Author: ken

“Security Theatre”

“There must be a reason the laptop is singled out” at airport security, wrote Matt Richtel , a technology reporter for The New York Times.  But in trying to find our what that reason might be, he ran into a bewildering array of evasions and obfuscations.

A spokesman for the T.S.A. couldn’t explain it because he “didn’t want to betray any secrets.”  No help there, but Richtel went on to explore possible explanations.  Could battery compartments be used to hide homemade bombs?  Yet, he reasoned, some netbooks and ultrabooks have similar compartments, and they don’t require separate screening.

Maybe, though, the circuitry of a laptop could be replaced with a device to jam an airplane’s controls.  Yet that could be done just as easily with phones or game players, which also do not have to be separately screened.

A blog site for the T.S.A. offered this explanation for having travelers remove laptop from their carryon bags:  “screeners can get a better look at them and see more easily into the rest of the bag.”  But usually screeners do not actually look into the bags, so that “explanation” explains nothing.

Richtel commented that “a security expert who asked that he not be identified . . . said that the laptop rule is about appearances, giving people a sense that something is being done to protect them.  ‘Security theater,’ he called it.” (See, “The Mystery of the Flying Laptop.”)

Bruce Schneier, the security chief for British Telecom and a long-time security expert on the psychology of security, agrees:  “It’s all nonsense.”  There just is no reason that has to do with actual security.

So, then, what are the irrational reasons?

One is to be found in the old adage, ‘better safe than sorry.’  Excessive caution feels reassuring and prudent.  Along those lines, undoing a safety rule can feel dangerous.  What if the rule is repealed, so this worried thinking goes, but then someone does actually figure out a way to slip a bomb into a laptop?

No doubt this is how rules and regulations proliferate.  If something goes wrong, our tendency is to create new laws and procedures to correct the old ones.  Rarely will a reform movement lead to a rethinking of all the rules.

True enough, but I think the stronger reason is that incentives to make life pleasanter are weak.  To be sure, eliminating unnecessary procedures would improve life for countless thousands of travelers not to mention baggage screeners.  But whoever got rewarded for making life easier?  We’d rather feel safe.

We don’t expect things to be simplified and made easier.  We care more about security and safety.  Driven largely by anxiety and fear, we recoil not just from the physical threat of bombs but also from the risk of being blamed for what goes wrong.  We don’t want to feel guilty.  We don’t want to be singled out.

So we dutifully line up and submit to safety procedures, regardless of how arbitrary and nonsensical they may be.  That is, until, armed with the safety of numbers, the crowd rebels.

 

 

 

 

 

 

 

 

And Understanding Their Decline and Fall

A new book, Why Nations Fail, argues that the wealth of a country is most closely correlated with the degree to which the average person can profit from his or her own initiative and effort.

In other words, claim the authors, Daron Acemoglu and James Robinson, it’s not about culture or climate or technological backwardness or, even, natural resources, as many economists since Adam Smith have argued.  It is about people having the opportunity to profit from their own work.

Adam Davidson, who writes “It’s the Economy” column for The New York Times Sunday Magazine, noted:  “According to Acemoglu’s thesis, when a nation’s institutions prevent the poor from profiting from their work, no amount of disease eradication, good economic advice or foreign aid seems to help.”   He added his own telling example of Haitian mango farmers.  “Each farmer had no more than one or two mango trees, even though their land lay along a river that could irrigate their fields and support hundreds of trees . . . .  But these farmers also knew that nobody in their village had clear title to the land they farmed. If they suddenly grew a few hundred mango trees, it was likely that a well-connected member of the elite would show up and claim their land and its spoils. What was the point?”  (See, “Why Some Countries Go Bust.”)

Why Nations Fail is closely reasoned and persuasive.  You might think it would also come across as common sense in an age where the logic of markets has triumphed over centralized planning and collectivism.  It’s the same logic that drives entrepreneurs, inventors, local businesses, micro-lenders, and merchant in the souks and bazaars around the world.  What might have kept us from seeing this point before?

No doubt the power of entrenched interests, the land-owners in Haiti, for example, the ones who have the power to take over a good thing when they see it, or to prevent a competitor from thriving.  Or “special interests” that get legislation passed on their behalf.  Or simply the forces of too much money, overwhelming competition, corrupt government, unequal protection under the law, and so on.

According to Acemoglu, the Tea Party and Occupy movements show that many Americans still believe that that the political process can make a difference.  “But, he quickly pointed out, what if Americans find their protests have no impact? What if the United States becomes a truly extractive nation, with violent repression of protest or — in some ways, worse — the grudging acquiescence of the beaten-down masses?”

Acemoglu is pessimistic.  According to The Times, the book’s “sections on ancient Rome and medieval Venice are particularly compelling, because they show how fairly open and prosperous societies can revert to closed and impoverished autocracies. It’s hard to read these sections without thinking about the present-day United States, where economic inequality has grown substantially over the past few decades. Is the 1 percent emerging as a wealth-stripping, poverty-inducing elite?”

If people believe they have the opportunity to prosper, they will work to succeed.  But if the opportunity isn’t really there, even if they try, they will fail — and stay poor.

 

Can They Be Bad for Your Health?

The potential dangers of financial instruments, argue two professors at the University of Chicago, “seem at least as extreme as the dangers of medicines.”  So they should be vetted by a “financial products agency,” like the Food and Drug Administration for drugs.

Full disclosure of risk is not enough, they claim, as information seldom deters people from acting against their best interests.  A drug that does not work or has harmful side effects should be kept off the market to ensure that people won’t buy it.  That is an interesting point, as the inference is that if investors were to be informed that a financial instrument is potentially dangerous or toxic they would not be deterred from buying it.  They will gamble with their money, as they should not be allowed to gamble with their health.

They have an interesting point, essentially based on a clear discrimination of the markets for goods and services, which by and large should not be regulated, from financial markets, which can be socially harmful.  As Gretchen Morgenson, the reporter for The New York Times, put it in her account of their proposal:  “For example, financial instruments could be judged by whether they help people hedge risks — which is generally beneficial — or whether they simply allow gambling, which can be costly.”

The poster child for dangerous instruments that incite financial speculation is, of course, the “credit default swaps” that played such a critical role in the credit meltdown of 2008.  Imagining a credit default swap being brought before a financial protection agency, the professors wrote:  “We would expect the F.P.A. to treat it skeptically.”

The professors say their goal, though, is not to protect investors from shady practices but to “deter financial speculation . . . [that] contributes to systemic risk.” (See, “How to Prevent a Financial Overdose.”)  Only if the economy is endangered by excessive risk should government step in.

I doubt if investors, small investors particularly, want to gamble. It’s one thing to buy a lottery ticket or go to the races, but most of us want to protect what we have stashed away for our children or for retirement.  We are retail shoppers, looking for bargains, perhaps, but not looking for windfalls.  Credit default swaps were never targeted for the man on the street.

So what are these professors really saying?  My guess is that they are dancing on a tightrope, wanting to affirm the primacy of free markets, like all their peers.  Investors ahold be allowed to gamble and, even, run the risk of being hoodwinked.  But lacking confidence in the ability of the financial industry to use its own good judgment, they want to regulate them.  It’s not the consumer who needs protection.  It’s the big investors that need to be reined in.

A better analogy might be gun control.  You don’t want to make guns too easy to get for those who are most likely to shoot with them.

 

 

 

 

 

 

 

Politics and Markets

“The first lesson you learn as a pollster is that people are stupid,” said Tom Jensen of Public Policy Polling.  That certainly seems warranted by the wild gyrations and arbitrary opinions expressed during the current Republican primary campaigns.

If the strength of democracy comes from its grounding in public opinion, that sometimes seems to be its basic flaw as well.  Jensen added:  “I also think voters are showing a tendency to turn issues that should be factual or non-factual into opinions.” Think of the “birthers” and those who continue to say that Obama is a Muslim.

Another disturbing sign is how quickly public attitudes towards candidates change in response to events that have nothing to do with them.  A good example being widely cited now is how skyrocketing gasoline prices at the pump have caused the President’s approval ratings to plummet.  Most people who understand gasoline markets know there is nothing Obama could have done about it. (See, “How Much Do Voters Know?“)

Could it be that pollsters bring out the stupidity in people?  Let’s think about that.

By and large, when people express their opinions they know that the results will be tabulated and publicized.  In effect, the question becomes their moment of fame, an opportunity to matter.  That is encouragement to shout out about the things that disturb them most.

Similarly, when asked about gas prices or any other current problem, they want someone to blame.  Angry and often anxious, they see the question as a chance to get back at the source of their discomfort.  The pollster does not usually ask the people they are polling to “take a minute,” or “think about it.”  On the contrary, they want responses, and that is often just what they get.

Quinnipiac pollster Peter Brown, notes:  “Just because someone’s not familiar with something doesn’t mean they won’t give you their opinion.”  But he adds, “And just because they don’t know a lot about it – their vote still counts as much as someone who does know a lot about it.”

“In the business of politics, voters are always right. Just like on Wall Street, the market is always right,” he said. “You don’t fight the market.”

That’s a good point, but when people are confronted with investment decisions, they do often slow down and take the time to think about the reasons why they are making choices.  They worry about the consequences.  It is not exactly the same as showing off, and it’s usually not impulsive.

But it can be just as detached from reality, and just as influenced by the crowd.  What matters is giving your self the chance to wonder if you really believe in what you are saying or doing.

 

 

What to Believe About Goldman Sachs

A few days ago, a mid-level executive quit his job at Goldman Sachs and sent off an expose to The New York Times that ricocheted around the internet.  He accused the firm of contemptuously exploiting its customers, “muppets,” he said the traders called them.  “These days, the most common question I get from junior analysts about derivatives is, ‘How much money did we make off the client?’”

Greg Smith’s description of Goldman’s “toxic and destructive” culture certainly has the ring of truth, and comes as no great surprise to those who know anything about the financial industry.  Conflicts of interest are among the very least of Wall Street’s sins.  Contempt and arrogance are endemic.

But the issue is so charged and has so many partisans that it is hard to see the landscape clearly.  The firm has awed so many with its intellectual fire-power and financial muscle that many have seen it as in a class by itself.  Other firms suffer from “Goldman envy,” palpable in the glee and schadenfreude that has greeted Smith’s expose.  On the other hand, many have rushed to the firm’s defense, like New York’s Mayor Bloomberg.

There is also the virulent competition ever-present in the industry, and the eagerness of other firms to capitalize on any damage to Goldman’s reputation and the eroding trust of its clients.  Moreover, there is dread about how this will further undermine the standing of the financial industry, especially at a time when it is struggling to fend off increased oversight and regulation.

Powerful and swirling emotions cloud the issues.  Smith’s account has a strong suggestion of disillusionment, and a few false notes.  His initial naivete seems exaggerated: “When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces.”  And his account of the culture he came to know at the beginning seems too idealized to be credible:  “teamwork, integrity, a spirit of humility, and always doing right by our clients.”

And then there are his attempts to boast while trying to sound modest:  “Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars.” (See, “Why I am Leaving Goldman Sachs.”)

I don’t doubt the facts he reports, but his account is vulnerable to the scorn with which other financial executives have greeted his “innocence.”  It is also without a suggestion of illegality, making almost certain there will be no investigation.

My guess is that, titillating as the “expose” may be, and accurate in its facts, it will fade quickly from our minds.  The moral, if there is one, is too familiar:  caveat emptor (let the buyer beware).  And Goldman Sachs will go on.