-party candidate could not win the district. Many of the district’s conservative Democrats would never vote for a Republican, but could be convinced to vote for a non-Democrat.

Now, we base this conjecture on absolutely no evidence, but we could imagine Mr. Altmire getting 30% of the vote from folks who will never, ever would vote for anyone who is not a Democrat; Ms. Buchanan getting 20% from similarly-devout Republicans; and a conservative, independent candidate getting 50% from independents, conservatives, and conservative Democrats. In other words, those folks who comprise and are represented by the Tea Party movement.

We’re not sure if he is considering that scenario or if he has overlooked the possibility of a second opponent in the fall, but a “yes” vote would make him very vulnerable to just such a campaign.

If he votes “no,” we would bet that he is almost certain to win re-election, and while we would prefer someone substantially more conservative, that’s a better outcome both our district and country than foisting more government mismanagement into our lives.

So, we have only this to say: we suspect that if he votes with Ms. Pelosi for the take-over of health-care, Ms. Buchanan will not be his biggest concern, and we hope that’s enough to scare him to doing the right thing this week.

Otherwise, while he may be able to defeat Ms. Buchanan in a one-to-one race, he could be unknowingly sacrificing his Congressional career to be an soon-to-be-forgotten under-secretary in the Department of HHS.

While it’s a little different, it might not be that different than many Massachusetts Democrats asking “Scott who?” at last season’s holiday parties.

Related posts:

• Mark Critz and Jason Altmire
• Is It Easier to Get 60 Votes Than 50?
• More Health-care, Not Less
• What Are the Odds?
• Should Haiti Choose To Be a U.S. Territory?

A few weeks ago there was an article in The Wall Street Journal, What’s a Degree Really Worth. In it the reporter Mary Pilon discussed the estimated difference in the average lifetime earnings between individuals with and without the college diplomas, and she mentioned a few problems–but only a few of the problems–with some of those calculations.

We don’t have much to say about those bad calculations other than the estimation methods aren’t very sophisticated. The one method involved multiplying some overall difference in average annual earnings by 40 years–the presumed length of one’s work career. Among other things, that simple product doesn’t include opportunity costs–e.g., wages lost while not working during time in college–or differences in growth rates of compensation through time or time-value-of-money considerations.

So, while we don’t have much to say about the central idea in the article, we do have (1) a comment about tuition inflation and (2) a related critique about college as white-collar, vo-tech training (and the implications of that).

1. All things equal, government subsidies to consumers increase prices–in this case tuition–which can then spiral upwards.
2. All things equal, higher tuition costs induce students to become more professionally-oriented, and that has several implications, including a de-emphasis of the liberal arts, and that permits anti-social and silly behavior and theories to persist in what has become the figurative backwater of the academy.

(1) Government Subsidies & Tuition Increases

In the article, Ms. Pilon briefly mentioned that average, annual, undergraduate tuition and fees at private colleges increased from $15,518 to $26,273 during the past ten years.

That 70% increase is twice as great as the change in consumer prices– of about 35%–and that’s nothing new. This table at http://www.finaid.org/savings/tuition-inflation.phtml shows that tuition inflation has been greater than general inflation for at least the past 50 years.

Hmm, now what other industry has shown percentage price increases greater than the rate of inflation for a long period of time? You know, that industry that comprises about 16% of GDP? Could it be health-care? Why, yes, it could–although to be precise, health-care inflation has been substantially less than tuition inflation.

So, is it a mere coincidence that two of the industries that have historically been the most-subsidized in the U.S.A. are also two industries with very large and sustained price increases over a long period of time? We don’t think so.

Here is an example of how subsidies increase prices.

We recently had a conversation with the parent of a high school senior. He told us that he had budgeted a certain amount for his child’s tuition next year; let’s say it was $7,500.

Any tuition cost above that amount would have to be funded with grants, loans, work-study programs, and scholarships.

By the way, the reader should think of scholarships from colleges as nothing more than discounts from list prices. Often, they are awarded based upon merit and are called academic scholarships, but that’s not always the case. Colleges have much more pricing flexibility than most parents know, and for whatever arbitrary reason, college recruiters can consider some students more desirable than others and offer those prospects price concessions.¹

Anyway, consider someone like our acquaintance who has $7,500 per year to spend on college. To keep it simple, assume no other sources of funds–no subsidized loans–except a possible federal grant of, say, $2,500.

Without the grant, the maximum that any college could get from the family is $7,500 per year. With the grant, the maximum is $10,000.

Without the Grant

Let’s consider our acquaintance as an average parent. If on average, families have up to $7,500 to pay for college expenses, then on average, colleges have to find ways to operate (as going concerns) with $7,500 per student. Actually, due to their ability to price discriminate, college would charge more and then have to offer scholarships to more students. That’s because stated tuition rates are nothing more than list prices, and one would expect the list price to be greater than $7,500. In that way, the colleges can find ways to charge higher prices to wealthier families with above-average budgets and offer discounts–err, we mean scholarships–to everyone else.

Regardless, colleges wouldn’t be able to get more than $7,500 from our average parent.

With the Grant

Now, it’s quite possible that an average parent could say to his college-bound child, “we had $7,500 to spend for college but luckily you have a grant for $2,500; so, we’ll only spend $5,000 of our own money, and your tuition budget remains the same: $7,500.” It’s possible, but it seems unlikely. Unless tuition is less than $10,000, we’d expect that families who commit $7,500 would be willing to spend that amount under many circumstances.

So, if the family spends anything above $5,000, then the college gets more than without grants. If parents commit their entire $7,500, then the college gets $10,000. That increases the incentive for the college to raise tuition to extract the entire amount available from the family. So, it seems reasonable to conclude that the tuition rates would be higher than they would be without subsidies. Clearly, the college would still try to get as much as possible from wealthier families (and from everyone else, too).

In those instances, where the family commits the entire $7,500, it is no better off, but the college certainly is.

However, it’s worse than that when the government “attempts to help make college affordable” over time. Imagine the first year after the government begins offering grants, if our thinking is correct, then one would expect colleges to increase tuitions. That means that the difference between tuition rates and parental budgets–say, a constant $7,500–would grow. If that difference causes Congress and the President to offer larger grants, then we have the beginning of an inflation spiral. The families that continue to spend $7, 500 are no better off than without subsidies. The families that spend less benefit somewhat, but we’d expect that they would be in the minority. The colleges are definitely better-off (and fatter) and tax-payers are strictly worse-off (as usual).

From each family’s perspective, given that grant programs exist, then receiving a grant is obviously beneficial because it provides more flexibility and capacity to meet high tuition payments. However, collectively, if everyone–or enough students–receive grants, than no one is better-off because tuition demanded by the college is higher only because those grants are available, and the colleges get fatter.

(2) Speculation on High Tuition Costs, Career Training & their Unintended Implications

Or, Does Outrageously High Tuition Doom the Liberal Arts to a Ghetto of Anti-social Silliness?

Note up-front that like much of what we write this critique is rather speculative and requires several assumptions. Admittedly, we ignoring many important general economic and demographic factors, and we make several, very gross generalizations, but (obviously) we think our analysis is compelling nonetheless.

Note also that:

• From this site, one can see that government-provided financial aid began in the 1940s for veterans and was revised in the 1950s. It then expanded to segments of the general population in the 1960s and ’70s and expanded beyond grants to include subsidized and guaranteed loans.
• From the link near the top of this post, the reader can notice that tuition inflation has outpaced general inflation for at least fifty years.

As we explained above, we think that the second point is an implication of the first. So, we’ll assume that such subsidies increase the cost of higher education. (It would be truly remarkable, would it not, if subsidies to families reduced tuition rates and made colleges more efficient than they otherwise would be–whether that subsidy is via a grant or a cheap, guaranteed loan. In many ways, the long-term phenomenon is no different than the early 21st century housing price bubble created by Fannie Mae and Freddie Mac’s loose and subsidized credit standards.)

So, what could be the unintended consequences of very high tuition costs? We have two in mind, though the second one depends upon the first one.

College as White-Collar, Vo-tech Training

We think that it is possible to argue that higher college costs, along with the associated large sacrifices and borrowings by households and students, have induced many of them to take myopic, careerist approaches to higher education, e.g., “we’re spending a lot of money and borrowing a lot of money, so you better get a good job when you’re done.”

If that perspective is rampant and consumers of education over-emphasize career training, then college is not a place–or is less-of-a-place–where one can gain general knowledge and the ability to think clearly about a variety of problems and possibly–just possibly–a bit of wisdom. In fact, if that is the case, then college becomes little more than white-collar, vocational training that requires a few other required courses and electives.²

That’s not a new complaint and perhaps we’re just projecting our own youthful motivations and experiences as an undergrad and MBA student–so we imagine that everyone is as money-hungry as we were–but there does seem to be a terrible emphasis on how “useful” a course will be, where “useful” is usually defined as something related to some task that one hopes to perform for some prospective employer.

Unfortunately, (1) the uneducated–i.e., students–by the nature of their ignorance are usually not in good positions to determine what’s useful or not (or what should be taught or not), and (2) “relevant” or “practical” white-collar vocational training often reverts to a kind of monkey-see, monkey-do mimicry.

Such thoughtless mimicry isn’t necessarily optimal for students, their prospective employers, or society. For example, consider the very bad financial modeling that helped cause the worldwide financial crisis in 2008. Many colleges taught–and continue to teach–techniques and algorithms that were in use, but weren’t/aren’t particularly useful (or appropriate). So, rather than emphasize strengths and weaknesses of different techniques and abstractions, the emphasis was on teaching techniques because that’s what students and employers wanted–but not necessarily what society needed (or needs): yet another form of myopia.

So, readers sympathetic to our position may readily accept our supposition. For those unpersuaded we have a question: of every former, current, and prospective college student (and their family) that you know, how many have mentioned a reason other than salaries or careers as their reason to attending college? Be honest and consider the percentages.

Note that all things equal, given the fixed number of credits that need to be earned to graduate, an over-emphasis on supposedly “practical” career training almost always means an under-emphasis on other courses that could increase general knowledge and help develop thinking skills as well as (perhaps) help students acquire a bit of wisdom.³

And what are the costs of that careerist, vo-tech approach to college study? Many are well-known and frequently-made complaints about MBAs and engineers and other professionals: short-sighted, lack the ability to learn and adapt and synthesize, etc., but we don’t want to focus our attention on students who become employees. Instead, let’s consider what that careerist perspective does within colleges and universities.

First, we’ve already mentioned–or at least insinuated–it “dumbs-down” studies within particular fields, particularly in professional schools and for professional degrees where the focus is often on what’s done (or what’s to be done) rather than what is known (and unknown) about the world or a phenomenon.

The Irrelevancy of Liberal Arts

Second, the enhanced interest in supposed practical, job-oriented training has led to an under-emphasis on non-professional courses and areas of study. (You know, those required courses that enterprising students view as the collegiate chaff of the professional , vo-tech wheat that they seek.)

To us, that lack of interest and the view that such coursework is a “necessary evil” of getting a degree (and a job) means that (many) students take those courses less seriously and view participation as a cost minimization problem to solve, rather than as a value maximization problem. In others words, they presume such courses are worthless and attempt to find the easiest ways to satisfy requirements and other constraints (while attempting to maintain a high GPA, because, you know, “that’s what employers like to see”).

That has a number of implications, including a desire by professors to pander to students via the offering of silly and worthless courses, which, of course, turns the students’ initial perceptions into self-fulfilling prophecies and permits the such profs to (correctly) view most students as short-sighted, money-grubbers with no intellectual curiosity.

But those opposing negative opinions are not the only consequences of the bad equilibrium. Worse is that such indifference (by students and others, including employers) permits radicalized and poorly-trained faculty to flourish and hire others with similar tastes and predilections. They’re not challenged within the academy, because, frankly, other than a few critics on the right, nobody cares. (Did you hear JP Morgan is on campus today?) That’s true of administrations that emphasize careers, student amenities, and NCAA Division I sports teams.

In our mind, that’s why so much thoughtless, knee-jerk radicalism has thrived within (that portion) of academia since World War II.

Such radicalism and silly inquiries and teachings are come at quite a cost to society; however, we think that their effects are overstated, and, again, that’s because the vast majority of students are too busy seeking career training and summer internships. (Did you hear GE is on campus today?)

And, that’s the true tragedy. The high cost of college–partially to due government involvement–induces students to obsess about career factors, so they don’t get the education that they deserve. Well, they don’t get the education they could have received in a different realization of the world, and that education would include, well, an education, including extensive exposure to the classical, liberal arts.

P.S. Like many of our longer posts, we’ll likely edit the errors and typos and possibly expand our analysis as we think more about the issues.

Footnotes:

Related posts:

• Best Sentence That We’ve Read in Awhile
• Abject Silliness
• Solving the Social Security Problem
• If ‘If’s and ‘But’s Were Candy and Nuts…
• When the Going Gets Tough…Quit.

In fact, students of historical linguistics could tell you that many other words are homographs, too, and those students could also explain semantic change, including the pejoration and reclamation of words. (Don’t be a fool, you know where this is heading.)

We doubt that we have much in common with President Obama’s Chief of Staff, Rahm Emanuel, but we do sympathize with him for the grief he is taking for using ‘retarded‘ as a pejorative.

Was it poor judgment? Sure. Should he have known better? Of course. Are we italicizing homographs? You know it. (Actually, because we are lazy and didn’t major in linguistics, only the homographs that are easy to identify and only the first time, but we’ll stop now.)

So, while politically we tend to agree with his critics like Sarah Palin, in this case we think that she and all the other cynical or pious grievance-mongers should grow-up, shut-up and go away.

If you are aggrieved by something that a stranger said about someone else in a place where you weren’t approximately six months ago, then you, dear reader, are either a cynical, politically-motivated d.b. or you are a humorless scold–possibly a bit too sensitive and possibly with deep emotional problems.

In fact, it would do everyone–individually and collectively–much good to remember that on occasion, everyone behaves like a butthead, but there is a huge difference between malicious behavior and simply making a mistake in the heat of the moment.

In our mind, that difference is nearly analogous to Saint Francis de Sales’ distinction between sin and imperfection; however, in this case we have a different ‘Francis’ quote in mind. That would be one spoken by Sargeant Hulka in the 1981 movie, Stripes. When one of the recruits states, “… Any of you guys call me Francis, and I’ll kill you,” the good sergeant replies, Lighten Up, Francis.”

So, lighten up, Sarah and posse. There are too many important issues where he is on the wrong side to worry about a silly one like this one.

Related posts:

• Grow Up
• Two Americas
• Commodity Speculation
• TARP? Garp? Is There a Difference?
• Memorial Day, 2009

Update: This article, White House Toughens Tone, from Monday’s (January 25th) edition of The Wall Street Journal supports our hypothesis. Yeah, blame Bush from your budget deficits. That will get you far.

We don’t mean Scott Brown’s amazing victory. We mean President Obama’s, and we write it quite sarcastically.

For awhile, it seems that all we heard and read was that team and candidate Obama were brilliant and disciplined and ran excellent campaigns against Hillary Clinton in the Democratic primary and then John McCain in the general election–as if he and his staff had solved complicated optimizations problem and had picked the best strategy(ies) from many available ones (to achieve their goals).

But, what if it wasn’t brilliance and amazing problem-solving ability? What if it were simply good luck? What if those campaigns were the only type of campaign they could run and it just turned out to be the right campaign at the right time, given the nation’s economy, mood, etc.

Recently, we’ve heard many commentators–not just conservatives–question the general wisdom and judgment of President Obama and his administration on any numbers of topics, but especially with respect to judging the “mood” of the nation. Many of those commentators have also mentioned that the President and his subordinates have been far less flexible, adaptable, and thoughtful than originally perceived?

What if that’s because they are not? Like a blind pig that finds an acorn or the broken clock that is right twice a day or a one-hit wonder, what if he/they aren’t very robust and don’t learn very quickly and were just lucky? In that case, his opponents and his allies may have both over-estimated him (and his advisers).

Regardless of the reader’s politics, it’s kind of disconcerting isn’t it?

Related posts:

• For President
• Don't Worry, They Hate You, too.
• If 'If's and 'But's Were Candy and Nuts…(#2)
• Ignoring the iceberg, the cold water and the 1,517 dead, the cruise went well.
• Mortgage Losses, the Obama Campaign and Uncertainty Management

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• Paving Obama's Road
• Is He a Good Student?
• Potential Long-term Implications of Nominee Tax "Issues"
• Read It and Weep
• Good Luck, Mr. Obama!

Last month, we wrote about A Rise in Internet Hacking Attempts at this site, and all of those hits seemed to originate from within China. (Whether they were spoofed or not, we can’t tell.)

The number per day peaked over the Christmas break and has since decreased.

We have no idea if there is a relationship between what Google discovered and what we noticed here. We doubt it because we’re tiny and have almost no following and in two years have written only four or five posts criticizing China. However, we have not seen similar attacks at any of the other sites that we maintain.

We would like Google to publish a list of offending IP addresses to shine further light on the issue and so that folks like us can see if there are any matches.

Related posts:

• Curious Quirk: Chrome & IE Give Different Google Results
• Best Sentence We’ve Read in Awhile
• Our Second Anniversary
• Map the Fallen
• This is So Cool!

“Those who do not learn from history are doomed to repeat it.”

—George Santayana

Preface: on Monday, we wrote Human Error (versus Systemic Failure), which supplemented our longer post from Sunday: Intelligence Failures and Bad Information System Design. Much of that ‘Human Error’ post was devoted to mentioning that within organizations, most failures, including human failures, are systemic failures. You can’t blame it on your subordinates!

In the Sunday post, we hypothesized and speculated that bad information system design could be the cause of the recent intelligence failures. We based those suppositions on our knowledge of information systems, common design flaws, and the dysfunctional nature of the federal bureaucracy but with no real or specific knowledge of the circumstances. We don’t work for the government, and we’re too lazy and too busy to investigate on our own, but we figured our hunches were correct (and were willing to stake our meager reputation on them).

So, in the Monday post, we used L. Gordon Crovitz’s column, Intelligence Is a Terrible Thing to Waste, which appeared in that day’s edition of The Wall Street Journal, to provide some anecdotal evidence to support our conjectures of the overly-centralized and overly-rigid nature of the systems.

We closed Monday’s post with: “Sad,  but true.”

Unfortunately, an article in Friday’s edition of The Wall Street Journal, Years of Spotty Data-Sharing on Suspects, provides additional evidence to support much of the criticism that we levied on Sunday (based upon our speculation).

We write “unfortunately,” because this is one of those cases where we hate to be right, but read it (the article) and weep. Here are several items mentioned in the article and our comments.

President Obama ordered agencies to bolster information technology.

• It’s unlikely that the failures are about technology or inadequate budgets. Note, using open-source web apps, our database-driven site and e-mail costs less than $150 per year to operate. It is a state-of-the-art publishing system that could be easily used by departments and agencies to post (and categorize) qualitative information and leads. Those categories could include substantiated versus unsubstantiated claims.
• More likely it’s about system design. We’re not under-estimating the volume of data for some agencies, but we are questioning the need to centralize its storage and management. More on this below.

A previous integration attempt, appropriately called the Information Integration Program, failed.

• Is anyone surprised by that result?
• We suspect it is overly-rigid and centralized.
• We also suspect that if such an integration attempt were to ever succeed, it would be immediately obsolete–most likely because some such agency upgraded one of its databases, and it is no longer integrable.

Supposedly, another integration attempt won’t be complete for two years.

• Remember: the last attempt failed. So, why believe the two-year deadline?
• It likely involves many industrious and very hard-working consultants spinning around on the little hamster wheels and sweating profusely, but with no real chance of success. It would be a Greek Tragedy if it weren’t an American one.
• There are needs for large systems, but we suspect far fewer than presumed.
• The issue isn’t how to accumulate all information and data, it is how to access information as efficiently as possible. So, why should a middleman aggregate it when individual agencies could publish it and searchers (with proper clearance) could immediately find it.

Emphasis on connecting e-mail systems

• Please see our post, Inexpensive but Valuable Web-​based MIS, especially the section, ‘E-​mail as the Central Nervous System.’ No need to repeat the argument here, but e-mail is an inefficient management information system. Better and inexpensive substitutes exist.
• Communication should be about be about publishing facts, speculations, and opinions, and letting others search those posts or reports (and/or receive feeds of future ones).
• E-mail is archaic for these purposes. We ask, dear reader: do you know any one of our several e-mail addresses? Unless or are a friend or acquaintance, no, you don’t. Yet you can read our current and past speculations and be automatically informed of future ones.
• Why shouldn’t intelligence analysts, within their own communities, have the same capacities that you, dear reader, have throughout the worldwide community that is the web? Provided you live in a free, uncensored society, you have the capability at little or no cost. You can search for items of interest and read and evaluate them based upon your knowledge and perspective. You can think we’re a fool or not, but you can make that assessment yourself for your particular problem or need. Why shouldn’t analysts be able to do the same on their intranet?

National Intelligence Library permits searches of finished reports

• That’s good, but it’s not enough.
• How much subjective and unsubstantiated and unverified data are eliminated from those finished reports? Again, that’s the stuff of new leads and threat identifications.
• How long does it take for such reports to be “finished” and available for general consumption?
• If agencies or work groups had their own (secure, intranet) publishing platforms, why bother consolidating? Let potential users, with the right clearances, surf. Another way to ask: why bother consolidating when the consolidator cannot necessarily anticipate the needs of users? Also, each blog on the web has its own system of permissions for access to private and password-protected information. Has anyone investigated whether a central clearinghouse is more efficient than maintaining access to data at local levels.  We don’t have many subscribers, but we know when we have new ones, and can grant various levels of permissions to them.

Problems searching unprocessed information, especially clearances

• See Sunday or Monday’s post.
• Regarding who has access to which databases, security clearances are a major issue for a variety of good reasons, but distinctions should be made between data about citizens and foreigners, and there is no reason to endow foreigners with our rights; so, information about foreigners should be more easily accessed.

Security clearances

• Obviously necessary, clearly a constraint. In fact, by definition, they are constraints on sharing.
• We don’t have an answer to this issue, but we do have questions: Is clearance a status-symbol? Should lower level investigators and analysts have greater access? What are the costs and benefits of greater access? How could leaks compromise various investigations? Obviously, records of visits, queries, etc, can be kept (just like we have at our site and most other web publishers have).

Terrorist Identities Datamart Environment

• We ask: who, other than a government (or corporate) bureaucrat (or parasitic consultant), could like that name? Seriously? Is it that crucial to create a word from the acronym?
• Does the mangling of English imply anything about the construction of the system? We wonder.
• It’s clearly a centralized system, and based upon the Crovitz column we mentioned above, it seems very difficult to get on the list. We suspect it is harder to get off of the list.

What would we do?

For certain standardized monitoring and detection systems, there is a clear need for large databases. These are similar to record-keeping systems for transactions and events, i.e., not much different than, say, keeping track of checking account transactions or purchases and returns at WalMart. In a world-wide endeavor like terrorist detection and monitoring, such systems need to be search-able web applications (on a private intranet). That very much reduces the need for consolidation into one ginormous database.

In fact, the web is nothing if not one, large, searchable database (made of millions of small ones). However, the consolidation and aggregation is inherent and organic, rather than commanded or centrally-planned. In fact, modern sites are database-driven, and a visit to a page is the call to an (actual) database. Every time a Google search is performed, the web surfer is running a query, and has access to some sites but not other, password-protected ones.

Moreover, the search engines have developed algorithms to present the results in particular ways, and they are incredibly good at it. (At least on those searches where we rank high.) That is where time and effort should be devoted–not in attempting to physically consolidate disparate databases.

In that respect, let the disparities grow so that each agency can best serve its own mission, yet produce and publish intranet-accessible reports and notes.

We’d imagine that many of investigations are ad hoc and involve a bit of serendipity. We would imagine that with slightly different missions, the agencies have slightly different data and information requirements and emphases and traditions and cultures. So, why try to centrally consolidate (and therefore homogenize) the unique systems that may have evolved for specific and good reasons.

However, small, idiosyncratic systems that comprise a security intranet,  can be index-able and search-able–just like the web.

So, we say harness the power of existing web applications and technology to protect our nation. Allow investigators and analysts be entrepreneurial publishers of their idiosyncratic views, facts, and suppositions. (All private and all secure on an intranet.)

Let investigators and analysts publish their reports and speculations for themselves and other agencies, join forums, and converse with their colleagues–even anonymously. (We reiterate: all published securely and privately on a huge intranet, of course.) Let them use their intellects and training to behave entrepreneurially, not bureaucratically.)

Use central resources to develop search algorithms and security clearance/permissions applications that operate seamlessly in a secure environment. Integrate intelligently, not by consolidation, by query. User management and permissions are immensely important, but millions of sites have solved such problems. With a bit of guidance and in time, we think the government can, too.

Information: it’s like the economy (and wealth) stupid. Try to centralize it, and you’ll kill it and destroy the incentives to produce more. In that respect, see The Wall Street Journal’s Review & Outlook, ‘A Failure to Connect the Dots’, for more corroborating evidence and perspective.

We’ll likely edit this post in the morning. (We did, and will likely do so again.)

Related posts:

• John Bolton is Right
• Idle Speculation about Spam and Terrorists
• Information System Design
• Human Error (versus Systemic Failure)
• A Nationwide Dangling Feedback Loop

After intermittently pondering the attempted Christmas Day bombing of Northwest Flight 253, yesterday we published Intelligence Failures and Bad Information System Design.

Per its title, we speculated that bad information system design could have been the cause of the failure. In particular, if the system is overly-centralized and overly-rigid intelligence failures can occur. (It’s a long post, but we think that it is well worth reading.)

Shortly after publishing it last night, we saw today’s (Jan 4) opinion column by The Wall Street Journal’s L. Gordon Crovitz. His column is entitled Intelligence Is a Terrible Thing to Waste.

In it, he quotes the head of the FBI’s Terrorist Screening Center, Timothy Healy, and Mr. Healy’s explanation of ”reasonable suspicion,” which is what it takes to get on a “list.”

“Reasonable suspicion requires ‘articulable’ facts which, taken together with rational inferences, reasonably warrant a determination that an individual is known or suspected to be or has been engaged in conduct constituting, in preparation for, in aid of, or related to, terrorism and terrorist activities, and is based on the totality of the circumstances. Mere guesses or inarticulate ‘hunches’ are not enough to constitute reasonable suspicion.”

Mr. Crovitz then goes on to explain that if Mr. Healy’s explanation sounds like legalese that’s because it is and that it is silly and dangerous (our words) to treat potential foreign terrorists and enemy combatants as domestic criminals.

That’s very similar to we wrote yesterday:

…In particular, we could imagine that unverified and unsubstantiated reports are among the least generally-accessible data–until they are verified, reviewed or accepted by the bureaucracy, regardless of whether that involves a single agency or an over-seeing umbrella group.

BUT those unsubstantiated reports are the ones that are most likely to provide information about new terrorists like Abdulmutallab, (and that is the problem with treating foreigners who are threats to our national security as criminals rather than enemy combatants.) If our hunch is correct, then one should expect future “intelligence failures” to arise in similar situations.

Moreover, if our hunch is correct, then a centralized, database administrator’s (rather arbitrary) rules–or worse, some lawyer’s rules–substitute for the individual knowledge and discretion of various field agents and supervisors.³ As such, fields agents may not have the opportunity to synthesize the information until it is too late. (It’s a case of the perfect being the enemy of the good.)

By the way, Mr. Crovitz concludes with:

We have a choice. We can limit how information is used or we can allow smart use of information to prevent attacks. If we continue to choose to limit how information can be used in our defense, we shouldn’t be surprised when our defenses fail.

In that closing paragraph, he succinctly states the problem that we more precisely explain (in terms of information system design) and our recommendation to make security-related information systems more like the internet and blogosphere.

When Human Errors Are Systemic Errors

Please note our footnote (#3) in the third paragraph of the above excerpt from yesterday’s post. It reads: In this post, we won’t provide any support for the following statement , but, like errors in banking and the financial services (and almost everything else), we prefer errors to be idiosyncratic rather than systemic. (See Systemic Risk Regulation and Irony and especially Idiosyncratic and Concentration Risk, Again for our perspective in those areas.)

We noticed an article in today’s Pittsburgh Post-Gazette, Bomb attempt blamed on human error that describes Deputy national security adviser John Brennan’s explanation for the security failure.¹ To paraphrase, he said it was human error.

Blaming something on “human error” makes it seem like an individual, rather than the system, failed–like the sole checkpoint operator arrived late because he was hung-over from a Christmas party. However, unless some device or dog fails, all errors are human errors. In fact, one could argue that device and canine errors are human errors, too, because the planner or designer did not have the foresight to anticipate and mitigate those errors or failures.

So, one–that would be us–could argue that fixing the blame on human error isn’t very descriptive or useful. If at some level, all such errors are human errors, then we haven’t been told much or learned much. We don’t know if those “human errors” are truly idiosyncratic or systemic. Did a poorly-designed system induce higher levels (or probabilities) of human errors (than what could have been)? We don’t know.

When it seems reasonable to assume that near-perfect detection is demanded, we wonder why the system designer or administrator would permit truly idiosyncratic errors, and we wonder if contingencies have been developed in case of failures.

We’re not calling for over-complicated solutions, just a little foresight. In that sense, it’s not different than planning for the failure-related activities in manufacturing or any other field of endeavor. Such planning should occur ex ante, rather than ex post, but does it?²

So, unless there was egregious, criminal, or treasonous behavior by a member of one of our security forces, blaming human error doesn’t answer the question of what went wrong, and does little-to-nothing to prevent such problems in the future. Moreover, it validates what we wrote yesterday (immediately below the excerpts shown above):

Unfortunately, that problem is exacerbated once those rules and policies are set. Later administrators may be unwilling to “rock the boat” and initiate worthwhile changes because there is a chance of being blamed for subsequent failures but little chance of being rewarded for success. (Those accolades would most likely go to the “eagle-eyed” agent who noticed something was wrong.) By the way, as we often argue, it is difficult to categorize such a choice–not to act–as irresponsible behavior, especially when it is induced by poorly-designed policies and a lack of managerial discipline. That’s why it is a bureaucracy, after all.

So, rigid policies self-perpetuate and information, hunches, and rumors are not passed along.

Sad, but true.

Related posts:

• John Bolton is Right
• Systemic Risk Regulation and Irony
• Sad but True: Intelligence Failures & Bad Information Systems
• What ‘Miranda’ Rights?
• The Cure is Worse than the Disease

In this rather long post we speculate about a possible underlying cause of the “intelligence failure” involving Umar Farouk Abdulmutallab, the Nigerian accused of trying to blow-up Northwest Flight 253 on Christmas Day. Of interest is how he was cleared to fly despite his father notifying U.S. authorities of his–the son’s–extremism and potential for terrorism.

Note that we have absolutely no private information regarding either the incident or government information systems; so, we speculate based upon our knowledge of other large, bureaucratic organizations with rigid, poorly-designed systems.

We realize that incentive problems–which result in the unwillingness of agencies and individuals to share data and information across jurisdictions–and our freedoms and rights constrain the effectiveness of investigative efforts, but for the most part, we’ll ignore those issues to focus on information systems.

Common MIS Issues & Problems

A few weeks ago we wrote Inexpensive but Valuable Web-based MIS. Besides describing those beneficial systems, we mentioned that many so-called “management information systems” are, in fact, merely data-processing and record-keeping systems (for transactions and events).

Such systems rarely provide information–decision-altering content–for the types of strategic decisions made by senior managers, and unfortunately, they may not be well-designed to provide useful tactical information, either. That’s the case if the systems:

1. Produce useless standardized output (reports);
2. Are difficult to fully access or query; or
3. Don’t adapt quickly or well to changes in the environment, operations or institutional knowledge.

In Umar Farouk Abdulmutallab’s case, we suspect that it is the inherent rigidity of the database application and/or the rigidity of the designers’ thought processes that are to blame. (Note that for new information systems, useless standardized reports result when systems designers don’t ask users the correct questions or do ask the right questions, but don’t really understand the replies. See Details Are Not Information for more on this topic. One of our MIS friends often remarks that her key function is to serve as a translator between system users and system developers, and that role is critical but too often ignored. For older systems, irrelevance and obsolescence usually result when the system isn’t easy to change.)

What Went Wrong on Christmas?

When bad things happen, i.e., when someone like Umar Farouk Abdulmutallab squeezes through the detection sieve, it is possible that nothing failed. One must consider that the detection system–the net, the filter, the web–may not have designed to catch everything and that the designer or owner considered a certain level of error or misclassification to be acceptable.  The designer may have concluded that a perfect, error-free system is too expensive to develop and maintain.¹

However, the failure in the Abdulmutallab case was so egregious that it seems far more likely that either the detection system was either incompetently designed or administered.

Now, it is quite possible that a government sentry or sentinel fell asleep or neglected his or her responsibility. In that case, it is both a human error–because a person failed–but also a systemic error because there was no redundancy or backup mitigate such error. However, rather than criticize government employees involved with the nation’s security, we’ll assume that they are earnest, capable, and hard-working as we believe that is true.

In that case, it must be that despite their best efforts, the detection system failed, and one reason for the failure could be the improper design of the government’s information system.

One obvious weakness in the terrorist detection system–and it is by design–is the government’s unwillingness to use conditional probabilities to assess the likelihood that someone is a terrorist, especially if the person is a foreigner and is not protected by our Constitution and Bill of Rights. As we wrote in The Absurdity of Hassling Grandma but not Nidal Hasan, we do blame the government (and President Obama) for maintaining policies and procedures that ignore information, i.e., prior and posterior (conditional) probabilities that someone fits the well-defined profile of a terrorist.

However, other than criticizing his unwillingness to “profile,” we don’t blame President Obama for the failure on Christmas, and we think that it is silly for others to blame him.

We do think that his preferences and mindset for large, centralized, mechanisms–e.g., nationalized health-care, bail-outs, etc–are similar to the problem we discuss below, but in all likelihood, the system predates his tenure.²

So, despite the system handicapped by the unwillingness to profile, if the intelligence failure was not President Obama’s fault (and not former President Bush’s fault) and it is not the fault of those manning the systems, than who or what is to blame?  We suggest that the reader consider a poorly-designed, overly-rigid database/information system.

Too Rigid

By definition, in an overly-rigid information system, both the input and output functions may be less flexible and user-friendly than required. Given the federal government’s penchant for large, centralized, standardized solutions, it is easy for us to believe that such an information system (or systems) has (have) been employed in the war against terrorism and that such systems increase the likelihood of “intelligence failures” and terrorists evading detection.

Rigid Input: Round Holes, Square Pegs and Worse

Consider the idiom of “putting a square peg in a round hole.” For databases that means that certain facts that should be recorded may not be easily categorized into available fields because proper, descriptive fields do not exist (and cannot be easily added). For example, consider census or EEOC forms where there is no appropriate box to check: where it is required to select a single “nationality” or “race” when you are 1/16 of this and 1/8 of that, et. al.

If such metaphorical “square pegs” could consistently be jammed into “round holes,” there would not be an issue because users would likely have developed heuristics (rules-of-thumb) to create well-formed substitutions and work-arounds. In all likelihood, those rules or mappings would not be formalized in any official manual or documentation, but they would be well-known and transmitted during both formal and informal training sessions.

Unfortunately, real-life is often not so simple, because the so-called “square pegs” may not be of, say, uniform size, color, and shape.

In fact, other than certain fields like names and addresses, we suspect that many of the facts that should be recorded can’t be easily or succinctly described in a word or two–that they are more nuanced and qualitative and graduated and require lengthier, usually subjective descriptions. Actually, they may not be very different than blog posts, and we would hope that writers and recorders of those posts would have the flexibility to create new fields and categories on-the-fly–like we do every time we add a new tag or category.

Unfortunately, we suspect that leads to many “coding” errors and inconsistencies and extremely long descriptions of fields (to prevent such “errors”.) We also suspect that it leads to too much oversight; many layers of approval by superiors (and therefore much editing and changing); and overly-restrictive input policies, e.g., “he doesn’t have the permission or authority to write that.”

Moreover, we also suspect that these problems are exacerbated when investigators and field agents aren’t involved in the information system design process.

Rigid Output

Other problems with rigid, poorly-designed systems include (1) not providing useful, standardized output or (2) not having the capacity for users to easily search and access stored data for ad hoc queries.

Note again that we have no knowledge of actual, routine TSA, FBI, CIA, and Homeland Security reports, and if we did, we probably couldn’t write anything.

1. Too Centralized and Uniform

That being said, we could imagine that there are different levels of security clearance, and that access to the data could be overly-restricted based upon those clearances. In particular, we could imagine that unverified and unsubstantiated reports are among the least generally-accessible data–until they are verified, reviewed or accepted by the bureaucracy, regardless of whether that involves a single agency or an over-seeing umbrella group.

BUT those unsubstantiated reports are the ones that are most likely to provide information about new terrorists like Abdulmutallab, (and that is the problem with treating foreigners who are threats to our national security as criminals rather than enemy combatants.) If our hunch is correct, then one should expect future “intelligence failures” to arise in similar situations.

Moreover, if our hunch is correct, then a centralized, database administrator’s (rather arbitrary) rules–or worse, some lawyer’s rules–substitute for the individual knowledge and discretion of various field agents and supervisors.³ As such, fields agents may not have the opportunity to synthesize the information until it is too late. (It’s a case of the perfect being the enemy of the good.)

Unfortunately, that problem is exacerbated once those rules and policies are set. Later administrators may be unwilling to “rock the boat” and initiate worthwhile changes because there is a chance of being blamed for subsequent failures but little chance of being rewarded for success. (Those accolades would most likely go to the “eagle-eyed” agent who noticed something was wrong.) By the way, as we often argue, it is difficult to categorize such a choice–not to act–as irresponsible behavior, especially when it is induced by poorly-designed policies and a lack of managerial discipline. That’s why it is a bureaucracy, after all.

So, rigid policies self-perpetuate and information, hunches, and rumors are not passed along.

2. Searchable? We Doubt It.

As we have repeatedly mentioned, much of this post is mere speculation. A few of our conjectures are projections based upon our own experiences. Given that, we could imagine that investigators, analysts, and agents cannot query or search the entire database (if it exists in one place).

Most likely, they receive exported subsets of the data, and those subset do not arrive immediately upon request. (The decision to grant the request is probably made by a database manager or administrator and may require detailed specifications and possibly multiple approvals–a whole process. Again, that’s why it is a bureaucracy.)

Now, we’re not sure of the benefits of such a bureaucracy and suspect that such processes continue to exist because “that’s how we’ve always done it,” which could be translated as “we don’t know any better.”

Regardless, there are costs to such procedures. Besides the possible lack of timeliness, there is a reduced opportunity of discovering anything–patterns, what not–accidentally or serendipitously. When a subset or export is requested and justified it must be completely specified; so, the requester needs to know exactly what he or she plans to investigate before completing a request and there is little chance of expanding or redirecting the investigation without re-submitting requests for additional fields.

In addition, if the entire database is not fully-searchable, then investigators are less likely to find matches and patterns across fields. Recall our criticism above: with rigid input fields, and varying “square pegs,” agents in different locations and departments may input similar facts in different fields. If some of those fields are not available and searchable, then investigators will get fewer hits and matches and that will reduce the chance of making connections and discoveries.

Our Recommendation

So. the diligent reader, who has made it to this point, may ask: if your hypotheses and speculations are correct, then what’s your solution? (Alternatively, they may note that the sellers of hammers tend to see a lot of nails.)

We reply with a rhetorical question: why can’t such systems or conglomerations of systems be more like the web and blogosphere? By that we mean why can’t they be unfettered, completely-searchable, accept responsible comments and questions, and even permit writers with varying degrees of credibility to post entries. (If the government already has such a system, then kudos to it.)

Why not decentralize the process and empower security investigators, analysts, and agents to use their idiosyncratic beliefs, opinions, information, experiences, positions, and knowledge to identify problems and to adapt the database as threats and knowledge change?⁴

We imagine a mini-version of the internet (with the ability to search the entire internet, too), where individual agencies publish blogs and news reports for themselves and other agencies. (Geez, they could even sign-up for each others’ feeds.

Of course, such a system would need to be at least as secure as on-line banking, but more private, but all such systems must be.

Note, also, that nothing precludes the running or harvesting of routine reports from such sites. That’s what search engines and their bots and a host of sites already do. They standardize the output of many disparate systems. In fact, our recommendation does not require any new or advanced technology–just the application of existing platforms that are freely and readily available to anyone with a few bucks and an internet connection.

Granted, it’s on a much larger scale than our blog, but it need not be expensive.⁵ Moreover, we suspect that access to existing systems could be incorporated easier via web apps than through custom programming forays that attempt to merge or consolidate existing databases.  For example, every Google query searches millions of MySQL and MSSQL databases all with slightly different structures and fields.

Maybe we’re wrong, maybe we’re right. However, even if our diagnosis is correct, we doubt that the government would act on our recommendation. It would most likely try a centralized “fix” of the identified problems or would try a pilot-program that (due to its limited nature) would be destined to fail. In that case, hoping for continued good luck might be the most reasonable and viable strategy.

In closing, note that we are not disparaging the efforts of our fellow citizens or the nation’s allies in their defense of our country and way of life. Instead, if our speculations are correct (or nearly so) we are recommending a change in strategy and tactics so that their earnest effort yields more productive results.

As usual with long posts, we’ll likely make corrections and edits that clarify our prose during the next few days.

Copyright © 2010 Spero Consulting.

Footnotes:

Related posts:

• John Bolton is Right
• Information System Design
• Idle Speculation about Spam and Terrorists
• Human Error (versus Systemic Failure)
• Sad but True: Intelligence Failures & Bad Information Systems

Nothing was done about it. According to the Journal, “The communications between the men appeared related to Maj. Hasan’s work at Walter Reed Medical Center and his pursuit of a master’s degree…”

So let’s try to understand this. It’s okay to be a U.S. Army officer and contact a radical cleric who tries to recruit for the jihad on his web site…if it’s for “educational” purposes. (We imagine that one “educational” purpose would be, say, “I want to learn more about the jihad and what I can do to help.”)

Geez, we recall when Pete Townshend (and a few others) were caught with kiddie-porn on their computers, and their defense was that they had it for “research” (read educational) purposes, only. Not very compelling there, either.

Think of the billions of dollars and millions (if not billions of man-hours) used to harass honest citizens at the nation’s airports. Folks for whom the prior probability that they are, in fact, terrorists is as close to zero as practically possible. (We ask, how many zeros are to the right of that decimal point for you, dear reader?) Folks who have never contacted radical clerics for “educational” reasons or any other reasons. In fact, folks who would prefer that the government take actions to block or remove such sites–even if it means taking down the power grid in Yemen. Folks like you and us and your grandmother or your children’s grandmother.

As a citizen, Major Nidal has rights, but as an Army officer, he doesn’t have the same freedoms as civilians, yet the FBI and Army are too emasculated and weak-willed (and politically correct) to play the probabilities.

What’s the probability that someone has terroristic or severe anti-Western tendencies GIVEN that they sought out and conversed with a radical Islamic cleric and jihad recruiter?

It seems to be quite a bit higher than the probability that the federal government can effectively manage health care–by at least one order of magnitude.

While we’d like to close with the previous sentence–we think it’s kind of pithy–we must ask: how many other individuals like Major Nidal, have the agencies ignored, deemed harmless, or not bother with? Wonder if any of them live near you, or us?

Related posts:

• Intelligence Failures and Bad Information System Design
• It’s the Unintended Consequences, Stupid.