Sunday, July 17, 2011

The Two Debt Ceilings

Lots of heat and little light about the debt ceiling this week. The President has set July 22 as the deadline for a deal regarding the debt ceiling, which begs the questions "What is the debt ceiling anyway?" and "Why does Duvall think we have two of them?" I will try to provide links to my sources. I have opinions, one of them is that people should have data before they make statements.

Part I: The Debt Ceiling

For the first question, the answer is the debt ceiling is an arbitrary limit established by Congress in its present form in 1939 (originally in 1917, as part of war bond sales) that sets the maximum limit to which the government may become indebted. Article I Section 8 of the Constitution assigns to the House of Representatives the ability to create bills that allow the borrowing of money on the credit of the United States Government, among other powers. No body or person in the government has or shares that power, it resides in the House of Representatives. Why? Because as the most granular representation of the will of the public (435 elected officials) it is presumed to be the body most responsive to the will of the public. There are only two Senators from each state, and only one President. Although we all vote for the President, he is one person that is expected to represent the entire population. Your House Representative is responsible to only about 600,000 people, and responsible every two years. All laws regarding spending by the government have to be generated in the House of Representatives. The Senate may or may not approve them, the Senate may have their own ideas and the House and Senate get together in what is called a conference committee to hash out the details and make a final bill approved by both houses, but the power of the purse is in the House of Representatives.

Every few years the House of Representatives has voted to increase the debt limit. Usually, the party in power votes for the increase and the party out of power votes against it while tut-tutting the profligate ways of the party in power. The current President, in his partial term as Senator for Illinois, voted against a debt limit increase in 2006. His thoughts at the time were,
"The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."
John Boehner, current Speaker of the House, voted to raise the debt limit five times between 2002 and 2007, when his party controlled the Presidency. Both persons now find their roles reversed, both seem a little hypocritical, but hey they're politicians. This is a dance that both parties have done for decades.

The reason that the debt ceiling debate is taking up bandwidth now is that back in March the US hit the maximum indebtedness allowed by law, $14.294 trillion dollars. To put that in perspective, a billion seconds is about 30 years. A trillion seconds is about 30,000 years. Fourteen trillion seconds ago there is no fossil evidence of homo sapiens on the planet. That is a staggering amount of money. The gross domestic product of the United States, the value of all goods and services produced by every person in the United States in one solid year is a little over that level, almost $15 trillion dollars a year. We owe 96% of our GDP in debt ALREADY, before any debt ceiling increase. The wheels fell off Greece when they made it to 120% of GDP in debt, we are not far behind that level. We are only 12th in the world in the debt-GDP ratio, but in terms of total indebtedness we are far and away number one with a bullet. Greece is underwater with a paltry $500 billion in debt, we owe 28 times what they owe.

"But hey," you ask, "it's almost August and the debt ceiling was hit in March. How come we aren't seeing mobs march on the Capitol, burning Starbucks stores as they go?" Well, there are a couple of reasons for that. The Treasury has some latitude to short-term borrow from federal pension funds, which has kept us afloat until now. The other reason is that while our government borrows 43 cents of every dollar it spends, tax receipts pay the other 57 cents of every dollar. We don't need to borrow everything to keep going. Tim Geithner, the Treasury Secretary, has juggled the books with the pension money and kept us going this long without having to hit the market for more debt. That pension-fund borrowing is about to run out, so we either raise the debt ceiling or we have to live on the taxes we collect.

So what happens if the government is unable to borrow from itself in this manner after August 2? The answer is that the government will not have enough money to meet all of its commitments, and it will have to begin prioritizing who and what gets paid. Even without access to the international debt markets, the United States collects about $200 billion a month, roughly 57% of what the government feels it needs to make ends. What it costs to pay the interest (the "coupon") on the debt we already have is $20 billion a month or so, well within our means. When politicians use the term "default", they mean the government cannot pay everyone for everything. In the narrow but more important financial definition, "default" means failing to make an agreed interest or principal payment, much like missing a mortgage payment. Anyone who tells you the United States is going to "default on its debt" is misinformed. Unless the President and Treasury Secretary are completely incompetent (ahem) the first payment out the door will go to people holding the public debt of the United States. Should the US default on its debt in the financial sense, the credit rating of the US will drop to somewhere around Greece's and interest rates will skyrocket.

If this happens it will NOT be because the Congress did not raise the debt limit, it will be because the Treasury failed to prioritize payments to debt holders, plain and simple. This eventuality is the one that people worry about, but it is very, very unlikely. The only time the US technically defaulted on debt was in 1979, and the last thing the Obama Administration needs is yet another analogy to the Jimmy Carter administration. We can be reasonably certain that the US government will not default on its debt, but with 57 cents to cover every dollar of commitments, somebody is going to get shafted. So who is that going to be?

Although the President shamelessly attempted to scare those dependent on Social Security payments, SSI consumes only about $60 billion a month, meaning that those payments can very safely be made. If you add in Medicare, the military, funds needed to support troops in Afghanistan and Iraq, you get pretty close to the $200 billion that we take in every month. Other things will have to go by the wayside. National Park Rangers, Border Patrol, FBI, Department of Education, Department of Agriculture, school loans, etc. As Chief Executive, the President will have to see how much can be done with the tax reciepts, what will happen is not a default but in essence a partial government shutdown, with the Chief Executive responsible for turning out the lights in the parts of the building that cannot be paid for. There have been government shutdowns in the past, but full shutdowns where people's government benefits have been threatened. This will be different: there is legally-authorized money, just not enough for everything.

The job of the President as Chief Executive is to see that the programs established by Congress are run properly and the money spent appropriately. There was an amendment to the constitution, the 14th Amendment adopted in 1868, that has gotten some press recently in the discussion about the debt ceiling. The main reason we remember the 14th Amendment has been for the Equal Protection Clause, upon which a large body of civil law including anti-discrimination statues are based. That is Section 1 of the Fourteenth Amendment. Section 4 is what is being debated now, quietly and in corners, as to the power of the President to ignore the debt ceiling. Section 4 reads:

Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

It is the first sentence that is in debate. Reading the entire Section and understanding the context as a response to the Civil War, the gist to me is that "Yes, the Confederate States of America owes you money. No, the United States of America is not going to pay it. We are going to ignore the CSA debt because we won, but any debt we issued is going to be honored." Reading the first sentence only, some people argue that because the validity of the public debt of the United States...shall not be questioned the President has a Constitutional duty to ignore the debt limit if Congress does not authorize raising it, and order the Secretary of the Treasury to continue to offer debt after August 2.

The Fourteenth Amendment was adopted over 70 years after the Constitution, which gives it "precedence" -- it has to be evaluated first. If the President decides to use this authority to offer debt above what the Congress has authorized, it will create a "Constituional crisis": the Executive Branch will be appropriating powers given to Congress and the House specifically, and it will be up to the Judicial Branch (eventually the Supreme Court) to decide who wins. There are people that have made arguments on both sides, but I find the argument that the President cannot do this to be more compelling. The Constitution is hostile to rule by fiat, and the 14th Amendment in context is a different story, to my non-lawyer-but-originalist interpretation. I can tell you what Scalia will say, in any event. This will be bad, because if the President authorizes the sale of debt against the will of Congress I would not want to be holding that debt. If negated by the courts the claim of debt holders against the government would be...suspect at best. The markets do not like 'suspect', I imagine that debt will be somewhat undersubscribed.

A 14th Amendment end-run I therefore see as unlikely. What should happen, and what will happen, is that the House of Representatives will pass a bill to raise the debt ceiling, with some conditions. The shape of those conditions is what the debate has been about in the past weeks, a debate that will reach a fever pitch in the coming week. Any agreement to raise the debt ceiling will be accompanied by some combination of offsetting budget cuts and/or tax increases, so that the US has the freedom to borrow to meet cashflow requirements but in essence doesn't have to borrow as much in the future. It's important to know the players and their ideological positions, some inference on my part will follow.

  • President Obama has stated his position that the issue should be addressed with shared sacrifice. He is absolutely committed to tax increases in addition to spending cuts as part of the offsets to the debt ceiling raise. He wants a debt ceiling raise that is large enough that it will not have to be addressed again until after the 2012 elections. When the idea of a short-term raise in the debt ceiling raise was offered, to allow more time for shaping a larger deal he declined, warning "Don't call my bluff" on a short-term deal before storming out of the meeting. He has not been present at the meetings that have occurred in the months leading up to now, sending Vice President Joe Biden to attend the meetings. The details of the proposals in these meetings are not public, but he has yet to propose any change in the entitlement programs (Medicare/Medicaid, Social Security, others) that will comprise ever-larger portions of the federal budget in upcoming years. The tax increases he wants are also not specified but he has mentioned eliminating some depreciation allowances on oil companies and corporate jets, as well as closing other tax loopholes for "millionaires and billionaires". What is certain is that any proposal acceptable to him must have tax increases as a part of the mix.
  • John Boehner, the GOP Speaker of the House, has not expressed personal opinions as to the composition of the offsets for any debt increase. He has clearly expressed that he does not have the votes to pass any legislation that increases taxes as a part of the debt ceiling increase. The GOP House will not accept that proposal and chances are good that even with 100% House Democrat support of any tax increase plan there are not enough Republicans willing to cross the line to form a majority. The plan at this point is to cut $2.4 trillion from the Federal Budget over the next 10 years, in return for a debt ceiling increase of $2.4 trillion. That will get the President the term on the deal he wants through the 2012 election, but not the composition. The GOP House has already announced that they will take up the measure today, Tuesday July 19th, and given that they have a majority it will almost assuredly pass.
  • Mitch McConnell, GOP Senate Minority Leader, is working on a plan that will allow the debt ceiling increase in automatic intervals for a total of $2.4 trillion in the next two years, with the President required to send a list of offsetting cuts to the federal budget that may or may not be approved by Congress. This is kind of a head-scratcher, but it forces the President to detail cuts to get money while allowing the GOP to vote against debt increases. The best description of it is here (Keith Hennessey is wicked smart), opinions vary and analyses I have seen are largely positive or negative depending on the analyst. McConnell is doing this because the House plan will almost assuredly not pass the Democrat-controlled Senate, and there needs to be something on the table or there will be no debt ceiling increase on August 2. Unfortunately, this is unlikely to pass the GOP House so its validity is in question.

The reason for the headache over the composition of the deal is that the GOP does not trust the Democrats to propose actual spending cuts; however, they believe the tax increases will be not only entirely real but detrimental to the economy. The Democrats know the people who will elect them will pillory them if they make cuts to Great Society or New Deal-era programs, support for which largely defines the Democratic Party, and they think the wealthiest Americans have gotten a free ride for the last decade, and should pony up.

Some inconvenient realities are that if you seized ALL of the income of the top 2%, leaving them no income for the year, it would still not close the budget deficit this year...and what would you get out of them next year? Would they even work? Would they still be Americans or would they be economic refugees? Depending on income tax increases for the wealthy to pay for this is a bad idea, particularly because those taxes will also hit small businesses, and economically speaking we are not out of the woods yet.

President Obama acts as if tax increases are not already on the way. There is a raft of tax increases coming in 2013 to pay for Obamacare (the Patient Protection and Affordable Care Act), detailed at the link. Furthermore, the two-year extension of the Bush tax cuts expires in 2013 as well, a bit of a double whammy for the people who largely fund small business in the United States. The tax increases the President wants as part of a debt ceiling deal are in addition to all these taxes that are going to increase on their own already.

Tax receipts as a percentage of GDP are down considerably from the Bush years, this chart from the Tax Policy Center shows that compared to a historical average of tax collection in the US since 1950 of 16.9% of GDP, tax receipts are down to 14.9% of GDP, tax collection was as high as 18.5% even with the Bush tax cuts in 2006. People who want to raise taxes will point to this and say "Stop whining, you're paying far less in taxes than you ever have". People who don't want to raise taxes will point out that the tax receipts by %GDP are probably low because the economy sucks. In 2006, we had 5% unemployment. Our stated rate is now 9.2%, and the real rate is probably somewhere in the mid to upper teens. With a better economy we can get back to historic rates of tax collection by %GDP fairly quickly, and increasing taxes is unlikely to boost the economy. The opposite may be true.

On the spending side, the situation is a whole lot less nebulous: we're spending far more money than than we ever have, both in dollars and in percentage of GDP. The last time we had a budget surplus (2000) we spent 18.2% of GDP and collected 20.6% of GDP in taxes. During President Bush's term, spending increased as a percentage of GDP, and with the stimulus, the bailouts and a variety of other reasons the government spent the equivalent of 25% of GDP in 2009 while collecting only 14.9% in taxes. There are some confounding factors, the peaks of tax collection were the dot-com and real estate bubble years where the wealthy paid a staggering amount of capital gains taxes, but the fact remains that we have gone from spending 18.2% of GDP to spending 24-25% of GDP in the last couple of years. Tax collections will vary with the economy, but our spending has dramatically outstripped the historical standard.

To summarize the first part:
1. The debt ceiling is approaching on August 2.
2. Very doubtful that the US will default on its debt, very likely that absent a deal there will be a painful partial government shutdown.
2. Opinions vary about what to do about it, largely on ideological lines. The President and Democrats have an ideological bent to preserve spending and increase taxes, because taxes are too low. The GOP has an ideological bent to cut spending, as they believe spending is far above historical levels.

Part II: The Second Ceiling

So far I have discussed the things that are under the government's control. They may or may not reach a deal to increase the debt limit. If they do, they will cut programs, raise taxes or both. If they do not, the President will have to decide what portions of the government to keep operational and what portions to shut down. These are known unknowns, questions that we know there will be answers to though the answers are not yet known.

The larger, and to my mind far more significant problem that the debt ceiling is but a small part of is the staggering amount of debt the United States has accumulated. We are talking about increasing debt by a few trillion dollars to allow for cashflow. The rest of the world is far more concerned about our existing debt, and the obligations that we have made that are not part of the debt: Social Security, Medicare and other entitlement programs that are a demographic certainty to destroy our federal budget.

As a nation we enjoy a AAA credit rating. The belief in the veracity of the "full faith and credit of the United States" is strong, so strong that during the economic meltdown in the fall of 2008 when Lehman Brothers went bankrupt and Morgan Stanley agreed to become a ward of Bank of America, investors purchased short-term Treasury bills (T-bills) with a negative yield. They were willing to lose a small percentage of their money (getting back less than they paid) in return for not losing a larger percentage of their money in stocks and other commodities. Our government benefits immensely from this AAA rating, it's worth at least a percentage point of interest on the debt we issue -- which is a lot of money on $14.3 trillion dollars in debt. Every percentage point of interest on that debt that we do not pay is $140 billion a year we save.

Credit ratings agencies have not covered themselves in glory in the last decade. They greenlit an incredible amount of bad debt, part of the causality chain in the residential mortgage meltdown that burst the latest economic bubble in 2008. They underestimated the risk of that debt very badly, but the fact that they are wrong when they call risky debt safe does not mean that they are wrong when they call what has been safe debt risky, and they are doing that now. Standard & Poor's, Moody's, Fitch and others have notified the federal government that they are getting ready to downgrade our debt, to take away the AAA rating that saves us so much money in interest and upset the world's financial apple cart.

I cannot emphasize enough that our credit is about to be downgraded because of our existing debt, and the lack of any Congressional or White House plan or will to stop acquiring debt in the near future. The downgrade has little to do with our debt ceiling, which is an arbitrary cap on the acquisition of debt and which, if enforced, would actually put us on a more sound fiscal footing, albeit with a very low level of federal services. As I have shown earlier, we will not default on our debt even without a debt ceiling raise, absent gross incompetence on the part of Treasury officials, so the warning is not about our short-term inability to pay back debt. The warning is that our debt is already so high, our future plans in terms of what we've said we're going to pay for Social Security and Medicare imply so much more debt and our economy is so anemic for a variety of reasons that S&P thinks it's possible that we will not pay back our debt at some point in the future. S&P and others, will be saying to investors and money managers, "You should ask for more in interest rates if you agree to take this debt, because the United States government may not have the ability to pay you back," which is kind of a staggering statement but one they WILL make without major structural changes in our budgets.

A credit rating downgrade will be a sign that we are getting close to the second, real debt ceiling: the point at which the market will stop treating our debt as something special and start assessing our debt much like that of Argentina or other distressed nations. We have benefited greatly in the past few years by selling debt into a low interest rate environment. The Federal Reserve has cooperated with this over the past year by in essence buying large amounts of debt from the Treasury as it was issued, this was called "Quantitative Easing", and since it was the second such program the Federal Reserve undertook since the 2008 financial crisis, it was called 'QE2' for short. In essence, the Treasury created $600 billion in debt and the Federal Reserve bought it over the last several months, pumping $600 billion into the economy through the government in addition to the 2009 Stimulus money and all the other "pump priming" efforts of the government. The QE2 is now over, and there is talk of QE3 or other efforts to ostensibly stimulate the economy. While the stimulative ability of QE and Keynesian deficit spending are the subject of debate, the effect on the currency is not: both are creating inflation.

Why inflation? Because if you lower the value of your currency you are able pay people tomorrow with money that is worth less that it was when you borrowed it. The Chinese have noticed this, and are not happy. S&P is noticing this, and is not happy. When investors get unhappy they want more interest, and as each interest point is another $140 billion annually on debt we already owe, you can see why anything that jacks up interest rates is detrimental to the nation. We are already looking at about $1.5 trillion in deficit this year, with a 3% increase in interest rates we'll be looking at more like $1.92 trillion in deficit, with interest payments climbing rapidly as new short-term debt is issued. The recent bias toward issuing short-term debt will work against us, in that interest rate hikes will hit the short-term debt faster as we have to roll it over. Just like at your house, the debt builds up faster and faster when you're paying others interest.

The difference between the "second" debt ceiling and the August 2 debt ceiling is that we may have very little notice as to when the markets suddenly decide in a "tipping point" fashion that they don't want our debt anymore. Interest rates demanded for our debt will suddenly climb, and that's not subject to Congressional action. There will come a point, as there has come a point in Greece, where nobody wants to buy our debt at all, and that will be the true debt ceiling as well pretty much the end of America as we have known it. Our options at that point are defaulting on most government obligations or inflation of the currency to pay off our debts. There is even the potential for hyperinflation, when the currency is simply useless. In my lifetime we've seen similar instance in Zimbabwe (2000s) and Chile (1973), the classic example is Weimar Germany between World Wars I and II. Hyperinflation comes because people don't want or trust the currency, barter is preferable because in the time it takes to get from a place where you sell something for money to where you're intending to buy something for money you can lose significant value. Zimbabwe doesn't even have a currency anymore, they use dollars or Euros but their national currency stopped being printed shortly after they started printing $100 million dollar bills. What is a laugh line in 'Austin Powers' was a reality for those forced to use cash in Zimbabwe.

Bad politics can create bad economic situations, but bad economic situations often lead to the worst of bad politics. The worst example of all is Hitler rising in Weimar Germany, but there was plenty of other demagoguery in the 1930s, from Italy to Argentina and elsewhere. The economic shocks of the 1930s brought us great expansion of the federal government under Hoover and Roosevelt, measures that were ultimately unsuccessful at fixing the structural problems of unemployment and economic depression. What was successful at ending the Great Depression was relaxation of the onerous regulation the federal government laid on industry so the US could arm itself for war, and six years of the fiercest combat in human history that successfully if temporarily de-industrialized Europe, at least, by the time our bombers were through with it. That situation is neither welcome, nor likely to come again.

In summary,
1. The real debt ceiling, as opposed to the arbitrary one set by Congress, is when the world stops wanting to buy our debt. This will most likely happen because we cannot pay the debt we already have.
2. This is not subject to Congressional or Presidential control, and it can happen with little or no warning.
3. Credit rating agencies already believe we are close to the end of our means and are threatening to say so publicly, which will hasten the downhill process.
4. Credit rating agency statements are based on the debt we have and the spending we have planned, which looks reckless to them. Just so you know what 'reckless' means to them, they thought making mortgage loans to people with no job or documentation was fine and dandy. By comparison, the federal government's fiscal policy looks foolish.
5. Credit agencies are not threatening to downgrade us over the absence of a plan to raise the debt ceiling. The downgrade will come because there is no consensus plan to deal with our debt or control government spending.

Enjoy the next week!

UPDATE: Since I wrote this on Sunday and Monday, Moody's has announced that they want to see at least $4 trillion cut from upcoming federal budgets over the next 10 years to continue a AAA rating on the United States Government. The "McConnell Plan" and the "Gang of Six" plan announced today will not cut this much. The only plan that cuts enough is the GOP's "Cut Cap and Balance" plan...the one the Democrats say is dead on arrival.

Monday, May 02, 2011

On The Death of Osama Bin Laden

Heard it on the satellite radio on the way home from work last night that the Earth is short one terrorist leader, courtesy of Joint Special Operations Command, SEAL Team Six and some chopper pilots.

Some thoughts:

1. Am I "happy" about this? Not really. Satisfied would be a better description. A very bad person has been neutralized, one who would create disorder and chaos. The man who watched the 9/11 coverage and later claimed to be pleasantly surprised that the towers fell has met justice. About time, too. A box on a long list is checked, but as far as I am concerned, back to work. There's still Ayman Al Zawahiri, the physician-leader of Al Qaeda who is now the likely head. For strictly professional reasons I want that stain on my field of knowledge removed. There's a whole host of people in Yemen, including Anwar Al-Awlaki, that need a 5.56mm craniotomy. The list is long, and will grow until the ideology behind Al Qaeda is discarded by the Muslim community worldwide. This is an important step, but only a step.

2. The chanting and cheering outside the White House last night made me nauseated. First, it looked suspiciously like the same kind of victory lap the Gazans did after 9/11. The intent of creating goodwill or mollifying anger by treating the body of Osama Bin Laden with respect in keeping with Muslim tradition may not counterbalance the looped video of college kids signing our national anthem off-key and high-fiving each other over something they did not even do.

Second, all this celebration reminds me of bad football end zone dances, the kind that make you think the player had heard of the end zone but never dreamed he'd ever get there. We zapped a high-level terrorist, great job but in the scheme of things we put six landers on the moon forty years ago. The more we celebrate the more we raise the worth of Osama Bin Laden. I think it's reasonable for us to thankfully acknowledge a job well done by people whose names might be known 50 years from now, and move along. A memorial for those lost in 9/11 and in the fights against the kind of xenophobic religious extremism he represented might be more appropriate.

If you're in the military or if you're a NYC Firefighter, you get a pass -- these are your brothers and sisters that have died and been wounded and if you want to hoot and holler you have skin in the game. The GW and Georgetown students outside of the White House, eh, not so much. Congrats, the boogeyman of Osama Bin Laden who appeared when you were eight or ten is now gone. Attempt to comport yourself with some dignity. In case you don't remember we are Americans, we do the impossible immediately, the miraculous takes a bit longer. Save your excitement for things that matter. Save the "USA! USA!" chants for Olympic Gold Medals. We are professionals, this is not exceptional, it's what we DO.

3. Yes, Osama Bin Laden needed to die. He was a bad man, who did unspeakable things and planned worse, the hell he would have unleashed on us but for lack of resources is even worse than the things he is responsible for. A partial list includes the 1993 WTC attack, the 1996 Khobar Towers attack, the 1998 Embassy bombings, the 2000 attack on the USS Cole, the 9/11 attacks in 2001, the Spanish train attacks in Madrid in 2002, the Bali bombing in 2002, the London Underground attacks in 2005 and a lot of the insurgent activity in Iraq that left tens of thousands dead. There are also a host of other individual attakcs, the Daniel Pearl beheading, the Nick Berg beheading, little things in the overall scheme but horrific and intended to terrify. He declared war on us once in 1996, again in 1998, and 13 years later he took two to the head and one to the chest, followed by a short trip to the bottom of the Arabian Sea.

Now maybe he didn't pull the trigger or draw the knife, but he was an inspiration for those who did. Osama Bin Laden was an inspirational figure for years in the extremist Arab world, and his continued defiance of the United States made him a Robin Hood-type folk hero among those Muslims predisposed to active jihad. His arguments were persuasive to them and those close to him displayed intense personal loyalty. It's important to note that he had a $50 million price on his head, and nobody turned him in. The people who believed in him never stopped believing in him, maybe just maybe his death will cause a reassessment of positions that Osama, being fish food, cannot argue away. As a symbol of defiance he had to go, because you can't tug on Superman's cape even if Superman might not want to be an American anymore.

4. The death of Bin Laden is not the end of the War on Terror. Being a cellular network, shooting the lead node in the network does not disable the network. The things Al Qaeda likes, much like The Joker in The Dark Knight, are cheap: gasoline, explosives, firearms. Having built the foundation (literally, Al Qaeda is Arabic for "The Base") Islamofascism is not something you can snuff out with even a dozen takedowns of high value targets. It is a philosophy, a worldview, and those are far harder to kill than even one influential figure with what may be governmental cover in a far off land. None of the signers of the Constitution or Declaration of Independence are still alive, but their ideas linger on.

A similar dynamic is present with Osama, the idea of Islamofascism is out and it's like a bell that can't be un-rung. What wins wars is not the death of soldiers or leaders but the defeat of an ideology. The Japanese spent the better part of thirty years spooling themselves up on ideas of racial superiority, subjugating the Chinese and raping Nanking for ten years before attacking Pearl Harbor. They attacked because their ideology said they could. Our ideology contended with theirs in men and material and their ideology was shown to be unsound. The story of Nazism is similar but shorter, only 12 years from national prominence to utter destruction. The ideology of Japanese militarism and Aryan supremacy did not survive a test of arms. The wars did not end because we killed everyone who believed in those philosophies, but because reality and those ideologies diverged so wildly that people abandoned the philosophies, and with the philosophies the justification and motivation for war.

The three basic lies that underpinned Osama Bin Laden's string of BS are:
a) The US appears strong but that strength cannot effectively be brought to bear.
b) The US military cannot stay in a conflict if it takes casualties.
c) Religious piety will provide an advantage over US forces.

All three of these assumptions have some basis in fact, in the view of Osama Bin Laden. The Russians in Afghanistan were far more vicious than the United States has been in Iraq or Afghanistan, and religious piety won the day there. The US stayed in Somalia until the Black Hawk Down incident, after taking casualties the US pulled out. The US did not respond effectively to successive attack cumulating in the 9/11 attack, despite its technological prowess. We have a tremendous nuclear force but have not used it in 60+ years, for example. Trillions of dollars in nuclear deterrence did not provent 19 hijackers with box cutters from killing almost 3000 Americans. Power that cannot be brought to bear.

All of these assumptions have been confronted and found wanting in the past decade. Especially in the crucible of Iraq, many wannabe Islamists from the Arab world at large have found much to their detriment and sudden violent death that US troops will stand and fight, and will do so effectively. Armed confrontations give way rather quickly to much safer IED-type attacks, both in Iraq where the battle was hot from the start, and later in Afghanistan once US power was fully brought to bear there. We took casualties in combat but have stayed, in Afghanistan for almost ten years and in Iraq for over seven. Part of the credit for this needs to go to George W. Bush, whose resolve in the face of the domestic criticism, vituperation and outright hatred that Osama Bin Laden assumed no President could withstand is a credit to the office. We stayed in place and changed the dynamic with the professionalism of our armed forces, and the obstinancy of a President.

Our open society's ability to adapt and innovate has exceeded that of Al Qaeda and associated groups. The technological innovations used to thwart IEDs and find, fix and destroy insurgent groups are truly amazing, and aggressive use of these plus our troops' skill and bravery have made significant strides in Afghanistan this year.

So, the ideology is being defeated but it is not defeated yet. Calls of "Mission Accomplished" and "Now bring the troops home!" are well-intentioned but run the risk of snatching defeat from the jaws of our victory. Al Qaeda has been embarrassed by their inability to dislodge us from Iraq, and now their titular head just got taken out with no fuss and no casualties on our side. This is not the time to pull back or leave breathing room for Al Qaeda's interpretation of the appropriate use of jihad. People will abandon philosophies that make them look stupid. Osama himself thought people would follow a "strong horse" (Al Qadea) rather than a "weak horse" (the United States). Who's weak horse now? I'm thinking it's the guy lying with the coral on the bottom of the Arabian Sea.

This needs time to play out, the Arab Spring is (funny enough) the kind of thing George W. Bush was waiting to see happen by shoving an island of democracy or near-democracy into the heart of the Middle East. It is a moment where the Arab world gets a chance to reassess itself, and it's possible that Islamofascism may be discarded like so many burqas after the defeat of the Taliban in 2001. We need to stay in the game to see how it plays out.

5. Finally, credit to President Barack Obama for his handling of this issue. He campaigned with fierce moral urgency on the wrongness of renditions, Gitmo, enhanced interrogrations, the PATRIOT Act and warrantless wiretapping. While it's possible that he believed absolutely none of what he said at the time in 2008 (he is a politician), once he was fully briefed into the situation a shockingly large number of Bush-era programs that he previously castigated were quietly continued. As quietly as possible, mind you, but continued nonetheless.

Up until now his Presidency has not been a particular success, in fact, it was beginning to feel like Jimmy Carter redux. Malaise, the beginnings of stagflation, high unemployment, high gas prices, national discontent. During the Iranian hostage crisis, Jimmy Carter tried to rescue the American hostages only to have the plan fall apart at an airfield south of Tehran called Desert One. Technical problems and an unfortunate loss of life resulted in a scrubbed mission and a snakebit President.

Barack Obama did not risk his life, but a failed mission to capture or kill Osama Bin Laden with loss of life of American servicemen would have done much to cement the idea of BHO as Jimmy Carter II. Despite the political risk, when he had a clear shot at Osama Bin Laden he took it, and he deserves credit for that. That's the kind of "3AM Phone Call" Hillary Clinton's 2008 campaign ad was about, and this time he answered it. He has been criticized for being risk-averse, but he was not this time and deserves credit for taking a large political risk.

In announcing the death of Osama Bin Laden I found him appropriately reserved and he gave credit to the people who actually did the operation. No victory lap, no smiles, just a job done and justice served. I thought that was very Presidential. Doesn't mean I am a sudden convert to Obamacare, he needs to get serious about addressing the deficit, develop a real energy policy, stop bowing to foreign heads of state and get over himself a bit more, but this time he did well.

Friday, November 19, 2010

What The TSA Didn't Learn In History Class.

At the end of World War I, the French were bled dry. A sizable portion of their military-aged males were six or more feet under as a result of the slaughter of the Western Front. Their solution for the defense of France was the Maginot Line, a series of fortresses with machine-guns, artillery and shelters. Over 5000 fortifications were built across the plains opposite Germany, it interconnected with the Belgian fortifications that also faced Germany, with the anchor of the Belgian defenses at Fort Eben-Emael.

Eben-Emael was a huge excavation roofed with feet of reinforced concrete, bordered by a canal and a deep ditch. Conventional offensive technology of the day was useless against it. Armed and armored, it was practically invulnerable. Then the Germans came.

Using gliders they landed a small number of troops on the grass-covered roof. Using then-new shaped charges they incapacitated the cupolas from which the guns and periscopes projected, rendering the 650 men in the fort blind and unable to shoot back. The small unit was reinforced the next day, and the impregnable Eben-Emael surrendered within a day. With Eben-Emael incapacitated, the Germans ignored the neutrality of Belgium, swept through the Ardennes Forest and around the Maginot Line.

The 3 billion francs put into the static defense of France was utterly wasted and France fell to the Germans within 10 weeks of the fall of the Belgian fort. "Maginot Line" has since become a catchword for defenses destined to be bypassed. It is the classic example of the futility of static defenses against a mobile and inventive enemy. Static defense as a strategic policy has been a laughingstock since, but somehow this lesson of history has not been learned at our own Transportation Security Agency. In fact, they appear to be rather impressed by the Maginot concept, so much that they appear to be building one after another.

The 9/11 hijackers carried box cutters, so no knitting scissors or Swiss Army knives. Line no. 1.

Shoe bomber, so no shoes through the metal detector. Line no. 2.

Plan discovered to use liquid explosives, so no fluids over 3 ounces. Line no. 3.

Nigerian diaper-bomber, so whole-body scans and aggressive, disturbing pat-downs. Line no. 4.

Printer cartridge bombs, so no toner for you. Line no. 5.

Does anyone really believe there will NOT be another attempt, and shortly thereafter TSA's Operation Maginot 6.0 slid into place? Static defense always fails because you cannot put a line, either on a map or in human imagination, beyond which no one will go. Generals are accused of fighting the last war first, the TSA has institutionalized this edict. Were it not for the incompetence of our adversaries we would already be down at least two airliners.

The difference between TSA and Islamic fundamentalists is that incompetence for the fundies is the result of inexperience and will eventually be rectified, while at the TSA it is the result of policy and will not be voluntarily rectified. They will simply inconvenience and/or molest us all so the forms are maintained, and not if but when the next penetration of security comes they cannot be blamed as the protocol was followed. There will be a rectal bomb or at least an attempted bombing at some point, what do the security protocols become at that point? "Okay sir, you're free to go. And by the way, you might want to ask your doctor about your prostate, felt kinda' hard on the right." Free occult blood screens with every flight are part of Obamacare, right?

I don't mind talking with someone about where I am going and why. El Al-type security screenings don't bother me in the least. They might dissuade the constipated-looking religious student behind me who says he is headed to Yemen for "advanced training" though, which is the point. Besides being less invasive, they are more effective as they rely on training and intuition rather than Big Iron like backscatter x-ray machines.

The government has an onus to Do Something, and adding backscatter machines is something that people can walk by and say to themselves, "The government is Doing Something". On one level this is Mission Accomplished for the government, but in my book inflatable and inert machines would work as well for the PR purpose backscatter machines serve. Given that the billions of dollars spent on static machines to create the PR impression of safety is being handily and widely ridiculed by the phrase "Don't Touch My Junk", the PR war is already over and TSA lost. As long as we take intuition out of the loop, as long as people can make it onto a plane having paid cash for a one-way flight with no baggage if they can pass a backscatter exam and a pat-down without being questioned, we are not safer. .

We're just slightly more irradiated, and slightly less free.

Wednesday, April 21, 2010

What You Probably Don't Know About Goldman Sachs, John Paulson and the Financial Regulation Bill

Like most blog posts, I got to responding to something someone said on Facebook and kind of got carried away. So rather than boring everyone in that thread, I will reserve my boring for people specifically looking to be bored, by me, about something esoteric.

To recap, on April 16, Goldman Sachs was charged with fraud by the SEC (a civil charge, not a criminal one) for selling mortgage-backed securities that the SEC believes Goldman knew would lose value. The SEC charges that Goldman allowed a hedge fund run by John Paulson to choose the components of the CDO, or Collateralized Debt Obligation, called 'Abacus 2007-AC1' that was then sold to European banks and other investors. Paulson's firm bought insurance against those mortgages declining in value. When they did decline in value, his company made a billion (with a 'b') dollars from the insurance contracts they held against the decline in value of Abacus 2007 AC-1.

Just for a vocabulary review:

Mortgage-Backed Security: A stream of income and capital that comes from the repayment of mortgages issued by banks. Also called a MBS or a RMBS (residential MBS). Many mortgages are sold, and by 'buying' a mortgage the new mortgage owner gets the income and capital repayment coming from the original loan. If you bundle up enough of these, they act like a bond -- interest comes in, the capital is repaid over time, people get to pay monthly for their house and investors get their capital and interest repaid. Also, since banks are selling the mortgages they write and getting their capital replenished, they can offer more mortgages. Otherwise, the bank could only make as many loans as they have capital to support. A MBS is a bundle of hundreds or even thousands of mortgages, the bundles are traded.

Subprime Mortgage: A mortgage written to someone who is not considered an ideal credit risk, either because they have issues in the past with paying people back, or they are borrowing more money than their income would otherwise support. Not everyone who gets a subprime mortgage is a deadbeat, some self-employed people may have plenty of income to pay their mortgage but the bank or credit agency does not consider their income to be as reliable as someone with a 9 to 5 job. Unfortunately, a lot of people got subprime loans in the 2000s who should not have gotten any loans at all. Because the risk of default is higher, subprime mortgages generally have higher interest rates. From the investor standpoint, the risk is higher but the income is higher as well.

Credit-default swap: A kind of insurance against the risk of an investment going bad. This originally came from the municipal bond world, because if Peoria defaults on their sewer bonds, nobody really wants to try to claim their sewage plant back. The idea was that like any unlikely but damaging event, you could buy insurance against the risk of default. The CDS industry exploded in the 2000s as the utility of being able to insure against almost anything became popular. Unlike traditional insurance that you purchase to protect your assets, CDS can be purchased for almost anything that you can find someone else to have an agreement with. People with agreements are called 'counterparties'. CDS are not regulated and you don't even have to own the asset you are insuring against a loss. At one point, the dollar value in CDS was over $60 trillion dollars, more than the entire economic output of the world in a given year. Of course, a lot of those CDS were counteracting CDS -- I insure you against your value declining, and then I go and find someone else to insure me against your value declining so I don't have to pay the full amount. If this sounds like off-track betting with billions of dollars, it kind of is. The fact that respectable insurance companies like AIG were big players in this market is unsurprising, since the factor that decides who makes money is an assessment of the risks involved. Unfortunately, the amount of risk in the 2000s was inappropriately priced.

Collateralized Debt Obligation (CDO):
A Structured Investment Vehicle (SIV, another acronym) composed of various MBS of varying quality. This is the next order of complexity beyond just bundling up mortgages. CDOs were designed to minimize risk by getting chunks of MBS from various regions of the country and various levels of risk, the idea being that it was silly to think the whole economy would tank at once. Well, silly before 2007-8. If one region or segment of the market tanked, the rest could carry the CDO and still make payments. CDOs were divided into 'tranches', slices of the income from the best, second-best, not-so-best and worst bundles of MBS. The ones in the worst bundle had the highest interest, because they were the riskiest. The ones in the top tranche had the lowest return, but the least risk. Synthetic CDOs, like the Abacus 2007-AC1 deal, were made of tranches bought from other CDOs. If this seems confusing, it's because this is the kind of thing (along with CDS) that Warren Buffet called 'the WMD of the financial markets'. Basically, a CDO tranche owner would not be cashing your checks each month. The money from residential mortgages went into a mixmaster that makes the most complex highway interchange look like a single thread by comparison. Money came in, swirled around, and ended up in CDO accounts each month.

Others have pointed out that the timing of this news release was suspicious. I find the news release interesting for a few reasons.

1. It was a 3-2 decision whether or not to go ahead with the suit. The Republicans voted against, the Democrats voted for, and the sole independent voted to go ahead with the suit. Assuming the SEC are professionals, this is not the highest endorsement of the validity of the claim. Not that it shouldn't be pursued, but the PR damage is done. The SEC alleges, and must prove, these charges. Most likely, there will never be a courtroom resolution regarding this -- there will be a negotiated settlement so the SEC doesn't have to advance what 40% of its commissioners believes is an unwinnable case, and so that GS can take a smaller hit.

2. The release was during trading hours, rather than after, to insure the media would have plenty of time to dwell on the story. Note that the blog post on MoneyWatch is timed 1:59 pm on April 16, 2010. the release was during the trading day. Goldman Sachs lost 14% of its value and the whole Dow Jones Industrial Average shrank 1%. All you have to do is look at the Goldman Sachs price graph for 4/16/2010 to see that the press conference was around 11AM Eastern. I believe the SEC knew they would cause a stink, and did so despite any disruption in the market that might occur. If this was released on Friday at 4pm, after trading, the weekend might have been spent in reflection, with a more muted stock market response on Monday morning. As it is, the SEC made at least a minor panic in order to seem like they're doing something.

3. This just happens to involve John Paulson (no relation to Hank the Former Treasury Secretary), hedge fund manager and poster boy for profiting on credit-default swaps (basically, insurance) on something he didn't even own. Neither he nor his firm are charged, yet putting John Paulson in your press release will put the financial press in a tizzy. It's kind of like mentioning Brad Pitt in a salacious story for TMZ, but then not saying he did any salacious things.

Paulson made a billion dollars on this credit-default swap because his counterparty(ies) believed he was wrong about subprime mortgages. By comparison, his firm made $15 billion in profit in 2007. The Abacus deal was just 7% of the profits he made by betting that all the other smart guys in the room (including Bear Sterns, Lehman Brothers, and the entire credit rating industry) were wrong. Interesting times when being a contrarian is considered not just suspicious, but enough to indict. At least indict a counterparty. So far. Two other contrarians you might have heard of who thought the subprime mortgage market at derivatives were crazy: Warren Buffet and George Soros. Suspicious persons, indeed.

4. In fact, the CDS that Paulson & Co. bought were from Goldman Sachs -- kind of like buying insurance on a house you don't own, then collecting when it burns down. The insurance company gets screwed, yes, but in this case Goldman Sachs is the insurance company. Most likely GS offset its own risk with CDS that paid it if the Abacus 2007-AC1 went south and it had to pay Paulson, but like everything else, it's a bet and the outcome is not known. Very few people were betting against subprime mortgages in 2007. The folks who bought Abacus, mainly European bankers, are not stupid people. This is not an example of stealing money from Mom & Pop. This is big-boy business with a whole lot of money on the line, and if Abacus had gone long and made money, would the SEC be investigating GS for selling what proved to be worthless CDS to Paulson & Co.? I think not. If Paulson & Co. had collapsed taking all of its investors' assets with it as many other hedge funds did there would be no investigation.

5. Retrospectively they can identify something fishy with Abacus 2007 AC-1, but they can't find Bernie Madoff prospectively after he steals between $12 and $20 billion? And after they were sent a 21-page detailed memo that there was something fishy going on? Top of their game, these guys.

6. Then there is the curious timing of this release followed immediately by a broadside of criticism against the GOP for opposing a bill strongly supported by a Senator who received significant personal support from a subprime lender (Countrywide), a bill that contains not only a built-in fund for bailouts with a large advertised number ($50 billion), insuring that the government will continue to serve as a backstop for more risky investments than the market would otherwise bear, but a bill that vests in the Executive the ability to respond with almost unlimited resources to any future bailout/systemic risk situation. It's not that President Obama will have this power that bothers me. It's that any President has the ability to raid the Fed for whatever seems to be needed in the financial sector. Moral hazard out the wazoo. If you don't want business to try to manipulate government, then don't manipulate business from the government. The last thing the "Masters of the Universe", Tom Wolfe's phrase from The Bonfire of the Vanities need is the idea that profits are private and losses are public, because they can get a low-interest bailout from Uncle Sugar. No way. Take away the net, and they probably won't string the tightrope so high.

7. The timing is on the face suspicious because the press conference (unusual for the SEC) on April 16, immediately preceded the White House announcement Monday that he would be speaking at Cooper Union in NYC on Thursday. Look for the Goldman Sachs charges to be featured prominently. Oh, and floor debate on the Financial Regulatory Reform Bill begins just 10 days after the SEC's announcement, on April 26.

Now, the President denies that there was any coordination with the SEC, but even the press figured out that maybe GS wasn't the only ones cooking the books. Here's a quote from that CBS News link:

"Well, I think now that there has been a lot of momentum behind the financial reform bill, and I think that that momentum is only going to increase," Freeland said. "The charges on Friday will give the Democrats who wanted a tougher bill a lot more energy."

Wow. Ain't it great when things just happen to go your way? And that article in itself is a veritable masterpiece of innuendo and possibly-designed ignorance. Note how the reporter elides everything I've spent the last couple of thousand words explaining and simply implies theft:

Goldman took in $15 million in fees for arranging the transaction, while its investors lost over a billion dollars that became profit at Paulson & Co.

Now, quiz time: did the money from Abacus 2007-AC1 really go to John Paulson? Or did John Paulson find someone willing to bet that the assets in the Abacus 2007-AC1 investment would not decrease in value? And who was John Paulson's counterparty, the folks who paid Paulson & Co. when Abacus 2007-AC1 tanked? (Answer: Goldman Sachs)

The press is so willing to carry water on this one they might as well show up in Washington with buckets in hand. I understand the frustration. But I also understand that things are often far more complex than they seem. I don't see this story as an attempt to make complex things simple for anything other than political reasons.

More background on John Paulson here, from the Wall Street Journal. Excellent article.

NOTE: I do not own any Goldman Sachs shares.

Tuesday, April 06, 2010

Obama Changes Nuclear Posture to 'Fetal Position'

Today's New York Times describes the results of President Obama's "Nuclear Posture Review", which has been the product of 150 meetings and is a particularly bad example of the sausage-making process in the Executive Branch.

The United States' Nuclear Posture is the statement of when we will or will not use nuclear weapons. Under President Bush, the posture was essentially that any WMD attack could see a nuclear response. This is a simple and practical policy, because in the field of weapons of mass destruction the United States has divested itself of two of the three main categories of WMDs: chemical and biological. Under the Biological Weapons Convention that has been in force since 1975, the US does not maintain production facilities for or stockpiles of biological weapons. The US is also a signatory to the Chemical Weapons Convention, which went into force in 1997. The US has been steadily destroying its own stockpile of chemical weapons, at considerable expense, and has now destroyed 70% of its chemical weapons, with complete destruction of all chemical weapons scheduled for 2023. If this seems like it's taking a long time, that is because we still have chemical weapon stockpiles from World War I, and that's not the kind of stuff you can throw in a bin and be done with.

So by treaty, the US has already destroyed its biological weapons capabilities, is destroying its chemical weapons capability, and has already pledged to not use either of those weapon classes in warfare. What we're left with is nuclear weapons, and those are so nasty and destructive that they function as a deterrent to the use of biological and chemical weapons. You hit us, we hit you back once, and harder than you can possibly imagine. It's a good policy, and one I agree with. The last President didn't promise to use nuclear weapons, he said that our response may include nuclear weapons.

The three issues involved in deterrence are possessing the means of reprisal, convincing potential foes that you have the will to use the means at your disposal, and keeping any potential adversaries uncertain as to the shape of your response. Deterrence is not the same as a challenge, under the former Nuclear Posture Review we were not daring other countries or groups to challenge us, we were simply announcing the consequences should there be an attack. Deterrence does not seek conflict any more than a concealed carry licensee seeks a gunfight. The consequences of any conflict involving WMD are going to be horrific, and reasonable people can look at the probable butcher's bill and consider other courses of action short of WMD release. Unfortunately, we live in a world where the reasonable people are already deterred, it's the unreasonable ones that are of the greatest concern and here's where the President's characteristic unconstrained worldview begins to fall down.

The President's policy described in the NYT article is not one of unilateral disarmament. We will still have Trident submarines in the water, Minuteman IIIs in the silos and nuclear-capable B-52s able to respond to a strike. The President further refined his policy by stating that the exemption to nuclear response does not extend to countries that are not signatories to the Nuclear Non-Proliferation Treaty (he's looking at you, North Korea and Iran) and that if a biological attack is "serious enough" or biological weapons capabilities become significant enough, a nuclear response may be in order. It appears to me that he is attempting to use the Nuclear Posture Review as yet another lever in what has become a comic opera of trying to get Iran to abandon its pursuit of nuclear weapons, as well as to disincentivize other countries from becoming nuclear powers (he's looking at you, Hugo Chavez). Unfortunately, he and his advisers are overlooking a huge problem.

From an economics standpoint, the barriers to entry to the nuclear weapons club are substantial. A country has to obtain uranium, perform isotope separation to enrich the uranium, create a nuclear reactor, operate the nuclear reactor to produce plutonium, and then separate the plutonium (the optimal nuclear bomb fuel) from the spent and highly-radioactive fuel rods. Then, once sufficient plutonium has been obtained, an implosion system has to be created and tested, and finally the first bomb has to be detonated to prove your technology prior to deployment of a weapon. All of this technology is now 65 years old, but none of it is particularly cheap and most of it has an extra tax in the form of having to be performed clandestinely, with added costs to keep things off the books. If you want to join the thermonuclear club, you need to obtain tritium (a byproduct of nuclear reactors), deuterium (from the sea) and/or lithium-6 deuteride for the second stage of a fission-fusion bomb, along with additional years of testing. So far, none of the "new" nuclear powers (Pakistan, North Korea) have gone to the trouble of making a two or three-stage nuclear weapon. If you're willing to impoverish your country and become a pariah state, at least in the eyes of the United States, all of this is doable but it is neither cheap nor fast.

On the other hand, biological weapons are relatively easily obtainable. The DNA sequence of the H1N1 influenza and 10 strains of the variola virus (smallpox) are available in the scientific literature, with a DNA sequencing machine that is available commercially these can be recreated in a competent laboratory. The US Defense Threat Reduction Agency tested the ability to detect a covert bioweapons facility beginning in 1999, an operation called Project Bachus. For under a million dollars the DTRA was able to create a laboratory that made Bacillus thurigensis, a benign bacterium used to kill mosquitoes in standing water. This doesn't sound like much, but a close cousin of Bacillus thurigensis is Bacillus anthracis, which causes anthrax. If you can make the one, you can make the other. If you have a competent virologist and a supply of chicken embryos (eggs), you have the makings of a nasty virological program even without having to obtain cell culture material. Besides influenza, smallpox and anthrax, there are a host of diseases including tularemia, plague, glanders and a variety of viruses that can and have been weaponized.

Going beyond naturally-occuring pathogens, genetic engineering can create chimeric (mixed) strains of bacteria that can produce diseases the like of which we have never seen. In his 1999 book Biohazard, former Russian bioweapon scientist Ken Alibek describes an experiment performed in the former Soviet Union. A weapons developer inserted the gene for myelin, the protein that sheaths nerve cells, into a strain of Legionella pneumophila, a common and mildly-infectious bacterium that is most often remembered as the cause of "Legionnaire's disease". Legionella is lives in water, and is often found in the condensate within air conditioners. It most commonly causes a mild respiratory illness, and in the rabbits exposed to the engineered strain this occurred as expected. The genetically-engineerd barb in this bacteriological hook began to show several weeks later: by including the myelin protein in the bacterium, the host's immune system was taught that myelin was an invader and should be destroyed. Antibodies to myelin began to destroy myelin throughout the rabbits' bodies, resulting in paralysis and loss of function. In essence, they got a mild respiratory disease that also caused the equivalent of multiple sclerosis. Can you imagine the impact of an extra hundred thousand patients with florid multiple sclerosis? How about a million?

The flaw in the President's plan is that by telling potential enemies that we will respond with nuclear weapons only to a nuclear attack (and even then, only from a non-proliferating state), we are in essence telling them where to spend their efforts. Why build a trillion-dollar infrastructure to make nuclear weapons when a billion will buy you a first-rate biological weapons lab? The proviso that the policy will be reviewed should biological weapons prove to be more "dangerous" than previously thought overlooks the fact that they are already dangerous, and much more so than is currently considered by the President's advisers. This is a pointless policy change that, thinking like an adversary, dictates a cheaper and no less destructive avenue of attack.

A potential enemy doesn't even have to target humans -- the Ug99 strain of wheat rust could affect up to 90% of our wheat production if it makes it to the United States. A couple of bottles of wheat rust spores would take up no more space than a Gatorade, but like most biological weapons with the ability to self-replicate the wheat harvest of the US and Canada could be almost completely destroyed in a few seasons. How many millions would that kill due to famine and starvation?

Rationality works fine with other rational people, but the President has had a singular lack of success in convincing other countries to come along despite his great faith in his own gifts of persuasion. He cannot even convince Brazil to come along on economic sanctions on Iran, much less convince Iran to do much of anything. He has negotiated a nuclear weapons reduction treaty with Russia, which is unsurprising if you are aware of the decrepit state of Russia's nuclear forces. Their current nuclear missile submarines are the 1970s-era Delta-class, and they are reaching the end of their service lives. Their proposed replacement, the Borei-class, are having terrible troubles with their missiles and it's going to cost a fortune to fix those problems and launch new boats. In agreeing to mutual limits on nuclear weapons, the President has solved some very expensive problems for the Russians, with little gain on our side.

The article also mentions that the President's policy "renounces the development of any new nuclear weapons, overruling the initial position of his own defense secretary." The program in question is most likely the Reliable Replacement Warhead, a lower-yield but more-reliable and simpler nuclear warhead to replace our current stockpile. The net effect of bypassing the RRW is that our nuclear forces will continue a decline or require even more expensive refits to remain reliable. When our stockpile was designed "reliability" meant that a warhead would detonate as programmed and for a specified yield after a 6,000 mile flight at Mach 15 or so. Now that we've had them for a while and now that even underground testing is prohibited, reliability has come to mean the knowledge that these exceptionally complex devices will perform as designed after 20 or 30 or even 50 years of riding around in their delivery vehicles. Maintaining that level of reliability for high-speed low-drag mechanisms like the W76 warhead in Trident missiles and the W80 in Tomahawk cruise missiles can be a problem, namely that the things used to originally make those warheads can be difficult to recreate, and therefore even more expensive.

The RRW program was defunded by the Democratic Congress in 2008, and this administration's continued policy consigns our nuclear deterrent to obsolescence. The justification will be for cost reasons, the public will be told that it is just too expensive to maintain our nuclear deterrent, given all the other challenges we face as a nation, and it will sound reasonable. On the other hand, if we lived in a world full of reasonable people we wouldn't really need a nuclear deterrent. This policy is yet another example of ego trumping common sense, the President may be a reasonable man but his election did not make those who wish to strike at our populace any more reasonable. For a leader who claims the mantle of pragmatism, this is a policy that actually makes us more likely to be attacked by signaling that our deterrence is more conditional than it should be, and therefore less assured. By not wanting to appear threatening, the President is actually inviting more attacks, and history is pretty clear that at an unthreatening posture is not a reliable method of defense. We do have a very powerful conventional military, but that is best used for conventional foes. Foes willing to be unconventional should be heartened by our new 'posture'.

Wednesday, November 04, 2009

What the November 2009 Elections Mean

Had a bunch of elections around the country, and your interpretation of them seems to vary greatly depending on which party you favor. The GOP points to Bob McConnell's overwhelming victory in Virginia as evidence that Virginia is no longer 'purple', and to Chris Christie's upset win over Jon Corzine to take the governorship of New Jersey as a clear shot across the bow of what the Democrats viewed after November 2008 as a permanent change in electoral politics.

Democrats, like Nancy Pelosi and David Axelrod, believe that the more significant race was in the 23rd Congressional District of New York, where Democratic candidate Bill Owens edged out Conservative Party (yes, they have that in New York, which sounds like a reason to invoke the Endangered Species Act) candidate Doug Hoffman. This sort of ignores the fact that there actually was a GOP candidate, Dede Scozzafava, a state assemblyperson who dropped out of the race after being pummelled in the polls, despite RNC backing and who repaid her supporters in the Republican Party (including Newt Gingrich) by endorsing the Democrat rather than Hoffman. There is an meme floating around that the NY-23 seat hadn't been held by a Democrat since before the Civil War, but apparently people who believe that meme have no access to Wikipedia, the last Democrat to hold that seat was elected in 1991, and the seat has changed hands between the parties eight times in the last century.

In terms of the number of voters, overwhelmingly the votes went GOP on the whole, particularly in Virginia where McConnell stomped Creigh Deeds by a 20% vote margin. Considering that McConnell won the State Attorney General race against Deeds by a fraction of a percent in 2008, the players didn't change but the score most certainly did. Chris Christie was outspent 3:1 by Jon Corzine, a former Goldman Sachs partner and very wealthy man who spent heavily in New Jersey media, which means buying lots of air time in NYC and Philadelphia.

The lessons I take away from these results are as follows:

1. It's Still The Economy, Stupid.

Times are tough. When times are tough, voters tend to punish the party in power. The vote totals in favor of the GOP are similar to those in the 1993 by-elections, which implies that 2010 could end up much like the highly-disruptive 1994 election that swept the GOP into power. This is not an endorsement of the GOP, simply an observation that if the DNC believes that running against George W. Bush will work in 2010, I believe they will be rather rudely surprised, assuming the economy does not improve dramatically. Nobody is buying the 3.5% GDP bump. Unemployment and possible future unemployment is what motivated the voters this time around.

Continuing to trumpet a temporary bump in GDP in the face of continued job losses is a net loser for the White House. Compounding this with "jobs created or saved" numbers that not even the network newscasts will report with a straight face is telling the American people that "All is Well" when they clearly know all is NOT well. A scene from Animal House shows how I believe the White House's economic numbers are being received (note: the White House is played by Kevin Bacon):

2. With Enough GOP Help, The Democrats Can Win Seats In Purple Districts.

You would think that this would have been evident from the 2008 election, but it does not hurt to repeat it. John McCain was nominated from a dispirited field of GOP candidates, flirted with selecting a Democrat for a VP and refused to fight his opponent. Bob McConnell and Chris Christie ran disciplined races against Democratic opponents who had numerous campaign visits from the President -- and won.

Dede Scozzafava was the choice of GOP party people in NY-23, not the product of a contested primary. Her policy positions were far to the left of any mainstream Republican to the point where she was endorsed by ACORN, the SEIU and Markos Mouslitas of the Daily Kos. She made Arlen Specter look like Tom DeLay in terms of conservatism.

Even after getting millions of dollars and campaign volunteers from the National Republican Congressional Committee, she turned around and planted the knife squarely in the back of the party by endorsing not Doug Hoffman, who would have caucused with the GOP, but Bill Owens, whose policy positions were only a little to the right of hers. She quit the Saturday before the race because she was destined to finish a distant third no matter what, but given the small margin between Owens and Hoffman it's likely that her Dead Hand endorsement of Owens lost the district for the party she claimed to support. With enough help from incompetent Republicans, Democrats can eke out a victory.

3. Third Parties Feel Good, But Don't Win.

You know that guy, the one who drives a Peugeot just to be different? The person listens to African pop not because he likes it, but because it's different and allows everyone to know they're different when it leaks out their earbuds? Yeah, those people are probably third party voters, and while they're interesting and funky and unique, they're not going to win elections. It's about being pure to themselves and standing out more than getting anything done. Libertarian party, Green party, Peace party -- they're not unAmerican in the sense of treasonous, they are unAmerican in the sense that they're satisfied with being a stumbling block and not actually winning.

Doug Hoffman did not get Republican party support, but he did pick up endorsements from Fred Thompson, Sarah Palin, Tim Pawlenty and Mike Huckabee, as well as Glenn Beck. Doug seemed like a really nice guy in the interviews I saw, but somewhat unpolished and not ready for prime time. He did spectacularly well for a third party candidate, but -- and it's an important but -- he still lost. The way he came to be nominated over Scozzafava is part of the story here, and since Owens stands for re-election in 2010 I would love to see Doug lead a combined GOP-Conservative Party ticket in that election after he beats all comers in a primary.

The take-home lesson here is not that we need a Tea Party of staunch fiscal conservatives to spend themselves on futile, uncoordinated and underfunded attempts to win office. I sympathize with these people, I think their hearts are in the right place, but their small-government Constitution-quoting butts belong in the Republican Party. Those folks were sidelined within the GOP sometime around 2000, which was a cardinal mistake on the part of the GOP. Folks like Senator Tom Coburn need to go to the Tea Party folks, and the Tea Party people need to get into the Big Tent. Scozzafavas we don't need, you have to draw the line somewhere and she's farther outside the GOP perimeter than even Susan Collins and Olympia Snowe tend to wander.

The GOP needs the passion of the Tea Party people, and emphasis on small government and fiscal responsibility is the shortest path to rehabilitating the GOP brand.

4. Democrats In Red States And Districts Should Be Hearing Footsteps.

The Dems in Virginia didn't get beat, they got annihilated. Bill Owens in New York is not the newest progressive in Congress, he's the newest Blue Dog, and considering that he almost got beat by an almost-competent Doug Hoffman, I don't see him attending strategy sessions with the far-left Dems from deep blue districts any time soon. There are 83 representatives and 20 senators from states that went for McCain in 2008, and all of these people have good reason to point to the blood on the walls in the Democratic HQs in Virginia and tell their leadership that they are NOT voting for any tax and spend packages, like healthcare. Nancy Pelosi may have picked up another 'blue' seat in the House, but IMO the election results cost her many times that on specific issues from people in her own party.

The counter to the revolt of the Democrats in the House who are looking at serious reelection challenges is for the Democratic Congressional Campaign Committee to say, "Yes, you're right. It looks like a bad district in which to be a Democrat that you have there. If you vote with us, we might give you enough support for you to win in 2010, but if you don't -- good luck." Any party only needs 218 to hold a majority in the House, and Blue Dogs who stand a good chance of being replaced by Republicans in any event may find their votes and themselves not only not needed, but not wanted. It's a dangerous counter for the DCCC to play, but it's entirely possible they will invoke the 'death penalty' to get their signature legislative packages across. After all, they believe that PelosiCare, Cap & Trade and Card Check are what we need, even if we're not smart enough to see it for ourselves.

5. Barack Obama Looks Good In His New Suits, But They Don't Have Tails.

The spin on The One's involvment in NJ and VA is "He wasn't on the ticket, this has nothing to do with him." One Democratic representative said, "He hasn't even been in Virginia," which would have been true at the time if she had added, "in the last four days." Obama campaigned heavily for Corzine, Corzine completely outspent Christie, and Christie still won. McConnell, well, he demolished Creigh Deeds. He was expected to win by 15, but he won by 20. Ouch.

The 2010 elections will hinge on the President's ability to effectively campaign for Democrats. His appearances, his charisma, his connection to young and minority voters were deciding factors in 2008, and the Democratic majorities in the House and Senate are great examples of what having a powerful draw at the top of the ticket can do for a national party, only -- he's not on the ticket in 2010, either. It's debatable whether two state governor elections have anything to say about national politics, but if they have anything to say it's nothing that the Democrats whose names appear below the President/Vice-President block want to hear. Given that Barack Obama will be the lead singer in the DNC's national efforts in 2010, he needs to be able to do better. Any thought that the DNC had created a new grand coalition was cracked by Virginia going so solidly Republican and shattered by reliably-blue New Jersey repudiating Jon Corzine.

The "sea change" that President Obama was supposed to have led lasted all of a year -- a year in which the deficit tripled, more people lost jobs than in the year before and the Stimulus, well, didn't. The President's job is secure through 2012, but the Congress is definitely in play. The President's best hope is that the economy comes back, Iran signs a deal and China keeps its appetite for our debt for another 12 months, because if things continue as they have the voters will usher the Democrats to the door.

That's what I get out of this. Your thoughts?

Saturday, October 10, 2009

Facebook Nobel Prize/Obama Jokes

In the future, everyone will win the Nobel Peace Prize for 15 minutes.

In other news, the 2012 Olympic Committee announced today that President Barack Obama has been awarded the Gold Medal in the Decathlon, more than two years before the event was scheduled to begin. Commitee members were convinced of his fitness for the award based on shirtless pictures of the President published in People magazine.

President Barack Obama will receive an Emmy for his numerous appearances on television in 2008 and 2009. Particularly cited was his standout performance in the ABC production "Death of a Fly".

The President of the United States has been named as a 2009 Tony Award winner for his stellar attendance at a Broadway show in May 2009.

The producers of the Academy Awards program have announced President Barack Obama as the winner of the Irving G. Thalberg Memorial Award for lifetime achievement. In addition, the award will be renamed the "Barack H. Obama Award" and presented annually to President Barack Obama.

In recognition of the pitch he threw at the 2009 All-Star Game, President Barack Obama has been named today as MVP of the 2009 World Series.

The Heisman Trophy Trust announced today that the iconic bronze statue will be recast, with a shirtless Barack Obama replacing the anachronistic college football figure from the 1930s. In a mild departure from tradition, the President will be portrayed clutching a basketball, though a similar arm-forward pose will be used. Also, the 2009 award and all future Heisman Trophy awards will be presented th Barack Obama

The Association of Community Organizers for Reform Now (ACORN) has named President Barack Obama as their "Customer of the Year" for 2009. The White House had no comment. Senator Al Franken (D-MN) was disappointed in his second-place showing, but congratulated the President in a press release.

The National Organization for Women followed the lead of the Nobel Peace Prize committee and named President Barack Obama as NOW's "Woman of the Year" for 2009. When questioned about the President's lack of female gender, the spokesperson said, "He said he WANTS to be female someday, and we think that's good enough for us."

Seen elsewhere on the Internet: Barack Obama has been named Motor Trend's Car of the Year.

The First Lady announced that for the first time in her adult life she is proud of Norway.

"Hey honey, Barack Obama won the Nobel Peace Prize." "For what?" "Exactly."

Seen elsewhere on the Internet: The voting was close, but it was the Beer Summit that put Obama over the top.

Happiest guy in the world right now? The guy that had Barack Obama on his Fantasy Nobel Prize team.

I wonder if he sued to get all the other candidates off the ballot this time?

In a little-noted announcement, William Ayers received an 'Assist' award in the Nobel Prize for Literature category.

Chuck Norris could win the Nobel Peace Prize by default, simply by killing everyone else on the planet. Lucky for us, Chuck Norris does not want the Nobel Peace Prize.