As news trickles out about the details behind SocGen's $7B loss due to trading fraud (with recent articles here from: NY Times, Reuters, and Bloomberg), it seems to me that these are SocGen's problems and no one elses. Whatever the actions of the trader involved, SocGen has no one but itself to blame.
There appear to be three overall issues:
1) failure of management supervision
2) failure of control processes (including IT security training)
3) failure of control design
Below are several reported statements from SocGen and other reporting, and my comments:
NYT: Mr. Kerviel combined several different “fraudulent methods” to hide his activity — including using computer access codes of other employees and falsifying documents
My Comment: SocGen seems to have had a problem training staff on the prohibition of sharing user IDs and on holding all staff accountable. Anyone whose ID was used by Mr. Kerviel should also be considered culpable. It is everyone's responsibility to safeguard their own IDs. I am speculating that there were probably several other access control breaches that allowed Mr. Kerviel to hide transactions that traders should normally not be allowed to do.
NYT: controls identified from time to time problems with this trader’s portfolio,” Mr. Mustier said, although he declined to say when the first questions were raised by risk managers, saying that the bank’s auditors were still investigating.
Each time one of Mr. Kerviel’s trades was questioned, he would describe it as a “mistake” and cancel the trade, Mr. Mustier said. “But in fact, he then replaced that trade with another transaction using a different instrument” to avoid detection, he said.
Mr. Mustier also said that Mr. Kerviel’s fake trades did not fall into an identifiable pattern.
My Comment: There is a significant issue with failure to follow-up the concerns, particularly if they happened frequently. At a minimum. Mr. Kerviel's direct supervisors should have been informed that they had a trader who was making a lot of mistakes. Arbitrage traders deal in huge positions that net out to small exposures. If their are mistakes being made, then there is a risk that a position is "naked", i.e. not offset by a hedging position.
Furthermore, all good fraudsters vary their patterns. This is exactly why Anti-Money Laundering detection software specifically scans for the non-obvious so that further checks can be done.
Bloomberg: One of the first lessons to put in place is that we will do systematic controls on the nominal value, even if it doesn't show up as market risk,'' Jean-Pierre Mustier, chief executive officer of the Paris-based bank's corporate and investment bank, told reporters on a conference call yesterday.
My Comment: It is quite standard these days to do exactly that. It isn't clear why SocGen wasn't already looking at the maxium exposure and nominal value, in addition to the market risk and other standard value-at-risk measures.
Reuters: "Every two or three days, he was changing his position. He would input a transaction that would trigger a control in three days and before that happened he would replace it with a different one," Mustier was quoted as saying.
My Comment: This is a problem with control design. Why is the control trigger set at 3 days? There may be good reasons, but even then there should be reandom spot checks. At a minimum, this control needs to be changed going forward, because the whole world knows about it!
Bloomberg: He took only four days off last August and postponed a vacation at the end of the year, Societe Generale said. Banks often make trading staff take time off so any concealed positions will become evident in their absence.
My Comment: Absolutely. This is the one of the oldest controls in banking, i.e. mandatory block vacation at least once a year. The trend today is to also block system access from home, or at least track it. Trading, Settlement and Funds Transfer systems should generally not be accessible from home anyway.
Bloomberg: Kerviel was caught when he exceeded the recently changed counterparty risk limits on a trade, and the counterparty's e- mail confirming the transaction ``appeared suspect.''
My Comment: Interesting that he was finally caught when an internal control change that Mr. Kerviel was not familiar with. This was pretty much luck.
Still the key unanswered questions is how were the trades funded. Even if the trader was able to create fictitious trades to fool internal systems, this could not have fooled the external market and thus the reports back to SocGen from the various exchanges where these instruments were traded should have shown something unusual fairly early on. Even if the trading was done through an external shell company, that too would have had to meet margin call requirements, particularly for any large losing position.
But here's the really scary comments by French President Sarkozy as reported by Reuters:
SARKOZY DEMANDS REFORM
French President Nicolas Sarkozy demanded changes to the running of international financial markets in the wake of the fraud scandal at Societe Generale, saying it was time to restore a sense of proportion.
"We have to put a stop to this financial system which is out of its mind and which has lost sight of its purpose," Sarkozy said on Saturday while on a visit to India.
"If one can make profits in a few hours, one can also make gigantic losses in a few hours as well. And it is time to realize that (we need) to insert a bit of wisdom into all these systems."
Certainly French pride has been wounded by SocGen's failure, and their are no doubt red faces at SocGen's regulators and external auditors. But the failure is SocGen's and theirs alone. The only people hurt by this are SocGen managers, investors, and to some degree employees. It was their responsibility to put in place the controls, and more importantly a culture to prevent such events, or at a minimum mitigate such fraid exposure when it is discovered. No one outside was significantly impacted, at least in direct financial terms. Even SocGen itself appears to have mitigated the impact such that it survives as an institution with
Sarkozy, with whom I normally agree, is dead wrong. It is not for him to define the correct time frame for making or losing money in a well regulated market of willing and able participants (aside from the point that this fraud occured over months not hours). There could perhaps have been better escalation of the reporting of the incident within the French Government and to other central banks. But the speed with which SocGen acted after finally uncovering the problem is admirable, and anonymity in the markets may actually have helped prevent panic, allowing an orderly unwinding of the excessive positions.
It is perhaps inevitable that governments and regulators will review whether more controls are needed. The knee-jerk, Sarbanes-Oxley-style reaction is entirely predictable. Smart CEO's should anyway do their own internal reviews, and publicly state that they are doing so to ensure investor and public confidence. Josef Ackermann at Deutsche Bank is already on record with such a move. Good for him.
[Update 1/29/2008 2:00pm JST] Today on Reuters is further news that Eurex had indeed reported unusual trades to SocGen last year. This reinforces my point that trades may have been hidden internally, but could not have been hidden externally. SocGen failed to act sufficiently on the information that Eurex provided. SocGen's CEO has already offered to resign, which was rejected by the board, but that remains on the table. Despite SocGen's failures, the CEO has acted responsibly. He may still have to go, but he does appear to be the right person to see this crisis through at least for the next few weeks. It will take a new CEO, probably from outside, to restore confidence.
Monday, January 28, 2008
Sunday, January 27, 2008
Health Care - First Do No Harm
The first question is do we in fact need to do anything? Over 17% of the US economy is devoted to health care. This is indeed a high percentage, and worse it is increasing. This is in direct contrast to other basic needs, such as food, for which the share of the economy has decreased over time.
Here is an article by Milton Friedman hits the nail on the head. The problem isn't that health care is insufficiently nationalized. Rather the opposite. About 50% of US health care costs are nationalized, either through tax benefits for employer provided health insurance or direct Medicare/Medicaid subsidies.
It is a fact that people spend their own money more wisely than other peoples' money. This is why free markets and private enterprise are more efficient that government redistribution of taxed income and assets. Why should health care be any different?
Once difference is that certain therapies are indeed very expensive (major surgery). But that doesn't mean everything should be paid by someone else.
Here's a simple analogy using auto insurance. First, everyone who drives in the US is required to have auto insurance. But this doesn't mean that the insurance also covers routing maintenance. It certainly doesn't cover the cost of gas or the car itself. It covers the consequences of accidents, which should be fairly rare. Could health insurance be treated similarly? In other words, you take care of yourself, through healthy lifestyle, regular check-ups, and the like that you pay for our of your own pocket. Insurance is limited to catastrophic events. For the elderly, perhaps more can be covered by insurance (certainly more would be needed) as a form of pension or social security.
But the bottom line, we all should take more responsibility for paying our own individual basic health care costs, just like we cover food, shelter, and clothing ourselves.
In my own experience, where I have attempted to pay for routine care myself when visiting the US, I am continually amazed at how difficult it is to pay cash. Unlike just about any other situation where payment is made for services, I often cannot pay on the spot. The last time I experienced something like that was in 1984, while shopping as a tourist in the Soviet Union (!)
If we can get the government out of health care, then the free market can drive efficiency and technological advancement that will reduce the cost of health care as a portion of the total economy.
This will make health care more widely available, even to the poorest in society. And it will do so permanently.
Nationalization of health insurance and health care, as proposed by Clinton, Obama, Edwards, et al, is exactly backwards.
Here is an article by Milton Friedman hits the nail on the head. The problem isn't that health care is insufficiently nationalized. Rather the opposite. About 50% of US health care costs are nationalized, either through tax benefits for employer provided health insurance or direct Medicare/Medicaid subsidies.
It is a fact that people spend their own money more wisely than other peoples' money. This is why free markets and private enterprise are more efficient that government redistribution of taxed income and assets. Why should health care be any different?
Once difference is that certain therapies are indeed very expensive (major surgery). But that doesn't mean everything should be paid by someone else.
Here's a simple analogy using auto insurance. First, everyone who drives in the US is required to have auto insurance. But this doesn't mean that the insurance also covers routing maintenance. It certainly doesn't cover the cost of gas or the car itself. It covers the consequences of accidents, which should be fairly rare. Could health insurance be treated similarly? In other words, you take care of yourself, through healthy lifestyle, regular check-ups, and the like that you pay for our of your own pocket. Insurance is limited to catastrophic events. For the elderly, perhaps more can be covered by insurance (certainly more would be needed) as a form of pension or social security.
But the bottom line, we all should take more responsibility for paying our own individual basic health care costs, just like we cover food, shelter, and clothing ourselves.
In my own experience, where I have attempted to pay for routine care myself when visiting the US, I am continually amazed at how difficult it is to pay cash. Unlike just about any other situation where payment is made for services, I often cannot pay on the spot. The last time I experienced something like that was in 1984, while shopping as a tourist in the Soviet Union (!)
If we can get the government out of health care, then the free market can drive efficiency and technological advancement that will reduce the cost of health care as a portion of the total economy.
This will make health care more widely available, even to the poorest in society. And it will do so permanently.
Nationalization of health insurance and health care, as proposed by Clinton, Obama, Edwards, et al, is exactly backwards.
Saturday, January 26, 2008
Weekend Thoughts
Since last week, I've been working from Nagoya in support of a client's project, and that keeps me pretty busy Monday through Friday. So here's my feeble attempt at catching up.
Japan rocks! I come back to Tokyo every weekend on the bullet train. One of my colleagues who does the same trip has perfected the art of buying some sushi and sake for the ride back to Tokyo on Friday evenings. Commuting at 250 km/h or more on silky smooth rails, with some good food and drink, in a train full of well groomed and well mannered people, is a perfect marriage of utility and form.
US Stimulus: It seems the $150B package will pass, but since the impact won't be felt until May at the earliest, what's the point? The whole thing is a waste of time and taxpayers' money.
Socialist Dicators: Zimbabwe and Venezuelan continue their downward spiral. This should be proof enough that Socialism doesn't work, even when combined with oil wealth. Why would we want anything even near to that?
McCain: I'd like to but I just can't get behind the guy. His military service and courage in a North Vietnamese POW camp are real. That said, James Stockton (Ross Perot's running mate) was just as courageous, but that didn't make him a good candidate. I am not sure exactly what bothers me about McCain, but it is some combination of lack of executive/business experience, willingness to embrace liberal causes (e.g. global warming), and the fact that labels like "maverick" or "straight-talk" just don't compel me. It almost makes me want to support Romney. Let's see what Giuliani is able to do in Florida and Super-Tuesday.
Dems: Hillary's tactics are just abominable, but Obama has to step-up. I'd like to like Obama, but the minute he starts talking about any policy issue, I remember why I'm not a Democrat.
Sarkozy: I love this guy. Vive le France!
Iran: The mullahcracy there is just plain dangerous. I fear that it may come to a full scale military conflict. Iran makes North Korea seem almost rational.
Jonah Goldberg: I must read his new book Liberal Facism. From the reviews, it looks like an excellent book.
All for now!
Friday, January 25, 2008
Rouge Trader 2.0
Reuters and others are reporting on a rouge trader at Societe General who lost more than $7.8B in fradulent direavative trades. According to various reports, somehow he was able to cover his tracks through his in-depth knowledge of trading and reporting systems.
I've been around banking IT long enough to know that we're probably not getting the full story. The event took place last weekend, and was only reported yesterday, so there would have been time for SocGen to perform initial investigations before going public. The sacking of at least 6 other people is evidence of as much. However, a detailed forensic investigation of just what went wrong would probably take even seasoned investigators more time.
I can only speculate, but a few things that might have allowed this to happen.
1) The trader may still have had access to systems allowed in his former jobs in the bank, that he should not have as a trader. De-permissioning system access for an active employee who changes departments is notoriously difficult for large banks to get right.
2) There may have in fact been collusion (2 or more people involved) that isn't being reported.
Other than that, it is hard to see how this could have happened. There should be daily reconciliations of trading and settlement records, and large positions stand out all over the place. It seems the derivatives themselves were simple index futures, and thus quite liquid, easy to price, and easy to calculate market exposure. Even if fake trades were entered into the internal system, it is hard to see how they would not have been easily reconciled against the actual trade information that back-office gets each and every day, unless those systems were compromised as well. If that was the case, then there are significant IT access, operational and trading control issues.
I would love to find out more about what actually happened. I am sure there is more to the story.
I've been around banking IT long enough to know that we're probably not getting the full story. The event took place last weekend, and was only reported yesterday, so there would have been time for SocGen to perform initial investigations before going public. The sacking of at least 6 other people is evidence of as much. However, a detailed forensic investigation of just what went wrong would probably take even seasoned investigators more time.
I can only speculate, but a few things that might have allowed this to happen.
1) The trader may still have had access to systems allowed in his former jobs in the bank, that he should not have as a trader. De-permissioning system access for an active employee who changes departments is notoriously difficult for large banks to get right.
2) There may have in fact been collusion (2 or more people involved) that isn't being reported.
Other than that, it is hard to see how this could have happened. There should be daily reconciliations of trading and settlement records, and large positions stand out all over the place. It seems the derivatives themselves were simple index futures, and thus quite liquid, easy to price, and easy to calculate market exposure. Even if fake trades were entered into the internal system, it is hard to see how they would not have been easily reconciled against the actual trade information that back-office gets each and every day, unless those systems were compromised as well. If that was the case, then there are significant IT access, operational and trading control issues.
I would love to find out more about what actually happened. I am sure there is more to the story.
Wednesday, January 23, 2008
Stimulus - Not Needed
My earlier post on this matter notwithstanding, the economic stimulus plans being bandied about aren't needed. The 75 basis point rate cut will likely do the job, and any stimulus plan will simply be too late (March at the earliest) to have any effect. If it results in permanently lower taxes, then I'm fine. The gist of my earlier post was that the clamor for stimulus actually creates a political climate where that could happen. But that is not what is happening. My recommendation now is do nothing.
Here is Stephen Bainbdridge's roundup of reasons not to pursue a stimulus package.
Michelle Malkin is even more critical!
Japan tried fiscal stimulus for a decade, and it didn't do much other than increase Japan's overall debt burden and create an even more entrenched pork-barrel political system.
Here is Stephen Bainbdridge's roundup of reasons not to pursue a stimulus package.
Michelle Malkin is even more critical!
Japan tried fiscal stimulus for a decade, and it didn't do much other than increase Japan's overall debt burden and create an even more entrenched pork-barrel political system.
Saturday, January 19, 2008
Fiscal Stimulus
Some kind of fiscal stimulus plan looks likely. Normally I'd say the economy should be let to run its course. But this is also an opportunity to fix some things that don't get fixed unless there is a crisis. That's right, it is a chance to keep taxes down at least for a while. Here would be my recipe.
1) Immediate $500 gtax credit (not grant) to anyone who filed a tax return last year or who paid any form of federal taxes. $1000 for couples filing jointly. To offset taxes due in April and/or increase rebate.
2) Abolish the Alternative Minimum Tax. Right now. No questions asked.
3) Extend any past tax cuts (Income, Dividends, and Capital Gains) for as long as possible. At least until 2009.
4) Credits to financial services companies for re-writing subprime loans to offer alternative payment plans for the borrowers (together with a Fed lowering of interest rates, this should be straightforward).
5) Extend item 4 to credit card issuers, to help people work off high balances and avoid further defaults there.
This is only at the federal level, but high tax states should do something as well, tailored to the particular economic condition in those states.
In addition to fiscal benefits, the psychological benefits created by the perception that the government is taking prudent action could itself forestall a recession.
1) Immediate $500 gtax credit (not grant) to anyone who filed a tax return last year or who paid any form of federal taxes. $1000 for couples filing jointly. To offset taxes due in April and/or increase rebate.
2) Abolish the Alternative Minimum Tax. Right now. No questions asked.
3) Extend any past tax cuts (Income, Dividends, and Capital Gains) for as long as possible. At least until 2009.
4) Credits to financial services companies for re-writing subprime loans to offer alternative payment plans for the borrowers (together with a Fed lowering of interest rates, this should be straightforward).
5) Extend item 4 to credit card issuers, to help people work off high balances and avoid further defaults there.
This is only at the federal level, but high tax states should do something as well, tailored to the particular economic condition in those states.
In addition to fiscal benefits, the psychological benefits created by the perception that the government is taking prudent action could itself forestall a recession.
California Dreaming
I loved my time in California. I benefited directly from the UC system while pursuing my PhD at Berkeley. However, it will be a while before I go back there, if at all.
This post from NRO and linked by Instapundit says it all. How can a state as wealthy as California, with taxes among the highest in the US, have such fiscal problems?
I suspect it is unnecessary spending. And that's what needs to be looked at.
This post from NRO and linked by Instapundit says it all. How can a state as wealthy as California, with taxes among the highest in the US, have such fiscal problems?
I suspect it is unnecessary spending. And that's what needs to be looked at.
Repeating Mistakes - Japan Taxes
Taxes in Japan are actually quite straightforward. The overall tax burden is about the same as the US, although perhaps slightly more progressive (i.e. higher for higher incomes, lower for lower incomes) but not dramatically so. Best of all, the system is very simple. If you are employed and make less than JPY 20,000,000 a year, your employer takes care of it for you. If you make more than that, or have other income, etc. you simply file a 2 page form with the national tax office. All other income taxes, including local taxes, social insurances, and the like, all flow from that same income calculation. On top of this there is a nationwide 5% sales tax.
But here's the problem: Japan is looking to raise taxes just at a time when the economy remains fragile due to global pressures. There are serious discussions about raising the consumption tax from 5% to 7% or more. In the early nineties the tax increased from 3% to 5% and essentially killed off a nascent economic recovery. If consumption tax increases again, I predict the same thing will happen again.
The quirkiest tax is the gasoline tax. This was doubled in the 1970s as a 'temporary measure' for road building. What followed was a massive political patronage system around road construction that has lastet a generation. It would seem to me now that there are no roads left to build! However, the LDP preserves its power in part because of pork-barrel largesse to key constituencies. The DPJ, which now controls the upper house of parliament, naturally wants this temporary tax repealed. But this is not for any particular economic reason. Rather, they know that it would take away part of the LDP's power.
Who says Japanese politics is boring?!?
But here's the problem: Japan is looking to raise taxes just at a time when the economy remains fragile due to global pressures. There are serious discussions about raising the consumption tax from 5% to 7% or more. In the early nineties the tax increased from 3% to 5% and essentially killed off a nascent economic recovery. If consumption tax increases again, I predict the same thing will happen again.
The quirkiest tax is the gasoline tax. This was doubled in the 1970s as a 'temporary measure' for road building. What followed was a massive political patronage system around road construction that has lastet a generation. It would seem to me now that there are no roads left to build! However, the LDP preserves its power in part because of pork-barrel largesse to key constituencies. The DPJ, which now controls the upper house of parliament, naturally wants this temporary tax repealed. But this is not for any particular economic reason. Rather, they know that it would take away part of the LDP's power.
Who says Japanese politics is boring?!?
Japan Whaling - Dangerous Waters!
Commenting on Japan's whaling is certain to take me into dangerous waters! Emotions run high on both sides.
The issue is back in the news as Japan's hunt of up to 1000 minke whales gets underway in Antarctic waters, ostensibly for research purposes. Protest groups have harrassed Japanese whalers, with 2 protestors from Sea Shepherd dramatically boarding a Japanese ship. The pair have since been transferred to an Australian custody after high-level diplomatic intervention.
Now at the risk of offending both sides, here is my view. The International Whaling Commission is the legally constituted body that has legally sanctioned the research hunt. From that perspective, the activities of Japan are legal. Australia tried to declare a sanctuary zone in Antarctic waters, but no other nation (as far as I am aware) recognizes Australia's authority to do so. But here's my advice to Japan: Give up whaling. Putting aside for now morale questions about killing whales, the hunt provides no particular economic or scientific value. Whale meat, while nostalgic for some, isn't particularly special and it certainly isn't necessary for anyone's diet in Japan. The hunt does nothing but bring codemnation from most other nations. Japan is country that wants to be liked, and wants to be taken seriously as a world leader. The aggressive pro-whaling efforts undermine that. On purely practical grounds, the whole things is a massive waste of time and not in Japan's long-term self interest.
As for the activists who chase after the Japanese fleet every year, it is perfectly fine to shadow the fleet to track activities and collect video for us in a public relations effort. However, interfering directly with the lawful activities of Japanese ships in international waters is tantamount to piracy. Boarding a ship and threatening the crew with acid (as the two Sea Shepherd activists appear to have done) is terrorism. The two perpetrators should be remanded to Japan for trial on charges of piracy and terrorism. Those who wish to stop whaling, must take their arguments to the political arena, both at the IWC and in the court of public opinion in Japan. Such aggression in international waters is neither heroic nor romantic. It is a criminal and should be treated as such.
The issue is back in the news as Japan's hunt of up to 1000 minke whales gets underway in Antarctic waters, ostensibly for research purposes. Protest groups have harrassed Japanese whalers, with 2 protestors from Sea Shepherd dramatically boarding a Japanese ship. The pair have since been transferred to an Australian custody after high-level diplomatic intervention.
Now at the risk of offending both sides, here is my view. The International Whaling Commission is the legally constituted body that has legally sanctioned the research hunt. From that perspective, the activities of Japan are legal. Australia tried to declare a sanctuary zone in Antarctic waters, but no other nation (as far as I am aware) recognizes Australia's authority to do so. But here's my advice to Japan: Give up whaling. Putting aside for now morale questions about killing whales, the hunt provides no particular economic or scientific value. Whale meat, while nostalgic for some, isn't particularly special and it certainly isn't necessary for anyone's diet in Japan. The hunt does nothing but bring codemnation from most other nations. Japan is country that wants to be liked, and wants to be taken seriously as a world leader. The aggressive pro-whaling efforts undermine that. On purely practical grounds, the whole things is a massive waste of time and not in Japan's long-term self interest.
As for the activists who chase after the Japanese fleet every year, it is perfectly fine to shadow the fleet to track activities and collect video for us in a public relations effort. However, interfering directly with the lawful activities of Japanese ships in international waters is tantamount to piracy. Boarding a ship and threatening the crew with acid (as the two Sea Shepherd activists appear to have done) is terrorism. The two perpetrators should be remanded to Japan for trial on charges of piracy and terrorism. Those who wish to stop whaling, must take their arguments to the political arena, both at the IWC and in the court of public opinion in Japan. Such aggression in international waters is neither heroic nor romantic. It is a criminal and should be treated as such.
Tuesday, January 15, 2008
The Trouble with Romney
At first, Romney looked like my guy. He is a proven executive with a strong record of success. He is immune from the family issues or lifestyle issues other candidates may face. He looked electable.
However, on digging deeper, a lot of issues arise. Much of the below is thanks to my brother who lives in Massachusetts and gave me some insight into Romney's performance as Governor there.
In a nutshell, the issue is the flip-flop. Furthermore, the experience in business does not appear to have translated into results. Mind you, it is probably a miracle that anyone can get anything done in Massachusetts at all, but here are the problems.
1) Taxes: went up for just about everyone in the state, especially when fees are included. Massachusetts was already a high tax state.
2) Economy: Employers continue to avoid Massachusetts or leave the state. Romney did nothing to attract employers back, or keep them here. Tax cuts and reduced government red-tape, which should be core Republican values, were not even attempted.
3) Health insurance: approved a statewide health plan that is an unfunded mandate, which many poorer people still can’t afford even though they are now legally required to have insurance. Self-employed people really have a lot of sticker shock here. Meanwhile, the state can’t really afford it, and will likely have to increase statewide taxes and fees to cover Romney’s health plan. This is almost as bad as Hillarycare.
4) Car insurance: in Massachusetts, there is a state-controlled set of pricing constraints on auto insurance premiums. Basically, every company that offers auto insurance has to charge everyone the same price. This is the worst kind of government meddling in the free market. Instead of changing this, Romney kept it the same. The new democrat governor immediately acted to change this, and soon there will be basic market competition in auto insurance.
5) The Big Dig: Romney continued to botch this one just like everyone else. His business experience didn't help here.
6) Social issues (Abortion, Gay Marriage, etc.) Now these are probably no-win issues for social conservatives in Massachusetts, but they need to be dealt with. Flip-flopping here means you haven't thought it through, and without a value-based position it is impossible to secure your base (that's true for either side of the issue, depending on who your base is).
7) Immigration: Companies he hired to work on his house employed illegal immigrants. This was a huge media scandal for a while.
8) Leadership style: Romney appears to employ a top-down, authoritarian style of leadership. He gives orders and people are supposed to follow. He did not engage consensus-building, bottom-up leadership. This meant that he was often in the position of working against state legislators rather than with them. . .of course the buck stops with the Executive. But leadership comes from convincing people to join you, not from telling them. Ironically, that's often true in business as well.
9) Education: Promised to fix problems with Massachusetts charter schools but didn't. Changed plan on higher education after elected. Even Republicans in the state legislature voted against Romney's revised plan.
10) In addition to all that, Romney's foreign policy experience is limited.
Whatever people say about Bush, he at least does what he says he will do. People may not like it, but Bush's positions have been clear before every election, and the actions have followed. In other words, there were no surprises and voters got what they voted for.
I'm not saying that it is always wrong to change policy. I often present in these pages that indisputable facts may require a change in direction (indeed if liberals did this, they'd become Republicans). However, a set of core values is critical to leadership. And I'm afraid to say that Romney's record in Massachusetts fails the test.
However, on digging deeper, a lot of issues arise. Much of the below is thanks to my brother who lives in Massachusetts and gave me some insight into Romney's performance as Governor there.
In a nutshell, the issue is the flip-flop. Furthermore, the experience in business does not appear to have translated into results. Mind you, it is probably a miracle that anyone can get anything done in Massachusetts at all, but here are the problems.
1) Taxes: went up for just about everyone in the state, especially when fees are included. Massachusetts was already a high tax state.
2) Economy: Employers continue to avoid Massachusetts or leave the state. Romney did nothing to attract employers back, or keep them here. Tax cuts and reduced government red-tape, which should be core Republican values, were not even attempted.
3) Health insurance: approved a statewide health plan that is an unfunded mandate, which many poorer people still can’t afford even though they are now legally required to have insurance. Self-employed people really have a lot of sticker shock here. Meanwhile, the state can’t really afford it, and will likely have to increase statewide taxes and fees to cover Romney’s health plan. This is almost as bad as Hillarycare.
4) Car insurance: in Massachusetts, there is a state-controlled set of pricing constraints on auto insurance premiums. Basically, every company that offers auto insurance has to charge everyone the same price. This is the worst kind of government meddling in the free market. Instead of changing this, Romney kept it the same. The new democrat governor immediately acted to change this, and soon there will be basic market competition in auto insurance.
5) The Big Dig: Romney continued to botch this one just like everyone else. His business experience didn't help here.
6) Social issues (Abortion, Gay Marriage, etc.) Now these are probably no-win issues for social conservatives in Massachusetts, but they need to be dealt with. Flip-flopping here means you haven't thought it through, and without a value-based position it is impossible to secure your base (that's true for either side of the issue, depending on who your base is).
7) Immigration: Companies he hired to work on his house employed illegal immigrants. This was a huge media scandal for a while.
8) Leadership style: Romney appears to employ a top-down, authoritarian style of leadership. He gives orders and people are supposed to follow. He did not engage consensus-building, bottom-up leadership. This meant that he was often in the position of working against state legislators rather than with them. . .of course the buck stops with the Executive. But leadership comes from convincing people to join you, not from telling them. Ironically, that's often true in business as well.
9) Education: Promised to fix problems with Massachusetts charter schools but didn't. Changed plan on higher education after elected. Even Republicans in the state legislature voted against Romney's revised plan.
10) In addition to all that, Romney's foreign policy experience is limited.
Whatever people say about Bush, he at least does what he says he will do. People may not like it, but Bush's positions have been clear before every election, and the actions have followed. In other words, there were no surprises and voters got what they voted for.
I'm not saying that it is always wrong to change policy. I often present in these pages that indisputable facts may require a change in direction (indeed if liberals did this, they'd become Republicans). However, a set of core values is critical to leadership. And I'm afraid to say that Romney's record in Massachusetts fails the test.
Monday, January 14, 2008
Paul Krugman Wrong Again
In my earlier post on whether we'll talk our way into recession, I linked to Megan McCardle's post that details the 9 times Paul Krugman has incorrectly predicted a US recession.
I was about to challenge another Paul Krugman article lauding the European welfare state economic model, when I noticed this post linked by Instapundit. To summarize a few key points, Krugman is selective in his statistics, ignores macro demographic trends, and fails to comment on the rightward political trend in France and Germany.
I haven't done all the math, but if I would suggest any comparison also needs to consider a series of additional factors:
1) what is the median per capita purchasing power parity after tax in major countries?
2) how often to individuals move up the economic ladder, and what is the opportunity to make it to the very top based on personal initiative?
3) what are the various efficiency measures such as productivity growth, pollution per unit of economic value creation, job growth?
Of course Europe is prosperous and growing. It has a well educated populace, democratically elected governments, property rights, rule of law, independent central banks, and all that good stuff. However, studies have repeatedly shown that greater labor flexibility and lower taxes would provide even further benefit. Indeed the tigers of Europe, such as Ireland and much of the new Eastern European democracies, are pursuing exactly that.
I was about to challenge another Paul Krugman article lauding the European welfare state economic model, when I noticed this post linked by Instapundit. To summarize a few key points, Krugman is selective in his statistics, ignores macro demographic trends, and fails to comment on the rightward political trend in France and Germany.
I haven't done all the math, but if I would suggest any comparison also needs to consider a series of additional factors:
1) what is the median per capita purchasing power parity after tax in major countries?
2) how often to individuals move up the economic ladder, and what is the opportunity to make it to the very top based on personal initiative?
3) what are the various efficiency measures such as productivity growth, pollution per unit of economic value creation, job growth?
Of course Europe is prosperous and growing. It has a well educated populace, democratically elected governments, property rights, rule of law, independent central banks, and all that good stuff. However, studies have repeatedly shown that greater labor flexibility and lower taxes would provide even further benefit. Indeed the tigers of Europe, such as Ireland and much of the new Eastern European democracies, are pursuing exactly that.
Sunday, January 13, 2008
Grey Goo Bigger Threat Than Global Warming?!?
How would you allocate $100 million to protect the world from events that could destroy all intelligent life? Here's the survey on the Lifeboat Foundation's lifeboat.com site.
Interestingly, when I checked it just now, the 53 voters so far would allocate nearly $10 million to protect ourselves from rogue nanotechnology (grey goo) and only $7.6 million on environmental threats such as global warming!
It would be interesting to do a formal survey on a this question. . .and see if nanotechnology is really feared more than global warming! If so, then perhaps I should start a career as the Al Gore of Nanotechnology Alarmism in pursuit of the inevitable Nobel Prize ;-)
[Update 1/14 12:00 - after 80 votes, the Lifeboat Foundation survey is still $8.8M nanotech to $7.6M environmental]
Interestingly, when I checked it just now, the 53 voters so far would allocate nearly $10 million to protect ourselves from rogue nanotechnology (grey goo) and only $7.6 million on environmental threats such as global warming!
It would be interesting to do a formal survey on a this question. . .and see if nanotechnology is really feared more than global warming! If so, then perhaps I should start a career as the Al Gore of Nanotechnology Alarmism in pursuit of the inevitable Nobel Prize ;-)
[Update 1/14 12:00 - after 80 votes, the Lifeboat Foundation survey is still $8.8M nanotech to $7.6M environmental]
Capitalism is Good for the Soul!
Capitalism is not romantic like Socialism or Environmentalism. But it does work! Here is an excellent piece by Peter Saunders.
I particularly like this passage*
"When I was a university teacher, I frequently encountered students who argued just as Clive does. We are too materialistic, they told me, we don’t need all these possessions, we should stop the capitalist machine and devote our energies to better and higher pursuits. But whenever I asked them at what point in history they thought the machine should have been turned off, they would invariably reply, ‘now!’ "
In other words, those students want to keep the fruits of capitalism up to everything that they already have. Furthermore, they would deny those same benefits to those who do not have them.
So capitalism gives us too much of what we need. The alternative, is of course, that we don't get enought of what we need. . .and how easy would it be if you didn't have water, food, and shelter? Those of us who are fortunate enough to live in the capitalist west are able to take those basic needs for granted. Now that's luxury!
And, providing the best possible outcome for the most possible people, well that's good for the soul.
I particularly like this passage*
"When I was a university teacher, I frequently encountered students who argued just as Clive does. We are too materialistic, they told me, we don’t need all these possessions, we should stop the capitalist machine and devote our energies to better and higher pursuits. But whenever I asked them at what point in history they thought the machine should have been turned off, they would invariably reply, ‘now!’ "
In other words, those students want to keep the fruits of capitalism up to everything that they already have. Furthermore, they would deny those same benefits to those who do not have them.
So capitalism gives us too much of what we need. The alternative, is of course, that we don't get enought of what we need. . .and how easy would it be if you didn't have water, food, and shelter? Those of us who are fortunate enough to live in the capitalist west are able to take those basic needs for granted. Now that's luxury!
And, providing the best possible outcome for the most possible people, well that's good for the soul.
Bloggers Check the Math - The MSM Narrative Fails Again
Here is a good example of checking the data to challenge the New York Times on the number of murders caused by troops returning from Iraq.
Unfortunately for the NYT, the data (and the math) do not support the narrative the NYT is trying to push.
[Update 1/14 11:45 JST: more debunking of the NYT article is here Here. Furthermore, the Japan Times published the article in its Jan 14 issue, without bothering to check any of the data].
Another classic example is the now discredited study in Lancet that 650,000 Iraqi's have died since 2003 as a result of the war. (By the way, guess who funded that study?)
This doesn't mean that those deaths weren't tragic in themselves, and perhaps even 151,000 was too many - but my point here is that the facts deserve respect. It is a disservice to all who died to inflate the numbers beyond what they are, thereby diminishing the sacrifice made those who perished.
And here is more on Iraq numbers. Basically, it was much worse under Saddam especially if you consider Saddam's aggressions against Iran and Kuwait. And as some of the comments note, a key factor in the 151,000 deaths since the US invasion is the sectarian violence promoted by Al-Qaeda - in other words the enemy that the US military and Iraqis are trying to stop.
As for Global Warning, well here's a 'feast for cherry pickers'. Bottom line is that there isn't enough data to prove or disprove the IPCC's temperature predictions over the last 7 years, or indeed to determine whether there is a trend at all. It looks to me that temperatures are fluctuating within historical ranges. There is no correlation with CO2 trends (which are increasing). What we do know now is that the main computer models that predict temperature change due to greenhouse gases, to not yet fit the historical data. Given that, why should we expect them to predict the future?
Put another way, would you give your money to a fund manager, who has a computer model for picking stocks, that doesn't work when compared to past market data?
Unfortunately for the NYT, the data (and the math) do not support the narrative the NYT is trying to push.
[Update 1/14 11:45 JST: more debunking of the NYT article is here Here. Furthermore, the Japan Times published the article in its Jan 14 issue, without bothering to check any of the data].
Another classic example is the now discredited study in Lancet that 650,000 Iraqi's have died since 2003 as a result of the war. (By the way, guess who funded that study?)
This doesn't mean that those deaths weren't tragic in themselves, and perhaps even 151,000 was too many - but my point here is that the facts deserve respect. It is a disservice to all who died to inflate the numbers beyond what they are, thereby diminishing the sacrifice made those who perished.
And here is more on Iraq numbers. Basically, it was much worse under Saddam especially if you consider Saddam's aggressions against Iran and Kuwait. And as some of the comments note, a key factor in the 151,000 deaths since the US invasion is the sectarian violence promoted by Al-Qaeda - in other words the enemy that the US military and Iraqis are trying to stop.
As for Global Warning, well here's a 'feast for cherry pickers'. Bottom line is that there isn't enough data to prove or disprove the IPCC's temperature predictions over the last 7 years, or indeed to determine whether there is a trend at all. It looks to me that temperatures are fluctuating within historical ranges. There is no correlation with CO2 trends (which are increasing). What we do know now is that the main computer models that predict temperature change due to greenhouse gases, to not yet fit the historical data. Given that, why should we expect them to predict the future?
Put another way, would you give your money to a fund manager, who has a computer model for picking stocks, that doesn't work when compared to past market data?
Will We Talk Our Way Into Recession?
It would seem that bad economic news makes for better copy than good news. Unfortunately, this risks feeding the fear of recession, which could in turn contribute to an actual recession.
Fortunately, Internet bloggers are able to challenge the pundits. Here is a good round up by Megan McCardle of 9 times in the past half decade when Paul Krugman has incorrectly predicted a recession. As Glenn Reynolds points out, "eventually, however, he'll be right".
But what will really happen? My take is that since the economy seems to have replaced Iraq as issue of choice for those who want "change", Democrats and the MSM will continue to push the case that we are headed for, or perhaps even already in, a recession. We should factor that drumbeat of pessimism in to any personal or business forecast. There is sufficient uncertainty (sub-prime credit losses, commodity price pressures, slowdown in employment growth) that we should expect at least a slowdown. However, I don't think there is a case for a full recession.
At a mimum, the Fed and the US Treasury are on the case. Can you think of any two economic leaders better than Bernanke and Paulson to steer the economy during uncertain times? A mix of rate cuts and targeted stimulus might just do the trick.
This article in US News & World Report shows the bigger picture: The US has had a 25-year super boom, and is poised to repeat that. But probably most important is the key lessons learned:
1) keep competition high, especially flexible labor markets.
2) keep inflation low (in other words don't push rates down too far!)
3) keep taxes low. . .and by extension, definitely do not increase them!
Even democrats can vote for tax cuts, as happened twice for capital gains taxes - the engine of investment and therefore long-term growth!
Now - what candidates are strong on all three points?
Let me add a Japan angle as well. In the early 90's an increase in the Japan consumption tax (eseentially a sales tax increase from 3% to 5%) basically killed off a fragile economic recovery pushing the economy back into a low growth deflationary regime. Furthermore, Japan still continues to resist moves to increase competition, but wherever competition has been allowed to take root, growth has been high. Related to this, Japan invested billions so-called "pump-priming" economic stimulus measures. Most of that money ended up as some form of pork-barrel spending, that kept the ruling LDP in power and lined the pockets of various domestic industries, further impeding competition. This might have kept things going a bit, but whenever the stimulus stopped, so did the economic benefit, because almost none of that money found its way into investments in economic growth.
More here challenging Senator Shumer's stimulus suggestions. Let's not forget, that government money is by taxation that takes money out of the economy. If you want to put it back, the right way is not to legislate for the IRS to send me a $600 tax rebate check anytime Senator!
Fortunately, Internet bloggers are able to challenge the pundits. Here is a good round up by Megan McCardle of 9 times in the past half decade when Paul Krugman has incorrectly predicted a recession. As Glenn Reynolds points out, "eventually, however, he'll be right".
But what will really happen? My take is that since the economy seems to have replaced Iraq as issue of choice for those who want "change", Democrats and the MSM will continue to push the case that we are headed for, or perhaps even already in, a recession. We should factor that drumbeat of pessimism in to any personal or business forecast. There is sufficient uncertainty (sub-prime credit losses, commodity price pressures, slowdown in employment growth) that we should expect at least a slowdown. However, I don't think there is a case for a full recession.
At a mimum, the Fed and the US Treasury are on the case. Can you think of any two economic leaders better than Bernanke and Paulson to steer the economy during uncertain times? A mix of rate cuts and targeted stimulus might just do the trick.
This article in US News & World Report shows the bigger picture: The US has had a 25-year super boom, and is poised to repeat that. But probably most important is the key lessons learned:
1) keep competition high, especially flexible labor markets.
2) keep inflation low (in other words don't push rates down too far!)
3) keep taxes low. . .and by extension, definitely do not increase them!
Even democrats can vote for tax cuts, as happened twice for capital gains taxes - the engine of investment and therefore long-term growth!
Now - what candidates are strong on all three points?
Let me add a Japan angle as well. In the early 90's an increase in the Japan consumption tax (eseentially a sales tax increase from 3% to 5%) basically killed off a fragile economic recovery pushing the economy back into a low growth deflationary regime. Furthermore, Japan still continues to resist moves to increase competition, but wherever competition has been allowed to take root, growth has been high. Related to this, Japan invested billions so-called "pump-priming" economic stimulus measures. Most of that money ended up as some form of pork-barrel spending, that kept the ruling LDP in power and lined the pockets of various domestic industries, further impeding competition. This might have kept things going a bit, but whenever the stimulus stopped, so did the economic benefit, because almost none of that money found its way into investments in economic growth.
More here challenging Senator Shumer's stimulus suggestions. Let's not forget, that government money is by taxation that takes money out of the economy. If you want to put it back, the right way is not to legislate for the IRS to send me a $600 tax rebate check anytime Senator!
Thursday, January 10, 2008
Biased AP reporting on Bush's mideast trip
This AP article on Bush's trip to the Mideast is a prime example of MSM's anti-Bush bias. Several sentences, while not precisely wrong, are clearly written with an anti-Bush slant. To demonstrate what I mean, I've rewritten the article to show how a few re-writes can change the tone of the article, while still presenting essentially the same facts. Here it is (original text is as is, AP text that I would delete is in blue italics , and my new text in red italics):
JERUSALEM (AP) - President Bush warned Iran of "serious consequences" if it meddles again with U.S. warships in the Persian Gulf, opening a Mideast peacemaking mission Wednesday on an ominous note. He told Israel to dismantle unauthorized settlement outposts and demanded that the Palestinians halt rocket attacks from areas controlled by Hamas Islamic militants.
Bush, on his first visit as president to Israel, acknowledged widespread doubts about whether he can break through decades of distrust to achieve his goal of a major peace agreement by the end of his presidency in January, 2009.
"I'm under no illusions," Bush said at a news conference with Israeli Prime Minister Ehud Olmert. "It's going to be hard work."
Unpopular at home, Bush got an extremely warm welcome in staunch ally Israel. With his presidency slipping away and skepticism about the seriousness of his commitment to Mideast peacemaking, Bush hopes an accord would improve a legacy tarnished by an unpopular Iraq war, economic anxieties and other problems.
Bush got an extremely warm welcome in Israel. Although in the last year of his presidency, Bush’s trip is an attempt to advance the cause of peace in the Middle east, just as many other US president’s have done late in their terms of office. In the past, Bush has repeatedly stated that he is more interested in doing the right thing than in current opinion polls, although progress in this effort would likely burnish his legacy and improve his approval ratings, which have been steadily increasing in recent months after hitting historic lows last year.
Already a troubling issue for Bush, Iran jumped back into the spotlight Sunday when Iranian boats harassed and provoked three American Navy ships in the strategic Strait of Hormuz. U.S. officials said Iran threatened to explode the vessels, but the incident ended peacefully.
As further evidence of the seriousness and scope of the issue, Iran jumped back into the spotlight Sunday when Iranian boats harassed and provoked three American Navy ships in the strategic Strait of Hormuz. U.S. officials said Iran threatened to explode the vessels, but backed off at the last minute.
Bush said "all options are on the table" to protect U.S. ships. He said the Iranian boats "were very provocative and it was a dangerous gesture on their part. ... And they know our position, and that is: There will be serious consequences if they attack our ships, pure and simple. And my advice to them is don't do it."
Bush already was on the defensive about Iran because a new U.S. intelligence report contradicted White House assertions that Tehran was building a nuclear weapon. The National Intelligence Estimate found Iran halted its program in 2003 under international pressure.
Iran has been a concern since Bush included them in the "axis of evil" together with Iraq and North Korea. The latest U.S. National Intelligence Estimate stated that Iran had indeed pursued the building of nuclear weapons, but that it may have suspended the program in 2003. The report also indicates that Iran could potentially restart that program. Furthermore, Iran currently has an active uranium enrichment program that it claims is for peaceful purposes, despite the fact that Iran is rich in oil and does not yet have any energy-producing nuclear power plants.
Iran is a particularly sensitive subject here because Iranian President Mahmoud Ahmadinejad has repeatedly called for Israel's destruction, and Israelis wonder whether Bush has the resolve to deal with Tehran, especially in light of the new intelligence.
In Israel, Iran is a particularly sensitive subject because Iranian president Mahmoud Ahmadinejad has repeatedly called for Israel’s destruction. Israelis wonder whether past international efforts to resolve the issue are sufficient, given that Iran has repeatedly ignored U.N. Security Council resolutions and sanctions aimed at forcing a change in Iran’s nuclear ambitions.
Saying he still regarded Iran as a dangerous threat, Bush said, "We'll continue to keep the pressure on the Iranians. And I believe we can solve this problem diplomatically."
After a red-carpet airport arrival in Tel Aviv, Bush flew by helicopter to Jerusalem for talks with Olmert and Israeli President Shimon Peres, who cautioned that peace negotiations "may be slow, but the progress can be sweet."
Olmert said Israel would not accept a peace agreement unless there is a halt to rocket attacks from the Gaza Strip, controlled by Islamic militants dedicated to Israel's destruction. The U.S.-backed Palestinian president, Mahmoud Abbas, wields authority in the West Bank but not in Gaza, meaning the Palestinian population is effectively split between two governing entities.
"There will be no peace unless terror is stopped," Olmert told Bush. "And terror will have to be stopped everywhere. He said that "Gaza must be part of the package and that as long as there will be terror from Gaza, it will be very, very hard to reach any peaceful understanding between us and the Palestinians."
The threat to Israel was underscored Wednesday when Palestinian militants in the Gaza bombarded southern Israel with rocket and mortar fire.
On Thursday, Bush will fly to the West Bank and question Abbas about just that.
"As to the rockets, my first question is going to be to President Abbas, `What do you intend to do about them?'" Bush said.
"Because ultimately, in order for there to be the existence of a state, there has to be a firm commitment by a Palestinian government to deal with extremists and terrorists who might be willing to use Palestinian territory as a launching pad into Israel."
Stephen Hadley, Bush's national security adviser, sounded pessimistic about Hamas joining the peace process.
"Nobody, unfortunately, is very optimistic that they will make that choice," Hadley said. "Hamas came to power in election; it will have to submit itself at some point to the people of Gaza in terms of their approval of the job they have done. And at this point, it's a pretty depressing situation in Hamas—in Gaza for all those people who live there."
The administration set low realistic expectations for Bush's eight-day Mideast journey, which also includes stops in Kuwait, Bahrain, United Arab Emirates, Saudi Arabia and Egypt. Bush said it would be unproductive for him to "butt in and actually dictate the end result of the agreement."
But that did not stop him from telling Israel what to do about settlements.
"In terms of outposts, yes, they ought to go," Bush said. "Look, I mean, we've been talking about it for four years. The agreement was, `Get rid of outposts, illegal outposts,' and they ought to go.'"
Israel has established some 120 settlements in the West Bank, which are home to about 270,000 Israelis. In addition, there are more than 100 outposts, most of which are tiny encampments—built by hardline activists without authorization—meant to serve as the seeds of future settlements.
The U.S.-backed peace plan known as the "road map" calls on Israel to remove dozens of outposts and freeze settlement activity, including construction in existing settlements.
Olmert repeated his pledge not to build any new settlements, but indicated Israel will continue building in major settlement blocs and east Jerusalem.
Bush was silent on Olmert's claims to the settlement blocs and east Jerusalem. This was disappointing to the Palestinians, who say all settlements are illegal.
The Palestinians want all of the West Bank and east Jerusalem for their future state. Israel wants to keep east Jerusalem and the large settlements in the West Bank under a final peace agreement.
Bush offered support to Israel on one of the core issues in the conflict. "The alliance between our two nations helps guarantee Israel's security as a Jewish state," Bush said.
Bush has referred to Israel as Jewish state in the past but the reference—here in the region—had special significance. Palestinians oppose the term, saying it rules out the right of Palestinian refugees to return to lost properties in Israel. Nevertheless, many Israeli citizens are Arab and non-Jewish, and enjoy full rights and protections under the law in one of the only fully democratic countries in the entire Middle East.
JERUSALEM (AP) - President Bush warned Iran of "serious consequences" if it meddles again with U.S. warships in the Persian Gulf, opening a Mideast peacemaking mission Wednesday on an ominous note. He told Israel to dismantle unauthorized settlement outposts and demanded that the Palestinians halt rocket attacks from areas controlled by Hamas Islamic militants.
Bush, on his first visit as president to Israel, acknowledged widespread doubts about whether he can break through decades of distrust to achieve his goal of a major peace agreement by the end of his presidency in January, 2009.
"I'm under no illusions," Bush said at a news conference with Israeli Prime Minister Ehud Olmert. "It's going to be hard work."
Unpopular at home, Bush got an extremely warm welcome in staunch ally Israel. With his presidency slipping away and skepticism about the seriousness of his commitment to Mideast peacemaking, Bush hopes an accord would improve a legacy tarnished by an unpopular Iraq war, economic anxieties and other problems.
Bush got an extremely warm welcome in Israel. Although in the last year of his presidency, Bush’s trip is an attempt to advance the cause of peace in the Middle east, just as many other US president’s have done late in their terms of office. In the past, Bush has repeatedly stated that he is more interested in doing the right thing than in current opinion polls, although progress in this effort would likely burnish his legacy and improve his approval ratings, which have been steadily increasing in recent months after hitting historic lows last year.
Already a troubling issue for Bush, Iran jumped back into the spotlight Sunday when Iranian boats harassed and provoked three American Navy ships in the strategic Strait of Hormuz. U.S. officials said Iran threatened to explode the vessels, but the incident ended peacefully.
As further evidence of the seriousness and scope of the issue, Iran jumped back into the spotlight Sunday when Iranian boats harassed and provoked three American Navy ships in the strategic Strait of Hormuz. U.S. officials said Iran threatened to explode the vessels, but backed off at the last minute.
Bush said "all options are on the table" to protect U.S. ships. He said the Iranian boats "were very provocative and it was a dangerous gesture on their part. ... And they know our position, and that is: There will be serious consequences if they attack our ships, pure and simple. And my advice to them is don't do it."
Bush already was on the defensive about Iran because a new U.S. intelligence report contradicted White House assertions that Tehran was building a nuclear weapon. The National Intelligence Estimate found Iran halted its program in 2003 under international pressure.
Iran has been a concern since Bush included them in the "axis of evil" together with Iraq and North Korea. The latest U.S. National Intelligence Estimate stated that Iran had indeed pursued the building of nuclear weapons, but that it may have suspended the program in 2003. The report also indicates that Iran could potentially restart that program. Furthermore, Iran currently has an active uranium enrichment program that it claims is for peaceful purposes, despite the fact that Iran is rich in oil and does not yet have any energy-producing nuclear power plants.
Iran is a particularly sensitive subject here because Iranian President Mahmoud Ahmadinejad has repeatedly called for Israel's destruction, and Israelis wonder whether Bush has the resolve to deal with Tehran, especially in light of the new intelligence.
In Israel, Iran is a particularly sensitive subject because Iranian president Mahmoud Ahmadinejad has repeatedly called for Israel’s destruction. Israelis wonder whether past international efforts to resolve the issue are sufficient, given that Iran has repeatedly ignored U.N. Security Council resolutions and sanctions aimed at forcing a change in Iran’s nuclear ambitions.
Saying he still regarded Iran as a dangerous threat, Bush said, "We'll continue to keep the pressure on the Iranians. And I believe we can solve this problem diplomatically."
After a red-carpet airport arrival in Tel Aviv, Bush flew by helicopter to Jerusalem for talks with Olmert and Israeli President Shimon Peres, who cautioned that peace negotiations "may be slow, but the progress can be sweet."
Olmert said Israel would not accept a peace agreement unless there is a halt to rocket attacks from the Gaza Strip, controlled by Islamic militants dedicated to Israel's destruction. The U.S.-backed Palestinian president, Mahmoud Abbas, wields authority in the West Bank but not in Gaza, meaning the Palestinian population is effectively split between two governing entities.
"There will be no peace unless terror is stopped," Olmert told Bush. "And terror will have to be stopped everywhere. He said that "Gaza must be part of the package and that as long as there will be terror from Gaza, it will be very, very hard to reach any peaceful understanding between us and the Palestinians."
The threat to Israel was underscored Wednesday when Palestinian militants in the Gaza bombarded southern Israel with rocket and mortar fire.
On Thursday, Bush will fly to the West Bank and question Abbas about just that.
"As to the rockets, my first question is going to be to President Abbas, `What do you intend to do about them?'" Bush said.
"Because ultimately, in order for there to be the existence of a state, there has to be a firm commitment by a Palestinian government to deal with extremists and terrorists who might be willing to use Palestinian territory as a launching pad into Israel."
Stephen Hadley, Bush's national security adviser, sounded pessimistic about Hamas joining the peace process.
"Nobody, unfortunately, is very optimistic that they will make that choice," Hadley said. "Hamas came to power in election; it will have to submit itself at some point to the people of Gaza in terms of their approval of the job they have done. And at this point, it's a pretty depressing situation in Hamas—in Gaza for all those people who live there."
The administration set low realistic expectations for Bush's eight-day Mideast journey, which also includes stops in Kuwait, Bahrain, United Arab Emirates, Saudi Arabia and Egypt. Bush said it would be unproductive for him to "butt in and actually dictate the end result of the agreement."
But that did not stop him from telling Israel what to do about settlements.
"In terms of outposts, yes, they ought to go," Bush said. "Look, I mean, we've been talking about it for four years. The agreement was, `Get rid of outposts, illegal outposts,' and they ought to go.'"
Israel has established some 120 settlements in the West Bank, which are home to about 270,000 Israelis. In addition, there are more than 100 outposts, most of which are tiny encampments—built by hardline activists without authorization—meant to serve as the seeds of future settlements.
The U.S.-backed peace plan known as the "road map" calls on Israel to remove dozens of outposts and freeze settlement activity, including construction in existing settlements.
Olmert repeated his pledge not to build any new settlements, but indicated Israel will continue building in major settlement blocs and east Jerusalem.
Bush was silent on Olmert's claims to the settlement blocs and east Jerusalem. This was disappointing to the Palestinians, who say all settlements are illegal.
The Palestinians want all of the West Bank and east Jerusalem for their future state. Israel wants to keep east Jerusalem and the large settlements in the West Bank under a final peace agreement.
Bush offered support to Israel on one of the core issues in the conflict. "The alliance between our two nations helps guarantee Israel's security as a Jewish state," Bush said.
Bush has referred to Israel as Jewish state in the past but the reference—here in the region—had special significance. Palestinians oppose the term, saying it rules out the right of Palestinian refugees to return to lost properties in Israel. Nevertheless, many Israeli citizens are Arab and non-Jewish, and enjoy full rights and protections under the law in one of the only fully democratic countries in the entire Middle East.
Wednesday, January 9, 2008
Let's Count Delegates
With Iowa, New Hampshire, and the Wyoming Republican caucus now over, it's time to start counting party convention delegates instead of polls. As I mentioned in an earlier post, unlike the national election in November, the primaries are not winner-take-all.
Here's what's on CNN right now:
Republicans (1191 needed to win)
Romney 30
Huckabee 21
McCain 10
Thompson 6
Paul 2
Giuliani 1
Hunter 1
Democrats (2025 needed to win) including Superdelegates:
Clinton 183
Obama 78
Edwards 52
Richardson 19
Kucinich 1
Democrats excluding Superdelegates
Obama 25
Clinton 24
Edwards 18
Looking at these numbers, the Republican story should be "Romney in the lead". For the Democrats its still neck and neck, but the story should probably be "Obama still in front". But it remains to be seen whether Obama can gain enough support to overcome the Superdelegate bias for Clinton.
But in summary, it is still very early days and yet again it pays to look at the actual data and not just the MSM headlines.
Two Good Articles
Here's two good articles
Daniel Pipe's review of Jonah Goldberg's new book Liberal Facism
A piece in American Thinker comparing 8 years under Clinton and the last 7 under Bush and why Republican's shouldn't worry quite so much.
Daniel Pipe's review of Jonah Goldberg's new book Liberal Facism
A piece in American Thinker comparing 8 years under Clinton and the last 7 under Bush and why Republican's shouldn't worry quite so much.
New Hampshire Primaries
So apparently Hillary has achieved a 'startling upset' in New Hampshire.
But wasn't she the inevitable nominee not even a month ago? OK, so Hillary 39% to Obama 36% (with 70% of precincts reporting) shows that polls can be wrong and that the Democratic nomination is still close. But it's hardly an upset. Hillary should have an outright majority. Anything less shows that she's still got a ways to go.
I'd say that Iowa and New Hampshire so far don't prove all that much. Here's my take so far:
1) Obama showed that he is a contender
2) Hillary is not going away anytime soon
3) Edwards is finished
4) Huckabee has much less of a chance among Republicans than Obama has among Democrats
5) For Republicans, it's McCain and Romney for now, but probably too soon to count out Giuliani or even Thompson.
The real contest will be Super Tuesday next month, and I'd say for now the contest is wide open.
And don't forget, unlike the Electoral College process for the final election, the primaries are not winner-take-all. The delegates are divided up proportionally. Also, the Dems have 20% of delegates to the convention that are not assigned by the primaries.
Monday, January 7, 2008
High Rollers in Tokyo!
Reuters reports on Japanese "new rich partying like it is 1989." $15,000 martinis with diamonds? $130,000 watches bought on a whim? Harry Potter style gothic lettering embroidered into your headrest on your Bentley?
You know what? It's all true and I have seen it. I have the good fortune to live and work in the Shibuya/Roppongi area of Tokyo, which is nothing if not the home of understated, but nevertheless quite visible, consumption.
I have been to the Ritz-Carlton bar on the 45th floor of the Midtown complex, and I've seen the "Diamonds are Forever" martini on the menu. I have personally been to a department store show, where a salesman offered me a $140,000 dollar diamond Piaget watch for a mere $100,000 and was all ready to put on my credit card (it was a beautiful watch!). I don't know about the Bentleys, but Maybach cars of over $750,000 a pop graced the parking area where I used to live, and more than one!
As for the less affluent? Well they are certainly not hurting. This part of Tokyo is home to perhaps the best-dressed, best-groomed, best-mannered populace on the face of the planet. As I've said before comparing Japan to China, this place has cash. Japan has over 1.5 million people with liquid assets of more than $1 million. That's over $1.5 trillion dollars cash in the hands of Japan's elite. That's more than all of China (including Taiwan and Hong Kong). And that's part of the over $12 trillion in investable assets held by all Japanese households, half of which is cash sitting in low-interest time deposits (and by low I mean less than 1% per year).
For some people, money really is no object. Furthermore, I don't envy them one bit. I hope to be one of them some day soon! Not sure that I'll spend my money exactly the ways listed in the Reuters artcile, but I'm sure I'll think of something!
And is there a lesson here for the US? The story of the Grasshopper and the Ant comes to mind. . .guess which one is Japan and which is the US!
It Could Be Worse!
Here is an article by Daniel Henniger at the Wall Street Journal reminding us that it could be worse.
Take for example these points:
"In 1980, deaths per 100,000 U.S. children aged 5 to 14 was 30.6; by 2004, that number fell to 16.8. Some 25 years ago, daily cigarette smoking among 12th graders was about 21%; in 2006 it was about 12% for both males and females. Childhood immunizations are rising steadily."
"In August, the Centers for Disease Control noted that the death rate in 2004 fell by 3.8% in a year, "a record low historical figure." Life expectancy for men and women at birth in 1940 was 63 years; it is now nearly 78 years. We, or someone, must be doing something right."
Take for example these points:
"In 1980, deaths per 100,000 U.S. children aged 5 to 14 was 30.6; by 2004, that number fell to 16.8. Some 25 years ago, daily cigarette smoking among 12th graders was about 21%; in 2006 it was about 12% for both males and females. Childhood immunizations are rising steadily."
"In August, the Centers for Disease Control noted that the death rate in 2004 fell by 3.8% in a year, "a record low historical figure." Life expectancy for men and women at birth in 1940 was 63 years; it is now nearly 78 years. We, or someone, must be doing something right."
Clearly something is going right, and that is change moves slowly enough that sometimes we don't realize how good we have it, and that things are indeed getting better.
That's not to say that we don't want to do even better, but it strikes me as a fundamentally American trait that we are never satisfied. This pushes Americans to continually strive to make things better. But let's hope that same desire to improve doesn't tempt us to follow the false prophets of big government nanny-statism. It is a good trait to want to "do something". That doesn't mean we should do anything. It's worth reflecting on how well things are going, even if it is mostly bad news that gets into the headlines.
UK living standards exceed US?
This article from the UK Times on-line would have you believe that UK per capita living standards now exceed that of the US.
"The Oxford analysts also point out that Americans benefit from lower prices than those in Britain. With an adjustment made for this “purchasing power parity”, the average American has more spending power than his UK counterpart and pays lower taxes."
The article states that GDP per head in Britain will be £23,500 this year, compared with £23,250 in America.
Ah, but that is a straight calculation at current exchange rates. It does not consider purchasing power. Further in the article is the following clarification:
"The Oxford analysts also point out that Americans benefit from lower prices than those in Britain. With an adjustment made for this “purchasing power parity”, the average American has more spending power than his UK counterpart and pays lower taxes."
So there you have it. After taxes, Americans have more money in their pockets and can purchase more with it. Leave it to the Times to get the headline wrong. Instead of "UK living standards outstrip US. Living standards outstrip those across the Atlantic for first time in over a century." It should have been something like. "Strong Pound Helps UK Income vs. US. But US residents still way ahead in after-tax purchasing power."
And for a humorous take on the amenities available to the average American, check out Bill Bryson's wonderful book on returning to America after 20 years in the UK. He recounts the joys of garbage disposals, ice in drinks as a non-luxury item, among other amusing anecdotes. And even though Bill is way left of me politically, as a writer and observer of the minutiae of life, I have no quarrel!
Naomi Campbell and the "Angel" Chavez
I'll believe that Venezuela's Chavez "poses no threat to democracy" when he steps down from office to be replaced by someone who is not a leftist nutcake. Here is the article about Ms. Campbell's visit to Chavez, as linked by Breitbart.
Where to begin on Chavez? Let's start with some facts:
1) Crime is on the increase and per capita death rate is actually worse than Iraq (!)
2) Income distribution (as measured by the gini coefficient) is getting worse, not better, with corrupt Chavistas gathering wealth for themselves, despite their claims to be supporting "the poor."
3) Basic staples are disappearing from the shelves. Basic services, such as trash removal, are faltering.
4) Inflation at 23% is among the worst in Latin America, forcing a meaningless re-denomination of the currency.
Chavez is a farce. His socialist policies will ultimately fail, just as they have everywhere else they have been tried. The parallels with Zimbabwe and even Nicaragua under the Sandanistas are clear. Chavez is a new Mugabe, and will become just as lunatic over time.
That doesn't mean he isn't a charmer. Most demagogues are charismatic. Castro is charismatic. He is also a murdering despot - look up the early history of his Cuban revolution if you don't believe me. Hitler was charismatic and called himself a "socialist", "national socialist" to be precise, also known as "nazi". Perhaps Chavez isn't the new Mugabe. Is it wrong to say that he's actually a Latin Hitler? Just as smooth, just as popularly elected, and just as wrong?
Why any celebrity would spend even a minute of time with this charlatan is beyond comprehension. It is time to start boycotting anything Ms. Campbell is shilling. . .and if I see any attractive pictures of her, I will ogle at them in the crudest, most anti-feminist-objectifying possible way . . .as for Sean Penn, Oliver Stone, and that Kennedy, well why even bother commenting. . .
Fortunately, things aren't looking so good for Chavez. The people of Venezuela rightly voted down constituational reforms. Chavez also clearly has no magic ability to resolve complex, deeply rooted problems such as the FARC in Colombia. That latter episode showed up Chavez for the buffoon he is.
Here is news from a Venezuelan Blogger for more, highly readable, insight. Good work Daniel. Keep it up.
There is a reason why McGovern lost.
George McGovern believes Bush and Cheney should be impeached. The article is here
Putting aside the obvious point that the Vice President presides over the impeachment trial in the Senate, shooting this down point by point is almost so easy to be unsporting! but here goes:
McGovern claims that the removal of Saddam Hussein by military force was done in defiance of the US Congress and the UN charter and is a violation of law. This is not correct. While not a Declaration of War per se, the US Congress did authorize military action against Iraq and has not removed such authorization. Furthermore, while there is debate on the issue, UN resolutions post the Iraq invasion of Kuwait do authorize military action in case of a failure by Iraq to live up to the terms of its cease fire. UN Security Resolution 1441, while not providing a new and separate authorization to invade, clearly states that Iraq has not lived up to its cease fire obligations. UN Security Council Resolutions 660 and 678 allow military action by member states in such a case.
McGovern claims that the Bush administration purposely deceived Congress, the press, and the public relating to Iraq's possession of WMD. There is no evidence to suggest that US intelligence services or other national intelligence services did not at the time believe that Iraq was working to create WMDs and indeed had them. Furthermore, the fact that WMDs were not found after the war, while damning, is not in itself proof the such weapons programs did not indeed exist. A transcript of a secret meeting between Bush and government of Spain, leaked last year, provides further interest that Bush was acting only on the basis of the best available evidence and that military action was a last resort.
McGovern claims the Bush administration is creating a climate of fear post 9/11 2001. Well guess what George: there are Islamofacist terrorists out there who do indeed want to kill us. This line of thinking goes back from Bin Laden to the Muslim Brotherhood to early Wahabbism, to Islamic leaders in the 18th century and before who continue to quote (i.e. distort) the Koran to justify the slaughter of "infidels", namely us. Bush did not create a climate of fear. Islamofacist terrorism is the cause. The assassination of Bhutto in Pakistan is further proof. See my earlier post quoting an article by William Shawcross in the Spectator on this very topic.
McGovern also blames bush for the aftermath of hurricane Katrina. Putting aside for the moment the responsibility of the governments of Louisiana and New Orleans, as well as the substantial misreporting of events that have now been thoroughly debunked, and this is certainly a stretch. It's as if Bush directed Katrina to hit New Orleans.
[Update 1/15/2008 10:15am - Here is a strongly-worded post on what's wrong with New Orleans and why it doesn't deserve another dime! ]
McGovern also touches on Guantanamo and FISA, which I won't even bother with. The courts and congress are well equipped to deal with those, and so far have not required a significant change in behaviour by the administration.
But here's the fundamental misunderstanding that undermines everything McGovern says. He writes, "[t]heir conduct and their barbaric policies have reduced our beloved country to a historic low in the eyes of people around the world."
Really? On what basis is it true that our country has been reduced to a historic low in the eyes of the world? That opinion doesn't appeared to be shared by the newly elected governments of Germany and France, or even where I live in Japan. That opinion is not shared by the millions of immigrants risking everything to come illegally to the US. And by the way, since when should US policy be determined based on the opinions of the rest of the world?
If we really want to start laying blame, then lets look at what administration let Iran fall into the hands of religious fanatics, who are now bent on developing nuclear weapons, the destruction of Israel, and have been up to no good in terms of stabilizing Iraq. Remember who that was? It was Carter/McGovern. . .if Reagan hadn't followed, we might still be fighting the Cold War with the Soviet Union (who by now might be allied with a resurgent China)!
Sony's Rolly - Big in Japan? Not
Instapundit, covering the Consumer Electronics Show, has this to say about the Sony Rolly (I kind of robot dancing thingy:
(posted on www.instapundit.com Jan 6, 2008, 9:58pm)
"My impression, though, is that there's not much that's really new here -- just a lot of slightly-improved iterations of products that are already out there, for the most part. Sony led off its presentation with the Rolly (pronounced "role-y"), which is basically a dancing Walkman. Apparently it's huge in Japan, but so was Spinal Tap. I'm underwhelmed. Here it is, up close, on a lighted disco floor. It's about the size of my fist."
"My impression, though, is that there's not much that's really new here -- just a lot of slightly-improved iterations of products that are already out there, for the most part. Sony led off its presentation with the Rolly (pronounced "role-y"), which is basically a dancing Walkman. Apparently it's huge in Japan, but so was Spinal Tap. I'm underwhelmed. Here it is, up close, on a lighted disco floor. It's about the size of my fist."
I have to agree. I live in Japan, and three words: haven't seen it.
And any clubber I know would not be caught dead bringing something like that to a dance floor, even a retro 70s-disco one!
Getting behind the US middle class income numbers
The Say Anything blog has a post pointing out that the US Middle Class is declining, not because of economic hardship as John Edwards and other populists would have you believe, but rather because more Americans are getting richer. I suspect, as I'll show below that the situation is rather more complex, and digging into the numbers reveals considerable nuance, which is why this issue has traction on both sides of the political fence.
Here is the key quote that is embedded in the post: "Economist Stephen Rose, defining the middle class as households with annual incomes between $30,000 and $100,000, says a smaller percentage of Americans are in that category than in 1979—because the percentage of Americans earning more than $100,000 has doubled from 12 to 24, while the percentage earning less than $30,000 is unchanged. “So,” Rose says, “the entire ‘decline’ of the middle class came from people moving up the income ladder.” Even as housing values declined in 2007, the net worth of households increased."
However, the comments associated with the link go back and forth on whether the definition of middle class is adjusted for inflation. I would suspect that a competent economist would not make such a basic error, but let's run some simple numbers anyway:
The 1979 range of $30k to $100k adjusted for inflation for 2006 is $86k to $298k (according to US CPI data run through an on-line inflation calculator at http://www.westegg.com/inflation). Then, looking at 2006 data from Wikipedia I find that about 20% of households are between $85k and $250k in income. It also says that about 50% of households are between $30k and $100k, and 17% over $100k. The numbers don't quite match the post, but this could be an issue of 2006 vs. 2007 data. The number of $300k isn't quoted, but it is small. . .this would seem to support the case of the populists.
Other data shows household income increasing slightly from 1990 to 2006 in constant dollars, with median income increasing from $44,603 (in 2006 adjusted dollars) to $48,201 (about 8%). This would be contrary to the populists. . .at a minimum, income is increasing.
Also, two other factors matter - one is household size, which has declined over time. So the better measure is probably income per person. Here's data I was able to find on average household size (http://www.census.gov/statab/hist/HS-12.pdf):
1979: 2.78
2006: 2.61
so let's take the 1979 household income range of $30k to $100k and divide by 2.78, to get a definition of the per capita income of a middle class person: $10.8k to $36k. People making above $36k would still be 12% of the poplutation. Let's adust that $36k for inflation to 2006, and we get about $107k. Looking at 2006 data on income per person, I get about 13% with over $100k, which is probably about 12% for $107k plus - in other words no change.
Again, these are pretty rough numbers, and several factors are still at issue here:
1) Are Stephen Rose's original numbers adjusted for inflation? You would think so, but we need to verify one way or the other by going back to the original work.
2) Economic growth is a fact. Likewise, CPI is hard to measure over time. For example, what kind of computing power could you buy in 1979 for $1000 versus today? Defining wealth is not necessarily a trivial problem (particularly if you include non-financial factors, such as "free time" or "happiness".)
3) None of this considers household net assets. It considers only income. Wealth is a combination of income and assets.
4) How about income after taxes? In the same period tax rates have dropped, allowing individuals to keep more in their pockets (at least on average. . .would need to analyse for just the middle class). As far as I'm concerned, the money in my pocket after tax is far more interesting than the gross income (adjusted or otherwise!)
5) Also, where does the spending go? it would be interesting to break this down into cost per basic requirement (housing, food, transport, vs. discretionary items - although CPI baskets attempt to do that in part). I suspect a much smaller portion goes to basic needs now than was the case in 1979.
6) Classes are not static. People can and do move between income quintiles, in both directions, as a result of a variety of factors. Millions of people come to America (legally and illegally) on the basis that they expect to move up the income ladder through hard work and access to opportunity.
At a minimum, it isn't possible to boil this down into simple sound bytes. What is needed is a hard look at the actual data. My best advice would be to take whatever the main-stream press says with a grain of salt, and first look at your own situation, the choices that you made that affect the situation, and then get behind the headlines and throw-away lines through your own look at the numbers.
Sunday, January 6, 2008
Nanotechnology - Enabler versus Application
Nanotechnology is word that is thrown around a lot in techie circles, but there is a lot of confusion as to just what it means.
My colleagues and I have been working on a number of projects for the Japan National Institute of Advanced Industrial Sciend and Technology (AIST), focused primarily on business process improvement of technology transfer (e.g. patent liscencing) and the management of innovation
for nanotechnology research.
In the course of that work, one of my co-authors developed a simple concept that cuts through most of the confusion around the use of the term nanotechnology.
Nanotechnology is an enabler and not an application. In other words, nanotechnology should be thought of as the techniques (enablers) for measuring and manipulating materials at the nanometer scale. Nanotechnology is not the result (application) of that manipulation, which should be categorized and managed according to its own well established discipline. For example, the methods used to encapsulate medicines in nanometer scale structures for improved delivery is nanotechnology. The resulting compounds and the testing of their efficacy is pharmacology, or more broadly medicine. A manufacturing technology to self-assemble semiconducter and electronic materials at the nanometer scale is nanotechnology. The resulting circuits and systems are electronics.
This has policy implications. In the above drug delivery example, the testing of new nanotechnology drugs should follow the same protocols and regulatory processes as for any other drug testing, regardless of how the drug was made. When it comes to the safety of the drug, there is fundamentally no difference in the the need for appropriate testing of the resulting drug (application) regardless of what techniques or tools were used to create (i.e. enable) it. It is only the materials handling at the nanometer scale that may require special treatment.
This is good news, in that well established standards, protocols, and regulations already exist for just about anything you could conceivable make with nanotechnology.
Even the "grey goo" problem can be treated this way. It isn't so much the nanotechnology that needs special regulation. Rather, it's the "grey goo" (the application) that must be controlled.
Our work is in the process of being published, so I'll have references information soon!
My colleagues and I have been working on a number of projects for the Japan National Institute of Advanced Industrial Sciend and Technology (AIST), focused primarily on business process improvement of technology transfer (e.g. patent liscencing) and the management of innovation
for nanotechnology research.
In the course of that work, one of my co-authors developed a simple concept that cuts through most of the confusion around the use of the term nanotechnology.
Nanotechnology is an enabler and not an application. In other words, nanotechnology should be thought of as the techniques (enablers) for measuring and manipulating materials at the nanometer scale. Nanotechnology is not the result (application) of that manipulation, which should be categorized and managed according to its own well established discipline. For example, the methods used to encapsulate medicines in nanometer scale structures for improved delivery is nanotechnology. The resulting compounds and the testing of their efficacy is pharmacology, or more broadly medicine. A manufacturing technology to self-assemble semiconducter and electronic materials at the nanometer scale is nanotechnology. The resulting circuits and systems are electronics.
This has policy implications. In the above drug delivery example, the testing of new nanotechnology drugs should follow the same protocols and regulatory processes as for any other drug testing, regardless of how the drug was made. When it comes to the safety of the drug, there is fundamentally no difference in the the need for appropriate testing of the resulting drug (application) regardless of what techniques or tools were used to create (i.e. enable) it. It is only the materials handling at the nanometer scale that may require special treatment.
This is good news, in that well established standards, protocols, and regulations already exist for just about anything you could conceivable make with nanotechnology.
Even the "grey goo" problem can be treated this way. It isn't so much the nanotechnology that needs special regulation. Rather, it's the "grey goo" (the application) that must be controlled.
Our work is in the process of being published, so I'll have references information soon!
Saturday, January 5, 2008
Global Warming Alarmism - The New Marxism and How to Defeat It
Now a foray into Global Warming alarmism. Here's a nice article by Richard Fernandez writing in PajamasMedia
Title: Bali's smog of self-delusion
Excerpt: "Environmentalism has become the political lifeboat into which the survivors of the socialist shipwreck have crammed themselves. The need to “manage the climate” became the new foundation on which to base regulatory structures, impositions, and taxes which were formerly justified by the imperative to manage the “commanding heights of the economy.” Kyoto was the highest expression of the program to “manage the climate” and provided the same new basis for socialistic policies that Marxism once did. As such, Kyoto was too politically useful to discard. But like its socialist predecessor it suffered from the problem that it wouldn’t work. "
So what to do? Actually there is an answer to reducing output of pollutants including greenhouse gases. Independent of whether man-made CO2 (or methane, etc.) actually cause climate change or not, it would seem prudent not to generate more waste than is necessary. It seems to me that here are two ways to do this, either:
1) stifle economic growth, resulting in less energy consumption (and lower quality of life), or
2) continually improve the efficiency of energy consumption as the economy grows.
The first is what happens when economies collapse or incentives other than efficiency exist (e.g. increase output regardless of cost).
Naturally, I prefer the second, which is exactly what free-market economies produce. In the capitalist west, efficiency is favored over waste, which results in an ever improving carbon-footprint per unit of economic value. Ultimately this may even result in a reduction of total CO2 output as efficiency continues to drive forward.
Here is some data on the increase in CO2 output by country from 1990 to 2003:
source: http://www.swivel.com/graphs/show/21353758
Russia -22.55%
Germany -12.56%
Switzerland -10.49%
UK -6.05%
France -2.45%
USA 4.95%
Australia 11.27%
Japan 11.25%
Italy 11.91%
Brazil 21.3%
New Zealand 27.3%
India 49.02%
China 53.4%
In the case of Russia, the reduction was during a period of economic contraction. In much of Europe and the USA, economic growth over that period was substantially higher than the increase in CO2 emissions, demonstrating the improving efficiency. In high-growth emerging markets, the efficiency is not yet obvious, but is potentially there as well.
Note also that the USA is doing better than many countries that approved the Kyoto treaty, and that ultimately the high-growth economies of India and China must be a party to any agreement, for it to be worth anything.
But at the end of the day, what will really matter? I suggest it is the cost of energy relative to its impact. Efficient energy is ultimately cleaner, and less use of energy for the same output (e.g. more efficient semiconductor lighting vs. incandescent light-bulbs) ultimately drives economic growth.
In Japan alone, CO2 consumption could be reduced 40% simply by improving the insulation in windows in houses and offices throughout the country.
The right answer, then, is to let the free market run its course. Furthermore, efforts to promote the ideals of western, free-market, capitalist, democracies are ultimately the best way to reduce the potential for human impact on climate change while maximizing individual prosperity for the greatest number of people.
The wrong answer is global bureacracies engaged in wealth redistribution. . .as if that has ever worked before.
Title: Bali's smog of self-delusion
Excerpt: "Environmentalism has become the political lifeboat into which the survivors of the socialist shipwreck have crammed themselves. The need to “manage the climate” became the new foundation on which to base regulatory structures, impositions, and taxes which were formerly justified by the imperative to manage the “commanding heights of the economy.” Kyoto was the highest expression of the program to “manage the climate” and provided the same new basis for socialistic policies that Marxism once did. As such, Kyoto was too politically useful to discard. But like its socialist predecessor it suffered from the problem that it wouldn’t work. "
So what to do? Actually there is an answer to reducing output of pollutants including greenhouse gases. Independent of whether man-made CO2 (or methane, etc.) actually cause climate change or not, it would seem prudent not to generate more waste than is necessary. It seems to me that here are two ways to do this, either:
1) stifle economic growth, resulting in less energy consumption (and lower quality of life), or
2) continually improve the efficiency of energy consumption as the economy grows.
The first is what happens when economies collapse or incentives other than efficiency exist (e.g. increase output regardless of cost).
Naturally, I prefer the second, which is exactly what free-market economies produce. In the capitalist west, efficiency is favored over waste, which results in an ever improving carbon-footprint per unit of economic value. Ultimately this may even result in a reduction of total CO2 output as efficiency continues to drive forward.
Here is some data on the increase in CO2 output by country from 1990 to 2003:
source: http://www.swivel.com/graphs/show/21353758
Russia -22.55%
Germany -12.56%
Switzerland -10.49%
UK -6.05%
France -2.45%
USA 4.95%
Australia 11.27%
Japan 11.25%
Italy 11.91%
Brazil 21.3%
New Zealand 27.3%
India 49.02%
China 53.4%
In the case of Russia, the reduction was during a period of economic contraction. In much of Europe and the USA, economic growth over that period was substantially higher than the increase in CO2 emissions, demonstrating the improving efficiency. In high-growth emerging markets, the efficiency is not yet obvious, but is potentially there as well.
Note also that the USA is doing better than many countries that approved the Kyoto treaty, and that ultimately the high-growth economies of India and China must be a party to any agreement, for it to be worth anything.
But at the end of the day, what will really matter? I suggest it is the cost of energy relative to its impact. Efficient energy is ultimately cleaner, and less use of energy for the same output (e.g. more efficient semiconductor lighting vs. incandescent light-bulbs) ultimately drives economic growth.
In Japan alone, CO2 consumption could be reduced 40% simply by improving the insulation in windows in houses and offices throughout the country.
The right answer, then, is to let the free market run its course. Furthermore, efforts to promote the ideals of western, free-market, capitalist, democracies are ultimately the best way to reduce the potential for human impact on climate change while maximizing individual prosperity for the greatest number of people.
The wrong answer is global bureacracies engaged in wealth redistribution. . .as if that has ever worked before.
The Enlightenment vs. Islamofacism
This article in Spectator (UK) by William Shawcross is spot on: Read the whole thing!
Title: We are at war with hatred, fanaticism and despair
Excerpt: "When will we ever learn? The murder of Benazir Bhutto should finally convince us that we are in the midst of a crucial international war to stop Islamist terrorists destroying all that is best in our imperfect world"
I also like the the tag-line from Specator: "Champagne for the brain"
Title: We are at war with hatred, fanaticism and despair
Excerpt: "When will we ever learn? The murder of Benazir Bhutto should finally convince us that we are in the midst of a crucial international war to stop Islamist terrorists destroying all that is best in our imperfect world"
I also like the the tag-line from Specator: "Champagne for the brain"
The Coming Paradigm Shift in Enterprise Technology: Thin, Lean and Mobile
Note: This is an edited version of an analysis I wrote as a Council Member with Gerson Lehrman Group (http://www.glgroup.com) and posted to GLG members on August 28, 2007.
The high cost and relatively inflexibility of information technology is frustrating for many business managers. My experience running large technology infrastructure organizations for investment banking and financial services firms taught me this first hand. Why does it cost $1000 a year or more just to support a desktop, not counting the cost of hardware and application software? Why can't ease of use and flexibility be as good as many people now have at home, with a standard PC and an internet broadband connection? These questions will be familiar to almost any IT support manager!
To protect customer data, provide information security and manage costs, IT shops must typically lock-down desktop PC and server standards, denying flexibility and rapid deployment to application developers. At the same time, the demands for data storage and archiving, high reliability, and continual cost reduction seem insatiable. Unfortunately, the traditional client/server model seemed ever more poorly equipped to deliver the necessary results. Unfortunately, there were few alternatives.
Thin-client solutions had limited applicability and didn't really save all that much money. Solutions, such as Citrix, worked reasonably well for a small number of well defined desktop applications distributed across a large branch network. However, the cost of managing and maintaining the back-end and related networks was often significant. Additionally, this solution did not scale to application-intensive environments such as a securities trading floor or a large and complex head office.
Alternatives such as Clearcube's system, which puts blade PC's in a server room off the trading floor were one solution, but the price point was very nearly identical to traditional client PCs, with the added complexity of concentrating the power load and heat dissipation requirements into that very same server room, which anyway could not be far from the end users.
Nevertheless, the direction is clear: traditional fat-client desktop installations are no longer sustainable. It is simply too expensive to manage large desktop installations, particularly when a desktop visit by tech support is required for certain types of repair tasks. Furthermore, desktop compute power cannot be shared by multiple users. A power user needs a high-end desktop, even if it sits idle overnight and on weekends. Solutions for reliable thin-client technologies are maturing, and the product by Pano Logic described in the attached weblink are yet another example of this trend.
The coming paradigm shift was further brought home to me while working on the technology for my current consulting practice. After over a decade in large financial firms, I had perhaps gotten used to an IT price point in the tens of thousands of dollars annually for some users. Needless to say, a boutique consultancy does not have that kind of money. More importantly, we didn't need it. A few low-end Apple computers, open-source software, and widely available networking and e-mail solutions costing a few dollars a month mean my price point per desktop is measured in tens of dollars a month, not hundreds. This is not a mere 10% or 20% savings - this is an order of magnitude lower cost, with nearly all the same usability and security benefits of large, legacy installations that I had been managing. This is even before considering alternative desktop application solutions over the network such as that now being offered by Google.
So are alternative solutions ready for prime time? I believe that increasingly the answer is yes. First of all, we've already solved the networking problem: The standard is now the IP protocol running over ethernet or WiFi local area networks. No longer do we deal with SNA, DecNet, IPX, or a range of other protocols that were common place just a decade ago. Next we need to tackle the desktop, data storage and management, and mobility requirements.
IT managers will need to review the business applications currently in use. It remains the case that many legacy applications are difficult to port to thin-client solutions. By the same token, many of them are probably not really needed. The decision-making process to retire such applications requires close business/IT cooperation, but can deliver significant rewards. Perhaps ironically, Sarbanes-Oxley (and its equivalent requirements around the world) actually helps here: Since business managers are required to understand their business processes, and by extension the applications that support them, the excercise to cull unnecessary software should already be underway!
In addition to desktops and applications is the complexity of data management. I would hazard a guess that much of what people store is unnecessary e-mail with too many attachments. Thus, the next piece of the paradigm-shift puzzle is data storage. Here the problem is trickier, but the bottom line is that it is simply too hard to find things when you need them. This is true both for the individual employee trying to dig out that Powerpoint file from 3 months ago as well as for the Legal department manager who needs to track down particular e-mails to comply with a court-order for documents relating to pending litigation.
The trend is moving beyond mere data storage, to data management. This will take several forms: (1) Application managers will of necessity get better at imposing data architectures to which all applications, in-house and off the shelf, must adhere. (2) Rules for tagging and archiving e-mails will get more sophisticated, so that necessary e-mails are kept and logged, and unnecessary ones get deleted after a defined period of time. (3) All other application files will be similarly tagged and culled or archived on defined schedules. (4) Tape back-up will not be used for archiving data that is regularly needed.
There was a time when technology infrastructure managers simply had to deliver storage solutions with tape back-ups. This will change, as infrastructure will increasingly be bundled with applications software to manage data content.
Lastly, the workforce will become increasingly mobile. Fortunately, efforts to centralize the back-end and improve information mangement will make mobile computing easier. A networked worker will be able to access everything from nearly anywhere, with security controls varying depending on whether the access point is in a company office or over a remote network. The holy grail of free-seating and mobile workforce are increasingly in reach.
Enterprise computing is shifting to a new paradigm: Thin, Lean, and Mobile: true thin-client desktops, lean application suites with even leaner data management, and increasingly mobile access including free-seating, WiFi, and mobile wireless.
Firms that deliver cost-effective, reliable, and scalable solutions that fit this paradigm will be the winners in the enterprise technology vendor market.
Cool Japan: Trends Underpinning Japan Creative Content as an Export Force
Note: This is an edited version of an analysis I wrote as a Council Member with Gerson Lehrman Group (http://www.glgroup.com) and posted to GLG members on September 19, 2007.
Japan original creative content is suddenly appearing on the international scene in ways not seen before. In my view, this is an extension of trends that have long been underway and are now being enhanced by the growth of the Internet and a number of economic forces that are encouraging entrepreneurship in Japan.
For decades Japan has been recognized as among the best at taking external inventions and technologies and making them better. The automotive and semiconductor industries are just two well known examples. No longer is "Made in Japan" shorthand for low-cost copycat products. Japan is universally recognized for high-quality, high-performance products.
However, Japan has often been derided as lacking an ability to innovate and create at the international level. A paucity of Nobel prizes and world-changing inventions are often cited as an example of this. Indeed, Japanese Nobel laureate Leo Esaki spent 30 years in the US, and more recently the inventor of the blue LED, Shuji Nakamura, moved to the US to further his work.
When it comes to Japanese creative and artistic content, most would probably think of historical and traditional images, such as woodblock prints of geisha serving tea under cherry blossoms at an ancient temple, or tranquil images of a snow-capped Mount Fuji over a calm lake. The elegance and beauty are instantly recognizable, but would never be confused with cutting edge popular culture.
Nevertheless, in recent years Japanese imagery has crept into western media and entertainment. Movies such as Memoirs of a Geisha and The Last Samurai are examples that harken back to the historical imagery, but more recent examples such as Quentin Tarantino's Kill Bill series or the "Harajuku Girls" featured in Gwen Stefani music videos are beginning to represent more stylized and modernized images from Japan film and pop culture.
These are however just the tip of the iceberg when it comes to Japan content as an export industry. A conference that took place September 19, 2007, in Tokyo, called the Japan International Contents Festival is an interesting milestone in this trend toward increasing interest in Japan original content for export. A brief look at animation, gaming, and youth fashion provide some interesting insight.
Animation, known as anime has had a cult following for several years, but recently has attracted more general attention. Actually, Japanese animation has been exported for decades, but it was often not generally recognized by audiences as Japanese. A good example of this is Speed Racer that was available on US television in the 1970s, but almost no child would have considered it anything more than typical Saturday or Sunday morning television just like everything else. Feature-length animation such as Princess Mononoke (1997) and Spirited Away (2001) by Studio Ghibli are more recent examples of Japanese animation attracting critical and audience attention for their artistry and story-telling. Tie-ins with games and merchandising such as Pokemon and the robot-based series such as Gundam and Transformers are further examples of well-known content with a Japanese source. The rise of the internet has made Japanese anime, and the related print media manga, much more widely accessible. The best content is widely recognized by critics and fans alike for its cutting edge style, artistry, and story-telling.
Gaming is somewhat similar in its appeal to a youth demographic with cross-over appeal to a wide range of audiences. Nintendo is of course well known, to the point where the phrase "play Nintendo" is almost synonymous with video gaming itself. More and more, Japanese game developers are being recognized as world class designers and programmers, accolades that have not accrued to their colleagues in traditional software development fields. Japan is indeed the second largest producer and consumer of gaming content after the US, with several characters and titles selling well internationally.
Youth fashion is also interesting. For years Japanese, particularly Japanese women, have been big spenders on imported luxury brands such as Louis Vuitton, Chanel, and Christian Dior. Perhaps less obvious is the degree to which Japanese youth spend on keeping up with the latest local styles and trends. Ground zero for all this is the back streets of Shibuya and Harajuku, with the undisputed shopping mecca Tokyu Department Store's 109 shop just a short walk from Shibuya station.
The story of 109 is itself interesting: Some 15 years ago, it was just another sleepy multi-story department store filled with boring attire for salarymen and office ladies. Sales were falling and costs were rising, forcing Tokyu management to take a new approach. At the same time, many little stalls near the station were doing a brisk business catering to young people. Tokyu took the bold step of offering space in the 109 building to these young entrepreneurs, but with the caveat that successful sales results were required to keep the space. At the same time, these shops learned that the best salespeople were young people similar to the shoppers themselves, who could wear and comment on the clothes for sale. In short order, these shop assistants became mini celebrities, with power to influence trends. This continues to this day, with a Darwinian focus on sales results and trend awareness.
Again, the Internet has brought trend awareness from the streets of Shibuya to the countryside and to the rest of Asia, to the point where trend-conscious young people, with more and more disposable income, can see what is happening in the hottest spots around Tokyo and dress accordingly. Additionally, the fashions from Tokyo tend to fit the Asian coloring and physique well, attracting further interest from an international consumer audience stretching from Korea to Singapore.
So what do these trends tell us about business and culture in Japan? I'd like to offer a few observations. First of all, none of the business areas were orchestrated by government ministries or national initiatives. Quite the opposite took place, i.e. basically these industries were left alone to grow and develop on their own. Secondly, Japanese youth and young people in their 20s and even 30s often live at home and do indeed have a reasonable amount of disposable income available for fashion and entertainment. This provides a large domestic audience for creative content that is also quite discerning. This keeps designers and entrepreneurs very focused on creating content that people will buy. Third, the recession of the last decade has lead many creative and intelligent young people to rethink the life-time employment, salaryman culture of the past, and venture into creative and entrepreneurial ventures. For the first time and ecosystem has developed around creative content, much of it centered around Shibuya. Fourth, the revision of the Commercial Code has made it much easier to establish both companies and limited partnerships for creative ventures.
Put together, these trends are perhaps a reaction to the old Japan, Inc. linkage of government and industry. Indeed many of the most creative ideas and businesses have simply bypassed the traditional way of doing things. The Internet is a major enabler in this, but not the only one. The revision of the Japan commercial code also helps, in that new entrepreneurs can much more easily set up companies or limited partnerships for creative ventures.
I can offer a few simple examples. One business contact of mine is a young Japanese company CEO who is all of 26 years old. He started out 4 years ago with a desire to produce content for Japanese television, but quickly realized that he was simply too young to break into the very rigid market for traditional video content. So he changed gears and got into internet marketing. His business took off almost immediately, as there were very few barriers to entry. His primary market, young women between 18 and 25, were also primed to purchase products on the internet or via their mobile phones and didn't much care about the traditional ways of shopping. This convergence has not abated and this particular business continues to grow.
In another case, a small animation studio I know has learned that it can set up limited partnerships for each animation project, without giving up control of intellectual property such as characters. Nor does it need to maintain a permanent stable of animators and creative talent. Indeed, this is exactly how movies are produced in Hollywood, but only recently has this legal structure been available so easily in Japan. This trend will continue to break the stranglehold of traditional content providers and distributors in Japan.
So the bottom line, is not only does Japan have the talent necessary to generate creative and original content that is becoming a larger export industry every day, the underlying forces will continue to support this trend and indeed threaten to breakdown some of the traditional impediments to innovation in Japan.
Changes in both technology (e.g. the Internet) and structural impediments (the Commercial Code) are unleashing creative potential in ways that are creating intellectual property for export. The ultimate potential is likely quite significant.
Japan original creative content is suddenly appearing on the international scene in ways not seen before. In my view, this is an extension of trends that have long been underway and are now being enhanced by the growth of the Internet and a number of economic forces that are encouraging entrepreneurship in Japan.
For decades Japan has been recognized as among the best at taking external inventions and technologies and making them better. The automotive and semiconductor industries are just two well known examples. No longer is "Made in Japan" shorthand for low-cost copycat products. Japan is universally recognized for high-quality, high-performance products.
However, Japan has often been derided as lacking an ability to innovate and create at the international level. A paucity of Nobel prizes and world-changing inventions are often cited as an example of this. Indeed, Japanese Nobel laureate Leo Esaki spent 30 years in the US, and more recently the inventor of the blue LED, Shuji Nakamura, moved to the US to further his work.
When it comes to Japanese creative and artistic content, most would probably think of historical and traditional images, such as woodblock prints of geisha serving tea under cherry blossoms at an ancient temple, or tranquil images of a snow-capped Mount Fuji over a calm lake. The elegance and beauty are instantly recognizable, but would never be confused with cutting edge popular culture.
Nevertheless, in recent years Japanese imagery has crept into western media and entertainment. Movies such as Memoirs of a Geisha and The Last Samurai are examples that harken back to the historical imagery, but more recent examples such as Quentin Tarantino's Kill Bill series or the "Harajuku Girls" featured in Gwen Stefani music videos are beginning to represent more stylized and modernized images from Japan film and pop culture.
These are however just the tip of the iceberg when it comes to Japan content as an export industry. A conference that took place September 19, 2007, in Tokyo, called the Japan International Contents Festival is an interesting milestone in this trend toward increasing interest in Japan original content for export. A brief look at animation, gaming, and youth fashion provide some interesting insight.
Animation, known as anime has had a cult following for several years, but recently has attracted more general attention. Actually, Japanese animation has been exported for decades, but it was often not generally recognized by audiences as Japanese. A good example of this is Speed Racer that was available on US television in the 1970s, but almost no child would have considered it anything more than typical Saturday or Sunday morning television just like everything else. Feature-length animation such as Princess Mononoke (1997) and Spirited Away (2001) by Studio Ghibli are more recent examples of Japanese animation attracting critical and audience attention for their artistry and story-telling. Tie-ins with games and merchandising such as Pokemon and the robot-based series such as Gundam and Transformers are further examples of well-known content with a Japanese source. The rise of the internet has made Japanese anime, and the related print media manga, much more widely accessible. The best content is widely recognized by critics and fans alike for its cutting edge style, artistry, and story-telling.
Gaming is somewhat similar in its appeal to a youth demographic with cross-over appeal to a wide range of audiences. Nintendo is of course well known, to the point where the phrase "play Nintendo" is almost synonymous with video gaming itself. More and more, Japanese game developers are being recognized as world class designers and programmers, accolades that have not accrued to their colleagues in traditional software development fields. Japan is indeed the second largest producer and consumer of gaming content after the US, with several characters and titles selling well internationally.
Youth fashion is also interesting. For years Japanese, particularly Japanese women, have been big spenders on imported luxury brands such as Louis Vuitton, Chanel, and Christian Dior. Perhaps less obvious is the degree to which Japanese youth spend on keeping up with the latest local styles and trends. Ground zero for all this is the back streets of Shibuya and Harajuku, with the undisputed shopping mecca Tokyu Department Store's 109 shop just a short walk from Shibuya station.
The story of 109 is itself interesting: Some 15 years ago, it was just another sleepy multi-story department store filled with boring attire for salarymen and office ladies. Sales were falling and costs were rising, forcing Tokyu management to take a new approach. At the same time, many little stalls near the station were doing a brisk business catering to young people. Tokyu took the bold step of offering space in the 109 building to these young entrepreneurs, but with the caveat that successful sales results were required to keep the space. At the same time, these shops learned that the best salespeople were young people similar to the shoppers themselves, who could wear and comment on the clothes for sale. In short order, these shop assistants became mini celebrities, with power to influence trends. This continues to this day, with a Darwinian focus on sales results and trend awareness.
Again, the Internet has brought trend awareness from the streets of Shibuya to the countryside and to the rest of Asia, to the point where trend-conscious young people, with more and more disposable income, can see what is happening in the hottest spots around Tokyo and dress accordingly. Additionally, the fashions from Tokyo tend to fit the Asian coloring and physique well, attracting further interest from an international consumer audience stretching from Korea to Singapore.
So what do these trends tell us about business and culture in Japan? I'd like to offer a few observations. First of all, none of the business areas were orchestrated by government ministries or national initiatives. Quite the opposite took place, i.e. basically these industries were left alone to grow and develop on their own. Secondly, Japanese youth and young people in their 20s and even 30s often live at home and do indeed have a reasonable amount of disposable income available for fashion and entertainment. This provides a large domestic audience for creative content that is also quite discerning. This keeps designers and entrepreneurs very focused on creating content that people will buy. Third, the recession of the last decade has lead many creative and intelligent young people to rethink the life-time employment, salaryman culture of the past, and venture into creative and entrepreneurial ventures. For the first time and ecosystem has developed around creative content, much of it centered around Shibuya. Fourth, the revision of the Commercial Code has made it much easier to establish both companies and limited partnerships for creative ventures.
Put together, these trends are perhaps a reaction to the old Japan, Inc. linkage of government and industry. Indeed many of the most creative ideas and businesses have simply bypassed the traditional way of doing things. The Internet is a major enabler in this, but not the only one. The revision of the Japan commercial code also helps, in that new entrepreneurs can much more easily set up companies or limited partnerships for creative ventures.
I can offer a few simple examples. One business contact of mine is a young Japanese company CEO who is all of 26 years old. He started out 4 years ago with a desire to produce content for Japanese television, but quickly realized that he was simply too young to break into the very rigid market for traditional video content. So he changed gears and got into internet marketing. His business took off almost immediately, as there were very few barriers to entry. His primary market, young women between 18 and 25, were also primed to purchase products on the internet or via their mobile phones and didn't much care about the traditional ways of shopping. This convergence has not abated and this particular business continues to grow.
In another case, a small animation studio I know has learned that it can set up limited partnerships for each animation project, without giving up control of intellectual property such as characters. Nor does it need to maintain a permanent stable of animators and creative talent. Indeed, this is exactly how movies are produced in Hollywood, but only recently has this legal structure been available so easily in Japan. This trend will continue to break the stranglehold of traditional content providers and distributors in Japan.
So the bottom line, is not only does Japan have the talent necessary to generate creative and original content that is becoming a larger export industry every day, the underlying forces will continue to support this trend and indeed threaten to breakdown some of the traditional impediments to innovation in Japan.
Changes in both technology (e.g. the Internet) and structural impediments (the Commercial Code) are unleashing creative potential in ways that are creating intellectual property for export. The ultimate potential is likely quite significant.
Consumer Finance in Japan - a new Sub-Prime Debacle or a Positive Opportunity?
Note: This is an edited version of an analysis I wrote as a Council Member with Gerson Lehrman Group (http://www.glgroup.com) and posted to GLG members on October 17, 2007.
The $170B Consumer Finance industry in Japan is undergoing significant change, which has potential to affect both consumer lenders as well as the broader economy. A new law passed in December 2006 eliminated so-called "gray zone" lending at interest rates up to 29.2%. Prior to the new law, consumer loans could be offered above the maximum 20% legal rate, so long as the customer formally agreed to pay a higher rate after receiving a full explanation of the costs. The new law eliminates this gap by 2010. But even now the impact is being felt. Additionally, a recent Japan Supreme Court ruling allowed borrowers to recover payments of excess interest, forcing consumer lenders to set aside large reserves. The industry was also rocked by scandal when some major players were admonished by regulators for inappropriate and in some cases illegal loan collection techniques. The new law also restricts the total loans that may be offered to an individual, requiring the aggregate across all loans to be less than a set proportion of annual income. Additionally, rates lower than 20% are required depending on the size of the loan.
Indeed the entire industry is somewhat curious in a country where home mortgages can be had for a 2% or less, and savings deposits routinely pay barely 0.1% interest. The history of the industry would be an essay of its own, but for now suffice it to say that it is driven by two things: 1) It is notoriously difficult to get any other form of loan. Traditional lenders, such as banks, are very risk adverse having been burned badly in the real-estate and stock-market bubbles of the late 1980's, which resulted in over a decade of industry consolidation and bad-loan restructuring. Even then, a loan typically requires a family member or some other affluent party to co-sign the loan as a "guarantor". 2) The concept of "saving face" is as important in Japan as elsewhere in Asia, and it is often considered shameful to need to borrow money. The relative anonymity, including in some cases the absence of the requirement for a guarantor, that consumer loan business provides is one of its attractions.
So to the question, is there a real problem? In the short-run, there are certainly several warning signs. The major Japanese firms Aiful, Promise, Acom, and Takefuji have all suffered of late. Most reported losses in 2006 and many will also report losses or much lower profitability in 2007. The recent FT article cited as a lead-in to this analysis also highlights difficulties in raising capital from Asset Backed Securities, which can be as much as 46% of the capital source for the major firms. The ABS market has essentially dried up. A smaller firm, Credia, defaulted when its banks pulled credit lines despite an investment grade rating. Additionally, the spreads between short-term and long-term Credit Default Swaps have gone to nearly zero. Major banks such as Sumitomo Trust and Aozora have also been reported as having reduced their exposure to ABS and CDS markets and as lenders to consumer finance firms.
Among the major foreign players, Citigroup, which operates under Citifinancial's DIC brand in Japan, took a charge in late 2006 and reduced the number of manned DIC branches by 80% to about 50. This came after several years of tuning the DIC operation to better automate the business end-to-end with better standardized processes for all aspects of loan origination, credit scoring, and collections in a division that had consistently been the most profitable Citigroup business in Japan (and indeed a major earnings source for Citifiancial International overall). General Electric has been reported to be considering exiting the Japan consumer finance market altogether by selling its local Honobono Lake branded business. GE has already cut 60% of its 115 manned branches.
Will these legal and regulatory changes, and resulting impact to consumer loan companies have a broader economic impact? Some analysts have presented doomsday scenarios. For example, respected economist Jesper Koll forecast that a full 1% impact on GDP could be possible (in an economy where the central bank is forecasting only 2.4% GDP growth) as a result of the impact reduced credit access to certain sectors of the economy may have on consumer spending and other parts of the current tentative recovery. The fear is that this change will be as bad as the increase in consumption tax from 3% to 5% that occured in 1997 and tipped the economy into years of deflation and low growth. Another worst case scenario is that entire sectors of the economy no longer have access to credit, and thus go to illegal loan-sharks at usurious rates for money, resulting in a variety of social ills.
However, the industry itself is not so pessimistic. Promise is purchasing Shimpan Finance in an effort to gain market share. Aiful is also forecasting a return to profitability in 2008. These firms, as well as Citigroup, are working to diversify into credit cards, home loans, 2nd mortgages, and small business loans. Equally, major banks also have consumer finance divisions that are diversifying across the entire range of consumer credit products.
Overall, we must remember that credit markets in Japan are relatively underdeveloped. Additionally, land and property values are recovering, unemployment remains low, and consumer and business sentiment is improving. The deflationary spiral appears to have largely ended, and the Bank of Japan is taking tentative steps to raise interest rates overall. This is very different from the sub-prime mortgage debacle in the US, which resulted from over-extension of credit with built-in rate increase triggers coinciding with and the bursting of a property bubble in much of the US. It is also unlike the sub-prime credit card concerns of 2005 and 2006, which equally resulted from over-extended lending to borrowers with poor credit histories. Even the $170B consumer loan business in Japan is relatively small as a part of the overall economy. Average top rates are around 23%, thus the gap to 20% is perhaps not as bad as it might seem. Additionally, much of the economy is still based on cash, with credit cards still relatively rare.
On the political front, the resignation of Prime Minister Abe and replacement with the new Prime Minister Fukuda would seem to portend a return to a safe pair of hands. This doesn't mean the government of Japan couldn't still derail a nascent recovery, but there is certainly a sense of "back to basics" in the local political landscape.
The stock market is also showing a recovery. As deflation has ended, the Nikkei index is back in the 17,000 range. Then yen continues to range between 115 and 118 to the US dollar, driven more by the carry-trade which drives the yen up when things are uncertain, and down when things look more certain and encouraging investors to take on the risk of profiting from interest rate differentials between the yen and other currencies. The next phase of the Nikkei bull market will occur when bond investors start moving back into equities, which hasn't really happened yet but will occur when Japan interest rates start increasing.
Naturally the spreads between borrowing money and lending it out to consumers will squeeze consumer finance companies, but this, perhaps ironically, could have a positive impact at several levels:
1) First, the under-developed lending markets will naturally be driven to a more developed state, sophisticated risk management and credit scoring, improved automation for low cost processing, and sophisticated product development. Already new entrants such as Shinsei bank are offering home loans more aggressively than has been seen in the recent past.
2) Further consolidation in the entire consumer finance industry will shake out the weaker players and drive further improvements as mentioned above. One estimate suggests that the current 10,000 total money lenders will reduce to about 3,000 overall with the weakest systematically absorbed by the strongest.
3) Credit Cards and more traditional credit products are now more widely accepted and more mature are a credit instrument, and will likely continue to mature.
There are still 2 years before the new law takes full effect, but already lenders and banks are working to prepare, with very few new loans being given out at the highest rates, and with a clear eye on the credit worthiness of borrowers. Consumer loan advertising, which is visible just about everywhere, clearly points out the lower rates and advantages to credit-worthy customers.
It is also worth noting that something similar happened before, when the top rate was reduced from nearly 40% to 29.2%. At that time, similar things happened in that lenders had to adapt or die, with the weakest lenders shaken out of the market. There was little adverse impact to the overall economy, and overall borrower disciplines arguable improved with borrowers better able to spend and invest in the general economy instead of financing high interest payments.
In the short run there may indeed be some turmoil, and lenders will certainly need to adapt. Nevertheless, there is room for cautious optimism that in the long run the changes will have a net positive impact on the world's second largest economy.
Update: The US sub-prime problem is taking longer to resolve itself than I expected last October. This is putting pressure on the Japanese stock market (the Nikkei 225 index fell below 15,000 yesterday), and is also resulting in a reduction in the so-called "carry trade" and thus a stronger Yeh to the dollar (now about 108, vs. 115 when this was written). There are also rumors that Citi may sell off its consumer finance business in Japan. But the crux of the analysis remains valid, i.e. that Japan credit markets will mature and the consumer loan industry will adapt, which is a net positive overall despite that government intervention to dictate what rates and risks are acceptable businesses for these lenders.
The $170B Consumer Finance industry in Japan is undergoing significant change, which has potential to affect both consumer lenders as well as the broader economy. A new law passed in December 2006 eliminated so-called "gray zone" lending at interest rates up to 29.2%. Prior to the new law, consumer loans could be offered above the maximum 20% legal rate, so long as the customer formally agreed to pay a higher rate after receiving a full explanation of the costs. The new law eliminates this gap by 2010. But even now the impact is being felt. Additionally, a recent Japan Supreme Court ruling allowed borrowers to recover payments of excess interest, forcing consumer lenders to set aside large reserves. The industry was also rocked by scandal when some major players were admonished by regulators for inappropriate and in some cases illegal loan collection techniques. The new law also restricts the total loans that may be offered to an individual, requiring the aggregate across all loans to be less than a set proportion of annual income. Additionally, rates lower than 20% are required depending on the size of the loan.
Indeed the entire industry is somewhat curious in a country where home mortgages can be had for a 2% or less, and savings deposits routinely pay barely 0.1% interest. The history of the industry would be an essay of its own, but for now suffice it to say that it is driven by two things: 1) It is notoriously difficult to get any other form of loan. Traditional lenders, such as banks, are very risk adverse having been burned badly in the real-estate and stock-market bubbles of the late 1980's, which resulted in over a decade of industry consolidation and bad-loan restructuring. Even then, a loan typically requires a family member or some other affluent party to co-sign the loan as a "guarantor". 2) The concept of "saving face" is as important in Japan as elsewhere in Asia, and it is often considered shameful to need to borrow money. The relative anonymity, including in some cases the absence of the requirement for a guarantor, that consumer loan business provides is one of its attractions.
So to the question, is there a real problem? In the short-run, there are certainly several warning signs. The major Japanese firms Aiful, Promise, Acom, and Takefuji have all suffered of late. Most reported losses in 2006 and many will also report losses or much lower profitability in 2007. The recent FT article cited as a lead-in to this analysis also highlights difficulties in raising capital from Asset Backed Securities, which can be as much as 46% of the capital source for the major firms. The ABS market has essentially dried up. A smaller firm, Credia, defaulted when its banks pulled credit lines despite an investment grade rating. Additionally, the spreads between short-term and long-term Credit Default Swaps have gone to nearly zero. Major banks such as Sumitomo Trust and Aozora have also been reported as having reduced their exposure to ABS and CDS markets and as lenders to consumer finance firms.
Among the major foreign players, Citigroup, which operates under Citifinancial's DIC brand in Japan, took a charge in late 2006 and reduced the number of manned DIC branches by 80% to about 50. This came after several years of tuning the DIC operation to better automate the business end-to-end with better standardized processes for all aspects of loan origination, credit scoring, and collections in a division that had consistently been the most profitable Citigroup business in Japan (and indeed a major earnings source for Citifiancial International overall). General Electric has been reported to be considering exiting the Japan consumer finance market altogether by selling its local Honobono Lake branded business. GE has already cut 60% of its 115 manned branches.
Will these legal and regulatory changes, and resulting impact to consumer loan companies have a broader economic impact? Some analysts have presented doomsday scenarios. For example, respected economist Jesper Koll forecast that a full 1% impact on GDP could be possible (in an economy where the central bank is forecasting only 2.4% GDP growth) as a result of the impact reduced credit access to certain sectors of the economy may have on consumer spending and other parts of the current tentative recovery. The fear is that this change will be as bad as the increase in consumption tax from 3% to 5% that occured in 1997 and tipped the economy into years of deflation and low growth. Another worst case scenario is that entire sectors of the economy no longer have access to credit, and thus go to illegal loan-sharks at usurious rates for money, resulting in a variety of social ills.
However, the industry itself is not so pessimistic. Promise is purchasing Shimpan Finance in an effort to gain market share. Aiful is also forecasting a return to profitability in 2008. These firms, as well as Citigroup, are working to diversify into credit cards, home loans, 2nd mortgages, and small business loans. Equally, major banks also have consumer finance divisions that are diversifying across the entire range of consumer credit products.
Overall, we must remember that credit markets in Japan are relatively underdeveloped. Additionally, land and property values are recovering, unemployment remains low, and consumer and business sentiment is improving. The deflationary spiral appears to have largely ended, and the Bank of Japan is taking tentative steps to raise interest rates overall. This is very different from the sub-prime mortgage debacle in the US, which resulted from over-extension of credit with built-in rate increase triggers coinciding with and the bursting of a property bubble in much of the US. It is also unlike the sub-prime credit card concerns of 2005 and 2006, which equally resulted from over-extended lending to borrowers with poor credit histories. Even the $170B consumer loan business in Japan is relatively small as a part of the overall economy. Average top rates are around 23%, thus the gap to 20% is perhaps not as bad as it might seem. Additionally, much of the economy is still based on cash, with credit cards still relatively rare.
On the political front, the resignation of Prime Minister Abe and replacement with the new Prime Minister Fukuda would seem to portend a return to a safe pair of hands. This doesn't mean the government of Japan couldn't still derail a nascent recovery, but there is certainly a sense of "back to basics" in the local political landscape.
The stock market is also showing a recovery. As deflation has ended, the Nikkei index is back in the 17,000 range. Then yen continues to range between 115 and 118 to the US dollar, driven more by the carry-trade which drives the yen up when things are uncertain, and down when things look more certain and encouraging investors to take on the risk of profiting from interest rate differentials between the yen and other currencies. The next phase of the Nikkei bull market will occur when bond investors start moving back into equities, which hasn't really happened yet but will occur when Japan interest rates start increasing.
Naturally the spreads between borrowing money and lending it out to consumers will squeeze consumer finance companies, but this, perhaps ironically, could have a positive impact at several levels:
1) First, the under-developed lending markets will naturally be driven to a more developed state, sophisticated risk management and credit scoring, improved automation for low cost processing, and sophisticated product development. Already new entrants such as Shinsei bank are offering home loans more aggressively than has been seen in the recent past.
2) Further consolidation in the entire consumer finance industry will shake out the weaker players and drive further improvements as mentioned above. One estimate suggests that the current 10,000 total money lenders will reduce to about 3,000 overall with the weakest systematically absorbed by the strongest.
3) Credit Cards and more traditional credit products are now more widely accepted and more mature are a credit instrument, and will likely continue to mature.
There are still 2 years before the new law takes full effect, but already lenders and banks are working to prepare, with very few new loans being given out at the highest rates, and with a clear eye on the credit worthiness of borrowers. Consumer loan advertising, which is visible just about everywhere, clearly points out the lower rates and advantages to credit-worthy customers.
It is also worth noting that something similar happened before, when the top rate was reduced from nearly 40% to 29.2%. At that time, similar things happened in that lenders had to adapt or die, with the weakest lenders shaken out of the market. There was little adverse impact to the overall economy, and overall borrower disciplines arguable improved with borrowers better able to spend and invest in the general economy instead of financing high interest payments.
In the short run there may indeed be some turmoil, and lenders will certainly need to adapt. Nevertheless, there is room for cautious optimism that in the long run the changes will have a net positive impact on the world's second largest economy.
Update: The US sub-prime problem is taking longer to resolve itself than I expected last October. This is putting pressure on the Japanese stock market (the Nikkei 225 index fell below 15,000 yesterday), and is also resulting in a reduction in the so-called "carry trade" and thus a stronger Yeh to the dollar (now about 108, vs. 115 when this was written). There are also rumors that Citi may sell off its consumer finance business in Japan. But the crux of the analysis remains valid, i.e. that Japan credit markets will mature and the consumer loan industry will adapt, which is a net positive overall despite that government intervention to dictate what rates and risks are acceptable businesses for these lenders.
Subscribe to:
Posts (Atom)
