Kevin Drum

Arabic on the Net

| Fri May 7, 2010 12:16 AM EDT

Just so you know: according to ICANN, today was "the most significant day" since the launch of the internet. Why? Because for the first time ever, you can type in a full URL, including the top level domain name, in a non-Latin alphabet. Namely, Arabic:

One of the first websites with a full Arabic address is the Egyptian Ministry of Communications. Egypt's communication and information technology minister Tarek Kamal told the Associated Press that three Egyptian companies were the first to receive registrar licences for the '.masr' domain, written in Arabic.

Other countries will get top level domains in Arabic shortly, and further non-Latin alphabets are in the works. So now you know.

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Our Lucky Ozone Escape

| Thu May 6, 2010 8:45 PM EDT

You all know the story of Stanislav Petrov, right? He's the Soviet lieutenant colonel who was on duty in 1983 when an early warning system reported that an American ICBM was heading toward the Soviet Union. Luckily (and correctly), he decided it was just a computer error and decided not to start World War III. Whew!

That's about how I felt when I read Brad Plumer's piece on possible planetary disasters in the last issue of the New Republic. I'd never heard this story before, but it turns out that back in the middle years of the 20th century Planet Earth dodged a serious ozone layer bullet thanks to nothing more than a chance decision1 by Dupont about how to manufacture chlorofluorocarbons:

As luck would have it, DuPont had been using chlorine instead of bromine to produce CFCs. As far as anyone could tell, the two elements were interchangeable. But, as another prescient ozone researcher, Paul Crutzen, later noted, bromine is 45 times as effective at destroying ozone as chlorine. Had DuPont chosen to use bromine, the ozone hole could well have spanned the globe by the 1970s instead of being largely confined to Antarctica — long before anyone had a glimmering of the problem.

It’s not hard to see what massive worldwide ozone depletion would’ve meant. Punta Arenas, the southernmost town of Chile, sits under the Antarctic ozone hole, and skin cancer rates there have soared by 66 percent since 1994. If humans had destroyed stratospheric ozone across the globe, we would likely be unable to set foot outdoors without layers of sunscreen and dark shades to prevent eye damage. Worse, the excess UV rays could have killed off many of the single-celled organisms that form the basis for the ocean’s food chain and disrupted global agriculture (studies show that bean and pea crop yields decline about 1 percent for every percent increase in UV exposure).

Just thought I'd share. Let's be careful out there, OK?

1In comments, Daryl Cobranchi points out that the reason Dupont used chlorine is that it's less expensive than bromine. So the "luck" here isn't that Dupont tossed a coin and it came up on the right side, it's the fact that Cl2 happens to be cheaper than Br2.

Did a B Kill Wall Street?

| Thu May 6, 2010 5:37 PM EDT

The stock market plummeted today, but it did so in an odd way: the Dow dropped about 6% in the space of five minutes and then gained about 5% a few minutes later. Initial news reports suggested the drop was centered on panic over Greece, but there was no special news about Greece that suddenly hit the wires at 2:30 pm and then, just as suddenly, disappeared a few minutes later. Perhaps, instead, it was just a garden variety screwup?

The WSJ reports that a trader may have accidentally placed an order to sell $16 billion in futures tied to stock indexes, when he meant to place the order for $16 million.

And there were "a number of erroneous trades" during the minutes when the market was plunging, a spokesman for the company that owns the New York Stock Exchange told Bloomberg.

The FT's Alphaville blog points out that Procter & Gamble shares fell by more than 20 percent — about three times as much as the Dow — before regaining almost all of the ground it lost, and says the decline may have been related to a "technical screw up." And Barron's notes that shares in Accenture — which opened and closed the day above $41 per share — traded for one cent per share at one point today.

Planet Money's chart of the Procter & Gamble drop is above (P&G = blue, overall market = red). So I wonder whose screwup this was? Rumors suggest it was some poor schlub at Citigroup. And what happened to all those automated systems we hear so much about that are supposed to prevent this kind of thing? After the Société Générale debacle didn't everyone supposedly install safeguards that prevented individual traders from taking massive positions like this?

Understanding the End User Exemption

| Thu May 6, 2010 5:26 PM EDT

Over at New Deal 2.0, former Goldman Sachs VP Wallace Turbeville explains derivative trading to end users in an interesting way that I haven't seen before. You should read the whole thing, but in a nutshell here's how he describes the process:

  1. A bank sells a derivative to an end user. For example, for an airline company it might be a hedge against fuel prices rising in the future.
  2. If the hedge goes the customer's way (i.e., fuel prices go up), the bank pays up. But if the hedge goes the bank's way (i.e., fuel prices decline), the end user has to pay up.
  3. As always, though, there's a risk of default. Maybe the end user won't make good on his payment.
  4. In essence, then, the bank is selling both a hedge and a loan at the same time, and assuming credit risk on the loan.

Why do this? Why not, instead, extend an ordinary loan, have the customer post that as collateral, and sell the hedge at a lower price since there's no credit risk built in? Turbeville:

It is widely known that deployment of credit capacity to trading with a company is far more profitable than conventional lending. This means that

  • the profit from a trade coupled with the extension of credit through forgone posting of collateral is far more profitable than
  • the profit from a conventional loan plus the profit from a trade in which no credit is extended.

Viewed from the perspective of the company making the trade, it is either willing to pay more for the packaged deal or it does not properly evaluate the all-in cost.

Turbeville goes on to explain in more detail why traders benefit from this arrangement (it locks in customers and helps banks build dominant positions in particular markets) but then circles back to his starting point:

There is a lingering, unanswered question raised by the foregoing discussion: Why do the end users prefer packaged credit and trading deals, even though the banks make more than the unpackaged alternative?

The obvious possibilities are inertia and convenience — though given the efficiency of modern finance it's hard to believe that separate credit facilities would really end up being much less convenient, especially for large, sophisticated companies. But in a followup piece, Turbeville suggests a different answer: a conventional loan is carried on a corporation's balance sheet as debt, while the embedded loan in a packaged derivative isn't. So the packaged deal provides an attractive accounting loophole:

Avoiding an accounting exemption is very appealing. But perhaps the better way to address this is to encourage efficient, third party systems, short of full on clearing, to track these exposures and to facilitate efficient collateral funding in bi-lateral transactions. The simple exemption for end users in financial regulation does not encourage the development of such a system. It ignores a troubling practice which need not burden the marketplace.

In other words, maybe the end user exemption that just about everyone supports isn't such a great idea after all. Via Mike Konczal.

Why Greece Matters

| Thu May 6, 2010 2:24 PM EDT

In an unprecedented display of 21st century comity and bipartisanship, I would like to fully endorse Andrew Stuttaford's takedown of Sen. Jim DeMint (R-SC), who remains defiantly unhappy that his proposal last year to ban taxpayer money from being used to "bail out" foreign countries was voted down:

All one can say is that, on this occasion, the Senate got it right. Senator DeMint may not like it, but we live in an economically interdependent world....Greece's problems are not just Greece's, and the threat that they pose to economic recovery stretches far beyond that unfortunate country's borders and, for that matter, the frontiers of the wretched eurozone.

The current weakness in the global economy is a clear and present danger (to borrow a phrase) to the dangerously fragile, dangerously indebted U.S. economy and to this nation's wider strategic, political, and economic interests. For all its flaws, the IMF is the best tool we have to help countries (usually on tough terms — that's why they are rioting in Greece, Senator) that have got themselves in the mess they have, a mess that threatens us, too. Seen in this light, crippling the IMF makes no sense — no sense at all.

Oddly enough, I wrote nearly those exact same words last night for distribution via email tomorrow. It's part of the answer to Felix Salmon's question, "Why should Americans care about Greece?" (For the other part of the answer, sign up for my newsletter! In addition to the rest of the answer, you also get bonus cats.)

What's more, I think Stuttaford is right about this despite the fact that even with IMF help Greece is likely doomed. In fact, as pessimistic as I've been about Greece for a long time, I've grown more pessimistic as time passes. At this point, unless the EU is almost literally willing to make Greece a long-term ward of the state and provide the massive amounts of funding needed to pull this off, it's hard to see any endgame that doesn't include debt default and Greece's exit from the Euro, with all the attendant chaos that implies. The IMF rescue delays the day of reckoning, which might be worthwhile in the same way that delaying GM's collapse until the economy improves might have been worthwhile, but I don't see how it eliminates it. I sure hope I'm wrong, though.

Quote of the Day: Our Crappy Senate

| Thu May 6, 2010 1:02 PM EDT

From Rep. David Obey (D-Wis.), explaining why he's retiring after 42 years in Congress:

I believe the job of a good politician was to be used up fighting on behalf of causes you believed in, and when you are used up, to step aside and let someone else carry on the battle. Well, today I feel used up....Given that fact, I have to ask myself how I want to spend the time I have left. Frankly, I do not know what I will do next. All I do know is that there has to be more to life than explaining the ridiculous, accountability destroying rules of the Senate to confused, angry, and frustrated constituents.

....I am also increasingly weary of having to deal with a press which has become increasingly focused on trivia, driven at least in part by the financial collapse of the news industry and the need, with the 24-hour news cycle, to fill the air waves with hot air. I say that regretfully because I regard what is happening to the news profession as nothing short of a national catastrophe which I know pains many quality journalists as much as it pains me. Both our professions have been coarsened in recent years and the nation is the loser for it.

Meanwhile, speaking of the world's greatest deliberative body, Democrats say that GOP senators are "either breaking rules or 'hold-laundering.' " Just try explaining that to confused, angry, and frustrated constituents.

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What Happens When Terrorists Get Smart?

| Thu May 6, 2010 12:19 PM EDT

One of my running jokes about 24 is that it makes me thankful on a weekly basis that real terrorists are nowhere near as smart as TV terrorists. We'd all be dead a dozen times over if they were.

That's just a joke, but there's a serious question underneath: why is it that nearly all the terrorist attacks on U.S. soil over the past few years have been so laughably incompetent? Shoe bombs, underwear bombs, blowtorches, moronic plots, and now a propane bomb that wouldn't have caused very much damage even if it had gone off. David Corn asked a few experts about this and here's his conclusion:

In other words, terrorist outfits organize two types of operations: those they meticulously plan and to which they devote their best resources, and those they take a flyer on. The recent miscues have been the latter. And those are likely to continue—with the possibility of success. What's perhaps harder to know is whether al Qaeda is in the position to mount the more serious and extensive operations, which demand competent, intelligent, and well-trained operatives.

Bruce Schneier provides a more global answer:

There are actually several answers to this question. One, terrorist attacks are harder to pull off than popular imagination — and the movies — lead everyone to believe. Two, there are far fewer terrorists than the political rhetoric of the past eight years leads everyone to believe. And three, random minor terrorist attacks don't serve Islamic terrorists' interests right now.

OK. But this still leaves me scratching my head a little bit. Terrorist groups have been building increasingly deadly explosives for decades now, a story told in some detail by Mike Davis in Buda's Wagon: A Brief History of the Car Bomb. It's not a trivial task, but it's not rocket science either. Somehow you'd think that even lone wolves working for newbie groups like the Taliban would be able to pull off an operation that works. Not a massive, state-of-the-art car bomb, but still something that detonates.

But apparently not. At least, not yet. 

UPDATE: Here's another theory from Steve Coll: "When a singleton of Shahzad’s profile — especially a U.S. citizen — turns up in a place like Peshawar, local jihadi groups are much more likely to assess him as a probable U.S. spy than as a genuine volunteer. At best, the jihadi groups might conclude that a particular U.S.-originated individual’s case is uncertain. They might then encourage the person to go home and carry out an attack — without giving him any training or access to higher-up specialists that might compromise their local operations. They would see such a U.S.-based volunteer as a “freebie,” the former officer said — if he returns home to attack, great, but if he merely goes off to report back to his C.I.A. case officer, no harm done."

How the Drone War Heated Up

| Thu May 6, 2010 11:56 AM EDT

How is it that we've been able to expand drone attacks along the AfPak border so heavily? Better intelligence? More cooperation from Pakistani authorities? In the LA Times today, David Cloud explains that in the past the White House approved attacks only on specifically named militants, but now the CIA is allowed far greater discretion:

The expanded authority, approved two years ago by the Bush administration and continued by President Obama, permits the agency to rely on what officials describe as "pattern of life" analysis, using evidence collected by surveillance cameras on the unmanned aircraft and from other sources about individuals and locations.

....Instead of just a few dozen attacks per year, CIA-operated unmanned aircraft now carry out multiple missile strikes each week against safe houses, training camps and other hiding places used by militants in the tribal belt bordering Afghanistan...."The enemy has lost not just operational leaders and facilitators — people whose names we know — but formations of fighters and other terrorists," said a senior U.S. counter-terrorism official, speaking on condition of anonymity. "We might not always have their names, but ... these are people whose actions over time have made it obvious that they are a threat."

....The CIA was directed by the Bush administration to begin using armed drones to track Osama bin Laden and other senior Al Qaeda figures, as well as Taliban leaders who fled to Pakistan's tribal areas after the Sept. 11 attacks.

President Bush secretly decided in his last year in office to expand the program. Obama has continued and even streamlined the process, so that CIA Director Leon E. Panetta can sign off on many attacks without notifying the White House beforehand, an official said....The number of Predator and Reaper drones in the region is classified, but one former official estimated that the size of the fleet has at least doubled in the last year.

I imagine that this basically puts drone attacks on the same footing as manned air attacks, which have never been restricted to missions with specifically named targets. Maybe that's appropriate. But it's pretty much certain to increase civilian casualties too. There are no free lunches.

Ratings Agency Update

| Thu May 6, 2010 1:35 AM EDT

Quick ratings agency update. Al Franken has introduced an amendment that reforms the way ratings agencies compete for business. Dave Dayen explains.  Meanwhile, over at Rortybomb, former Moody's director Jerome Fons suggests that this is a good idea but not a sufficient one. He wants to remove the regulatory reliance on ratings and then crowdsource ratings by making the details of every security public knowledge. You can read the whole thing here.

Carbon Emissions Down 7% in 2009

| Wed May 5, 2010 11:08 PM EDT

This just in from the EIA's latest report: carbon dioxide emissions in the U.S. were down 7% last year. That's on top of a 3% drop in 2008. This means that we're already more than halfway toward our goal of reducing carbon emissions 17% from 2005 levels by 2020. About one-third of the reduction was due to the recession, one-third to reduced energy intensity, and one-third to the use of cleaner energy. Joe Romm has more.