From the Washington Times, October 19, 2007, p. 15: "KABUL The top U.S. general in Afghanistan said yesterday he estimated that Afghanistan’s rampant opium poppy cultivation was funding up to 40 percent of the Taliban-led insurgency. Gen. Dan McNeill, head of the NATO-led International Security Assistance Force, added he had been told by an international specialist that his figure was likely low and could reach up to 60 percent..." Nuff said.
Two crucial inputs into Pillar 1 (Minimum Capital Requirements) of the proposed Basel II Framework for the International Convergence of Capital Measurement and Capital Standards have, if not gone belly-up, at least been severely compromised by the recent financial markets turmoil. They are the reliance on credit ratings provided by the internationally recognised rating agencies (currently Moody’s, Standard & Poor’s and Fitch) and the crucial role assigned to internal models in everything from stress-testing to marking-to-model illiquid assets.
It is clear that, as regard rating complex structured products, the three internationally recognised rating agencies have done a terrible job. That is in part because rating complex structured products is very difficult. There is more to the ratings performance however. There appears to be a systematic bias in the ratings. If rating were merely difficult, you would expect as many over-ratings as under-ratings. What we see instead, is a persistent bias: ratings seem to systematically over-estimate the creditworthiness of the rated instrument or structure. The reason for this must be the distorted incentive structure faced by the rating agencies. They are inherently and deeply conflicted.
I am not asserting that the rating process of complex financial instrument is unavoidably utterly corrupt and useless, although some of it probably is. Clearly, reputational considerations mitigate the conflict of interest faced by the rating agencies. The rating agencies have, for a long time, done a passable job of rating sovereign debt instruments and corporate entities. However, the principal-agent chain linking an individual or team working for some rating agency to the buyer of the security they rate is lengthy and opaque. The bottom line is that no-one any longer trusts the rating agencies’ judgement of the creditworthiness of complex structured instruments. That puts a huge hole in Pillar 1.
The recent financial turmoil has led to a demystification of quants and other high-tech builders and maintainers of mathematical-statistical models and algorithms. We have had a powerful reminder of the ‘garbage in – garbage out’ theorem. On many occasions marking to model has turned out to be marking-to-make belief or marking-to-myth. Wishful thinking dressed up in advanced mathematics remains wishful thinking. The incentives faced by the designers, maintainers and users of these models, and of those who calibrate their inputs have not been taken into account. Again conflict of interest is pervasive and inescapable.
With so many illiquid, non-traded instruments on their books (and in off-balance-sheet vehicles that may have to be brought on balance sheet again soon), many banks are confronted with the fact that ‘fair value’, when it cannot be measured objectively by a market price, is unlikely to be calculated fairly by techie employees of the bank whose activities are not understood by the bank’s risk managers or top management, and whose pay and prospects depend in a pretty obvious way on the numbers their models crank out. Again reputational considerations will mitigate the incentive to distort, but will not eliminate it. Turnover of quants, risk-managers and even top managers is so high that the restraining influence of reputational concerns is often weak at best.
What is Pillar 1 of Basel II without reliable and trusted rating agencies and without reliable and trusted methods for marking to model the illiquid assets of the banks? Not something I would use as a rule book for capital measurement and capital standards for banks. So whither now with
As regards internal models and marking-to-model, I can see no way the cripling conflict of interest can ever be resolved for anything other than the simplest structured products - those for which even the CEO can understand the principles underlying the model and the numbers going in and coming out. This would mean that banks would not be allowed to hold on their balance sheets, or to be exposed to through off-balance sheet connections, complex structures whose valuation cannot be verified easily by third parties. This is tough and will be unpopular with the industry, but necessary for financial stability.
In any case, if a financial product is too complex for its valuation to be understood by the average Joe, it probably contributes negative marginal social value. Such complex products tend to be motivated by regulatory avoidance and tax avoidance considerations, and should be discouraged by regulatory design. True risk trading and risk sharing require simple, transparent instruments, designed for specific contingencies (states of nature), rather like elementary Arrow-Debreu securities. They don’t require convoluted bundles of heterogeneous opaque contingent claims.
The United Nations Office on Drugs and Crime (UNODC) has published a new report on poppy cultivation and opium production in
The report also contains some some ludicrous assertions and cockamamie analysis, which one suspects was dropped on the authors of the report from on high. This suspicion is strengthened by the singularly loopy statements at the launch of the document and in its Introduction by Antonio Maria Costa, Executive Director of the UNODC (and my former colleague on the Executive Committee of the European Bank for Reconstruction and Development). Mr. Costa is one of those bureaucrats for whom the conventional scientific modes of proof - proof by deduction and proof by induction - take second place to a third mode of proof (not yet recognised as fully legitimate in scholarly discourse - proof by repeated assertion.
Even someone widely acknowledged as not the sharpest arrow in the quiver should have caught the manifest absurdity of the characterisation, in his own Introduction to the Survey, of opium as "... the world’s deadliest drug...". As regards deadliness, opium and its derivatives isn't a patch on tobacco and alcohol.
Mr. Costa’s most accurate reported statement is "The Afghan opium situation looks grim, but it is not yet hopeless,"; this statement is half right: the Afghan opium situation is both grim and hopeless. He goes on to say: "Where anti-government forces reign, poppies flourish," a correct statement of the observed statistical association between poppy production and the degree of Taliban control in Afghanistan since Taliban’s de-facto rule over the country was ended by the US-led Allied troops almost six years ago.
As a (former) social scientist, Mr. Costa must be aware of the pitfalls associated with the causal interpretation of a statistical association between two phenomena, A and B, say. The statistical association could mean that A causes B, that B causes A, that A and B are interdependent, or that some third factor (or set of phenomena), C, say, is driving (causes) both A and B, without either A influencing B or B influencing A – the ‘common third factor’ interpretation.[1]
Mr. Costa, however, has no doubt; as far as he is concerned, Taliban control of an area causes poppy cultivation to expand in that area. The fact that when the Taliban controlled all of the country, poppy cultivation was almost wiped out, is conveniently forgotten. The Report’s policy recommendation that tackling the Taliban insurgency is key to stemming opium cultivation misses the point completely. Key to tackling the Taliban insurgency is the legalisation of the production, sale and consumption of poppy and its currently illegal derivatives, opium and heroin. This will deprive the Taliban both of political support from farmers who see their livelihoods destroyed or threatened by the Allies’ eradication efforts, and of a ready-made tax and extortion base.
Let me expand slightly: there is indeed a third ‘common (set of) factor(s)’ at work here: the main one is the fact that poppy cultivation and the production, sale and consumption of poppy derivatives such as opium and heroine are illegal almost everywhere.
The case for legalising currently illegal drugs like opium, heroin, cocaine, and various cannabis derivatives can be made on both utilitarian and libertarian grounds. The utilitarian case has recently been effectively restated by Ethan Nadelmann, in the September/October issue of Foreign Policy. The website of the Drug Policy Alliance, of which Mr. Nadelmann is founder and Executive Director, contains useful statistics, arguments, and information about drug policies worldwide. The resurgence of the odious Taliban in
[1] There could also be a common third factor, C, as well as interdependence between A and B.
© Willem H. Buiter 2007
Two news bulletins from the Low Countries:
First, Ehsan Jami, a Dutch local authority councilor for the Labour party, of Iranian origin, announced a few months ago that he was creating a Committee for Ex-Muslims. Since then has been beaten up by islamist thugs and has received dozens of threatening phone calls. His life has been threatened, Islamic prayers have been screamed down his phone line as well as many an 'Allahu Akbar.'
Second, Geert Wilders, Chair of the Dutch party PVV (Partij voor de Vrijheid - Party for Liberty) wants to have the Quran banned in the Netherlands. His reasons are that the Quran calls for the death of those guilty of apostasy, blasphemy, homosexuality and pre-marital or extra-marital sex, condones slavery, supports the subordination of women, and asserts the superiority of Islam over any other religion and accordingly assigns greater rights to Muslims than to non-Muslims.
There are times that losing my Dutch passport because I voluntarily took on another nationality is distinctly less bothersome. The day I read these two news items was one of those days.
Mr Wilders and the thugs that beat up and persecute Ehsan Jami deserve each other. It is clearly of the utmost importance that those who treasury liberty and an open society be aware of just what they are up against when confronted with Islamic fundamentalism and islamist fanatics.Apostasy in Islam (the rejection of Islam in word or deed by a person who has been a Muslim) is, according to Sharia law, punishable by death. All five major schools of Islamic jurisprudence agree that a sane male apostate must be executed. The fatwahs targeting Salman Rushdie were therefore fully consistent with the prevailing interpretations of Sharia law. A female apostate should be put to death, according to some schools, or imprisoned, according to others. Whether this contrasting treatment of the female and the male is good news or bad news, I leave as an exercise for the reader. (For that matter, proseletyzing targeted at Muslims is likewise forbidden by Sharia law; punishments vary according to the legal and cultural traditions but can include death for the would-be missionaries.)
Blasphemy, according to Sharia law, is also punishable by death or exile: "... execution, or crucifixion, or the cutting off of hands and feet from opposite sides, or exile from the land: that is their disgrace in this world, and a heavy punishment is theirs in the Hereafter;”[Surah Al-Maidah 5:33]). The assassination of the Dutch cineast Theo van Gogh by an islamist fanatic was justfified on the grounds of van Gogh's blasphemous work, including his film Submission.
The Islamic view of apostasy is clearly incompatible with western views of human rights and religious freedom. No compromise is possible. People must have the right to change their religion as often as they change their underwear. To observe any religion or none is a fundamental human right. End of story.
Blasphemy laws still survive in various forms in some western countries, although the penalties fall short of what Sharia law demands. All blasphemy laws should be relegated to the scrap heap of history, together with any lèse majesté laws that may survive.
Homosexuality is a sin according to Islam; according to fundamentalist Islam, it is punishable by death. Extra-marital and pre-marital sex can be punishable by imprisonment, corporal punishment or death. This intolerant barbarism is not acceptable and must be fought. Of course, the same intolerant views can be found in the Christian bible and in the Hebrew Scriptures.
It is true that the Quran condones slavery and supports and mandates the subordination of women. So do the Bible and the Hebrew Scriptures. A very clear statement of the common roots of female subordination in Judaism, Christianity and Islam by the Egyptian feminist Dr. Nawal Saadawi (1990) : "the most restrictive elements towards women can be found first in Judaism in the Old Testament then in Christianity and then in the Quran",..., "all religions are patriarchal because they stem from patriarchal societies" and "veiling of women is not a specifically Islamic practice but an ancient cultural heritage with analogies in sister religions".
It is not the Quran, or the Bible or the Hebrew Scriptures that are dangerous and should be banned. The danger comes from a fundamentalist, literalist reading of selected passages of these bewildering, complex and contradictory writings. Most modern Christians and Jews (and many modern Muslims) recognise that the time and place of their holy books' creation deeply influenced, constrained and at times distorted the manner in which these books' authors or chroniclers expressed themselves. The message needs to be constantly adapted and adjusted to remain relevant to changing times and circumstances, and indeed to remain true. Believers also tend to subscribe to the view that there is a deep core of the divine message that is unvarying - permanent. But that essence need not even be expressed in any of the exact words or phrases found in the holy books.
Fundamentalism is a curse, no matter which religion it infects. Fortunately, Christian fundamentalism and Judaic fundamentalism are less of a political force today than they used to be in days gone by. They are not completely irrelevant, unfortunately. Christian fundamentalism has poisoned the Republican Party in the US and polarised US political life at home and abroad since the days of Reagan. Jewish fundamentalism has a destructive influence quite disproportionate to its small numbers in the state of Israel.
No doubt Islam will evolve, given enough time, towards a less fundamentalist interpretation of the faith and its core writings - the Quran and the Hadith. God gave the same brains to Muslims, Christians and Jews; it just so happened that Islam emerged more than six centuries after Christianity and some 29 centuries after Judaism; one might therefore expect Islam to still need a few more centuries to work out some of the teething problems of becoming a religion fit for an emancipated, educated humanity. Actually, six centuries ago, Christianity was in its Ferdinand and Isabella phase - something much closer in spirit, practice and level of violence to the role of religion held by today's islamist fanatics, and inferior in most ways to the enlightened Islam of El Andalus and the Ottoman Empire. The scientific, scholarly, indeed secular approach to sacred texts like the Quran was pioneered in the 12th century by the great Arab philosopher - physician - mathematician - scientist Ibn Rushd, known as Averroes. It's been a long road downhill from Ibn Rushd, and even today it is hard to see the shoots of an intellectual, cultural and enlightened religious revival in the Islamic world. The struggle against fanaticism, intolerance, fear, hate, the worship of suicide, the glorification of mass-murder and the underlying cult of nihilism, death and destruction has only just begun. I doubt even my teenage children will live to see the end of it, even if they achieve their Biblical entitlement of three score and ten. But banning the Quran? What a stupid, destructive, trust-destroying publicity stunt to even suggest it. Why not ban the Bible as well. And the Gita. And Harry Potter.The semi-quote above is from Brzezinski
Brzezinski illustrates the shift in dominance between the power to control and the power to destroy y contrasting the current state of affairs with that of
Not only has the power of the state to control become less than its power to destroy, the power to destroy has been privatized, dispersed and democratised to an astonishing extent. Anyone with high-school-level command of chemistry and a mobile phone can put together a remotely controlled explosive device of enormous destructive power using ingredients that can be bought off the shelf in everyday shopping centres. If you are a suicidal maniac as well as a mass murderer, you don
I don’t yet foresee the day that, threatened with the destruction of London, by Al Queda, the Taleban or some North African Salafist outfit, the British government will order all British men to grow beards and all British women to wear burquas (or indeed all British women to grow beards as well), but who knows? Following the threats and attempted intimidation by the Minister for Parliamentary Affairs of Pakistan, Sher Afgan Khan Niazi, assorted high-level Iranian clerics, Al Queda’s number two, Ayman al-Zawahiri and many other odious personages and bodies in response to Salman Rushdie’s Knighthood, I don’t anticipate a peerage for Rushdie any time soon, even if he were to write half a dozen more Nobel-calibre novels.
Another bomb scare in London My first recollection of bombs going off in London goes back to the early/mid 1970s. After graduating from Cambridge in the spring of 1971, I often visited friends in the West End - Marylebone Mews, I believe. While staying there one day, I heard some loud bangs - sounds I now recognise as explosions. The IRA had detonated one of its explosive devices at the Selfridges Department store in nearby Oxford Street. In the years following, a performance I attended at Sadler's Wells Theatre was evacuated because of a bomb scare (false alarm), I had to leave a barber shop with half a hair cut, and people (including yours truly) got their knickers twisted in the Tube on a number of occasions because some nitwit had left a shopping bag behind. In 1997, I moved into the Canary Wharf area, first just to the north and later to the southern tip of the Isle of Dogs. Each working day, the Docklands Light Railway passed South Quay, where the IRA had set of a deadly explosion in 1996. Since then, of course, we have had the murderous post-9/11 attacks on London by Al-Quaeda-inspired British Muslim fanatics, the subsequent failed attacks on the underground system and today the two (so far) failed car bombs in the West End. You don't get used to these outrages. With each attempt to terrorise us by maiming and killing the innocent, seemingly at random, I get more angry and determined not to let the bastards that want to destroy my city and my way of life and who endanger the life and well-being of my loved ones, have their way. I don't care whether the perpetrators feel deeply aggrieved by what Bush/Blair/the US/the UK/the West/Christendom/the Crusaders and the Great or Little Satans may or may not have done to them and to the causes, beliefs and things they hold sacred. Sincerity and deeply held beliefs can explain actions, but do not justify them. No doubt Hitler was a sincere Nazi, Attila a sincere Hun and Idi Amin a sincere psychopath. Tout comprendre n'est past tout pardonner. There is no justification for the actions of these murderers and suicide cultists. The human excrement that perpetrate these crimes against God and humanity must be hunted down and locked up or killed. I admit that my occasional day dream, which involves tying the murderers/suicide cultists to their own explosive devices, and blowing them up one small piece at a time, is unworthy and does not express the teachings of the faith I would like to believe in. But I do not apologise for the righteous anger that prompts such musings, and I become even more determined that these emissaries of evil shall never prevail.
