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?