The Passed-Over Cardinals

The coach was passed over for a head coaching role by his former team.

The quarterback was passed-over by the NFL Draft, the team he took to the super-bowl twice winning once, and then a succession of teams.

The running back was passed over by his old team despite being their all time leading rusher.

How can you not cheer the success of these real life bad-news-bears?

Obama Heart David Brooks

DrudgeReport links to a 1996 interview in which Obama sounds very much like David Brooks:

"What concerns me the most are children and the way they are treated," he says about why he will pursue a career in public office. "As an African-American, I am very concerned about children from poor neighborhoods, the problems they deal with, the total lack of a stable environment to enable them to grow and develop. It depends a lot on the economy, the opportunities they are given, their own selves and their parents. It also depends on values, for instance on the kind of family values that get talked about a lot, especially by politicians."

He continues, saying, "values don’t just belong to individuals, they are also collective. Children are exposed to the values around them, and if they come to believe that the lives of their parents and their community cannot be rewarded, if their schools and homes are crumbling, how can they come to believe in their own values when they don’t have any to begin with? My priority is to return social values to public debate, because we are all one big family, transcending racial or class differences. We have obligations and responsibilities towards one another."

He says, "perhaps that’s where the private and public spheres meet, when it comes to couples, relationships, families or tribes. What’s important is empathy, an understanding of shared responsibilities, the ability to put yourself in other people’s shoes.

It is a standard part of the (neo-)conservative narrative that well-intentioned great society government programs (e.g.: welfare and integration) aimed at helping individuals wound up destroying communities -- homes and neighborhood schools -- and hurting the people they sought to help.

Obama appears, in this interview, to implicitly endorse, at least something close to this view.

Obama identifies empathy -- identifying, being fundamentally concerned, with the suffering of an-other -- as the solution to the breakdown of communities. A lack of empathy is the certainly, once he points it out, perhaps the most visible evidence of the dis-function of broken communities.

Obama leaves open what sort of policies he envisions to rebuild communal empathy. But it is clear that he understands the flawed nature of the knee-jerk great society liberal approach.

Obama and Hamas

Drudge links to Obama camp 'prepared to talk to Hamas'

The incoming Obama administration is prepared to abandon George Bush's doctrine of isolating Hamas by establishing a channel to the Islamist organisation, sources close to the transition team say.

The move to open contacts with Hamas, which could be initiated through the US intelligence services, would represent a definitive break with the Bush presidency's ostracising of the group. The state department has designated Hamas a terrorist organisation, and in 2006 Congress passed a law banning US financial aid to the group.

The Guardian has spoken to three people with knowledge of the discussions in the Obama camp. There is no talk of Obama approving direct diplomatic negotiations with Hamas early on, but he is being urged by advisers to initiate low-level or clandestine approaches, and there is growing recognition in Washington that the policy of ostracising Hamas is counter-productive. A tested course would be to start contacts through Hamas and the US intelligence services, similar to the secret process through which the US engaged with the PLO in the 1970s. Israel did not become aware of the contacts until much later.

There is less to this story then meets the eye. Obama is not likely to discontinue any of the policies by which Bush isolated Hamas. The idea that the current administration does not already have clandestine lines of communication with Hamas (for example: through Egypt) is silly.

The explicit 'break' from current doctrine is this: The Bush administration conducted clandestine negotiations with Hamas, as it did with Iran, clandestinely and indirectly, while Obama has advisors who would have him conduct clandestine negotiations directly and more publically. Bush's approach is based on the belief that direct and public negotiation with the United States is a diplomatic carrot -- by virtue of the legitimization it implies -- which American diplomats should not simply give away. I have a harder time understanding the rationale of the anonymous Obama advisors. Perhaps they do not see direct or public negotiation as extending implied legitimization to actors like Iran and Hamas.

The bigger question is not "how", but the "what". Bush extended clear terms -- fundamentally the same as what the US required of the PLO back in the day -- for including Hamas more directly in the conversation. Obama has given no real indication that he intends to relax these conditions. On the other hand, one doesn't have to read too deeply between the lines to sense that his anonymous advisors would have him do so.

Richard Haass, a diplomat under both Bush presidents who was named by a number of news organisations this week as Obama's choice for Middle East envoy, supports low-level contacts with Hamas provided there is a ceasefire in place and a Hamas-Fatah reconciliation emerges.

Another potential contender for a foreign policy role in the Obama administration suggested that the president-elect would not be bound by the Bush doctrine of isolating Hamas.

"This is going to be an administration that is committed to negotiating with critical parties on critical issues," the source said.

These are not consistent positions. As Hamas is a more critical party and the issues are more critical if there is no cease fire and no Hamas-Fatah reconciliation, the anonymous contender would not support the conditions Haass would have. Implicit in Haass' position is the supposed Bush doctrine of viewing negotiation as a reward for good behavior.

..."Secret envoys, multilateral six-party talk-like approaches. The total isolation of Hamas that we promulgated under Bush is going to end," said Steve Clemons, the director of the American Strategy Programme at the New America Foundation. "You could do something through the Europeans. You could invent a structure that is multilateral. It is going to be hard for the neocons to swallow," he said. "I think it is going to happen.

This reminds me of Met fans who chant "Yankees Suck" at Shea when the Mets do well. Policy makers should have greater concerns then how well neocons are swallowing what.

...the president-elect would be wary of being seen to give legitimacy to Hamas as a consequence of the war in Gaza.

Bruce Hoffman, a counterterrorism expert at George town University's school of foreign service, said it was unlikely that Obama would move to initiate contacts with Hamas unless the radical faction in Damascus was crippled by the conflict in Gaza. "This would really be dependent on Hamas's military wing having suffered a real, almost decisive, drubbing."

Even with such caveats, there is growing agreement, among Republicans as well as Democrats, on the need to engage Hamas to achieve a sustainable peace in the Middle East – even among Obama's close advisers.

The argument for engaging Hamas depends on the low likelyhood of Hamas participating in a "sustainable" peace still being greater then the likelyhood of Hamas being made irrelevant.

Hoffman's opinion is mind-bogglingly perverse. Hamas's military wing suffering a real, almost decisive, drubbing dramatically increases the likelyhood of Hamas being made irrelevant as their primary selling point is "We, better the Fatah, can stand up to Israel". To the degree that Hamas is not going away, there is some argument that it has to be dealt with. But why would anyone want America to rescue Hamas from the jaws of irrelevancy?

Which gets to a more fundamental point. In the end, negotiations with Hamas may well be a necessary evil. They ought not be something anybody is anxious to do.

Risk and Regulation

The Times has a good article about RISK Mismanagement. Between the lines, it well illustrates the dynamics by which ill-concieved financial service regulation worked against the health and stability of the financial system.

There are many such models, but by far the most widely used is called VaR — Value at Risk... one reason VaR became so popular is that it is the only commonly used risk measure that can be applied to just about any asset class... Another reason VaR is so appealing is that it can measure both individual risks — the amount of risk contained in a single trader’s portfolio, for instance — and firmwide risk... Top executives usually know their firm’s daily VaR within minutes of the market’s close.

Risk managers use VaR to quantify their firm’s risk positions to their board. In the late 1990s, as the use of derivatives was exploding, the Securities and Exchange Commission ruled that firms had to include a quantitative disclosure of market risks in their financial statements for the convenience of investors, and VaR became the main tool for doing so. Around the same time, an important international rule-making body, the Basel Committee on Banking Supervision, went even further to validate VaR by saying that firms and banks could rely on their own internal VaR calculations to set their capital requirements. So long as their VaR was reasonably low, the amount of money they had to set aside to cover risks that might go bad could also be low.

The intent of the regulators was sensible enough. Firms ought to report risk exposures to investors. Banks with riskier investments ought maintain larger capital cushions. In the end, however, attempts to enforce these good ideas with regulation are almost intrinsically problematic because risk is a rather difficult thing to quantify simply and objectively. There is almost willful oblivious-ness in coming up with a single number and blessing it as a functionally complete and objective measure of risk. But the bureaucracies -- large-firm management and the regulatory agencies -- required such a number.

Tangentially, its worth making explicit what is inherently put at stake by the notion that risk can be quantified simply and objectively: Were that true, free markets would be of limited practical value, and command economies would be the order of the day.

...Taleb, a trim, impeccably dressed, middle-aged man — inexplicably, he won’t give his age... He also went from being primarily an options trader to what he always really wanted to be: a public intellectual. When I made the mistake of asking him one day whether he was an adjunct professor, he quickly corrected me. “I’m the Distinguished Professor of Risk Engineering at N.Y.U.,” he responded. “It’s the highest title they give in that department.” Humility is not among his virtues. On his Web site he has a link that reads, “Quotes from ‘The Black Swan’ that the imbeciles did not want to hear.”
...
“Why do people measure risks against events that took place in 1987?” he asked, referring to Black Monday, the October day when the U.S. market lost more than 20 percent of its value and has been used ever since as the worst-case scenario in many risk models. “Why is that a benchmark? I call it future-blindness.

“If you have a pilot flying a plane who doesn’t understand there can be storms, what is going to happen?” he asked. “He is not going to have a magnificent flight. Any small error is going to crash a plane. This is why the crisis that happened was predictable.”
...
Eventually, though, you do start to get the point. Taleb says that Wall Street risk models, no matter how mathematically sophisticated, are bogus; indeed, he is the leader of the camp that believes that risk models have done far more harm than good. And the essential reason for this is that the greatest risks are never the ones you can see and measure, but the ones you can’t see and therefore can never measure.


There is something almost explicitly svengali about this Taleb; His ultimate claim -- Risk models are imperfect, ergo, they are useless -- is more theatrical then intelligent. (Tangentially, his argument mirrors that of a former manager of mine against using unit tests).

On the other hand, the pilot analogy touches on a key point. What he describes -- any small error crashing the plane -- is a system that is not robust. Systems are not made robust by meditating over the un-imagineable. They are made more robust, in the first instance, by being made more adaptable, in the second instance, by incorporating lessons learnt-the-hard-way and, above all, by redundancy. Its not difficult to demonstrate how ill-concieved well-meaning attempts at financial service regulation often -- by adding rigidity and introducing centralized points of failure -- make the system more brittle. And the lessons-learnt by politician-regulators are often different then those of market participants.

...The Securities and Exchange Commission, for instance, worried about the amount of risk that derivatives posed to the system, mandated that financial firms would have to disclose that risk to investors, and VaR became the de facto measure. If the VaR number increased from year to year in a company’s annual report, it meant the firm was taking more risk. Rather than doing anything to limit the growth of derivatives, the agency concluded that disclosure, via VaR, was sufficient.

That, in turn, meant that even firms that had resisted VaR now succumbed. It meant that chief executives of big banks and investment firms had to have at least a passing familiarity with VaR. It meant that traders all had to understand the VaR consequences of making a big bet or of changing their portfolios...

...All over Wall Street, VaR numbers increased, but it still all seemed manageable — and besides, nothing bad was happening!

The primary job of the SEC, of course, is not to protect the stability of the financial system (for example, by limiting the growth of derivatives), but to protect investors. In mandating the publication of VaR, it actually suceeded to the degree that investors were informed about the increasing riskiness of their investments.

The question, then, is why investors were not concerned. I believe it can be easily argued that regulations intended to make investment easier and safer, to protect investors not just from fraud, but from research and dilligence, have the effect of dumbing down investors, and so reducing their ability to over-see the companies they own.

The way, in the end, VaR analyis owes its universal adoption to regulations illustrates a crowding out effect. I interviewed in the credit risk department of a large -- relatively unscathed -- bank in march 2007. In one of my conversations we talked rather explicitly about the limitations of the sorts or risk numbers people threw around, but also, how regulatory requirement (Basel II above all), sort of forced banks to spend resources on risk analysis they understood to be less then useful, that could have been better allocated to more useful analysis.

Which gets to some core problems with the current conception of regulation. If a regulator is better then a private firm at managing risk, then that firm ought not be in business. And if the firm is better, then the regulator ought not be telling it how to manage risk.

Further, this is an example of how regulation can introduce single points of failure (in this case: a flawed risk management practice) into a system.

In a crisis, Brown, the risk manager at AQR, said, “you want to know who can kill you and whether or not they will and who you can kill if necessary. You need to have an emergency backup plan that assumes everyone is out to get you. In peacetime, you think about other people’s intentions. In wartime, only their capabilities matter. VaR is a peacetime statistic.”

This hits the nail on the head. Which is to say, VaR is a wonderful tool, with great utility in certain contexts (peacetime), but it is not a one-size-fits-all measure of risk. That some people viewed it as such says more about those people then it does about the tool.

And I think the frame-of-mind of those people is a key point here. If you are a "Risk Manager" in a giant bank, responsible for controlling risk across a mind-boggling array of products and activities, you need simple numbers. All the more so, if you are a regulator with responsibility across a whole economy. This is the black hole at the heart of the system. The choice between coming up with "God-Blessed" (to use a term loved by a Risk Manager I once worked with), if not-entirely-meaningful, numbers or throwing one's hands in the air.

Which is not to say that risk cannot be managed, only that risk management doesn't scale well. Or, rather, that it needs to be re-concieved as it scales. Which is to say, government regulators should be more concerned about, for example, structural risks like mis-aligned incentives, or the existence of firms too big to fail, then with how individual firms manage risk.

...the big problem was that it turned out that VaR could be gamed. That is what happened when banks began reporting their VaRs. To motivate managers, the banks began to compensate them not just for making big profits but also for making profits with low risks. That sounds good in principle, but managers began to manipulate the VaR by loading up on what Guldimann calls “asymmetric risk positions.” These are products or contracts that, in general, generate small gains and very rarely have losses. But when they do have losses, they are huge.

This is a really interesing angle that I had not recognized. The danger, in setting rules, is that they always have unintended consequences. The more universal a rule, the more dangerous those consequences.

Overheard On CNN

Around 10:15, CNN's Chief Business Correspondent Ali Velshi on AC360 explaining the details of Obama's planned stimulus plan:

...Here's the surprise, up to 40% of it ($300 Billion) is going to go toward tax cuts... They divide up between individual and business tax cuts... [the business tax cuts are] maybe not a bad idea. But tax cuts for individuals tho, Anderson, it didnt work last time around, if it did, last spring, we wouldn't be in a recession...

That analysis is almost too silly to comment on. Its fascinating to me that CNN has learned to love tax cuts for businesses while warning their viewers of the futility of individual tax cuts.

Which, puts me in the odd position of sort of agreeing with CNN. As a political matter, I don't love business taxes since they decrease transparency. Corporate taxes are borne, in differing measures, by customers, employees and shareholders. Who precisely bears how much of a corporate tax is near impossible to measure. Its a way, therefore, of taxing people on the sly. To believe that government ought to be open and transparent is to be biased against corporate taxation.

Gas Guzzling

Articles of the auto industry troubles cannot help but condemn our addiction to gas guzzling.

Its not clear to me that this condemnation is all that sensible or innocent. Buying a large "gas guzzling" car is a rational, even environmentally friendly, descision for for families with more then two children. The Prius is not a family car.

The demand, then, that American automakers make fewer Caravans and more Priuses is, simply, a demand that they cater less to a certain sort of Americans (families with more then two children) and more to the sort now in power.

Mike Shanahan

The Broncos have begun searching for Shanahan's replacement:

Owner Pat Bowlen, chief operating officer Joe Ellis and personnel chief Jim Goodman jetted off to New York on Saturday for a dinner meeting with New York Giants defensive coordinator Steve Spagnuolo, followed by a Sunday conversation with New England Patriots offensive coordinator Josh McDaniels.

The trio will return to Denver for interviews at team headquarters next week with Tampa Bay Buccaneers defensive coordinator Raheem Morris and Dallas Cowboys offensive coordinator Jason Garrett.

I have to imagine that top tier coaching prospects like Spagnuolo, McDaniels and Garrett will have little serious interest in coaching for Bowlen. All else being equal, why choose to work for a guy who has fired Dan Reeves, Wade Phillips and, now, Mike Shanahan.

They may well wind up with Morris. His defensive focus matches their primary need and his relative inexperience may limit his alternatives. If this happens, they will have replaced a super-bowl winning hall of fame head coach with a 32 year old who has yet to even hold co-ordinator responsibilities.