Comments on "Why does intelligence analysis sometimes fail?" (Science Daily)

Comments on "Why does intelligence analysis sometimes fail?" (Science Daily)

1  There are several things that are objectionable about this Science Daily piece [1] and other jobs...

First of all, the author seems not to have read the article in full. It says that Wirtz "focuses in particular on the contribution of the scholar Robert Jervis," as if this happened by no special reason.

Not so, Wirtz's article [2] is, as said in the acknowledgements, a contribution to a book [3] __in honor__ of R Jervis:

This article was previously published in a collection of essays in honor of Robert Jervis.

And second, it loads too much the conclusions. Science Daily's writer says that "The way to reduce failures Jervis believed [...] was to improve agents' analytical skills rather than endlessly reorganising the bureaucracy."

Wirt'z essay says that "Jervis focuses on analytic tradecraft, not bureaucratic reorganization, as the best way to improve intelligence. In that sense, he agrees with intelligence analysts, who often identify the quest for better tradecraft as the best guarantee against intelligence failure," which is a bit different of that statement by SD's writer. Maybe Jervis believed what SD published, but Wirtz goes not so far, he only says that Jervis focuses on analysis improvements.

To me, it is not in Wirt'z paper that Jervis is in some way against all reorganizations after intel failures or that he was skeptical of reorganization, generally speaking, as SD suggests with "rather than endlessly." Maybe both things, reorganization and analytic improvements, are needed in many occasions: First, make heads roll and dissolve some directorates or units after intel failures, and second, improve the craft.


2  Going now to Wirtz's job, maybe Jervis did focus "on analytic tradecraft, not bureaucratic reorganization, as the best way to improve intelligence" [2] because, one, he wasn't a manager and didn't have to focus in reorganizations, and was not contracted to give opinions of that field of reorganization, but in the one of analytic craft; and two, because he "is best known for his scholarship on international relations; especially the way human cognition shapes foreign and defence policies". [1] As Jervis said, as described in the presentation of his book, [4] "Give someone a hammer, everything is a nail."

This is applicable to Prof Jervis, isn't it? Like to everyone of us.


3  More generally, many scholars and professionals think like Prof Jervis: "In light of these critical intelligence failures, Jervis says, “We can do better.”" [4]

I doubt we can. And not only me. Jeffrey Cooper suggests, in a work he did for the CIA, [5] several, many ways to improve the analyst's job, but after those, he reminds us of Kahneman's suggestion of using methodologists in the teams to watch over the analysts' work, to prevent our falling in some trap of our sad, human nature, which is a way of saying there is no training or changes in our way of thinking/working that can compensate for our analytical pathologies:

Finally, the introduction of a "process watcher," as suggested by Kahneman, is intended to bring a clear and unbiased, outside expert’s eye to analytic teams. The process watcher function, unlike that of a Red Team, is intended to focus exclusively on identifying errors in the analytic process, not on alternative interpretations of the evidence or different logic chains.

Also, I infer from this recommendation that our bosses and organizations are also let's say less than capable of guaranteeing quality for the taxpayer's bucks.

Aside of the need of experts not in the contents, but in the methods, since we are not capable of working/reasoning/computing well [6 and references therein], can anyone compute the costs of adding to the intelligence units more personnel to improve the quality of our analysis?



References

[1]  Why does intelligence analysis sometimes fail?. ScienceDaily. Retrieved July 28, 2013, from http://www.sciencedaily.com­ /releases/2013/07/130723073955.htm?goback=%2Egde_2216219_member_260803925

[2]  James J. Wirtz. The Art of the Intelligence Autopsy. Intelligence and National Security, Mar 2013; DOI: 10.1080/02684527.2012.748371

[3]  James W. Davis (ed.), Psychology, Strategy and Conflict: Perceptions of Insecurity in International Relations (Oxford: Routledge 2012).

[4] Saltzman Lecture Report. Why Intelligence Fails: Lessons from the Iranian Revolution and the Iraq War New York, New York – March 9, 2010. Retrieved July 28, 2013, from http://www.siwps.com/events/professor-robert-jervis-why-intelligence-fails.attachment/jervis/Jervis%203-9-10.pdf

[5]  Jeffrey R Cooper: Curing Analytic Pathologies - Pathways to Improved Intelligence Analysis. Langley, VA: CIA, December 2005

[6]  Biased Policy Professionals. Sheheryar Banuri, Stefan Dercon, and Varun Gauri. World Bank Policy Research Working Paper 8113. https://www.bipartisanalliance.com/2017/08/biased-policy-professionals-world-bank.html

Liquidity coverage ratio disclosure standards - consultative document

Liquidity coverage ratio disclosure standards - consultative document
BCBS, July 19, 2013
http://www.bis.org/publ/bcbs259.htm

The Basel Committee on Banking Supervision has today issued for consultation Liquidity coverage ratio disclosure standards.

Following the publication of the LCR standard in January 2013, the Basel Committee indicated its intention to develop associated disclosure standards. Public disclosure improves transparency, reduces uncertainty in the markets and strengthens market discipline. To promote the benefits of disclosure the Committee believes that it is important that banks adopt a common disclosure framework to help market participants consistently assess the liquidity risk position of banks. Moreover, to promote consistency and ease of use of disclosures related to the LCR, the Basel Committee has agreed that internationally-active banks across Basel member jurisdictions will be required to publish their LCR according to a common template.

In designing the disclosure standards for the LCR, the Basel Committee has balanced the benefits of promoting market discipline against the challenges associated with disclosure of liquidity positions under certain circumstances, including the potential for undesirable dynamics during periods of stress.

Bank Resolution Costs, Depositor Preference, and Asset Encumbrance

Bank Resolution Costs, Depositor Preference, and Asset Encumbrance. By Daniel C. Hardy
IMF Working Paper No. 13/172
July 18, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40799.0

Summary: Depositor preference and collateralization of borrowing may reduce the cost of settling the conflicts among creditors that arises in case of resolution or bankruptcy. This net benefit, which may be capitalized into the value of the bank rather than affect creditors’ expected returns, should result in lower overall funding costs and thus a lower probability of distress despite increasing encumbrance of the bank’s balance sheet. The benefit is maximized when resolution is initiated early enough for preferred depositors to remain fully protected.


Conclusions and next steps (edited)


Bank resolution, like bankruptcy and debt restructuring generally, inherently involves a great deal of negotiation and uncertainty; these are situations in which contracts are far from complete. Experience from many sectors, most notably the financial sector, suggest that the attendant conflicts among claimants can add substantially to costs and delays in resolution.

The prospective costs attached to such conflicts, which should depend on the magnitude of residual assets, can influence the optimal composition and conditions of financing, and, in particular, motivate the introduction of provisions that make some claims “bankruptcy remote.” Bankruptcy remoteness can be achieved through statute and policy, as when depositors enjoy preferred status as a matter of law, or through private agreements, as when banks issue covered bonds backed by a pool of high-quality assets. The asset encumbrance that results from either mechanism can be desirable insofar as it reduces bankruptcy costs, and, through lower overall funding costs, lowers the probability of distress. This substantive effect from the composition of financing is not due to asymmetric information or related mechanisms, but to the gain from containing conflict resolution costs.

In the first instance, the gain should be capitalized into the value of the bank, which enjoys an overall reduction in funding costs. The extension of preferred status to some creditors (including a DGS) need not make them better off. Nor need non-secured borrowers be disadvantaged in expectational terms: they earn more when the bank survives but bear larger net losses in case of resolution (though they spend less contending for their claims). Granting preferred status to (some) depositors need not provoke increased collateralization of other credits: from the point of view of the borrowing bank, collateralization and statutory depositor preference are near substitutes, with the difference that collateralization can be increased at the bank’s initiative, albeit at an increasing marginal cost. However, the achievement of full benefits and their distribution will depend on pricing being risk-sensitive; the probability of distress might not be reduced if those that benefit from collateralization demand an interest rate that ignores the reduction in LGD that collateralization should achieve.

For these measures to be valuable, a high degree of legal certainty of their implementation must be achieved, and it is important that the resolution process starts when the borrowing bank still has enough residual assets that preferred or collateralized claims can be met. If, ex post, these conditions are not met, conflict may be intensified. Hence, bank stability might be enhanced by limiting total asset encumbrance (preferred deposits plus collateralized borrowing) to below the likely minimum level of residual assets. Authorities that are willing and able to take early corrective action, and therefore rarely have to deal with banks left with scant residual assets, can be more sanguine about asset encumbrance.

The analysis presented here lead on to other questions of practical relevance, which may be addressed in further research using an extension of the framework. Some of these questions include the following:

• What systematic evidence might be examined to determine whether and how bankruptcy costs depend on the intensity of conflict over residual assets? Some anecdotal evidence indicates that bankruptcy proceedings and bank resolutions are characterized by intensive lobbying in various forms, which considerably inflate the costs to all concerned. There is also some statistical evidence that bankruptcy costs and delays are related to the complexity of the affected corporation, and complexity is plausibly connected to the number of interest groups and thus expenditure on lobbying. But it would be worthwhile to investigate also who bears costs and receives benefits ex ante, as measured, for example, by the reaction of market prices to relevant regulatory innovations.

• Why is information on bank asset encumbrance not more readily available? Appropriate pricing of both collateralized and non-collateralized borrowing depends on making good estimates of probability of failure and of loss given default facing different creditors, and thus of the degree of outstanding asset encumbrance. Yet it is difficult to obtain current or detailed, bank-by-bank information: one may use published accounts to quantify a bank’s deposit base—if deposits enjoy preferential status—and the volume of covered bonds that it has issued, but typically one cannot know the volume of assets pledged in the interbank market, to the central bank, in liquidity swap and derivative deals, etc. Presumably a bank in a weak position is afraid to reveal that fact and face a “squeeze” on its position. However, there seem to be incentives for strong banks to disclose information, and thus to force others to reveal more. To some extent this occurs: many banks repaid as early as possible financing from the ECB’s Long-Term Refinancing Operation, presumably to demonstrate their strength. If banks do not volunteer much information on encumbrance, there could be grounds for imposing greater transparency through regulation, but national authorities have traditionally reserved the right to provide central bank refinancing on a confidential basis. [The European Systemic Risk Board recently issued recommendations to enhance prudential oversight of asset encumbrance and related market transparency, but explicitly prohibits the revelation of data on assets encumbered to central banks (see "Recommendations of European Systemic Risk Board of 20 December 2012 on funding of credit institutions" (ESRB/2012/2), available at http://www.esrb.europa.eu/pub/pdf/recommendations/2012/ESRB_2011_2.en.pdf?e622821b9c3171124f1d85f3a1b4d40e ).]

• What are the implications for funding behavior and stability of heterogeneity among creditors in their litigating/lobbying ability and incentives? Welch (1997) has initiated a discussion of the question, with a focus on a non-financial corporate facing a dominant bank creditor, but the situation of banks, with many retail and wholesale counterparties, may be rather different. The interests of those most effective in lobbying may not coincide with those of society or the prudential regulator. One advantage of depositor preference is that it protects the interests of a large number of creditors with a substantial portion of claims for whom, however, it is individually relatively expensive to defend those claims in case of resolution; the weak atomistic depositors are molded into one dominant creditor. In this connection, differences in lobbying ability could account for aspects of market segmentation: those with low costs might specialize in the holding of certain instruments, and those with high costs (or funding constraints) might want to concentrate on holding secured, bankruptcy-remote assets.

• In what ways would statutory bail-in of unsecured creditors be symmetric to the granting depositors preferred status, and in what ways would contingent capital (“CoCos”) be symmetric to collateralized credit?

The framework would need to be extended to analyze how different forms of asset encumbrance might affect bank liquidity risk, taking into account the availability of other liquidity buffers and interaction with solvency risk. Indeed, liquidity and solvency risk are deeply connected, especially for banks. Furthermore, illiquidity, like bankruptcy, is “a situation in which existing claims are inconsistent,” and so suited to an analysis based on costly resolution of conflict, rather than the application of predetermined rules and contracts. In all cases, one category of claimant is assigned a special status in case of bankruptcy or resolution—some are assigned an especially weak position, others an especially strong one. The incentives for, and ability of the different claimants to lobby for larger compensation is therefore affected. For example, those clearly subject to a statutory bail-in would not devote resources to contesting claims with those in a clearly superior position, and thus bankruptcy costs could be reduced. Holders of bail-in-able securities or CoCos would presumably demand higher yields to compensate for this risk, which in itself may increase risk of distress, but there could be some net benefit.

Conspiracy Theories Permeate Pakistani Society

Pakistan Taliban Lambastes Schoolgirl for U.N. Speech. By Saeed Shah
Anti-Western View Shown in Verbal Attack Permeates Pakistani Society
The Wall Street Journal, July 18, 2013, on page A7
For full article: http://online.wsj.com/article/SB10001424127887323309404578612173917367976.html

ISLAMABAD—Malala Yousafzai, a teenage campaigner for girls' education who was nearly killed by Pakistani militants, was feted at the United Nations last week. Here at home, however, she has been widely portrayed as part of a Western conspiracy against Islam and the developing world.

A 1,800-word open letter in imperfect English by Adnan Rasheed, one of the most feared Taliban leaders in Pakistan, outlined these conspiracy theories Wednesday, describing the type of secular education that Ms. Yousafzai championed as "satanic" and arguing that the U.N. wanted to "enslave the world."

Even as the 16-year-old girl is celebrated abroad as a hero, such radical views are becoming mainstream in Pakistani society, where even commentators hostile to the Taliban widely portray Ms. Yousafzai as a pawn of the West or even a CIA agent.

While Pakistanis usually condemn the violence of the Taliban, the paranoid worldview of the group has soaked deep into society, making the fight against extremism much more difficult. Many in the country, for example, still refuse to believe that Osama bin Laden was found living here in 2011.

"Public opinion is confused about the Malala issue. Many people hate Malala," said Zubair Torwali, a newspaper columnist from her home valley of Swat. "Anything here in Pakistan related to the West or America becomes a thing of conspiracy. The Taliban's ideology is flourishing in Pakistan. It is victorious."

Pakistani society is also influenced by the support that the military has long given to jihadist groups. More recently, the backlash over nearly a decade of U.S. drone strikes, and over the unilateral American raid to kill bin Laden deep inside Pakistan, has created a virulently anti-Western culture that sees spies everywhere.

Ms. Yousafzai narrowly survived an assassination attempt by the Pakistani Taliban in October last year, when she was shot in the head from point-blank range.

When aged just 11, Ms. Yousafzai became a powerful voice against the Taliban through a diary she kept of the extremists' takeover of Swat Valley, in northwest Pakistan. The diary was broadcast by BBC radio in 2009. Following the shooting in Swat, she was airlifted for treatment in England, where she now lives with her family.

Ms. Yousafzai, brought to the U.N. headquarters in New York to mark her 16th birthday, said in a speech Friday that "extremists are afraid of books and pens."

Mr. Rasheed's open letter to Ms. Yousafzai was the first reaction to these remarks by the Taliban leadership.

Mr. Rasheed began the letter by saying that he wishes that the attack on her had "never happened." Then, however, he went on to justify it with detailed arguments, showing, if there were any doubt, the dangers that Ms. Yousafzai would face if she returned home.

"Taliban believe that you were intentionally writing against them and running a smearing campaign to malign their efforts to establish Islamic system in Swat and your writings were provocative," he wrote.

Mr. Rasheed denied that the Taliban were against education—though he went on to spell out the movement's opposition to the "satanic or secular curriculum," which is a "conspiracy of tiny elite who want to enslave the whole humanity for their evil agendas in the name of new world order."

He advised Ms. Yousafzai to return to Pakistan and enroll in a madrassah, or Islamic seminary.

"Your propaganda was the issue and what you are doing now, you are using your tongue on the behest of the others and you must know that if the pen is mightier than the sword then tongue is sharper…In the wars tongue is more destructive than any weapon," the letter said.

When the shooting happened, there was an unprecedented outpouring of public sympathy for Ms. Yousafzai, and anger against the Taliban, inside Pakistan.

However, since then, opinion has hardened against the girl. Last week, on the local Pakistani language versions of the BBC website, in the national language Urdu and the Pashto spoken in her native Swat, the majority of comments were venomously against the schoolgirl. Some even described her as a "prostitute."

Detractors seized on the assistance and attention Ms. Yousafzai received from Western governments and media after the attack. Her appearance at the United Nations seemed to confirm the view that she was somehow working on a Western agenda.

Even Shahbaz Sharif, chief minister of the largest Punjab province and brother of Prime Minister Nawaz Sharif, issued an oblique criticism of Ms. Yousafzai's speech, posting on his Twitter account that it "seemed to be written for global consumption."

IMF Papers on Macroprudential Policies and Systemic Risk Monitoring

1  The Macroprudential Framework: Policy Responsiveness and Institutional Arrangements

Author/Editor:     Cheng Hoon Lim ; Ivo Krznar ; Fabian Lipinsky ; Akira Otani ; Xiaoyong Wu

IMF Working Paper No. 13/166, July 17, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40789.0

Summary: This paper gauges if, and how, institutional arrangements are correlated with the use of macroprudential policy instruments. Using data from 39 countries, the paper evaluates policy response time in various types of institutional arrangements for macroprudential policy and finds that the macroprudential framework that gives the central bank an important role is associated with more timely use of macroprudential policy instruments. Policymakers may also tend to use macroprudential instruments more quickly if the ability to conduct monetary policy is somehow constrained. This finding points to the importance of coordination between macroprudential and monetary policy.




2  Evaluating the Net Benefits of Macroprudential Policy: A Cookbook

Author/Editor:     Nicolas Arregui ; Jaromir Benes ; Ivo Krznar ; Srobona Mitra ; Andre Santos

IMF Working Paper No. 13/167, July 17, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40790.0

Summary: The paper proposes a simple, new, analytical framework for assessing the cost and benefits of macroprudential policies. It proposes a measure of net benefits in terms of parameters that can be estimated: the probability of crisis, the loss in output given crisis, policy effectiveness in bringing down both the probability and damage during crisis, and the output-cost of a policy decision. It discusses three types of policy leakages and identifies instruments that could best minimize the leakages. Some rules of thumb for policymakers are provided.



3   Systemic Risk Monitoring ("SysMo") Toolkit—A User Guide

Author/Editor:     Nicolas R. Blancher ; Srobona Mitra ; Hanan Morsy ; Akira Otani ; Tiago Severo ; Laura Valderrama

IMF Working Paper No. 13/168, July 17, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40791.0

Summary: There has recently been a proliferation of new quantitative tools as part of various initiatives to improve the monitoring of systemic risk. The "SysMo" project takes stock of the current toolkit used at the IMF for this purpose. It offers detailed and practical guidance on the use of current systemic risk monitoring tools on the basis of six key questions policymakers are likely to ask. It provides "how-to" guidance to select and interpret monitoring tools; a continuously updated inventory of key categories of tools ("Tools Binder"); and suggestions on how to operationalize systemic risk monitoring, including through a systemic risk "Dashboard." In doing so, the project cuts across various country-specific circumstances and makes a preliminary assessment of the adequacy and limitations of the current toolkit.

Bhidé and Phelps: Central Banking Needs Rethinking: The Fed's monetary policy is hazardous, its bank supervision ineffectual

Bhidé and Phelps: Central Banking Needs Rethinking. By Amar Bhidé and Edmund Phelps
The Fed's monetary policy is hazardous, its bank supervision ineffectual.
The Wall Street Journal, July 16, 2013, on page A15
http://online.wsj.com/article/SB10001424127887324879504578597721920923596.html

The Federal Reserve did well to supply liquidity after Lehman Brothers failed in September 2008 and the world was plunged into financial crisis. But since then the Fed's monetary policy has been increasingly hazardous and bank supervision by the Fed and other regulators dangerously ineffectual.

Monetary policy might focus on the manageable task of keeping expectations of inflation on an even keel—an idea of Mr. Phelps's in 1967 that was long influential. That would leave businesses and other players to determine the pace of recovery from a recession or of pullback from a boom.

Nevertheless, in late 2008 the Fed began its policy of "quantitative easing"—repeated purchases of billions in Treasury debt—aimed at speeding recovery. "QE2" followed in late 2010 and "QE3" in autumn 2012. Fed Chairman Ben Bernanke said in November 2010 that this unprecedented program of sustained monetary easing would lead to "higher stock prices" that "will boost consumer wealth and help increase confidence, which can also spur spending."

It is doubtful, though, that quantitative easing boosted either wealth or confidence. The late University of Chicago economist Lloyd Metzler argued persuasively years ago that a central-bank purchase, in putting the price level onto a higher path, soon lowers the real value of household wealth—by roughly the amount of the purchase, in his analysis. (People swap bonds for money, then inflation occurs, until the real value of money holdings is back to where it was.)

True, stock prices did rise in real terms in 2009-10. But surely that rebound in share prices from the panic of 2008 was mainly due to a stunning rise in after-tax corporate profits, much of it overseas. Stock markets did not begin their recent breakout until late 2012, by which time other factors were at work, such as Washington's heightened concern over continuing fiscal deficits on top of already high public debt and entitlements. Had Fed purchases raised stock prices to levels that caught the eye of business owners, the purchases might have prompted accelerated business investment, a powerful creator of jobs. But the rise was evidently too little and too late to hasten markedly the recovery.

Moreover, the Fed's quantitative easing appears not to have increased confidence and may have reduced it. No one—the Fed included—knows how much more it will buy or how much of its mountain of Treasurys will be sold back to the market. The Fed said it would end easing at serious signs of faster inflation. But as the housing bubble that preceded the financial crisis showed, imprudent speculation can be destructive without high inflation. Today we have banks, insurance companies and pension funds leveraging their assets and loading up on credit risks because prudence cannot provide acceptable returns.

The cost of this uncertainty can be considerable. An attendant foreboding may lie behind some of the depression in business investment—even if myopic traders in bonds and currencies are impervious to it and too-big-to-fail banks go on making one-way bets. Also, the time and money that businesses give to innovation and efficiency gains are squeezed if the businesses are distracted by the uncertainties surrounding monetary policy.

This ambiguity notwithstanding, President Obama commends Mr. Bernanke for "helping us recover much stronger than, for example, our European partners." Sure, the European Central Bank did not adopt quantitative easing. But the delay in Europe's recovery plausibly derives from the severity of its fiscal and banking problems and its structural disadvantages, such as inflexible labor markets and lack of institutions for early renegotiation of debts.

The Fed attributes persistent joblessness in the U.S. to a deficiency of aggregate demand, which the Fed blames on foreigners' thrift. But if the West's problem were simply that, it long ago would have increased its money supply to meet the increases demanded and would have invested in businesses at an increased pace to take advantage of the cheap credit.

Households have maintained their strong propensity to consume, persuaded that their retirement incomes will be topped up with entitlements. But consumer-goods production—giant machines needing only a guard and a dog, as some wag put it—is generally not labor-intensive enough to provide high employment at normal wages. A central bank's monetary policy, no matter how ambitious, cannot solve this structural problem.

What we do need from the Fed is reform of the ways banks are regulated and supervised. Tough, on-the-ground examination of individual banks not only helps keep them solvent, such scrutiny can also prevent out-of-control money growth without suppressing productive lending. Similarly, rules that discourage banks from relying on yield-chasing hot money will limit the runs and panics the Fed has to fight.

Unfortunately, over the past couple of decades, bank regulation, like the Fed's macro-interventions, has become more top-down and formulaic.

Until the 1980s, for instance, bank examiners would assess how large a capital buffer each bank should have, taking into account its specific risks instead of relying on internationally standardized ratios.

Dysfunctional rules have also sustained the growth of monolithic megabanks that have little interest in traditional productive lending.

Unsurprisingly, the Fed's aggressive monetary easing has helped large companies already flush with cash issue bonds at low rates, while small businesses have struggled to secure working-capital loans.

In a modern economy some areas of top-down control are likely to be unavoidable. But that does not mean we should settle for institutions that are less participatory or accountable. It is not desirable that seven people on the Federal Open Market Committee have the power to intervene on a massive scale based on theories that may or may not be right and do not reflect a popular consensus.

America has a constitutional takings clause, as well as checks and balances on the state's power of eminent domain. Such matters as tax laws and budgets are subject to votes rather than being left to "experts." These arrangements are as much about legitimacy and consent of the governed as they are about economic efficiency.

Congress passed the Federal Reserve Act in 1913 mainly to forestall and contain panics, discourage speculation and improve the supervision of banks, not to steer the economy. Indeed, the Federal Reserve System was set up as 12 more-or-less independent reserve banks to assuage concerns about centralized control and capture by financial interests.

Restoring the modest foundational aims and diffused governance of the Fed would be good for our economy and good for our democracy.

Mr. Bhidé, a professor at Tufts University's Fletcher School, is the author of "A Call for Judgment: Sensible Finance for a Dynamic Economy" (Oxford, 2010). Mr. Phelps, the 2006 Nobel laureate in economics and director of Columbia University's Center on Capitalism and Society, is the author of "Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change," forthcoming from Princeton University Press.

Trevor Butterworth's Fad Food Nation

Fad Food Nation. By Trevor Butterworth
A skeptical survey of the claims being made about food, health and the environment.
The Wall Street Journal, July 16, 2013, on page A13
online.wsj.com/article/SB10001424127887323823004578593943760620664.html  

Excerpts:

Not so long ago, I spoke to a chef who ministers to children attending some of the most elite and expensive schools in America. Why, I asked him, was his company's website larded with almost comical warnings about the lethality of eating genetically modified (GM) food? Did he actually believe this as scientific fact or was he catering to his clientele's spiritual fears? It was simply for the mothers, he said, candidly. They ate it up—or, rather, they had swallowed so many apocalyptic warnings about genetically modified food that he had no choice but to echo their terror. How could they entrust their children to him otherwise? The downside of such dogma, he explained, was cost. Many of the mothers wouldn't agree to their children eating anything less than 100% organic, even if organic food required flying in, as he put it, "apples from Cuba."

Mr. Butterworth is a contributor at Newsweek and editor at large for STATS.org.

The Financial Instability Council - Regulators want to make insurers too big to fail. Uh-oh.

The Financial Instability Council
Regulators want to make insurers too big to fail. Uh-oh.
The Wall Street Journal, July 16, 2013, on page A14
http://online.wsj.com/article/SB10001424127887324634304578537490141477314.html

There's finally a healthy discussion in Washington about how to end too-big-to-fail banks. But before the government can start getting rid of taxpayer-backed behemoths, it first has to stop creating them.

The 2010 Dodd-Frank law classified all banks with more than $50 billion in assets as systemically important, and the federal Financial Stability Oversight Council (FSOC) is considering which non-banks should also be deemed too big to fail. Last year the board of regulators slapped the systemic tag on eight "financial market utilities," including clearinghouses, which means taxpayers now stand behind derivatives trading. Congratulations.

And last week the council, chaired by Treasury Secretary Jack Lew, declared that GE Capital, the finance arm of General Electric, GE and AIG are also officially important. Now the council is trying to designate insurer Prudential as systemic, and perhaps MetLife too.

GE Capital was rescued in the 2008 panic and thus deserves the systemic label. AIG seems to welcome the designation, perhaps because its current mix of businesses means that it will face a lighter regulatory burden than some competitors. But taxpayers should be cheered to learn that Prudential and MetLife are resisting membership in the too-big-to-fail club, and for good reason. It's a giant and counterproductive leap to conclude that the insurance business presents a systemic risk to the financial system.

AIG was a giant insurer when it failed, but its disastrous housing bets largely occurred outside its traditional insurance businesses, which have always been regulated by the states. The company's catastrophic wagers on the mortgage market were overseen by the U.S. Treasury's Office of Thrift Supervision. So of course Treasury's solution is to expand federal regulation to the businesses that weren't overseen by the department and didn't fail. Makes perfect Beltway sense.

But this logic should give taxpayers pause. Along with the "systemic" designation comes regulation that was created for banks, not for insurance companies, and that will create problems for taxpayers and policyholders. Any firm dubbed "systemically important" will be regulated by the Federal Reserve. This will likely mean heavy new capital requirements designed to prevent problems that generally don't exist at an insurer.

Banks accept short-term liabilities in the form of deposits and use them to fund long-term loans. This "maturity transformation" has wonderful economic benefits but carries the risk of failure if lots of depositors suddenly want to withdraw their funds. To address this risk, banks are required to maintain capital cushions and liquidity to meet deposit withdrawals that can occur at any time.

Insurers, by contrast, match long-term liabilities with long-term assets. Premiums to cover some event likely to occur decades in the future are invested in assets of a similar duration. There is little risk of a "run on the bank" because policyholders, unlike depositors, typically cannot demand the face value of their policies in cash. Tornadoes, car accidents and terminal cancer do occur, but they don't occur everywhere at once, and they are not triggered by a panic in financial markets.

Insurers can fail, but since customers cannot immediately demand their money the way bank depositors can, the failures tend to play out slowly over many years. States also typically require insurers to contribute to a fund to make up for the shortfall if one of them fails and its assets and liabilities don't match. Without the same immediate demands for cash as at a bank that's heading south, there is less risk of an asset fire sale that could roil markets.

Treating insurers like banks would also raise costs substantially at insurers as they scramble to comply with the new burdens. This means higher premiums for customers. MetLife hired consultant Oliver Wyman to calculate the consumer costs of bank regulation if applied to several insurers that could potentially fall under federal bank rules. The industrywide estimate: $5 billion to $8 billion a year.

If companies can't pass along these higher costs to customers and stay competitive, they are likely to exit the business, especially the capital-intensive life insurance market. That would mean less competition.

The other big risk is that the systemic risk designation could turn out to be self-fulfilling. If an insurer has to accept bank regulation, it might as well consider expanding into bank businesses. If it has to pay the regulatory costs of holding short-term liabilities, then the natural next step is to consider relying more on short-term funding, which almost everyone agrees was a key vulnerability leading into the 2008 crisis. Insurers may become riskier institutions than they now are, which means more risks for taxpayers.

This is no idle fear because the only certainty about financial regulation is that it never prevents the next crisis. Yet in order to reinforce the illusion of effective regulation, and vindicate the folly of Dodd-Frank, regulators are about to force insurance companies and customers who didn't cause the last crisis to pay more while encouraging firms to pursue riskier business thanks to an implied federal backstop. They should have called it the Financial Instability Council.

Riot after Chinese teachers try to stop pupils cheating. By Malcolm Moore

Riot after Chinese teachers try to stop pupils cheating. By Malcolm Moore
What should have been a hushed scene of 800 Chinese students diligently sitting their university entrance exams erupted into siege warfare after invigilators tried to stop them from cheating. The Telegraph, Jun 20, 2013
www.telegraph.co.uk/news/worldnews/asia/china/10132391/Riot-after-Chinese-teachers-try-to-stop-pupils-cheating.html

The relatively small city of Zhongxiang in Hubei province has always performed suspiciously well in China's notoriously tough "gaokao" exams, each year winning a disproportionate number of places at the country's elite universities.

Last year, the city received a slap on the wrist from the province's Education department after it discovered 99 identical papers in one subject. Forty five examiners were "harshly criticised" for allowing cheats to prosper.

So this year, a new pilot scheme was introduced to strictly enforce the rules.

When students at the No. 3 high school in Zhongxiang arrived to sit their exams earlier this month, they were dismayed to find they would be supervised not by their own teachers, but by 54 external invigilators randomly drafted in from different schools across the county.

The invigilators wasted no time in using metal detectors to relieve students of their mobile phones and secret transmitters, some of them designed to look like pencil erasers.

A special team of female invigilators was on hand to intimately search female examinees, according to the Southern Weekend newspaper.

Outside the school, meanwhile, a squad of officials patrolled the area to catch people transmitting answers to the examinees. At least two groups were caught trying to communicate with students from a hotel opposite the school gates.

For the students, and for their assembled parents waiting outside the school gates to pick them up afterwards, the new rules were an infringement too far.

As soon as the exams finished, a mob swarmed into the school in protest.

"I picked up my son at midday [from his exam]. He started crying. I asked him what was up and he said a teacher had frisked his body and taken his mobile phone from his underwear. I was furious and I asked him if he could identify the teacher. I said we should go back and find him," one of the protesting fathers, named as Mr Yin, said to the police later.

By late afternoon, the invigilators were trapped in a set of school offices, as groups of students pelted the windows with rocks. Outside, an angry mob of more than 2,000 people had gathered to vent its rage, smashing cars and chanting: "We want fairness. There is no fairness if you do not let us cheat."

According to the protesters, cheating is endemic in China, so being forced to sit the exams without help put their children at a disadvantage.

Teachers trapped in the school took to the internet to call for help. "We are trapped in the exam hall," wrote Kang Yanhong, one of the invigilators, on a Chinese messaging service. "Students are smashing things and trying to break in," she said.

Another of the external invigilators, named Li Yong, was punched in the nose by an angry father. Mr Li had confiscated a mobile phone from his son and then refused a bribe to return the handset.

"I hoped my son would do well in the exams. This supervisor affected his performance, so I was angry," the man, named Zhao, explained to the police later.

Hundreds of police eventually cordoned off the school and the local government conceded that "exam supervision had been too strict and some students did not take it well".

Additional reporting by Adam Wu

Discussion on balancing risk sensitivity, simplicity and comparability within the Basel capital standards initiated by the Basel Committee

Discussion on balancing risk sensitivity, simplicity and comparability within the Basel capital standards initiated by the Basel Committee
July 8, 2013
http://www.bis.org/press/p130708.htm

The Basel Committee on Banking Supervision today released a Discussion Paper on the balance between risk sensitivity, simplicity and comparability within the Basel capital standards.

In response to the financial crisis, the Basel Committee introduced a range of reforms designed to substantially raise the resilience of the banking system against shocks. In addition to these reforms, during 2012 the Committee commissioned a small group of its members (the Task Force on Simplicity and Comparability) to undertake a review of the Basel capital framework. The goal of the Task Force was to identify opportunities to remove undue complexity within the framework, and improve the comparability of its outcomes. The creation of the Task Force acknowledged that the framework has steadily grown over time as risk coverage has been expanded and more sophisticated risk measurement methodologies have been introduced.

The paper being released today discusses the reasons behind the evolution of the current framework, and outlines the potential benefits and costs that arise from a more risk sensitive methodology. The paper also discusses ideas that could possibly be explored to further reform the framework with the objective that it continues to strike an appropriate balance between the complementary goals of risk sensitivity, simplicity and comparability.

The purpose of the discussion paper is to seek views on this critical issue so as to help shape the Committee's thinking. At this stage, the Committee has not made a decision to pursue any of the ideas presented; the paper is being published to elicit comments and feedback from interested stakeholders, which will help the Committee refine its thinking in this area. Furthermore, the Committee remains firmly of the view that full, timely and consistent implementation of Basel III remains fundamental to building a resilient financial system, maintaining public confidence in regulatory ratios and providing a level playing field for internationally active banks. Adopting the Basel III reforms (higher and better quality capital, improved risk coverage, capital buffers, and liquidity and funding requirements) in accordance with the internationally-agreed transition period deadlines is itself an important step in improving the consistency of bank regulation globally.

Mr Stefan Ingves, Chairman of the Basel Committee and Governor, Sveriges Riksbank said: "The Committee is keenly aware of the current debate concerning the complexity of the current regulatory framework. For that reason, the Committee set up a Task Force last year to look at this issue in some depth. The Committee believes that it would benefit from further input on this critical issue before deciding on the merits of any specific changes to the current framework. The paper being released today is designed to encourage discussion amongst, and solicit views from, a broad set of stakeholders."

The Committee welcomes views on the issues outlined in this paper. Comments should be submitted by Friday 11 October 2013 by e-mail to baselcommittee@bis.org. Alternatively, comments may be sent by post to: Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the website of the Bank for International Settlements unless a respondent explicitly requests confidential treatment.