Self Reference

I recently read an article in Fortune ("GM and Me", December 8, 2008) describing the gradual decline of GM. While reading it, I thought of Microsoft, and of the US as a whole. Why?

One of the themes of the article is how insular and self-referential the culture at GM is. They seem to hold themselves to their own standards rather than measuring themselves against competitors. Having captured so much of the market for so long, they apparently continued playing to that market. Meanwhile, over the years, the market gradually shifted out from under them, and they failed to either lead it (as Toyota has done) or follow it. The consequence of this has been a gradual decline over several decades. Perhaps the most telling part of the article: "Ask Rick Wagoner why GM isn't more like Toyota, and he'll tell you, 'We're playing our own game - taking advantage of our own unique heritage and strengths.' Turns out GM should have forgotten that and become more like Toyota. Toyota's market cap is now $103.6 billion; GM's is $1.8 billion."

So why did I think of Microsoft, which is still minting money on the strengths of Windows and Office? Perhaps it's because I heard a podcast (Windows Weekly) several months ago in which Paul Thurrott, a Windows expert, was asked by Microsoft PR how he liked Windows Mobile 6, which had just been released, and they were surprised when Thurrott asked them if they had even seen an iPhone, which is lightyears ahead of WM6 in just about every way. Perhaps it's because of the insistence, from Steve Ballmer on down, that Microsoft executives' kids shouldn't be allowed to have iPods. Both of these behaviors suggest the same kind of self referential, insular culture that caused GM to stall out.

Microsoft these days is a strange combination of competitiveness without inspiration, inward-looking but imitative. When Vista was released, the list of features apparently copied from OS X was striking. Apple releases the iPod, and Microsoft releases the Zune. Google has Google maps, and Microsoft has their own satellite mapping site. Google has Google Earth, and Microsoft has Virtual Earth. Adobe has Flash and AIR, and Microsoft follows with Silverlight. Even Microsoft's development environment, Visual Studio, has its roots in Apple's Hypercard and Interface Builder tools. Now, Ray Ozzie wants to lead Microsoft into the world of cloud computing and online apps, but Google and Adobe are already there. And Microsoft is trying to follow Google into the world of ad-supported search.

I think that Microsoft is at that point where GM was around 1980. At that point, GM employed about 853,000 people and dominated the largest automotive market in the world. Today, Microsoft claims about 90% of the world's desktop operating systems and provides software to most major businesses. But where GM's market moved to higher quality, more efficient Japanese cars, Microsoft's market is moving to Linux, Apple, and web apps. As GM struggled to design cars that people wanted to buy, Microsoft is struggling to gain traction online. Despite claiming to lead and innovate, GM continued to fall farther and farther behind, continually shifting strategies in the process. Same with Microsoft.

The lesson here, I think, is that the biggest mistake any organization can make is to start believing it's the best. That belief establishes the foundation for using oneself as one's own standard, which in turn leads to insularity and self-reference. At that point, you listen more to yourself than to your customers and competitors.

If I were running Microsoft, the first thing I'd do is let anyone buy and use an iPhone, iPods, Macs, Linux, Google, anything, to make sure that everyone understands the competitive environment that the company is operating in. Their customers understand that world - why shouldn't Microsoft? The next thing I'd do is ask whether the world really needs Microsoft to keep providing late, less compelling counterparts to every new big product, and whether continuing to follow the market leaders is a recipe for long term success. Finally, I'd ask the bright, creative, and entrepreneurial people in the organization to ask themselves where Microsoft could be leading instead of following, and how it can leverage the advantages it has in business platforms, Exchange, .NET, and so forth, to do something that no one else is doing yet.

I've left out one part of this story. Another thing I thought of while reading about GM is the US itself. Like me, many of you (Americans, at least) have probably been told countless times that we're the "greatest nation in the world". Americans have believed that for a long time, and the pitfalls of self-reference apply there as well. Like GM, we've become inward looking, unaware of the advantages that other nations may have. As a consequence, we're losing ground in life expectancy, education, quality of life, and productivity. I guess the old saying is true: as GM goes, so goes the country.

A Few Minutes of Calm

I have started a video blog at A Few Minutes of Calm. I've been writing music since I was a kid, and I've always been interested in the combination of music, visuals, writing, movement, and so forth. The videos are all of local scenery here in Point Roberts, Washington, which is a small piece of the US attached to the bottom of British Columbia, south of Vancouver. All scenes are taken with a still camera on a tripod, and all music is original. The intent is to capture a moment in time and a sense of place, in such a way that someone can check in any time they need a few minutes of calm, a break from a stressful day, or some time to relax or reflect. I hope you enjoy it.

Financial Innovation

In a recent Business Week article ("Get Credit Flowing, Heal Housing", November 17), the CEO of Ernst & Young is quoted as saying, "It would be a mistake to regulate so strongly as to stifle innovation." It's easy to reflexively agree with this statement if you don't think about it too much. But let's think about it for a minute.

Recent financial innovations have included junk bonds, derivatives, no-doc loans, interest-only loans, mortgage-backed securities, and credit default swaps. Recent prominent financial innovators have included Michael Milken, Enron, and Long Term Capital Management. Financial innovation seems dedicated to finding new ways to privatize profits and socialize losses, and innovations spread and generate profits until they cause a crisis, require a government bailout, and become regulated. Perhaps the field of Finance is mature enough now that innovation is more likely to cause harm than good.

Villains

This election has been characterized by much villainizing of the other side. People on both sides are genuinely scared of what will happen to the country if the other side wins. As a liberal, I think this has been encouraged more on the right than on the left, and I think this has been true since Reagan started villifying liberals. Since then, the right has framed liberal values and gay rights, in particular, as moral issues, and demonized people on the left for supporting those values.

I wonder how much of this is facilitated by our predilection to view stories in terms of good guys and bad guys, protagonists and antagonists, good and evil. As kids, we heard or read about evil witches, evil stepmothers, and so forth. As adults, our books, movies, and TV shows are filled with conflicts between good and evil, between heroes and villains. Villains are motivated by inexplicable evil tendencies, or by greed, fanaticism, and other traits that make them easy to hate. How much does this framework bias us toward seeing the world in the same way? And how much of our recent history has been shaped by an overly simplistic worldview, encouraged by this perspective?

Buried Ledes

The following excerpts are from the New York Times:

From October 17:

"The United States Supreme Court on Friday overturned a lower court’s order requiring state officials in Ohio to supply information that would have made it easier to challenge prospective voters. The decision was a setback for Ohio Republicans, who had sued to force the Ohio secretary of state, a Democrat, to provide information about database mismatches to county officials.... A 2002 federal law, the Help America Vote Act, or HAVA, requires states to check voter registration applications against government databases like those for driver’s license records. Names that do not match are flagged. Ohio Republicans sought to require Ms. Brunner to provide information about mismatches to local officials. Those officials could use information to require voters to cast provisional ballots rather than regular ones. They could also allow partisan poll workers to challenge people on the lists."

From October 15:

"Republicans have been angered by reports of voter-registration fraud linked to groups allied with Democrats, like Acorn, a community organizing group with ties to Mr. Obama. This month, the Ohio Republican Party filed a motion seeking to force Ms. Brunner, a Democrat, to hand over the list of all registration applications that had been flagged when checked using the state or federal databases. In court papers, Republicans said they wanted the names to file challenges.... Social Security data indicate that Ohio election officials found more than 200,000 names that did not match this year; state election officials say their analysis of the data indicates that most of these are individual voters, not duplicate registrations. But Ms. Brunner said that problems with the databases could very well be why the names did not match."

From October 16:

"When Mr. McCain invoked Mr. Wurzelbacher in Wednesday’s debate — some version of 'Joe the Plumber' was mentioned two dozen times during the 90 minutes — as a way to criticize Mr. Obama’s tax plan and wealth-sharing argument, Mr. Wurzelbacher suddenly found camera crews outside his home, Katie Couric on the phone, and himself in the full glare of the media spotlight.... Mr. Wurzelbacher is registered to vote in Lucas County (Ohio) under the name Samuel Joseph Worzelbacher. 'We have his named spelled W-O, instead of W-U,' Linda Howe, executive director of the Lucas County Board of Elections, said in a telephone interview. 'Handwriting is sometimes hard to read. He has never corrected it in his registration card.' The records, she said, showed he voted Republican in the March primary."

"I Didn't Do It My Way"

Prior to this election, John McCain enjoyed a well-earned reputation for honesty, integrity, and bipartisanship. I wonder, if he loses this election, if he'll look back on it and regret that he compromised those values so much and took the low road. And I wonder if he might be doing better in the polls if he had stayed true to his own values. Perhaps Americans have realized that "straight talk" has become more a branding exercise than a reality.

Abandon Ship

Items that have been abandoned recently:

- Decades of conservative free market ideology, to the overriding requirement to save the economy from effects of that same ideology

- The Bush administration, in Sarah Palin's readiness to point out its failings

- Trickle-down economics: how many Americans would currently support tax cuts for the rich?

- Neoconservatism: remember that?

Opportunity Knocks!

Hmmm... maybe now would be a good time to revive the idea of privatizing Social Security. Don't you think so?

Uncommon Sense

My last post elicited several comments, most in person, from some liberals and a conservative, all defending common sense. The funny thing is, each of them had a different definition of what common sense was....

Three Virtues That Lead to Bad Decisions

The recent Republican convention has caused me to think about how some of the values held up by the nominees and delegates can lead to poor decisions when used to drive policy. Three personal attributes that we Americans hold up as virtues can be particularly damaging:

Loyalty

Loyalty is necessary in a military context but can be counterproductive in a civilian one. Why? Because loyalty only comes into play when someone is obligated to do something that they fundamentally disagree with. After all, if one agrees with a course of action, there's no need for loyalty. Loyalty is used to keep members of a team marching in the same direction whether they agree with that direction or not.

This may be entirely appropriate and constructive when loyalty is earned rather than demanded. But when loyalty is demanded because it hasn't been earned, there's no rational reason that loyal behavior will lead to a good outcome. Rationally, someone with less knowledge should defer to someone with more. When someone with more knowledge defers to someone with less, because loyalty is demanded, the outcome can be catastrophic. One need look no further than Colin Powell's presentation to the UN for a clear demonstration of how unmerited loyalty can upend the proper relationship between someone who is informed and competent and someone who is not.

This is one of the basic dynamics that have led to the most prominent failures of the Bush administration: loyalty was the most important attribute to Bush, and it was demanded rather than earned. It was more important than competence, as demonstrated by the response to Hurricane Katrina and the inept handling of the Iraq war and reconstruction. It also prevented thoughtful deliberation and honest, informed feedback at those times when it was most needed; dissenting voices were absent, so decision-makers never benefited from hearing all sides of an argument.

This came to mind when reading about how Sarah Palin, as mayor of Wasilla, Alaska, fired her Chief of Police because she felt she didn't have his unreserved loyalty. Staffing an administration with people who are unquestionably loyal to you is a sure prescription for group-think, for suppressing the kind of feedback and honest disagreement that would lead to better, more informed decisions.

Toughness

One of the attributes that certainly appealed to Americans about Bush, and now about McCain and Palin, is toughness. All of them pride themselves on the strength to make tough decisions. By definition, a decision is only tough when it's unpopular. And, in some cases, it may be unpopular because it's wrong.

In these cases, one's self image as tough can make it hard, or impossible, to change one's mind when presented with new evidence. Toughness, inflexibility, and stubbornness are basically synonymous. Again, one need look no further than the Iraq war to see the results of decision making distorted by toughness. The fact that McCain and Palin share this trait may make them vulnerable to the same kind of inflexibility.

Common Sense

One of the delegates at the recent convention cited Palin's "small town values" as a reason to support her, and when asked what those values were, cited "common sense" as a prominent one. Americans love common sense. I think they believe that someone who operates on common sense is trustworthy.

There are several problems with common sense. An obvious problem is that it's a substitute for education. Nature abhors a vacuum, and common sense fills in where education is absent.

A second problem with common sense is that it's reductionist. It often relies on a few, basic principles, sometimes derived from religious belief or moral values, that fail to recognize the underlying tradeoffs and complexities that exist in the real world.

A third problem is that it's based on one's personal experience with the world, and thus is limited by the limits of that experience. It was once common sense, for example, that the sun revolved around the earth. We now know better, and the fact that the earth revolves around the sun is conventional knowledge. But evolution is currently running into the same resistance that the Ptolemaic universe once did, and probably for the same reasons. Amos Tversky and Daniel Kahneman have convincingly demonstrated the limits of human judgment, and the distortions of that judgment can be seen in the vast number of suboptimal decisions made in policy and economics, among others.

Again, one need look no farther than the Iraq war to see this in play. Common sense, to an American at least, would hold that one need only introduce democracy to a region and good things will happen. Bush's foray into Iraq failed to recognize the essential complexities of one of the most complicated parts of the world, and we will be paying the price for that for a long time.

Americans seem fundamentally suspicious of education, perhaps because they feel it will displace their highly valued common sense. They recognize that someone with more education than they have may be unpredictable to them, and thus untrustworthy. I think we can see this sentiment in the vilification of "elites" in the current campaign. But if anything, Americans should be suspicious of common sense, because it is as fundamentally incapable of grappling with the complexities of the world as our eyes are of watching atoms spin.

Trust

I don't include trust as a distorting virtue, but I do think that trustworthiness underlies all of the virtues that are. If someone is loyal, tough (therefore consistent), and uses common sense, they're more intrinsically trustworthy than someone who uses their superior education and mind. I wonder if our preference for trustworthiness over competence will, in the end, be the factor that holds us back in the world, as other nations embrace the opportunities that come with knowledge and better education.

Moral Authorities

How can President Bush chastise Russia for invading Georgia, after he himself so recently invaded a sovereign nation?

And how can he chastise other countries for human rights shortcomings, after his administration has engaged in torture, extraordinary rendition, and warrantless wiretapping?

How can politicians and pundits like Ronald Reagan, Newt Gingrich, Rudy Giuliani, John McCain, and Rush Limbaugh espouse family values after multiple marriages and, often, affairs?

How can Bill Bennett write a book called The Book of Virtues while gambling away several hundred thousand dollars?

And how can Sarah Palin press abstinence programs on the country despite the very visible evidence in her own family that they don't work?

The problem here is that our moral authorities have no moral authority.

Hypocrisy part 2

One of the things the federal census tracks is the balance of payments to the states. In general, the states that tend to vote democratic also tend to be net payers into federal coffers, while states that tend to vote republican tend to be net beneficiaries of federal payments. Ironic, no? Money being transferred from the states that most support federal programs to the states that advocate for small government? According to the most recent census figures, Alaska ranks seventh in the country in terms of how much money they receive from the federal government vs. how much they pay. (Virginia and Maryland are the top two because of the large numbers of federal employees, and federal paychecks, in those states.) So my question is, how can a state whose populace seems to pride itself on its independence and favors small government be so dependent on federal largess?

Buried Lede

From Peter Baker's New York Times Magazine feature article "The Final Days", on the last act of the Bush presidency, from page 4:

"'They’re friendly,' said Senator Lindsey Graham, the South Carolina Republican and McCain ally who has watched the two men up close. 'They don’t hang out together. I don’t think John’s ever been to Camp David. I think it’s respectful. President Bush respects Senator McCain, and I think Senator McCain respects the office of the presidency.'"

Hypocrisy

How come no one has pointed out that, of all the recent political sex scandals, the Democratic ones have involved consenting, heterosexual adults (Bill Clinton, Elliot Spitzer) while the Republican ones have involved homosexuality (Larry Craig, Ted Haggard, Jeff Gannon, Mark Foley...), soliciting minors (Mark Foley again), and teen pregnancy? How come no one has pointed out that families and areas with strong "family values" (read sexually repressive) have higher rates of teen pregnancy? Why isn't anyone drawing contrasts between Amy Carter and Chelsea Clinton, on one hand, and the Bush twins and Sarah Palin's seventeen year old daughter on the other? And why isn't anyone on the right questioning whether their focus on abstinence, faith, and marriage might be having exactly the opposite effect than the one they intend?

Supporters will say that Governor Palin's family should be off limits from the spotlight of politics. That would be fine, except that social conservatives are the ones who put the family in that spotlight in the first place. If they didn't want to impose their family-related values on the rest of us, I'd agree that private matters should be off limits. But they put that particular ball in play by supporting a sexually repressive social agenda, and they should be held responsible for the results when their own families fail to meet their own tests.

The Right Wing Lifestyle

Right wingers have frequently been vilified for their illogical views and hypocritical behavior. I must admit that I’ve been among those who have condemned such people, because I assumed that their views, and their unceasing attempts to impose those views on others, were a matter of choice and free will. However, I have become increasingly convinced that being right wing is not a choice, but instead is a natural, intrinsic product of who these people are. In fact, I wouldn’t be surprised if, someday, scientists demonstrate that the brains of right wing people are significantly different from those of you and me.

What brought me to this conclusion was the realization that no rational person would ever deliberately choose the right wing lifestyle and all the problems that come with it. Who, for example, would ever deliberately choose to believe that lowering taxes would increase federal revenues, or that you could reduce the murder rate by having more guns around? Who would deliberately overlook the fundamental inconsistency of advocating for religious freedom while simultaneously trying to deny gay people the right to marry? Who would deliberately believe that Creationism is a science while evolution is “just a theory”? Who would plausibly believe that teenagers can be abstinent? Who would deliberately believe that the sick and the poor should be denied health care? And who would deliberately believe that global climate change is purely a natural phenomenon despite overwhelming evidence to the contrary?

It’s hard to reconcile the obvious logical flaws of right wing thinking with the notion that anyone would choose to engage in it. Yet almost a third of Americans apparently do. And what a struggle they face in the pursuit of their lifestyle: trying in vain to defend the policies of the current administration, actually believing what they see on Fox News…. Even the Bible is against them, warning against the perils of right wing tendencies. Don’t believe me? Look it up – it’s near the section that condemns abortion and supports the right to bear arms.

If being right wing is a product of nature rather than nurture or choice, then we can no longer condemn the right wing lifestyle in good conscience. After all, we know better than to condemn people for things they have no control over. Here, again, is a difference, as right wing people do exactly this when they engage in racism, condemn gay people, or fixate on Barack Obama’s middle name. Forgive them – they can’t control their racist, homophobic, anti-Islamic tendencies. Instead, the next time a friend makes a snarky comment about a right winger, just smile to yourself, secure in the knowledge that they aren’t that way by choice. They just turned out that way.

Oil Men

With oil approaching $150 a barrel, gas in the US around $4.50 a gallon, and oil companies reporting the largest profits in corporate history, I wonder if this is our reward for having a pair of oil men appointed to the White House. And why does no one remember Dick Cheney's energy task force, whose members he has never divulged to the public? I'm not one for conspiracy theories, but I have to wonder if this was planned all along.... Nah, forget that. Given this administration's inability to plan and execute effectively, they couldn't possibly have pulled off something like this....

The "Us" Generation

Remember the "me" generation? The self-indulgent tail of the Baby Boom generation? Then came "generation x", then "generation y" (for lack of a more imaginative label)....

Much has been made of the social nature of today's young generation. With younger kids on MySpace, older ones on Facebook, constant sharing of pictures, text messaging, videos, and so forth, this generation is assembling a shared experience like no other before it. This has its downsides, of course; parents and business-minded adults fret that the "kids today" are leaving a trail of cyberdroppings that will follow them into job interviews, lead to stalking and identity theft, and compromise their privacy in ways they can't imagine or appreciate until they're older.

I wonder if this is necessarily a bad thing. Today's adults, like all the ones who have come before, hide their shortcomings and hope that their friends, neighbors, and associates will believe them to be stronger, more principled, and more sensible than they probably really are. The line between public information and private places personal habits and preferences that may be controversial or unsavory well behind the privacy line.

Today's generation may not have the luxury, or perhaps the burden, of keeping all that personal stuff off limits, when so much of it is on YouTube, Juicy Campus, and their own social network profiles. Rather than leading to embarrassment, though, I wonder if this might instead promote a wider understanding of what it means to be human, with all its flaws and frailties. Perhaps the "us" generation will, in the end, be more tolerant of personal differences and less burdened by conformity.

And, what happens when the "us" generation meets "Big Brother"? What happens when the continuing proliferation of data mining, background checks, surveillance, and other tactics of a generation that hordes its own privacy yet seeks compromising information about others meets the openness of a new, more social generation? Perhaps the personal information that Big Brother covets like gold will be recognized by a new generation as nothing but fools gold.

"Hello Kitty's" Blog Post

New post found on Hello Kitty's blog:

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Computer Illiteracy

It seems to me that computer literacy is becoming almost as important as the usual kind of literacy. We've seen cases recently where the lack of computer literacy has led to unjust court outcomes (like that of a teacher who was convicted of exposing her class to pornography when a virus- and spyware-ridden Windows 98 computer in the classroom encountered a Javascript "porn storm" and kept opening a new window for every window she closed....) and, obviously, bad public policy.

An example of the latter can be found in a recent Business Week cover story ("E-spionage: A Business Week Investigation", April 21) in which the magazine tries to describe the origins and effects of targeted malware emails to government agencies and contractors. Along the way, they apparently confuse a domain name registrar with an ISP, and describe "corrupted" Microsoft Office documents that somehow, apparently magically, install malware on the recipient's machine. How do they do this? Malicious macros? Buffer overflows? Are they really .exe files masquerading as .doc files? It would be useful to know. There are ways of recognizing these various kinds of attacks that the magazine apparently doesn't know about.

The best part of the article, though, was a description about how a staffer to Missouri Republican Senator "Kit" Bond recommended that the Senator see Die Hard 4 as background on cyber-terrorism. Bond is quoted as saying that "Hollywood... doesn't exaggerate as much as people might think." If our elected representatives are taking technology lessons from Hollywood, no wonder they think the Internet is a bunch of "tubes". Perhaps that also explains why they think they can successfully wiretap terrorists when any halfway computer-literate user can easily evade monitoring using simple, readily available tools, thus guaranteeing that the only "terrorists" these laws will trap will be the hapless, harmless wannabees.

Implicit Messages: Law and Order

Last night marked the end of Jesse L. Martin's long run as Detective Ed Green on Law and Order. Green left a hero thanks to the heroic efforts of the writers, who contorted the plot sufficiently to cast him as a villain before turning him back into a hero by the end. They did this by exploiting the heroic efforts of Green's partner, who wouldn't stop believing in him and continued pursuing leads long after the case seemed to be wrapped up, and members of the DA's office, who wouldn't stop believing in him and discredited their own witness, among other things, to find the truth. The explicit message of this was that Green really was the upstanding, heroic guy we've always believed him to be. A secondary explicit message was probably one of of how your friends will come through for you if you really are an upstanding guy.

But I wonder about the implicit messages. Did the producers mean to imply that your best chance to have justice, if you're improperly accused of a crime, is to have powerful friends in the police department and the DA's office looking out for you? And what does this mean on the day after the program aired, when a judge in Queens acquitted three detectives in the shooting of Sean Bell?

Straight Talk

John McCain has distinguished himself by taking stands that seem to be principled, sometimes because they are counter to those of the administration and the rest of his party. Hence, the "straight talk express". With most Americans now against the war in Iraq, his continued strong support for the war seems to be another example of a principled, unpopular stance.

But could it, instead, be due solely to a basic point of confusion?

McCain has several times recently raised the specter of Iran support for "Al Qaeda in Iraq". Does he not know that Al Qaeda is Sunni and Iran is Shi'ite? He also raises the specter of "Al Qaeda in Iraq" gaining control of Iraq. Does he not understand that the Shi'ites have the upper hand in the Iraqi civil war? If not, is it possible that his entire support for the war is based on a fundamental misunderstanding about the differences between these two Islamic sects?

Buried Lede

From Business Week, April 7, 2008, "China's Factory Blues", by Dexter Roberts (pp. 78 - 82):

"'Unlike in the last 20 years, when China exported deflation, from now on, China will export inflation,' says Peter Lau, CEO of Hong Kong retailer Giordano International, which has extensive operations in China. (p. 82).

The article describes how Chinese producers have hit the cost floor: the rising yuan, cancellation of preferential policies for exporters, and increased labor and environmental regulations are raising the cost of production in China. This is probably a good policy for China because it squeezes out the lowest cost producers who pay the lowest wages and contribute disproportionately to pollution. However, it's potentially bad new for us because low cost imports have kept inflation in check even as the economy expands. Now, with the economy contracting, the closing of this inflationary safety valve means that the Fed has less flexibility to stimulate the economy. Until now, the Fed has thrown considerable weight behind economic stimulus policies with a rapid series of large rate cuts. Now, that approach is much more likely to cause inflation.

Buried Lede

From Fortune, March 17, 2008, "The Man Who Must Keep Goldman Growing", by Bethany McLean (pp. 131 - 140):

"Goldman spotted the problem early because it is fanatical about pricing its holdings at their current market value - even at times forcing traders to sell part of a position to establish a price." (pg. 140)

Goldman Sachs was the only one of the major independent investment banking firms to make money from the subprime meltdown. The other banks have posted billions of dollars in losses because their subprime holdings have lost so much value. No one knows how much, because the banks can't sell them, so banks like Citi keep taking writedowns, hoping to find the true value of their assets at some point. The exception, apparently, was Goldman, apparently because they sold small amounts of assets periodically, even as they were rising in value, in order to determine what their real market values were. This allowed them to detect falling confidence in the assets before the other banks did.

In the best of all possible worlds...

In the best of all possible worlds, this is the answer that Barack Obama gave to the question in Wednesday's debate about his refusal to wear a flag pin:

"One of the problems we have in America right now is that too many people confuse symbols with the principles that those symbols stand for. We claim that terrorists 'hate us for our freedoms', yet we're willing to give up those very freedoms in the name of fighting terrorism. This administration has suspended Habeas Corpus, circumvented legal protections against spying on Americans, violated Constitutional mandates for due process and against cruel and unusual punishment, kept vital information from the American people about Iraq and the war on terror, and carried out other policies that fly in the face of the Constitution and our deepest values as Americans. Yet, they wave the flag and claim to be patriots. Let me tell you something: wearing the flag does not make you a patriot, particularly when you fight against free speech, due process, and the very liberties that it stands for. And not wearing the flag doesn't mean you're not patriotic, particularly when you are fighting for those values. When we go to war, we are not fighting for the flag; we're fighting for what it stands for. We're not fighting for the flag, we're fighting for the people who it represents. And when we confuse the symbol for the principle, we risk giving up the very thing that gives the flag its value."

Complexity

Law professor Michael Greenberger recently appeared on Fresh Air to explain the subprime meltdown and the overall state of the economy. He said that, while the US economy used to be based on investments in tangible assets and enterprises, it is now largely based on financial instruments that are essentially bets on the directions that the tangible assets and enterprises will move in value. He called it a "shadow economy" because a large percentage of its overall value is based on these instruments - derivatives, monetized baskets of assets such as loan portfolios, etc. In other words, much of our economic activity is based on what the tangible assets represent rather than on the assets themselves. I'd call it a second-order economy, perhaps.

It seems to me that this movement away from tangible asset to intangible derivative of the asset owes much of its existence to the Black-Scholes option pricing model and its relatives. This model made pricing an option apparently as reliable as pricing the underlying asset. It inspired so much faith that whole financial industries were built on its foundations. Perhaps the early collapse of Long Term Capital Management, which required the last large Wall Street bailout prior to Bear Stearns, should have been a warning that option pricing wasn't as reliable as it appeared to be.

Nonetheless, heedless of the LTCM fiasco, derivatives became the basis for huge investments in, among other things, baskets of mortgages. Because banks were able to sell their loans to aggregators that collected thousands of loans into securities that they could slice into derivatives and resell, the banks that originated the loans had no further incentive to ensure that the loans would actually be repaid, and every incentive to make and sell as many loans as possible. Consequently, no one knows how many of these loans will actually be repaid.

So here's the problem. Because no one knows how many of these loans will actually be repaid, no one knows what the true values of the derivatives are. When Citi Group or Merrill Lynch or Bear Stearns take writedowns at the end of a quarter, they don't know if those writedowns will be sufficient to cover the actual losses or not. No one knows - without knowing the actual risk underlying the instrument, there's no principled way to value it.

Here's where LTCM comes in. The mathematical models that generate derivative prices are so complex that humans can't understand them - hence, Long Term Capital Management encounters a scenario that they didn't anticipate and their house of cards crumbles around them. The underpinnings of the derivative market suddenly look shaky today, and the economy collapses around the vacuum created by a relatively small number of unpaid mortgages.

All of this makes me wonder - if the economy is built on financial instruments that no one actually understands, how reliable can it be? If software and operating systems are so complex that no one can actually understand how they work, is that why Windows and some applications are so unreliable? Is that why my old Windows Mobile phone kept having problems? Are we condemned to a world where our basic tools are so complex that, in the end, we can't trust them?

A Technology Tipping Point

Let's think about technology, for a few minutes, in terms of supply and demand. Not in the economic sense, though. In the sense that demand represents what users want from technology and supply is what technology can provide. Until now, we've clearly been in a state where supply hasn't quite met demand. Now, we may be at the point where the two are balanced, and supply is about to overtake demand. What happens then?

I used to have a Yamaha DX-7 synthesizer. It used FM synthesis to produce a wide range of sounds, based on the combinations of six sine wave generators. The sound you got depended on how you configured the generators to either sound independently or modulate each other, and what output levels, frequencies, amplitude envelopes, and other attributes you assigned to each generator. The number of possible combinations made a tremendous range of sounds possible, but the synthesizer had several obvious limitations: a relatively small keyboard (not full piano range), an inability to produce the very complex waveforms of natural instruments, and no onboard effects. It also used 12-bit signal processing, so it couldn't produce sounds at full fidelity. Although it was a wonderful instrument, and its limitations inspired a lot of edge-pushing exploration, it was easy to imagine what a better instrument might be like. In other words, there was still more demand than supply.

The synthesizer I have today is capable of full fidelity output, has a full weighted keyboard, contains a massive library of both sampled natural instruments and synthetic ones, and has an onboard sequencer, mixer, and effects. If the sound you want isn't in the built-in library, it also has sampling capabilities so you can add your own. You can dissect a sound to its essential waveforms and edit them to your heart's content, making it possible to both tweak existing sounds and come up with entirely new ones. It's so capable that it's hard for me to see, from a musical perspective, how it could be improved on. In this case, supply is exceeding demand, because I haven't come close to any of its limits, and I probably never will.

So what happens? In my case, there's no compelling reason to explore the limits of the machine any more, so my music has become more focused on the composition than on the sounds. And I think that this may become a common reaction as supply surpasses demand.

Consider movie special effects, for example. Over the past thirty years or so, special effects have played a prominent role in driving movie development and audience interest. People would flock to movies with awe-inspiring special effects and stunts. Now, however, we're reaching the point where an average audience can't distinguish between effect and reality, and effects that used to inspire awe are now routine. Again, supply is starting to exceed demand. Is it possible that, when special effects are no longer special, movies will have to re-focus on compelling stories and characters?

I think this is a universal phenomenon. Digital cameras are reaching the resolution of film. Web access is becoming ubiquitous. Video games and TV are reaching naturalistic fidelity. Social networking and wireless technologies are dissolving the separation of geographic distance. So, again, what happens next?

First, I think we'll see more and more evidence that people don't know how to make the most effective use of the technology supply. The TV coverage of last week's Super Tuesday primaries provided at least two wonderful examples: CNN's Anderson Cooper holding a platter with a mark that allowed the network to super-impose a standing pie chart that moved with the platter, and Fox News showing a collection of bar graphs that stood on a rotating platter like salt shakers on a lazy Susan. In both cases, the technology was clearly an unnecessary distraction; not only did it add nothing of value, it actually made it harder to interpret the information that was supposedly being presented. I'm sure it made Edward Tufte's head spin.

More seriously, I wonder if we may see a slow-down in the technology market within the next five years or so. I've written before about feature saturation - what incentive do people have to buy new products when they don't use all the features of the ones they already own? We may be at that point, with technology supply exceeding demand, where new product improvements aren't compelling enough to drive sales any more.

This is less true, though, of wireless technology. I think that's the one place where the limitations of today's technology are still so visible, and where improvements are still so easy to imagine and their benefits so apparent, that demand still exceeds supply. I think this is intensified by the growing awareness of technology and its benefits in the general population - with more users becoming more interested in technology in general, demand for improvements in wireless devices will continue to increase rapidly, so it may be many years before supply catches up to demand.

There are two other places where opportunities for improvements still exist: reliability and usability. Again, I've written about usability as a market discriminator before, and the iPhone is clearly demonstrating that theme. The less obvious one, though, is reliability. As technology becomes more complex, its potential failure modes become more numerous and more obscure. Couple that with the security vulnerabilities of networked devices, and the potential for technology to become more of a hindrance than a help is clear. Perhaps this suggests a maturity path for technology: features, then usability, then reliability. With the exception of wireless technologies, I think we're almost through the features stage and partway through the usability phase for most technologies. Someday, I hope that everything I might buy will be both usable and reliable. At that point, supply will truly meet demand.

Shooting Yourself in the Foot in the Middle of a Class War

I've decided to broaden the content of my blog to include thoughts in areas beyond human factors and user centered design. Politics, for example. Actually, you could make a case that politics are very closely related to the user experience of living in, and interfacing with, society at large.

I've noticed that most of the people I know who work in this area tend to be either liberal or moderate, and I wonder if it's because at the very heart of human factors is the recognition that people, in all their varieties, need to be accommodated by systems. It seems to me that liberalism and human factors both put people first, to borrow a phrase, the former in terms of societal priorities and the latter in terms of systems and product design.

So here's a first contribution to this area: an assertion that the subprime mortgage mess was based on a large bet that the upper classes put on the financial health of the lower and middle classes. And that the bet was essentially illogical because of all that's been done to weaken those latter classes over the past decade or so.

Here's a short list of ways the lower and middle classes have suffered in that time:

• falling real wages
• less access to health insurance
• bankruptcy "reform"
• welfare reform
• outsourcing
• the growing wealth gap
• rising education costs
• fewer social services
• the Iraq war, whose direct participants are disproportionately from these classes.
  

In all of these cases, the benefits of these changes have gone to the wealthy, but the lower and middle classes have bought into them. Why? I suggest that it's because the notion of trickle-down economics is basically designed to convince the lower classes that they have a stake in the health of the upper classes. The better off the latter are, the better off the former will be because of trickle-down effects.

So the lower and middle classes believe they have a stake in the health of the upper classes. What does this have to do with the subprime mortgage mess? Because, after reaping the benefits of a weakening lower- and middle-class, the upper classes placed a huge, unsecured bet that all the people in those classes could pay off any mortgage they signed up for, and bought billions of dollars' worth of securities derived from these mortgages. In essence, they placed a big bet on the health of those classes after doing whatever they could, in the preceding years, to weaken them.

I suspect that people in the financial industries won't recognize this tacit investment. I suspect that many of the conservatives in those classes will continue to advocate policies that continue to weaken the lower and middle classes. Ironically, though, this would further erode the value of their own investments in those classes.

If they did recognize this tacit investment, I think it would be a good thing. Just as, I believe, trickle-down economics has given the lower and middle classes an illusory stake in the health of the upper classes, mortgage-derived securities give the upper classes a real stake in the health of the lower and middle classes. I would love to see them recognize this stake, and start taking an interest in the real health of those classes. Perhaps then we would start to see better schools, better social safety nets, and other mechanisms that would benefit the lower and middle classes directly. Because they would also indirectly benefit the upper classes by protecting their investments.