Not over yet

A new consensus is seeing the end of World Depression II sometime in 2010. As a matter of fact, the list of positive elements is not negligible:

• - The very existence and the conclusions of the G20 show the existence of a fast global public response to the events, certainly going in the right direction
• - The US stimulus plan has had an initial favorable impact, paving the way for the other plans
• - Europeans plans are not as small as they look, considering the fact that social protection mechanisms mechanically increase public spending each time unemployment levels rise
• - The banking system has now ceased to crumble down, and the main pieces are back in place
• - Protectionism is being discarded as a solution
• - Destocking is reaching its material limits
• - Most commodities are back to reasonable prices
• - Confidence is being restored
• - Key currencies are stable: the ‘Chinamerican’ system protects the dollar, while the Euro structure prevents members to freely print money for their own selfish benefit
• - A reinforced IMF can be of assistance gain in the most disastrous areas
• - Last but not least, the US administration, having ceased to be an arsonist force, is now a factor of global appeasement .

Now, on the other side of the balance sheet, still lies a list of liabilities of such importance that the 2010 target remains a product of wishful thinking:

• - The financial system is by no means limited to the banking system, and it will take a long time (years) to monitor, fix, regulate and control the non-banking part which had become the largest part. This requires a better understanding and monitoring of securitization, another revision of corporate accounting, multilateral as well as bilateral negotiations for the creation of appropriate regulation entities, and adjustment of tax laws
• - Stimulus plans, limited by a dominant ideology against public deficits, are being set at an order of magnitude below actual needs: the financial wealth recently destroyed (stock markets, real estate, commodities, leveraged securities, for a total of perhaps $ 200 trillion) had been fueling growth, and must be substituted by public injections (today in the range of $ 3 trillion). In the meantime, business will lack funding and growth will stall.
• - Toxic assets are not yet entirely eliminated (CDS, and weak real estate based securities) and not even entirely identified
• - The global real estate crisis has not by any means reached its climax, and in many places (such as Spain or Dubai) drops in prices are still expected to reach 80% from currently already discounted levels
• - The West should continue to keep for several decades the largest consumer markets, and is also the place where unemployment shall keep rising: the gradient in technology capabilities which had separated East and West for the last two hundred years, creating the global system of economic specialization which in turn did sustain the extraordinary economic growth rate observed along the same period of time, is now reduced to very little. Countries like South Korea can produce basically anything the West can produce (except in the fields of airspace, nuclear energy, and armament), and can produce what the West cannot efficiently produce (e.g. consumers electronics). When China –which is a subcontractor of the West in about every sector) inevitably reaches the same situation than Korea, then Western and Eastern salaries will have to adjust. If they don’t, unemployment in the West will reach unprecedented levels, triggering an attrition of Western consumers markets, in turn preventing the East to generate resources for their own new consumers markets. If they do, social unrest in the West will contribute to the depression. In any case, the substantial cause of the economic crisis (not the occasional cause which was the financial crisis) is still in place for a while
• - When such stubborn facts appear in public view, further stimulus plans shall come. This time, however, they will have to be funded by deficits that only inflation can cure. For a short while stock market’s rallies should multiply. One could even use the opportunity to invest in the most protected sectors (let’s talk about them some other day). Yet, better miss a rally that hit the next crash sooner or later.

This is how the world goes. Please stay tuned.

Back to the Future

In 1992, a very famous book announced the End of History. For the better or for the worse, current events may be pulling us back to the future, i.e. to change under incertitude, the old feature of human condition. One of the foremost economic crises in modern times is not only blurring the vision of a triumphant capitalist market, but is also reopening the possibility of a political eschatology somewhat different from the everlasting parliamentary State.

While governments minimize by a full order of magnitude the quantities of financial medicine they should inject into the arteries of a chocking world trade, entire populations get closer everyday from feeling personally the pains of new poverty. The higher the recent growth their respective countries had reached, the harsher the depression will be for them. The most dependent zones on foreign trade are likely to undergo a severe social turmoil. For once, Western Europe is not the weakest link. Equipped with the strongest social infrastructures and relatively good reserves, the area is also protected by its dominant inner trade, as well as a long habit of bad news and of lagging in economic growth. “Chinamerica” should be the seismic zone, together with Eastern Europe. The United States cannot solve all issues by simply playing with an overwhelming currency, as in the good old days, and the Chinese armed forces are not strong enough to fight a violent resentment against so great lost expectations.

What’s really new is that domination of the State is not as much at stake as the State itself. We are not confronted with the prospect of opposition parties taking over, but with the one of a pervasive distrust for States in general. Tax boycotts could very well appear in America, and riots in many places. Young people raised in false hopes will show their anger. Nihilistic sabotage, rejection of intellectual property may also join the symptoms. Such disorders, not being driven by a structured vision of society, are among the most difficult to fight by anything else than extreme ideologies. Even Islam may prove unable to capture a negative energy essentially indifferent to geopolitics.

You may smile at this kind of doom saying and you may be right in only one case: if we can rebuild the system nearly as fast as we destroyed it, if the economy can take a fresh start on the basis of a fraction only of the assets which were annihilated. If you do not believe this is a real possibility, then better get ready to meet History again.

Bertolt Brecht had a say for the optimist and one for the pessimist. You can now make your choice: ‘The worst is never certain’ and ‘The belly is still fertile from which the foul beast sprang’. Personally, I would pick both.

This is how the world goes.

Multiple organ dysfunction syndrome

Considering that the lead physician in the intensive care room was, by far, the most incompetent of all, we are very lucky a proper treatment was eventually applied. Following the bold plan designed in UK, Europe has mobilized enough resources to reestablish interbank confidence, and driven a clumsy US administration into following (more or less) the same path. Theoretically things should improve for some time: guarantying interbank credit is like inserting a pacemaker to make a failing heart continue to beat. Recapitalizing major institutions is also a good remedy: it is not only a better way of injecting liquidity than adding to the total amount of debts, but also leaves some hope of getting part of the taxpayers money back once the markets are completely cured.

No doubt governments will use the opportunity to treat the very origin of the disease, i.e. uncontrolled leverage. Most financial institutions should be submitted from now on to banking rules, and especially the Cook ratio. Exposure will become more explicit and subject to surveillance. New equivalents of the good old Glass-Steagall Act, which had protected generations of depositors against the hidden risk of seeing their own money burn under the form of mindboggling securities, should be put into place. There is no need of a world government to achieve this; any local regulator of a market large enough to be indispensable to global investors, can impose it worldwide.

Everything would then be fine if the banking system was the only failing organ. Unfortunately the volume of wealth destruction which has occurred goes far beyond the $ 3 (or perhaps 5) 000 billion governments can possibly gather to reflate the economy at a proper level, and goes far beyond banks. The sepsis has reached industrial corporations, both as stockholders and as suppliers of markets. It has reached pension funds, as well as consumers directly. Even if the real risk represented by CDS (see previous posts) did not turn out as disastrous as it could be (we’ll know for sure before the end of year), a consumers’ market crunch is inevitable, which cannot be adequately compensated by sufficiently massive injections of additional cash. Even if some confidence was to be restored for a while, a deep recession would still be inevitable.

This recession will be dangerous for fragile stock markets and for depleted public treasuries. It should also bear large-scale social consequences. The average person is still stunned and silent. Scared for his (or her) family‘s future, he cannot believe what he is witnessing, and hardly realizes he will be the main payer of other peoples faults, the same people who just kicked him out of his home and his job or threaten to do so anytime soon. It will not be long before he awakens to the fact he has been playing an unfair game for the profit of an unreliable, reckless and somewhat criminal elite. Then what is likely to happen?

This is how the world goes.

Good Sunday

Today is Sunday; most stock markets are closed except in the Gulf area; it’s time for a pause. My recent posts have be depressing friends and giving nightmares to my son. So, let’s sit down for a minute and look and at the bright side of things. Yes, there is a good side.

Free markets, as opposed to planned economy, are as important and useful an invention as writing. They allow people to exchange any services (the so-called ‘goods’ are in fact services) they are capable and willing to exchange, and thus to benefit from the existence of other economic agents also capable and willing to exchange. As such, free markets are definitely a good thing and should be preserved.

Free markets, however, must always be regulated. Aristotle, who was the first theorist of markets, explained it very well: without a public control of weights and measures, people could not possibly know what they are actually exchanging, and would end up being cheated most of the times. Indeed, a large majority of goods cannot be checked at the time of purchase: how would we know what molecule is in the pills, if the pilot of the flight we are about to take has been properly trained, if the securities we intend to buy correspond to real assets? Two millennia later, Adam Smith, who was not a communist, insisted on the importance of public infrastructures, including courts, to make the system work.

An essential aspect of globalization is that a significant part of the financial markets was able to evade public regulations and controls. This is the main cause of the major problems we are currently confronted with. Things could have gone otherwise: it would have been relatively easy for the regulators of either or both the two most important economies, the USA and Europe, to impose global regulations. Exactly in the same way that the USA were able to efficiently pressure Switzerland (and other countries with ‘offshore’ banking) into submitting themselves to certain US rules (the deadly threat being to ban their banks from US markets), it would have been possible to prevent the global trading of uncontrolled securities, such as subprime loans and CDS. Ideology was the sole obstacle: 20 booming years of reagonomics and thatcherism had convinced many – against the constant opinion of free markets thinkers- that markets could self-regulate. We now realize that this was nothing but magical thinking. The good news is that, after we are finished paying the tremendous price, we know the cause and we know the remedy. No doubt it won’t happen again for a very long while.

Toxic securities are not the only issue the current crisis can help solving. The price of assets had reached ridiculous levels. Some companies were selling for 100 years of profits, when we now know (see Adam Hartung’s excellent blog on the blogroll) that no company has ever been able to anticipate the necessary market disruptions for any such length of time. The same applies to real estate which had been reaching price levels which would have made sense only if the earth was overcrowded, whereas millions of square miles can still be build (most of London is underused), and whereas most office space in the world is empty at least half of the time. It will take a long while before a closet should reasonably be worth $50.000, a price recently reached in several cities, including Mumbai…A world with cheaper enterprises, real estate and commodities can only be a better world.

Last but not least, the economic comeback will be centered on high-tech sectors, including green techs. This is also very good news. Feeling better now?

Have a nice Sunday. Worries on Monday. Perhaps also a quieter weather for a few days… until October 21, date of the first test for the CDS blast.

This is how the world goes

How will the world look like when the shock wave hits?

It has been fashionable for some time now to distinguish between ‘finance’ and the ‘real economy’. This is not very sound as finance is nothing but the cardiovascular system of the economy (made of goods and other services). The heart is now in surgery room, surrounded by physicians with limited knowledge and – above all – limited means. All they know is not to repeat the same mistake that was made in 1929, which consisted in adding a liquidity crisis to a stock market crash, and putting the overall activity close to a standstill. Governments and central banks are now pouring all the cash they have and soon all the cash they don’t into the failing arteries, in order to keep liquidity at a par with the massive destruction of wealth which is now occurring on stock markets. They definitely try their very best to save the banking system from complete crumble, by guarantying and nationalizing one after the other major financial institutions. Even after their current reserves are gone, they should be able to continue doing this by using their status of ‘least bad’ borrowers: sovereign obligations (close to having null interests’ rates) shall allow them to pursue this exercise for a while.

There is however a quantitative limit to the number and scope of entities they can bail out. Financial institutions are one important thing, and yet not the only components of the financial system. Corporations, pension funds, high net worth individuals are also facing almost unprecedented financial losses. Even massive tax cuts cannot compensate such losses (tax cuts are more or less automatically granted as losses are not supposed to be taxed in any case). For the economy to work, corporations and high net worth individuals must invest and pay salaries, while pension funds must pay pensions to consumers. Globally, they will not be able to do it at previous levels for a long while. And this is precisely how the shock waves hit the rest of the economy.

At this point, even if both causes and treatments are different from what they were in the 1930s, the phenomenology of the crisis shall look pretty much the same: massive plunge in the price of assets, massive unemployment, and massive physical poverty. As during the 30s, there will be some winners too: these are basically the owners of cash, now able to purchase the massively discounted assets as they come, provided however their cash is in safe currencies placed in a safety deposit boxes or nationalized banks. Opportunities, as a matter of fact, should multiply for them when the stock market goes down to 25-30% of its peak values, and real estate (or contemporary art) 50 to 20%. The problem is obviously that most people and corporations not only have little cash but are carrying heavy debts. Leveraged assets (many exist in the private equity sector) should go bust, and consumers’ markets will violently contract, fueling the vicious circle of recession. This should happen even if the CDS shock wave does not hit (see previous posts). If it does, you’ll see your attorney offer to work for food, and fascism come back.

Many people do not realize this. As few of them were directly exposed to the stock market, they are happy to see the ‘traders’ and the rich in general pay the price of their own mistakes, and believe they won’t have to pick the tab also, while governments are finding a solution. How wrong. They should start discovering the ugly truth sometime in 2009, and feel the consequences for a while (5 or 20 years?) afterwards.

How will the final relief come? As usual instant experts will promote gigantic schemes involving new ‘Bretton Woods’ (to achieve what as this is not a monetary crisis?) and ‘Marshall Plans’ (how can this be done in the absence of the equivalent of the 1945 USA?). As usual also, the military will attempt to be the new trusted economists, pointing at strategic hotpots (Iran, Taiwan) and lurking at weaker countries were money is left.

Let’s hope Obama can resist and someone comes up with better ideas.

This is how the world goes (sorry about that)

Don’t bother to be pessimistic: things are much worse than you may think

Remember my last post on the Credit Default Swaps? Dubai just obtained a 15 billion $ bailout from Abu Dhabi to face a default of their own Credit Default swaps. Dubai…

Let’s look again at the issue. The outstanding amount of subprime debt is about of 1,300 billion $. The outstanding amount of CDS is about 50 times larger. The good news is that a large part of this amount is made of offset positions by players reducing their exposure or netting their own contracts. As it is currently impossible to know the net total amount of outstanding CDS, let’s make the most unrealistically optimistic assumption, and consider 90% of the positions as offsets. The bad news is we are still left with at least 5 times the total amount of subprime debt.

Another element to be taken into consideration is that subprime debt is somehow based on real assets: even if they are worth a fraction only of their nominal value, buildings and apartments are still worth something. This is not at all the case with credit default swaps which are based on nothing else than gambling, a very special case of gambling, indeed. Casino gambling is regulated, CDS are not. Casinos have money to pay their own losses; this is not the case with CDS issuers. Casino’s risks are stable; CDS’s risks are not. Quite the opposite in fact: Credit Default Swaps are bets on the credit quality of third parties, at a time when the credit quality of all institutions in the world (including governments) is crumbling down under the effect of the financial crisis. Therefore most (net) CDS are doomed.

Just as the explosion of an H-bomb is initiated by the explosion of an A-bomb, the subprime crisis is getting ready to trigger the CDS crisis.

How many crises are we dealing with? Let’s count. 1 is the end of cycle which started last year and was accelerated by the surge in the price of commodities. 1 was strong enough to entail a recession that the general public would have started feeling in any case by the end of 2008. 2 is the subprime loans crisis, which already turned out to be big enough to shake the world banking system. 3 is the CDS crisis which has not started yet but looks inevitable, considering the combination of 1 and 2. 3 is definitely capable of destroying a large part of the global financial system. 4 is the subsequent mega recession which should logically follow, with major expected unemployment levels and market crunches.

Oh my, enough for today (to be continued though if you can still face it)

This is how the world goes.

Food or drug administration?

Genetic Modification technologies are neither good nor bad, they are tools. Anyone can agree with this, including activists and Monsanto.

Can GMOs be bad? They certainly can, for simple logical reasons. When a genetic modification is introduced, the resulting organism is different by definition. The differences may be small or large, visible at first sight or after microscopic investigation only, immediate or delayed; they may relate to the shape, chemical composition or biological properties (such as resistance of reproduction) of the resulting organism. A GMO may therefore carry or produce toxins, hormones, proteins which were absent from the natural organism. Their presence may induce, on the short or longer term, allergies, epidemics, all of which may also be extended and multiplied by genetic alterations all over the food chain, as well as by contamination of other cultures.

It is therefore a logical property of Genetic Modification technologies to induce a high level of risks. Theoretically, risks of the same kind are also present in the random natural modifications described by the theory of evolution. They exist, however, at a much higher order of magnitude in GMOs, as modifications occur and spread at a completely different pace and on a totally different scale. Traditional graft hybrids were unable to affect most aspects of the DNA and definitely did not cross the animal/vegetal-barrier, generating moderate biological risks. It should also be noted that graft hybrids increased biodiversity, when GMOs now tend to reduce it, because of the existence of specific ‘kill-all non GMOs’ pesticides (namely the ‘RoundUp’), as well as for economic reasons.

Now that we have the certitude that Genetic Modification technologies can induce dangerous biological consequences on a very large scale, the only question becomes: how should we handle them?

Industrial GMOs appeared in the 90’s, during the peak of the Great Deregulation move. Instead of being submitted to at least the same control than pharmaceutical products, or even the same than mere food additives, they benefited from an extraordinary political decision in the U.S. It was legally decided (not scientifically established, which would have been impossible) that a ‘substantial equivalence’ existed between them and natural organisms. The meaning of this decision, which is still in force, is that no evidence of their innocuousness has to be established by their producer, under the control of independent public agencies like the FDA, before they are put on the market. Moreover GMOs should not be tagged as different for the consumer who thus becomes the unwilling guinea-pig of a free and large scale experiment from which no one can opt out.

In practice, free trade agreements do not allow any country to decide in favor of more reasonable precautions. The maximum limit to GMOs is the possibility to tag them locally or suspend their distribution when and only when positive evidence of their actual dangers can be legally set forth. As even complete bans could not protect entirely other crops from contamination (which already happened in the case of the Mexican maize), any shorter measure represents a superior level of risk.

The advantages of GMOs would deserve a specific discussion. Let’s say briefly that they are unclear. They probably can increase the productivity of certain crops, prolong the delay of conservation of fresh products, improve the visual quality or even the taste of insipid industrial food, and they certainly can increase the profits of Monsanto. This is well enough to build up strong lobbies in their favor. On the other hand, they cannot eliminate or even reduce the need for pesticides. They increase the cost of seeds now submitted to a growing monopoly. They tend to eliminate agricultural independence of other countries. It is also interesting to note that the generalization of GMOs preceded a spectacular surge in the price of agricultural commodities, particularly those, like soy, in which their market share is the largest. Once these macroeconomic downsides and the biological risks described above are put together, the cost/advantage balance seems to go clearly at this stage against the GMOs.

One would like to review more scientific literature on such a major topic. It unfortunately turns out that most of the relevant research is directly or indirectly funded by Monsanto, and should be considered as unreliable at best, a situation which in turn increases the level of incertitude and risk.

The problem is that no matter how powerful lobby is, it cannot resolve the issues it so actively keeps hiding. No matter how blind a government is, when pushing across all borders a potentially very dangerous type of product for a short-term trade-balance advantage, it cannot prevent disasters to occur. Innovation does not imply letting irreversible problems take place before we learn how to take them under control.

GMOs may have a brilliant future once we know how to handle them. This is not the case yet. Even though genetically induced pandemias have been avoided during their very recent industrial devolopement, biological and economic incidents have already taken place, from mass suicides of Indian peasants, to accidental contamination of crops and allergies to associated pesticides. Time has come for independent research, limited experiment, premarket control, not yet to wild and world-scale industrial applications. The exact opposite is happening.

This is how the world goes.

Cassandra’s Principle (part 3)

In the mind as well as writings of its historical fathers, free market economy was never supposed to mean wild and unregulated economy. Left to itself, any free market inevitably generates distortions, e.g. monopolies behaving like tumours which may very well kill it if left unchecked. It is therefore the duty of market authorities to constantly protect markets from self-generated diseases.

A well-known condition for a healthy open economy is for instance the speed and quality of the information circulating within markets. This principle is today often understood as meaning that prices will automatically incorporate all available information about underlying assets. This interpretation is wrong. Market information does not come as a fixed quantity and its quality is a goal to be proactively achieved, not a given or spontaneous feature. Sources of distortions are varied and many: for instance, some agents are too weak to leverage the good information they possess, while others draw their strength from distorting information.

It is indeed difficult to overstate the importance of protecting economic agents in complex markets against bad information. This is particularly true in an age of extended securitization. Series of complex operations can transform any financial product bearing on real assets into an unrecognizable object composed of intricate layers of derivatives. When the distance between the final buyer of a security and the underlying assets is very large, there is simply no way for the final buyer to verify the nature of assets actually purchased. At each step of the transformation process, waivers are signed making it impractical or impossible to exercise guarantees from operators who may have corrupted the product or its components.

The subprime mortgage tragedy is nothing but the most massive example ever seen of this problem. Market authorities and regulators were unwilling to prevent manufacturers and brokers of such trash securities to create and sell on the largest scale nominal obligations having the highest probability of default. A chain of intermediaries was able to multiply their poisonous effect by mixing them up with otherwise healthy securities, spreading both the disease and its opacity into what was precisely supposed to be the safest and most liquid part of portfolios.

The magnitude of the crisis can only be guessed based on unheard of injections of liquidity made by central banks visibly attempting to avoid a market meltdown, without any further consideration for what used to be their primary concern, i.e. inflation. The best informed institutions all simultaneously trying to get rid of their plagued assets, are calling all possible margins, also creating the conditions for a domino effect and credit crunch.

 At this stage the probable willingness of governments to bail out irresponsible lenders is the least of many systemic problems induced by a major lack of market regulation and surveillance. Good wealth (made from real contributions to the global economy, e.g. long term investments in emerging countries) is likely to be destroyed together with artificially made wealth (from junk assets), when stock markets eventually adjust to the situation. Stagflation, the cancer of economy, will then show its hideous figure.

Western identity & Residual Privacy

Conflicts between public order and private liberties are as old as jurisprudence. The only conclusion, however, that was able to survive after centuries of critical thinking and political experience, is that whenever privacy disappears and the limits to public control are lifted, law becomes a mere shadow of itself. There may be, as a matter of fact, no better definition of totalitarianism and tyranny than the crossing of these borders by governments and public force.

It is also a constant lesson of history that, at any given point of time, excellent reasons can be found for shrinking somehow the sphere of privacy or violating it altogether. Authorities can always point to some actual or imaginary danger, coming from some inside or outside enemy, to justify such abuse. Every time the argument remains the same: “honest people have nothing to fear: their life can be turned into a glass house at no risk to them, as only the guilty has motives to protest”. Opponents to invasions of privacy are thus accused of criminal inclinations, absence of civic sense or lack of patriotism. Submission at all costs to the supposedly superior interests of law enforcement authorities becomes the sign of a good citizen, while taking at heart the principles of law in a civilized society is seen as proof of moral weakness, as if  hoping for a good police prevented  from blaming a bad one.

Perfectly aware of the implications of so dangerous an ideology, the fathers of modern constitutions were unanimous in safeguarding privacy against recurrent attacks. All over the Western hemisphere, these men thought that individual freedom is together with dignity the only value to be placed above any other consideration, even when efficiency and security are at stake.

The Universal Declaration of Human Rights thus sets forth: “No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honor and reputation. Everyone has the right to the protection of the law against such interference or attacks.” Few principles are now turned into more mockery. The “War on terrorism” was the occasion for the United States and the United Kingdom to ridicule all such rules. Germany, the most protective country for privacy, and France, against its own constitution, are now on the move. Spyware – ironically renamed ‘policeware’ – will be officially allowed, putting the entire content of private computers at the disposal of law enforcement authorities. At all times and from any place, all communications and data belonging to the targeted persons will be available online for analysis and storage, – an invasion of privacy in many ways much worse than putting cameras in bedrooms.

The fact that these new methods of surveillance are initially placed under the control of a judge is far from insignificant, but is certainly not a sufficient protection. As long as judges are not granted the appropriate tools allowing them to verify effectively the strict application of their orders, as well as the destruction of data irrelevant to specifically authorized investigation, the door is more than open to abuse. No one of course will give judges access to spyware allowing them to check the computers belonging to law enforcement agencies.

These methods are relatively inefficient against criminals, as was shown by the inability to catch Osama bin Laden in spite of the largest deployment ever of surveillance technologies. Criminals will use pigeons if need be. They are on the contrary very efficient against the average man, generally unaware of such threats and always defenceless against them.

There was a time when the Western legal system could be arguably opposed to Eastern despotism. This time is no more. The only residual differences are between primitive methods of coercion, such as actively blocking access to selected website, and the more sophisticated invasions of privacy through spyware or similar instruments.

The main combat of the 21^st century will not be between Right or Left or West and East, it will be between the defence of civil liberties and the submission to the universal tyranny which taking shape in front of us. Time has come to take sides.

This how the world goes.

The formation of public opinion

Public opinion is not an aggregate of individual opinions which would have been formed independently. Quite the opposite, really: opinions are for the largest part products of a preexisting public opinion. Naturally, public opinion acts in a circle, as it is reproduced through the very elements it has produced, the individual opinions.

Within its workings, Individuals are not passive, but they are restrained. All they can generally do is select according to their own preferences or interests (what Mark Twain used to call their ‘corn-pone opinions’) among a limited set of possible opinions deemed as legitimate and previously authorized by public opinion. In practice I may, for instance, entertain an opinion favorable to Obama, Clinton or McCain, not an ’illegitimate’ opinion, i.e. one which would be considered as eccentric, ridiculous, foolish, extremist or mad by public opinion. Well, I can, but I may not, at least if want my opinions to be discussed, respected or spread by others on any significant scale, and unless I don’t mind being ridiculed, isolated, silenced or persecuted. Actually, if I am obstinate enough not to mind this kind of social pressure, my attitude is likely to be interpreted as an additional confirmation of the illegitimacy of my opinions.

No individual or group of individuals can control public opinion which is essentially a-centric. Believers in conspiracy theories do not understand the mechanisms at work. The most one can do is influence public opinion, propaganda being the primary tool. Advertising – as we shall see – is the other one.

Not all individuals, however, were born equal before public opinion. Some of them are simply more intelligent, they have the capacity to question received ideas. Those can be extremely influential, usually after their death, when the previous ideas have lost momentum. They are very rare.

Another group are the so-called ‘opinion makers’. These do not actually ‘make’ anything, but have the power to focus public attention on a specific opinion rather than on others. These people are the actors of the Media. Their role is to increase the legitimacy of a subset of opinions, first by mentioning it, then by relaying it. In the general case, their audience already shares their subset of opinions. Very few people read a newspaper promoting adverse opinions. All they are looking for is a reinforcement of their established opinions, by the proper selection of appropriate facts and points of view. The more an opinion is reinforced, the better it spreads. Media backing such opinions get more following, and become more legitimate and influential.

The surge of the Internet did not entail any dramatic change until now. Assuming that the entire range of possible opinions is present on the web (a reasonable assumption), each of them remains almost invisible and diluted until some mass media directs public attention onto them. This can be done by non-digital media (a newspaper or a TV program mentioning an opinion expressed on the Internet, or adopting such opinion), or by digital media (e.g. major blogs). Self-organized buzz can in some cases spread virally, although none – to this date – have been able to become influential on a macroscopic scale without the leverage or traditional media.

In order to survive, traditional media need resources. Subscribers not being enough in most occurrences, advertising does the rest or does it all. In other words, any non-digital media is dependent on advertising. As advertising has also become the main source of revenues over the Internet (see previous post), the rule applies basically to all media of any kind.

Theoretically, advertisers on a perfect market are indifferent to the content of the support. They are supposed to advertise strictly according to the size of the audience. They don’t. They advertise only in ‘legitimate’ media, i.e. media relaying ‘legitimate’ ideas. Not only they are human beings, reluctant to help in any way people spreading dissenting ideas, but they are also aware that the ‘illegitimacy’ of the content can affect the image of whatever they have to sell. Even in the rare occasions where they accept a certain amount of scandal to draw more attention, things are kept within strict boundaries. For instance, Benetton ‘shocking’ marketing campaigns remained politically correct, until they had to be stopped altogether.

This means that media and therefore people working for them cannot afford emphasizing anything else than mainstream or innocuous ideas, unless they have a niche and motivated subscribers. Any opinion deemed to be illegitimate, no matter how sound or well documented it may be, is put aside or condemned. This includes original ideas, as well as views opposed to those of most people, or contrary to the interests of the advertisers.

Large corporations do not have to plot to impose their views. They don’t even have to plan it or think about it (although they of course can if need be). They simply have to advertise. Directly taking over the media is also an option, but not a necessary one. This is easily done, their opinions being usually of the mainstream kind or, more precisely, representing the subset of mainstream opinions the most compatible with their own interests.

The American people will soon elect the next President. Their choice will be limited however to candidates acknowledged as being legitimate by the media. May be a good group, may be not. Nothing can be done about it.

By the way, this post is a self-fulfilling prophecy.

This is how the world goes.

Nationalities in Europe: Confederacy or Commonwealth?

The European Union started as a future confederacy, all it has become is an intricate commonwealth. Both have their own advantage. It is however important to neither mix the two things up, nor consider them as mutually exclusive. A confederacy or confederation can emerge within a commonwealth and be a part of it. Conversely, not all members of the commonwealth wish to participate in a confederacy. Trying to reform the European commonwealth in order to turn it into a confederation would be a mistake, for members actively resisting such integration will always be found. The two entities are compatible as long as they remain separate.

The British (or should I rather say the English?) are experienced and comfortable with commonwealths. They reject the idea of a confederation, for a good reason among many. UK is the only country in Europe entirely made of clearly distinct nations placed under the domination of one, and odds are high that several of them would obtain quasi-independence as autonomous parts of a confederation. Scotland and Wales do not have the critical mass to be actual countries in the modern world, but could become direct participants in a confederation, severing more ties with England than what they have already been doing. The more diluted the European Union, the safer Westminster is. Italians, for symmetrical motives, are inclined towards a confederation: as none of their rival regions ever succeeds in dominating all others, more European integration can only reduce their persistent tensions, while preserving the concept of Italian unity. Belgium is placed in a similar situation, with none of the two provinces being able to takeover.

Some other countries in Europe also have serious problems with their nationalities, but these are minority problems of a different nature. Spain is the main one with Basques and Catalans, followed by Greece with the Turks in Cyprus. Hungarian minorities in Romania and Slovakia, or Corsican separatists in France do not have as much momentum and resolve. As Greece, Romania and Slovakia are most unlikely to be initial members of a European confederation, the only real question mark comes from Spain which, until now, has been demonstrating strong pro-European inclinations (while keeping a close eye on its historical ties with Latin America).

A commonwealth, in any case, doesn’t help solve such issues. Being indefinitely extensive, even the presence of Turkey in the current commonwealth is easily conceivable, whereas its presence in a European confederation would hardly make any sense. A confederation can only happen between countries willing to share at least the same currency, and common physical borders, a step already taken by many. They must also accept to form a joint constituency and elect a confederate administration endowed with actual (yet not exclusive) judiciary, diplomatic and military responsibilities. This does not look totally unrealistic if we consider at least the initial core countries of the EU, too strong to leave all their military decisions to NATO, too weak to act separately and by themselves on any significant scale. In agreement on most international issues, they also share more or less the same economic and social model.

European integration was put at a standstill by its extension to Central European nations. No matter the structure of institutions, there was no way so many actors could to be in agreement on all major policies, or could build anything else than a forced free market economy, opposed to the views an traditions of countries that had initiated EU. France was the first one to back off, vetoing by referendum the treaty of Nice. This does not mean that the confederal idea is dead. Having supported and ratified the so-called ‘mini-treaty’, which effectively ends the institutional deadlock, France has proven to be back in Europe. With his Mediterranean Union initiative, the French President is also trying to show that a loose commonwealth can be added to a tighter one, a concept Germany is reluctant to accept. Would a loose confederacy within a tight commonwealth be agreeable to both of them? That’s about all it would take to make it happen.

A small European confederation would inevitably become the dominant element in the large European commonwealth, an unpleasant prospect for some other members, but one they could do little to prevent, as any move towards unification can be made within the framework of the established system of “reinforced cooperation”.

As it is already hard to understand the past, I shall certainly refrain from predicting the future. All I can hope is that clarifying what EU has become, i.e. an over-administrated (and under-managed) commonwealth, may help find new and perhaps more reasonable solutions. Reasonable solutions are rarely the most probable, and yet may never be deemed impossible.

This is how the world goes.

Re-educating educators

The education system in France, which used to be among the best in the world, undergoes a deep crisis, for reasons of wider interest than the local problems encountered by this specific nation.

The most-cited causes are lack of public funding and rigidity of the unions. Lack of public funding is a relative notion, especially when the entire proceeds of the national income tax are devoted to education (€77 billion in 2007, equivalent to 28% of government spending, almost 6% of GDP, compared to about 5.5%. in the U.S.). Private funding is missing much more, as the total expenditure for all levels of education reaches 7.5% of GDP in the US against 6.4% in France, a spread that could not possibly be reduced by a further increase in public spending.

Improper diagnosis and subsequent mistreatment only add to the intricacies of any serious illness. What motivates teachers’ unions to oppose almost any reform is a combination of constant decline in relative income together with a severe degradation of their working conditions. Masses of students are now unfit to classical forms of education for which they show little or no respect at all. It should be said in their defence that the system was not designed for their current needs, leaving them with high levels of unemployment.

The key to these issues is that a small-scale production system was turned into a mass-production with no structural change. This would be true in almost any country. Shameless demagogy only made things worse in France. Politicians, who had received an ultra-elitist education, promised the baccalaureate to everyone (a target of 80% of each generation was proudly announced in 1985).Putting aside the pure and simple impossibility to do this by other means than devaluating diplomas, professional training at primary school level was abandoned, secondary education being put on the same track in the name of equality, while overcrowded universities were discreetly postponing the necessary selection until it was too late.

Before WWII, a university such as Sorbonne had a faculty of hardly a few dozens people and a few thousands students. Secondary school teachers were recruited among the best students, paid like superior army officers, and treated as notables. Most jobs were obtained after primary school. Faculties are now measured in thousands, upper education in millions, teachers are underpaid, students spend years unwillingly sitting in classes where they remain unprepared to the real world. Those of them who do not dream of becoming drug-dealers or civil servants struggle to obtain internships from corporations terrified by what they see as hordes of unreliable barbarians.

Well-off families spend fortunes in private lessons to help their children keep up with the most exclusive private or public schools which, in any case, eliminate all students not on a par with their statistics, leaving others with the prospects of always more assistance from their parents or of a shaky future.

Few students are good or bad in maths by themselves. Some are lucky to have had a good math teacher, while others were not. The same applies to most fields of knowledge. No country can produce tens of thousands of good maths teachers. It is even more difficult to train at once new teachers for new branches of education better corresponding to the actual marketplace: accounting, law, electronics, general problem solving, design, etc.

The goal therefore is not to have more teachers leading more students to upper education, but teachers better paid, preparing all students to citizenship and employment.

One way to do this is to include professional training at every level, instead of turning it into mockery and a dead-end for the least gifted. One doesn’t need to be a follower of Mao to understand the advantage of having been trained in several skills during one’s youth. Some notions of say carpentry learnt at primary school and of software development learnt at secondary school would not make a worse lawyer after he got his PhD. Conversely, the basics of citizenship (introduction to the legal system, tax returns, world history, etc) should be considered a must for everyone.

The other way is to switch from the archaic system of one teacher in his class, to fully interactive digital learning. Richard Feynman, a leading physicist of the 20^th century, was also a great pedagogue. He could have planted the seeds of science in to the mind of lemmings. Minds of such quality are scarce, and yet can be found in every generation. We can however leverage their talents by massive investments in the production of multimedia courses by people of this kind. Regular teachers should be retrained as coaches for the controlled and efficient use of digital lessons and related tests. A smaller number of more efficient teachers would select these courses as they used to do with manuals, customizing their usage for their various types of students. A large part of school time would be spent at multimedia libraries and workshops, requiring less physical supervision. Work could be seamlessly continued from home. Programs could easily evolve according to the economical or technological developments.

The goal is clear, the money is there. Will it happen soon enough?

You know how the world goes.

Intellectual Improperty (Part 3 – end)

In the same manner that new technology and market forces are undermining the role of copyrights in performing arts and related industries (see previous post), plastic arts (sculpture, painting, photography, etc.) are being forced to change directions and return to more traditional solutions.

Marcel Duchamp and Andy Warhol are landmarks of contemporary art which cannot be fully understood without their contributions. Although both were gifted artists under classical standards, showing great talent at creating individual and carefully crafted masterpieces, their fame came from their opposite stand that major art may come from minor displacements in our relationship to highly reproducible objects. Duchamp introduced ‘ready-mades’ and his famous ‘Fountain’ (a mere urinal) as a proof that industrial objects of minimal value can acquire an entirely new meaning when the very exhibition of art is used as an artistic tool. Warhol continued the demonstration with reproducible images of commodities, such as Campbell cans, Brillo boxes or icons of movie stars.

The irony was that while both artists were denouncing the fetishism traditionally associated with art, their own works became subjects of more veneration and more fetishism than anything before. Collectors started purchasing at prices never heard of and storing inside vaults objects which could have been obtained for a dime, and that a better understanding of the artists’ explicit intentions should have led to acquire preferably from supermarkets. The comedy was to reach a climax when Duchamp’s Fountain was hammered by a fan at the Beaubourg museum. During his trial the iconoclast explained that he agreed to pay for the repair, within the limits of what a decent plumber could ask for, as opposed to the half million requested by the museum as the actual cost of the restoration by experts trained in works from the Renaissance. He also claimed to be recognized as a co-contributor to the piece and a co-beneficiary to all related copyrights. Hilarious indeed and a good example of the paradoxes of copyright…

For a while photography was threatening sculpture and painting to become the major form of contemporary art. Serial art was reaching the same prices than unique pieces. Things have been recently calming down, and the specific quality of each singular copy is again considered as an essential factor of its economic value.

Absurdity, however, has not completely left the field of photography, as owners of rights to the objects that are being photographed are also granted rights to the picture itself. I am not talking of the legitimate right to privacy and control over one’s own image, but the strange idea that the mere image of material objects should be appropriated by someone. The city of Paris has a claim, for instance, on any picture taken of the Eiffel Tower. One could understand that smaller museums with limited funding would ask for a modest fee for using a camera within their premises. There is no justification, however, to limiting the passive reproduction of images of things already offered to public view, unless we adopt the metaphysical and rather primitive creed that the essence of things resides in their image.

In the distribution of digital copies of images of any kind, a part of the value comes from the service of distributing them, sometimes more than from the image itself. An image bank can draw revenues from gathering pictures, classifying them and making them available for downloading. The bank still has to pay for procurement, particularly when images are associated to trademarks, as trademarks imply contractual arrangements with their respective owners. A photographer’s trademark may or may not be important, only the market can decide. What is certain is that no one can contract on behalf of Leonardo when dealing with a picture of the Mona Lisa!

Protecting artists against unauthorized commercial use of their work does not mean preventing unlimited duplication for private use, nor the free secondary reproduction of images taken of any primary work.

Analogue is the situation of writers. In the case of journalism or screenplays, the work being created at someone else’s request for immediate release, a simple contractual arrangement is sufficient to generate payment. Such contract may very well include an override on future revenues. If the signature of the author has any residual value, then it can be treated as a trademark and protected as such for a while against infringements during secondary distribution. If on the contrary the market does not acknowledge any value to the trademark, i.e. if the text is completely dissociated from the author’s name when reproduced or used, such text has become a commodity, and I frankly would see no reason to grant it any privilege, compared to ideas or concepts. I feel sorry while writing this for one of my closest friends who specializes in remakes of foreign films. I simply hope he will see the advantage the recommended change could mean for the creation of films in general.

It is considered ignorance or bad taste to refer to a concept without mentioning the name of its first author, unless the reference is implicit or obvious. Nevertheless, it would not cross anybody’s mind to initiate lawsuits for payment of fees to Freud’s or Lenin’s heirs for use of their respective notions of the unconscious or the proletariat. Why then should we be fined for having bought a cheap copy of a Gucci © handbag, at least when the trademark is not used? Infringement of the trademark should be repressed (through sellers not buyers), as it can induce the consumer in error about the genuine quality of the object. In the absence of a trademark, however, the transaction bears on the idea of a Gucci © handbag, which is a totally different reality.

A world with no patent and copyright (and yet with trademarks) would be a better world, more logical and efficient. Creators would still create, and their creations would be used more. Trade would continue, based on services rendered and contractual arrangements. Lawyers and monopolies only would have something to lose. Who do you think will win, at least on the short term?

This is how the world goes ©.

Intellectual Improperty (Part 1)

The choice of words is a powerful weapon. For years Marxists were the great masters in this art, naming single-party dictatorships ‘Popular Democracies’, a cynical antiphrasis among many others. After enough harsh lessons, Conservatives have achieved equivalent mastery.

‘Intellectual property’ is one of these magical expressions which can trigger instant approval as soon as pronounced. Who can oppose ‘intellectual property’ but an idiot, an anarchist or a thief? Property is a universal right. The epithet ‘intellectual’ gives it full sanctity. Intellectual property, as it would seem, is the reward of genius and a key to human progress.

One might nevertheless wonder why it took so long for mankind to discover such obvious a concept, and why it does not apply to the most valuable products of the human mind. I am not referring only to Homer, Plato, Mozart or the inventor of the wheel, none of whom where protected by any kind of intellectual property; but also to Einstein whose ‘E=MC2’ was immediately appropriated by the world. Why is it that reproducing the last video clip of a rapper can lead you to jail, while one can freely use any major theorem even if discovered last month? What makes Mickey Mouse so important and so special that his very name and image still belongs to a single corporation after so many years, while no philosopher can retain the least control upon his own ideas?

From a legal standpoint, the confusing notion of ‘intellectual property’ (which remarkably belongs to no one) includes 3 main and somewhat unrelated components: trademarks, patents and copyrights. Trademarks are certainly a good invention. They play a role similar to measures. Measures have been controlled and guarantied by governments since markets started being in existence. As buyers can seldom verify by themselves the nature of what they intend to purchase, a public control of weights and measures remains an essential service. Verified trademarks carry important information on the quality of crafts. It is critical for instance to make sure that such or such pill contains the right molecule, something patients could never check by themselves. The manufacturer’s reputation being a strong indication in this respect, the presence of an appropriate trademark should not be overlooked. Even people involved in “piracy” over the web, insist on the value of their own informal trademark as a guaranty that their DVD ripping is state of the art.

Patents are a completely different animal. They inconsitently apply to certain sectors of the economy, not to others, with no better justification that old habits and vested interests. Manufacturing is much better protected by patents than any other area. Different countries choose to include extremely different types of inventions in the bizarre list of what may or may not be patented. Isn’t it quite irrational to allow the patenting of human genes (oh my!) on a continent and not on another? It makes little sense to protect a chemical process, not a financial invention.

This being said, the most important aspect of patents is the way they work: a patent does not allow someone to use an invention, it only excludes others from doing it. In other words, by their very structure, patents do not spread new knowledge but help slowing down its expansion. The main argument in their favour is that they are supposed to stimulate research and discovery by rewarding inventors. Inventors however are not the ones who are protected by patents but those who invest in their creations. Elizabeth Maggie was the inventor of the ‘Landlord’s game’ soon to be made famous, after minor modifications, under the name of Monopoly ©. Parker had bought her out for $500 and no royalty. Albert Fert, Nobel Prize in physics (2007) is responsible for an invention which changed the order of magnitude of data storage. He could easily have claimed a patent and become one of the richest men. His deliberate choice was not to delay the advantage for mankind of a discovery all of us are using today, rather than accumulating a wealth almost impossible to efficiently spend in charities.

Even if we consider investment in research, as opposed to inventors, as a valid object of protection, it remains to be seen whether or not patents are good at stimulating research, and whether or not the larger number of economic sectors in which patents play a minor role, have been less inventive or prosperous than the others. Finance and banking have been doing rather well (or at least did until ‘subprimes’ were invented!). They continuously bring to market highly sophisticated products, and the people who come up with these concepts for them are generally well paid. When traveler’s checks were introduced by American Express in 1891, the absence of patents did not impede success, this company having kept a leadership for over a century. Patented electronic traveler’s checks are hardly used by anyone. Pharmaceutical industries are patent-freaks, a feature which turns out to be counterproductive not for their revenues but for their discoveries: when was last time new antibiotics (a major need) appeared on the market? Not a convincing change from old times when universities and hospitals did the primary work in medical research, and when discoveries were almost immediately published and rarely patented. The cliché that patents are made necessary by the sky-rocketing costs of biomedical research rests on shaky grounds. Patenting is a partial cause of the increase, together with lobbying (and corruption in various countries). The associated secrecy is another one, making evaluation and clinical trials such an inefficient process that in the U.S. only public funding (through the National Institutes of Health, not to mention other public sources) has had to be raised to almost $30 billion a year.

I personally would be inclined to get rid of all patents altogether; not for the sake of an ideology but for a better release innovation in the economy, and a faster cross-seeding of ideas. The most inventive corporations would still retain a decisive advantage under the form of acquired market-shares, experience and know-how.

(to be continued)

 

 

Whatever happened to Democracy?

When considering democracy it’s always a good thing to remember the Greeks, at least to measure how different we are from them. Their notion of democracy was twofold. In the strictest sense, it meant direct government by the people, a regime strongly disapproved by all ancient philosophers (in fact, probably the only thing they would unanimously agree upon). No matter how attached we are to the word of democracy, most of us partake in the old consensus. We prefer elections to direct government which is now limited to juries and referendums of minor scope. The reason direct government is disliked are basically the same than they were before: masses are prone to hysteria, lynching and mass murder, as we were reminded in our lifetime by Red Guards and by Red Khmers. Although, according to their very definition, elections produce elites, our oligarchies (government by the few) are placed under the control of the popular vote. This is the essence of the so called “mixed regime” that the very wise Aristotle always recommended.

The second sense of democracy, and the most important, is equality before the law, a concept that Greeks called “isonomy”. The presence or absence of isonomy is much more critical than any other aspect for the evaluation of a regime. The constitutional form of government (presidential or not, republican or not, federalist or not) is a mere technicality compared to it. We are (really) equals before the law or we are not, courts (efficiently) protect the weak from the strong and the individual from the State or do not. That is the question, or at least the main one.

There was a short period of time when the Western world could claim a clear superiority in both its “isonomy” and its technology. Is it still the case today and, if it is, for how long? Recent trends hardly allow any optimistic prognosis. The judicial system, the very key to actual “isonomy”, is turning mad. The Ancients used to say “too much law kill the law”, and they were right. We have too many laws, almost impossible to understand and enforce. One should add “too many legal fees give it the final blow”. Where is justice when you may have to spend more to obtain justice than what you can expect from it? Where is it when defenders can buy their peace out? As if all this was not threatening enough, governments can now escape the most basic constraints; in such a way that the more we fear our enemies the less protected we are from our own protectors. Privacy is no longer a reasonable claim, when even your turned off cell phone can be used as a microphone against you by the authorities. Waterboarding as a regular technique of government is the last symbol of what habeas corpus has become.

In theory, public opinion could react and citizens could demand a return to more respect. But how is public opinion now formed? This question needs to be discussed in another sad post.

This is unfortunately how the world goes.