Casualties of Stock Market Warfare

A friend of mine linked to a blog post from Ivan Krsti? about a massive short squeeze on Volkswagen stock back in October of 2008. Ivan does a great job of explaining what happened (so read that first), but I wanted to build upon the story.

Porsche vs. Traders

Basically, a bunch of hedge funds were betting on Volkswagen’s stock price being too high for Porsche to buy it out. So they added short positions on Volkswagen in anticipation of the price falling. At the same time, Porsche was buying up Volkswagen shares, purportedly up to 75% of them, almost the entire available float. This caused a short squeeze, and the price of the stock skyrocketed from its normal trading range of €200-450 or so to over €1k on October 28th.

volkswagen

Certain investors got creamed by this manipulation — part of me wonders how stuff like this is legal for businesses to engage in aggressive trading — but Porsche must’ve made a bundle from it. The price has since then floated back to its normal range.

But since any short trade is selling borrowed stock, it is classified as a margin trade (i.e. you borrow money from your broker in order to buy/short stock, usually at 2x your cash level but in some cases up to 10x, which caused the massive speculative bubble burst among some of the big banks last year).

Therefore, if the price increases and you don’t have the margin to cover the shares, your broker can force you to cover or add more capital. That is why some players couldn’t just ride out the short squeeze until it was over.

Said Ivan Krsti?:

“On paper, Porsche made between €30-40 billion in the affair. Once all is said and done, the actual profit is closer to some €6-12 billion. To put those numbers in perspective, Porsche’s revenue for the whole year of 2006 was a bit over €7 billion.”

I remember reading a headline about this and wondered how it could have happened…but the EU has some weird relationships between different same-country companies. I didn’t look further into it.

Ugly Americans

I remember reading a similar story in Ben Mezrich’s “Ugly Americans: The True Story of the Ivy League Cowboys Who Raided the Asian Markets for Millions”, a fine re-telling of American finance guys traveling to Japan to play the markets there in the 1990’s.  I don’t remember all the details but basically everyone in town thought a deal between two organizations was going to happen on a specific date, so everyone traded the same way on it.  The subject of the story, however, reasoned that since he couldn’t actually find anyone involved in the deal, then it must not exist.  He changed his firm’s position on it and made a ton of money when no deal happened on that date.

Warfare, stock market-style.

Suicide

The Volkswagen story came back last week when one of the speculative traders, Adolf Merckle, tossed himself under a train in an apparent suicide. Merckle himself lost about €500mil on the Volkswagen trade, reportedly, while his family’s holding company owed €5bil to banks. Obviously Merckle’s financial story was spiraling out of control and he couldn’t take it anymore.

This is what makes investing, speculative trading, gambling, playing poker, anything involving rapid changes in cash levels so dangerous and oftentimes deleterious to one’s psychological health.

Most people might now think of the recent Madoff scandal reflexively.  But that wasn’t trading or addiction to gambling; such a Ponzi scheme is a one-off affair and people got burned, but it was a consensual affair with some degree of complicity, and it’s doubtful that you’ll see much more than some sheepishness as a result of the investigation.  As my girlfriend pointed out to me, Madoff doesn’t even feel remorse after the fact.  More of an “oops” than an admittance of personal failure.

Jesse Livermore

It’s not entirely clear what caused Merckle to commit suicide (it might not have been the Volkswagen trade at all, as his “empire was falling apart”), but certainly there’s a parallel between the lives and deaths of Merckle and a famous trader, Jesse Livermore.

Jesse Livermore was a stock trader back at the turn of the 20th century. He famously shorted the market in 1907 and in 1929 and made millions of dollars (good in today’s terms but phenomenal back then). He has turned into a trading legend and Edwin Lefevre’s pseudo-biography of him, “Reminiscences of a Stock Operator”, is considered a must-read in the trading canon.

He went bankrupt a few times.  He also ended up losing big on a cotton trade gone wrong.  Eventually he blew his brains out.

Psychology

Merckle and Livermore were individual men, trading fantastic amounts of capital. It is one thing to lose a hundred dollars in Vegas, but quite another to lose what would be a massive setback ($500mil) for an entire company, let alone one person.  What I think compounds the psychological damage is to place a trade, which is usually an expression of your opinion on a matter, and then have it go against you.  Not only was Merckle wrong, he was also $500mil wrong.  The market told him in no uncertain terms that he made a bad decision.

Traders often deal with this by justifying their trades.  “Oh it’s going down, and my shares are losing money, but I know eventually it will go up.”  And they ride it all the way down.  Eventually the price plunges quickly, causing traders to panic and sell…at which point a bottom comes in, at least temporarily.  But the traders got swept out because of emotion and fear.

It is almost impossible to rewire one’s brain to not react this way — which is why good traders are so hard to find.

So at some level, for many traders, successful trades are not just making money for them, they are also verification of traders’ sense of worth and identity.  If you make a bad trade and lose a lot of money off it, not only are you poorer but you also question your own worth.  I know this because I felt the same way on some trades I made.

Which is one reason I don’t trade anymore…  I’m a lousy trader.  But I’m a somewhat decent investor, and I try to stick just to that.

Conclusions

Scale is a consistent theme within these narratives.  That is, small traders tried to play a game against a large firm on the basis of the firm’s decision-making, and so the firm held all the cards (and all the shares).  The small traders got burned.

But another phenomenon has caught my interest:  there’s so much capital out there that individuals can retire overnight.  We are all just one NYTimes best-seller or Billboard album or accidental event away from being a multi-millionaire who can coast for the rest of his life on the winnings.  Trillions of dollars float around the world, and we need only capture a million or two of that to be “rich”.

This is great for those who are keen enough to go out and grab it, but it also doesn’t scale well because individuals cannot handle much of the pressure that comes with the large swings of capital.  We are used to paying $5-15 for a meal, and we may forego that extra $1 for bacon on our burger.  But we might at the same time be in a business like poker or trading where we regularly win and lose $50k in a few minutes, and rarely think about what that $50k actually represents in terms of actual worth.  I don’t know if most human brains and nerves can deal with the swings, as Matt Damon’s character in Rounders points out (forward to 4:36 or use this link to go right there).

Now individuals (with 100% liability) are competing with large firms who have limited liability.  This provides huge opportunity and huge risk.  Will individuals encounter psychological problems with scaling in, competing against an integrated economy, and dealing with the fallout?

Some manage it well; celebrities like Britney and Lindsey handle it poorly.  And people like Livermore and Merckle end up in grizzly failure piles of suicidal detritus.

In the future, we will all be empowered as individuals, but with that comes a lot of accountability and responsibility.  If we can’t deal with it individually (or build in social safety nets and cultural/social communities), then it will consume us.

Interesting Economic Datapoints

So I’m done with this semester and I was just watching C-SPAN2, which was covering the Senate vote on the automaker bailout.  The vote failed 52-35 or so.  Dow futures were down -325 around the time of the vote.

I am still cash but am getting a bit more antsy to buy than I was before.  I have an “I know it when I see it” approach to bottoms and tops, so I’m waiting for that feeling again.

But it’s clear that the economic outlook is not good, with record unemployment numbers, commodity and energy shocks, and real bloodshed within the old American industries like media, auto, and finance.  Tech and internet has not been immune, but their companies are still announcing improvements and new products…

AMZN

I bought AMZN at 36.5 one day but got shaken out at the end of the day by climax selling.  Since then, AMZN rallied and touched 54-55 as the market bounced off fresh lows a few weeks ago.  What a pain that was to watch.  The rally came off Obama’s announcement of the next economic team, but it’s unclear whether there’s correlation there.

AMZN should announce the next Kindle soon, and it has been opening up its web services platform up even more.  The next generation of Kindle will suck people like me in to buying digital books (and probably be the last time I buy actual books en masse) and any increase in consumer demand will grease all of AMZN’s cloudy wheels.

TED Spread

The TED spread tracks the spread between inter-bank loans and US treasury bills and is a measure of liquidity in the credit markets — if there’s a high spread, then banks aren’t lending because it costs too much to do so.  Here’s the chart:

08_12_11_ted

After the initial credit shock when Bear Stearns folded in Augustish, 2007, you can see that the spread spiked up to about 200 basis points.  From then, the market stabilized until Septemberish of this year, when all the Fannie, Freddie, Lehman, AIG, etc. crap happened.

The market was on the brink of collapse until the Fed and Treasury decided to do whatever it took along with a massive finance bailout.  Until the public money was sure to flow in, the TED spread spiked up to 450 basis points — essentially no money was flowing anywhere within the private banking sector.

The spread then fell and has stabilized as the market’s continued to sink.  Now 200 basis points seems to be an agreed-upon number, but note that it is only back to where we were after the first credit shocks.  The normal TED spread was well below 100 basis points up until 2007.

In other words, there’s still substantial risk and unwillingness to lend.

[Note:  On Tuesday, Dec. 17th, the Fed cut rates essentially to 0%, which should reduce the usefulness of looking at the TED spread since the Fed is essentially acting like another lender…]

Treasury Bills

On Tuesday, for the first time ever, three-month treasury bill interest rates went negative!  This means that, for a brief period, people were willing to PAY the government to hold their money instead of seeking a return elsewhere.  That is, people didn’t even want a return ON their money; they just wanted a return OF their money!

Later, the government managed to sell $30bil worth of T-bills at 0% interest.  Which is still ridiculous.  Here’s the chart:

08_12_11_tbills

From The Sun's Financial Diary

These are rare times…we keep seeing records being broken, aberrances being observed for the first time, red-flag indicators going off everywhere.

Iceland

Iceland’s finance-dominated stock market completely collapsed.  Here’s the chart:

08_12_11_iceland

Icelanders are devastated.  There’s pretty much nothing left.  But to add insult to injury, the index, which had been hovering in the 600’s, just plunged down to the 300’s this week after another major bank failed.

Oil

Here’s the thing about oil.  Everyone who’s been predicting peak oil soon and all these ridiculously paranoid and apocalyptic scenarios were made to look like experts over the summer when oil prices spiked to the $140’s and gas hit $4/gallon.  A lot of financial risk management and analysis reports were written up until now, assuming continued high oil prices.

Of course, oil has since crashed.

08_12_11_oil

In other words, these knuckleheads don’t know what they’re talking about, or where oil prices are going next.  The term “black swan”, I should add, really pisses me off.  Geez.  Enough with Taleb!

Certainly the shock of oil prices has everyone rattled.  The instability of prices along with Obama being elected will hopefully be enough to spur long-term energy innovations to get us out of this fucking mess.  The time for US energy independence is now.  Especially if we really believe in protecting national security, not to mention national (and global) stability.

My position on oil is that its days are numbered as the major energy source, but it will still be needed for many products and as one of many sources of energy, even after we’ve converted heavily away from petroleum.

I also do not believe peak oil is soon.  I believe oil bedevils much of our foreign policy and is tied to our adventures with Israel and the Middle East and South America.  I believe we have in our own hands the ability to rid ourselves of these albatrosses.

I believe the chart above correlates extremely well with the “war” in Iraq, starting in 2003.  I am not sure what happened this summer in 2008.  I know that the Status of Forces agreement started hitting Iraqi politics around the same time but the massive oil spike could have been a climax of worldwide fear.  I don’t know.  The Iraq “war” seems to be all but over now that the SOFA passed and Obama is in, and I think oil is pricing that news in.  Oil has always correlated well with foreign wars.

What Next?

It’s amazing what we as Americans are willing to inflict upon ourselves.  All of this is solvable, and we know approximately what the causes are.  Until Obama got elected, we refused to acknowledge it.  Here’s hoping that Obama can translate a good plan into action. But it will be hard to generate political action when so many interests are set against it, even if it means saving our economy.

In the meantime, the economy and financial markets are still a mess, even after a bunch of layoffs have helped companies streamline.  Will those frictionally unemployed turn into structurally unemployed?  With little emphasis on job re-training, and a prolonged recession, one might think so.

Something does not feel right at all out there in my gut, making me suspicious to put my money forth, and we have yet to deal with the next big financial bomb:  consumer credit.  What happens when people, many of whom have lost jobs and have lost a safety net because of Republican idiocy, run out of money to pay back creditors?

[60 Minutes just did a report on the upcoming 2nd mortgage shock:  option arms resets.  They will balloon homeowners’ monthly expenses and look to be as bad as the first shock.  Watch the entire video for more.

07-10-24d_mortgage-resets-comprehensive

The light-green reflects the damage we’ve dealt with already, and the light-yellow and yellow are what’s still to come.  Sobering.]

Hawai'i Trying to Be a Better Place

[NOTE:  Some of the stats used in this article are outdated but I think they still capture the depth of Hawai’i’s energy risks.]

Hawai’i wants greater energy independence and is taking active steps and forming policies to do so.

This has fascinated me since this summer when I went to visit my brother on O’ahu.  I stayed with him for a few days in Honolulu and we got a good chance to catch up, since Hawai’i and DC are quite far apart.  I went to Hawai’i to attend the International Achievement Summit on the Big Island (my write-up here).

My brother, who is a programmer for a project for NOAA, is always particularly well-informed.

We were driving to the airport and he was telling me how much the oil price crisis was hurting Hawai’i, back when oil was heading for $140/barrel.  The impact of higher oil prices is particularly significant to Hawai’i, since most of its imports must be petroleum from Alaska and the Pacific Rim to support its own economy (I was unable to find the exact percentage of the total trade balance spent on petroleum imports, but oil costs them $7bil/year to import).  My brother told me the taxi drivers were hurting in particular, but also anyone in the logistics and transportation sectors.  Even here in DC, there was a $1 surcharge on all cab rides to account for higher gas prices — they only recently removed it again after oil prices dipped into the $40’s.

Hawai’i in other words is highly dependent on energy imports, moreso than any other state in the union.  Petroleum in particular takes up 90% of all energy usage, 40% being imported from Alaska.  Hawai’i’s demand is highly inelastic for energy since it is a basic requirement for economic operations there.  However, in looking at the stats in depth, most of that oil demand comes from jet fuel and military operations.  Around 60% is used for transportation purposes, and about 1/3 of that oil is used on jet fuel alone, according to some sources.

A Better Place?

So when I read an article yesterday in the NYTimes describing Hawai’i’s electric company and government endorsements (whatever that means) of Better Place (press release here), a new automotive energy infrastructure start-up, I was excited but skeptical.

Better Place is a company started by an amazing salesman, Shai Agassi.  He recently had a long write-up in Wired Magazine (which, I should add, should be a must-read for anyone — it posts all its magazine articles online for free, but subscriptions run super-cheap).  And I saw Mr. Agassi speak on a panel for an electric car conference in downtown DC over the summer, featuring a Tesla Roadster and Jim Woolsey.  Agassi is considered to be (fairly over-optimistically) the leader in pushing for the future of automotive energy.

His plan for Better Place is to build an infrastructure of charge-up stations and battery-swapping stations using existing gas station infrastructure.  Combined with electric cars, which he sees as appealing to car companies because his company can separate the battery and energy production from the car design itself (which will allow car companies to execute on what they know (or should know) best), people will be able to drive longer distances and just swap out batteries interchangeably with ones at the stations.

“Agassi dealt with the battery issue by simply swatting it away. Previous approaches relied on a traditional manufacturing formula: We make the cars, you buy them. Agassi reimagined the entire automotive ecosystem by proposing a new concept he called the Electric Recharge Grid Operator. It was an unorthodox mashup of the automotive and mobile phone industries. Instead of gas stations on every corner, the ERGO would blanket a country with a network of “smart” charge spots. Drivers could plug in anywhere, anytime, and would subscribe to a specific plan—unlimited miles, a maximum number of miles each month, or pay as you go—all for less than the equivalent cost for gas. They’d buy their car from the operator, who would offer steep discounts, perhaps even give the cars away. The profit would come from selling electricity—the minutes.” (Daniel Roth, Wired)

Very ambitious.  And hard to get off the ground, apparently.

Electric Cars in Hawai’i:  The Holy Grail and a Prototype?

But Hawai’i poses a unique environment that might be perfect as an Agassi prototype.  This is the sort of shit that an international affairs grad student such as myself really enjoys analyzing.

It is a small collection of islands with a diverse ethnic composition of mainlanders and haolis, native Hawai’ians, and many Japanese and other Pacific Islanders.  It is one of the most progressive states in the union (probably second only to DC in unanimity in voting for Barack Obama in 2008’s election).  It is a major hub for civilian and military travel.  It has the largest protected natural reserve under monument status in the country, which is what my brother is working on for NOAA.  As said before, it is highly dependent on energy imports.

So it is a highly progressive state that exists somewhat outside of the rest of US politics, its budget made frail by reliance on energy imports, and is geographically suited for not only a small-scale electric car prototype project and to rid itself of continued energy dependence.

Caveats

Interestingly, Agassi’s first attempt to install a Better Place infrastructure has been Israel.  It also has interesting characteristics, being a highly-modernized nation dependent on oil, which it imports from its “enemies” (although it cuts deals with them all the time, normally) in surrounding Muslim countries.  It is essentially isolated by geography, and is small enough for electric cars’ limited ranges.

But in Hawai’i’s case, if much of its actual oil consumption is constituted by jet fuel, then Hawai’i is ages away from ridding itself of that energy hurdle.  Electric car models cannot be transferred to airplane models yet.  We won’t have “green planes” for a while.

So one has to be realistic about the ultimate impact switching to electric cars would provide to Hawai’i.  The other component is that electric cars will increase the demand for electricity production, which is also to some degree reliant on energy imports.

Hawai’i Policy

Hopefully the Hawai’ian government understands this with its more holistic solution for electric cars within a broader energy policy (read about it here).  It instituted the Hawai’i Clean Energy Initiative (HCEI) recently as an agreement with the local utilities as of October 20, 2008, to end up receiving 70% of its energy needs from clean alternatives by 2030 as opposed to the 92-95% dependence on petroleum as of now.

So there seems to be a lot of political traction right now.  My brother informed me that Lanai is trying to build large wind and photovoltaic farms and the islands are trying to unify their electricity grids, hopefully towards the smart grid that Agassi would like in order to distribute power and conserve it during peak times versus inactive times.  So the increase in demand for electricity could be off-set by a shift from dirty energy to clean, alternative energies, facilitated by Hawai’i’s policies and initiatives.

[My buddy Monkey Pope (just returning from O’ahu) in his comment below rightly pointed out that I left out the rail transit plan in Honolulu.  My brother mentioned this to me and said it was a highly-contested debate between people concerned about budget and environmental damage and people who want to remove the burden of cars on the gridlocked roads.  As it turned out, the last election day found that the rail plan passed a vote.  So this new railway may assist in removing pollution and energy burdens too.]

Politics

All of this is also interesting within the context of the automotive industry lobbying for a government bailout in DC.  Better Place and Tesla Motors are two companies started out of Silicon Valley circles of entrepreneurs and not out of Detroit.  Hawai’i and San Francisco have signed on to the Better Place project.  Tesla’s popular among the rich investors in California.  These projects may fail, but it’s sad that they receive so little support; in fact, the tech sector seems to be the only thriving source of innovation within the US right now save for its university research (pharma, auto, media, etc. are crumbling and are full of old minds that don’t understand why they’re losing) and if the US loses that, then we’re fucked.  On top of that, the Republican party and its masters and lapdogs make fun of the fags in San Francisco and Massachusetts and the cocktail-drinking elite in DC…all the people who are busy creating real value in this country instead of peddling old garbage in strip malls that no one wants to buy now that they’re having to pay off their overpriced mortgages and credit card bills.

Here’s hoping for an innovation commons promoted by Barack Obama (a Hawai’ian) that leads to more of these companies!

Thanks to my bro for getting me to think about this stuff.

Emergence of New Systems

Last week the National Intelligence Council released its 2025 Global Trends report and naturally our Georgetown MSFS program was pretty interested in looking at it.  The report considers what the major themes and trends will be of the next couple decades and assesses how they will affect different countries, power structures, and ideologies.

It must have sucked for the NIC because at first the report was issued at 33MB and didn’t seem to be uploaded correctly.  It wasn’t until this weekend that the report was fixed and was only 8MB to download.  Lost a lot of readership that way.

Some of the report’s assessments I didn’t exactly agree with.  I felt that it sold international institutions short, saying countries and regions would seek pragmatic concerns — a return to a “mercantilist” and realist perspective — over recommitting to international institutions.  At the very least I think it’s up in the air on that count; Obama’s presence alone (see his calm, thoughtful interview on 60 Minutes) might bring people back to the table, especially with Europe seeking to reassert itself in the midst of its own internal problems with population and economic stagnation and with filling a power vacuum from America’s absence the last 8 years.

Read More »

Why I Chose Development

When I tell people I’m studying development at grad school, their eyes glaze over.  What does this mean?

Are they confused as to whether I mean business development as in getting new clients?  Or as in employee training?  Do they only understand what I mean if I say “international development” instead?

Do they know what the field is, but assume that it’s just for pot-smoking Peace Corps losers who want to go help the dark-skinned starving people who have AIDS?

Or do they REALLY know what the field is, and associate development with World Bank and IMF policies which were attacked for being neo-colonialist and usurious toward developing nations?

Those are the broad generalizations and stereotypes.

And what of me?  I just got out of the Army.  I went from trying to kill some people to learning how to help others.

To be honest, I applied to the Georgetown Masters of Science in Foreign Service program intending to study foreign policy and try to start a career in national security policy.  I figured I could continue doing what I was doing before, but at a higher policy level.

But all the classes I wanted to take were in development.  Why?  Because that’s where a lot of cool stuff is going on.

Here’s what international development is to me:  billions of people around the world still aren’t healthy, educated, and online.  They have no voice.  They have few rights.

Meanwhile, technologies in health, science, telecommunications and economics fields that study behavior, developing markets, microfinance, etc. are all converging.

Lift people out of poverty and you connect more people together.  You get new ideas, new influences, new businesses, new economic models, new politics.  You get substantially more new opportunities for business and sharing and progress.  You get more representation from around the world.

Have you heard of USAID?  DFID?  UNDP?  Probably not, but these organizations are using a lot of money to fund programs that are geared towards certain aspects of development, including human capacity, governance, gender equality, food and nutrition, etc.

In the past, funding and programs had disastrous results.  Economic theory has been most pushed by areas such as development theory, which has failed time and time again to deliver success to third world nations.  Models have been hyped up and then discarded as they’ve led to countless failures.  But all that work has enabled us to figure out the different elements of what goes into human organization:  politics, individual rational and irrational decision-making, economics, biological nutritional and health and hygiene needs, etc.

Also strongly influencing helping poor people has been foreign policy (why Afghan development and not Darfur?), economic ideology (Keynes vs. Friedman), and misinformation about what has succeeded and what hasn’t (AIDS awareness programs).

And how do you measure the success of programs and donor money?  This requires a study of basic accounting and balance sheets for microenterprise and microfinance, developing proper metrics to properly assess impact of projects (does counting the number of graduates in a country tell you improvement in overall education?), and understanding of how to win a development contract and then plan it through 5 years to completion with a fluctuating budget.

Do you know what that is, all that project design and evaluation stuff?  It’s basically the same thing as learning how to found and run your own startup.

That’s where I’m going with all this.  I want to start new companies.  If all the stuff above didn’t excite you, then I’m not sure what will, because all of what goes into development involves all aspects of the human condition and learning how people make decisions and what people need to be successful.  It involves all the fields where breakout technologies are currently coming from.  It involves being able to meet and interact with and do business with vastly more people.

Development rides a lot off social change, but also technological and economic change.  The implicit understanding, in my opinion, is that development is disruptive.  Sometimes this can be very bad, but hopefully it will be even better.  I seek the new, profitable ideas.

Even the coldest entrepreneur-oriented MBA, who writes development off as poor-paying jobs in bad countries, needs to understand where the market gaps are in order to found a new company and make a lot of money.  One would need to understand social needs, social trends, and the limits of said change within policy and economic environment contexts.  Learning straight-up MBA tools can help you only if it builds upon the potential you have to create your own ideas — that is, business training only helps you monetize pre-existing ideas — it doesn’t actually create new ideas.

That’s enough of my rant on that.  Probably a bit unfair, anyway.  I want to keep this pretty positive and insightful so I guess I’ll close by saying that I have been deeply suspicious of policy and aid but upon learning more about it, I’ve found that there’s just so much meat in the study of it that I’m loving every bit of it.

The Digital Africa Surprise

For my African Development class, I was required to write a 15-page paper on some aspect of African economic development. I chose to write about converging factors, such as the east coast Africa backbone coming online, the cloud, and cheap online tools, contributing to a surprising boom in African digital connectedness to occur in the next decade. Will people be paying attention?

Read my INAF-450 Paper 1:  “The Digital Africa Surprise”.

[I’ve also converted the paper to Google Docs if you’d like to read it. (and here’s the .doc format).]

Is the US in Decline?

Georgetown’s foreign policy discussions lately have been in love with the question of whether the US is in decline. For the most part, I think most of the experts I’ve listened to have fallen on the side of “not really”.

I tend to agree. My attempt to understand what’s been going on is this: my thoughts aided by Naomi Klein’s “Shock Doctrine”, I believe that the Friedmanites ran out of places to apply their shock and awe, what with South America resisting first, and then Russia, Iraq, and then Afghanistan. The only place left to try was the US, and privatization and starvation of government funding ran amok during Bush rule.

Loosening regulation on the financial markets led to a string of bubbles, resulting in massive redistribution of wealth to the rich and making the system unsustainable. Right now such a large failure of theory is forcing us to reevaluate what the best policies are: on preemptive war, the role of government, the subtlety of good governance (within international development in particular) and regulation.

The US left a lot of countries in its wake. People complain that the US is losing its dominance, but in fact it merely overstretched its bounds under neoconservative attempts to take advantage of unipolarity. The US spurned organizations it helped to create during its darkest hours, like the United Nations, Bretton Woods, and the World Bank. It sought to throw Iraq against the wall as an example to the rest. It pushed radical free market ideology to other countries.

The US is being hurt by its own financial greed, preying upon its own poor, but look at what’s happened elsewhere: Iceland’s stock market fell 76% in one day, heavily reliant on financial services. London has had to nationalize some of its institutions and it would not surprise me if London collapsed to some degree, being a close competitor to NYC in financial service offerings.

The countries our most slack-jawed patriots fear the most are not immune. Russia’s stock market was forced to halt on three occasions, I believe, because of volatility. Putin has gained popularity by bringing the Soviet Bear back to Russia (having thrown Georgia against the wall himself), but his oligopolistic, intimidation government is somewhat hollow and driven by commodity appreciation.

China, which has been fairly modest in its rise, despite our antagonism towards it publically, is also a victim. It depends on foreign demand for its goods, most of which are cheap and have little real value. It has not matured enough yet to wean itself off exports through adding value to its goods. According to an NPR article, it has lost 20 million jobs so far and is in danger of much more. The Shanghai stock market index has plummeted. (By the way, a hilarious paragraph from that article: “Harley Seyedin, the president of the American Chamber of Commerce in South China, says this slowdown was the result of deliberate action by the government.” Think that guy’s a Friedmanite?)

Many other countries lost half their stock market values during this mess as well. Jeffrey Sachs says the real victims won’t be third world countries, but the second world countries dependent upon globalization.

So why do Americans see the world from inside a bubble? Why do they think China (or the EU!) can develop a military to compete with ours? Why do they think China will leave our economy in shambles? China indeed will produce more than us by 2050 (yes, 2050 according to the estimates, which are all we have to go on), but per capita the US will still grow faster.

Now let’s look at the US. Clearly it has its own problems. Financial bankruptcy is a major concern, yes. How will we pay for our retirees or for medical care? How will we generate the political will to modernize our institutions for the internet age? Racism and intolerance has been exacerbated by economic uncertainty and by McCain and Palin standing idly by instead of speaking out against it. (“No, Obama’s not an Arab, he’s a good man.” Hmm.)

But unlike the EU and other large countries, we will continue to have more immigrants coming in, ensuring our replacement rate is sustainable. We have a diversified, innovative economy with no peer in terms of high-valued goods. Ironically the horrible subsidies we give to farmers have wrecked world crop markets enough that in crises we will fare better in terms of having access to raw materials. We still have protected strategic oil reserves that of course Republicans seem to want to tap out so we can be even more vulnerable in terms of national security.

We have the chance to roll out highly productive solar collectors and electric cars before other nations, and INCREDIBLY SOON, if we invest right. How’s that going to affect the Middle East, Russia, and Venezuela? And Canada for that matter?

Our military, although involved in two occupations, could redeploy and then deploy somewhere else and not fail. It is incredibly resilient as long as we can finance it. It can even be argued to provide a common good to international stability, according to Michael Mandelbaum. (highly contentious, but worth thinking about)

Sure, there’s no doubt that Fareed Zakaria is right: this is about the rise of the rest, not the decline of imperial America. But the rise of the rest what we SHOULD want as peaceful, freedom-loving, ultra-competitive Americans: no nations in poverty, more nations contributing to a globalized, efficient, tolerant world. (notice I didn’t assume democratic) And we will lose some of our influence as long as we remain backwards in our foreign policy, but that tide can turn quickly if we provide leadership by example.

So I think the naysaying is overblown. I expect a lot of what I just wrote to turn out to be incomplete or even blatantly wrong, but it is at least framed in a more holistic picture of what the levers are that affect international affairs than just the fact that the US has done some incredibly dumb things.

Besides, Barack Obama is about to win. Do you have any idea how big the fucking party in DC is going to be when he claims victory? Do you have any idea how much this will affect the rest of the world?

Developing Nations and Leapfrogging

In Prof. Nelson’s “What’s Shaping the Internet” class yesterday, one of our colleagues gave a good presentation on broadband in Africa.  We discussed a new backbone cable that will go live soon in Africa as well as the new O3b project to provide satellite service to the other 3 billion global citizens without internet access.

Our Yahoo!/ISD senior fellow, Gaurav, is auditing the class.  He stated that in India, where he’s from, they find mobiles to be the preferred form of access to the internet and to their social networks.  Broadband penetration is extremely low.  Contrast this with the US, where we have grown up with the internet, tethered to it by slow modem, slow DSL, slow cable, all the way up to where we are now.  And now devices like the iPhone and Blackberry are familiarizing us with using the internet on a handheld.  But we think of mobile as an add-on to our hardwired world.

The context and culture in which countries and cultures think and will think about mobile vs. hardline greatly varies.

This made me think about how in Africa, penetration is also low while download costs are still prohibitively expensive.  It will likely be decades before Africa is hardwired, if at all.  Geographic constraints and population dispersion may make it uneconomical.  However, submarine cables will bring in bigger pipes for a continent that has shown itself to be ravenous for collaboration, communication, and awareness of the outside world, while WiMAX-like wireless broadband to the last multimiles.  Have you seen the rise in Africa blogs (see White African, found through Kevin Donovan), the success of mobiles (as a result of lower costs for building cell tower infrastructure than for laying cable), and a more optimistic GDP growth estimate now that Africa is emerging from the IMF’s and WB’s disastrous indentured servitude period?

How will developing nations think about their relationship to the internet?  Americans think of broadband as a Comcast coax that goes into their modem.  Mobile access to the internet is somewhat of a luxury.  What will Africa or India think about hardwired broadband?  Will they understand it in ways significantly different than their relationship with mobile internet?

Will there be more pressure on spectrum policy than there is in the US as a result of more reliance on wireless access?  Will the absence of legacy standards and outmoded ways of thinking help developing nations reach high-speed access faster?  What will the internet look like in Africa?

There is convergence in my studies on tech policy, African economic development, international development program design, and fanatical use of the internet, and I don’t think this is coincidence.

My hunch is that Africa’s cataclysmic decline after independence came as a result of external factors, and that it will surprise the developed world in its future growth.  I also think the conditions are right, along with breakthroughs in participatory and collaborative processes, and a developmental move towards good governance, to encourage a groundswell of a lot of the next century’s ideas and inventions to come out of Africa’s diverse (how many countries are there again, all of them different?), untapped base of knowledge and experience.  Already, success in mobile networking and remittances and payment has come out of Africa.  What will be likely to happen next?  I intend to research all this for a 15-page paper in my African development class.

[Funny that as I wrote this, one of my classmates sent out a message promoting the first event for GAIN, the Georgetown Africa Interest Network.  Contact me for more details about getting in touch with them.]

Am I being optimistic?  Certainly.  Africans and development practitioners have their hands full with various poverty traps and tenuous stability.  Movements in Africa have failed many times.  But some of the larger structural barriers are being mitigated (trade regimes, misguided economic theory from development programs, etc.), allowing for humans’ natural tendency to self-organize to emerge once again.

Implications of Amazon's Mechanical Turk

I got this link via Waxy of Waxy.org.  In it, he writes about how he needs to transcribe an interview he recorded onto MP3 files.  He decided to use Amazon’s Mechanical Turk, which is a service that lets people post micro-jobs for other people to do in exchange for micropayments.

He set up small jobs for people to transcribe the MP3s for him. He posted them before he went to sleep, and when he woke up, other people had completed his task for him for less than $16.

What are the implications of this system?  Well, so far it is being used by what seem to be spammers, using humans to describe images to beat security systems or to collect data for use in spamming.

But being able to pay others to do menial tasks has precedent — outsourcing to a surplus of labor, this time online.  Obviously it’s as prone to slave/poor labor abuse as gold farming in multiplayer online games is.

But on the positive side, it might allow us to tackle problems more quickly, such as allowing non-programmers to build applications by outsourcing small tasks of writing small code for them.  I know I could use it right now, but I’m not sure what I need yet.

The problem of translating/transcribing videos and audio used to be monetized by translation companies who charged a fortune to do it — now it can be done on the cheap online.  Companies that properly use this service could put a lot of tasks out online and let their employees work on more important things.  One problem of course is that one is limited in the data he can send to Mechanical Turk — he couldn’t let someone else work on his internal databases or phone registry, for example.

So it has its limitations.  But it’s a fluid, transparent system, isn’t it?  Who knows what will come out of it?

It reminds me of a different approach that uses games to get users to voluntarily — and for fun — label and classify photos and words:

I haven’t looked into other speculation about possible applications, but the Wikipedia page should continue to be updated with the more interesting of them.

Quotes from "Inside the Jihad"

I’m reading an excellent book, Omar Nasiri’s “Inside the Jihad:  My Life with Al-Qaeda”, for Michael Scheuer’s class about a guy from Morocco who ends up being a spy within a mujaheddin cell in Belgium and then goes through terrorist training camps in Afghanistan and other terrorist hotspots, finally writing a book about the dilemmas and moral quandaries he finds himself in as a Muslim disgusted with radicals.  Did I tell you I love this class?  I should also ask, “Is this book fake?”  The story is almost too good.

Here are some early quotes:

“Every boy has a dream — to be a fireman or an astronaut or a president, to be something fantastic.  Of course, most boys will never fulfill their childhood dream, but that’s not the point.  As a boy grows up and becomes a man, he gradually lets the dream go, although it may still linger in the form of nostalgia.  But if his dream is destroyed at a very young age, the boy will either be destroyed totally along with it, or he will become strong.  He will become strong because he no longer has anything to lose.  He will give up on the future.  A boy without a dream is dangerous.” (p. 12)

“His eyes flickered for a moment, and I knew I had him.  There are guys like this all over the world:  they drink, they smoke, they snort coke, they are complete infidels in the eyes of real Muslims.  But at the first mention of the words umma or jihad they suddenly reconnect with Islam.  I think this is particularly true in Europe, where young men are so far from everything, from the Muslim land.  Jihad is nothing to them, nothing real.  But it is also everything.” (p. 28)

“Only one thing really bothered me about my new career:  the Uzis.  It made me sad to see all of them — Hakim, Yasin, Amin — prattle on about umma and jihad while they spent thousands on Israeli guns and Russian bullets.  This is the problem of modern Islam in a nutshell.  We are totally dependent on the West — for our dishwashers, our clothes, our cars, our education, everything.  It is humiliating, and every Muslim feels it.  I felt it every time I thought about the Uzis.  I was disappointed with Amin and Yasin for their hypocrisy, but even more disappointed in the Muslim world.  Once we had accomplished so much — in science, mathematics, medicine, philosophy.  For centuries we ran far ahead of the West.  We were the most sophisticated civilization in the world.  Now we are backward.  We can’t even fight our wars without our enemies’ weapons.” (p. 38)

“‘Your battle against the terrorists.  You’ve already lost your battle.’  Gilles was curious and asked me why I said that.  I told him that Muslims everywhere were rebelling against the dictators they lived under.  In Tunisia, Morocco, Egypt, Algeria, and all over the Middle East, Muslims knew that their governments were being propped up by France, England, or the United States.  It was bad enough to live under these repressive regimes, but far worse knowing that these regimes were just the playthings of Zionist and Christian nations.  It enraged Muslims and made them hate the West.  And it made them distrust democracy, because they saw how antidemocratic Western countries could be when it served their interests.  There would always be violence, I told him, as long as Western powers continued to manipulate the Muslim world.” (p.53)