Coyote Blog

SB7 has some good observations about risk:

I was listening to the WSJ radio podcast while getting some dinner ready, and one of their reporters said, in the context of discussing Fukushima, that some of the engineers at the plant "knew there was a risk" in the plant's older design and could conceivably face charges for not doing something about said risk.

This kind of talk really grinds my gears.  In any engineering situation there is always some risk.  You can have less risk, or more risk, but risk is not something you either have or do not have.

I will go one step further.  This ex post facto witch hunt aimed at folks who discussed risks  (an pogrom that occurs in nearly every product liability lawsuit with fishing expeditions through company memos) is the WORST possible thing for consumers concerned about the safety of their products and environment.  Engineers have to feel free to express safety concerns within organizations no matter how hypothetical these suppositions may be.

Some concerns will turn out to be unfounded.  Some suggested risks will be deemed too small to economically overcome.  And some will turn out to be substantial and require action.  And sometimes well-intentioned people will make what is, in retrospect, the wrong trade-offs with risks.   These witch hunts only tend to suppress this very valuable and necessary internal dialog within organizations.  Nothing is going to turn the brains of engineers off faster than an incentive system that punishes them retroactively for well-intentioned discussions about risk.

Harold Koh on what does and doesn't make for a war:

Koh, a former Yale Law School dean who wrote about the War Powers Resolution during his academic career, said the “narrow” role of U.S. warplanes in the mission doesn’t meet the definition of hostilities.

The circumstances in Libya are “virtually unique,” he said, because the “exposure of our armed forces is limited, there have been no U.S. casualties, no threat of U.S. casualties” and “no exchange of fire with hostile forces.”

With a “limited risk of serious escalation” and the “limited military means” employed by U.S. forces, “we are not in hostilities envisioned by the War Powers Resolution, Koh said.

As an outsider to the political process, it has been absolutely hilarious watching a White House full of children of the 1960's retroactively justifying Nixon's Christmas bombings of Cambodia.  It's not a war, they claim, as long as our soldiers are safe and we are mostly just killing citizens of other nations from the air.  Of course, by this definition, the Japanese attack on Pearl Harbor was not an act of war.

There are many reasons to put separation-of-powers-type scrutiny on war-making that go beyond just the risk to American lives.  In particular, killing people from other countries can radically change our relationship with other nations.  I find it ironic that that White House has deliberately put blinders on and declared that the only reason to get Congressional approval is if US soldiers are at risk, since it was Obama who lectured the nation on the campaign trail about how damaging to our world image he felt Bush's wars to be.

This is a bit old, but Powerline had a good analysis on oil speculation.  The short answer:  Think Progress confused, either accidentally or on purpose, the notion of a risk premium with speculation excess.

Several of the amendments in the Bill of Rights, notably the second and the tenth, are no longer treated by many folks as "real."  Just old TJ kidding around.

Over the last several years, I have worried that the Fourth Amendment is rapidly heading in the same direction.  This week has been a bad week.

First up, today's decision that if cops have some reason to think valuable evidence is being destroyed, they can bust down your door without a warrant.  Toilet flush?  Must be getting rid of drugs.  Can be seen in the window at the computer?  Must be deleting child porn.  Silence?  Must be destroying evidence really quietly.

Think I am exaggerating?  Here are the facts of the case:

It began when police in Lexington, Ky., were following a suspect who allegedly had sold crack cocaine to an informer and then walked into an apartment building. They did not see which apartment he entered, but when they smelled marijuana smoke come from one of the apartments, they wrongly assumed he had gone into that one. They pounded on the door and called "Police. Police. Police," and heard the sounds of people moving.

At this, the officers announced they were coming in, and they broke down the door. They found Hollis King smoking marijuana, and put him under arrest. They also found powder cocaine. King was convicted of drug trafficking and sentenced to 11 years in prison.

Sounds of people moving in apartment = break the door down, no warrant needed.  This is just a joke, though I must also say the drug war has already gutted any number of Constitutional protections, so its not surprising to see yet another blow to liberty in the name of rounding up anyone who might be smoking a joint.  (more here)

The other case is perhaps even more egregious, and comes from Indiana, where the state Supreme Court decided that citizens must defer to agents of the state, even when those agents are violating the law.   In particular, if a cop wants to enter your house for no reason at all without a warrant, you can't resist.

"We believe … a right to resist an unlawful police entry into a home is against public policy and is incompatible with modern Fourth Amendment jurisprudence," David said. "We also find that allowing resistance unnecessarily escalates the level of violence and therefore the risk of injuries to all parties involved without preventing the arrest."

David said a person arrested following an unlawful entry by police still can be released on bail and has plenty of opportunities to protest the illegal entry through the court system.

Escalation of violence is a two-way street.  Why is the homeowner, the innocent party, the one who is made legally responsible for such escalation?  Why isn't it the agent of the state who is responsible for any such escalation?  And while a homeowner may have plenty of opportunities to protest illegal entry after the fact (though this is debatable in real life) I would argue that the police officer had plenty of opportunities before the fact to get a freaking warrant.

Via Reason from the pathetic hulk that was once the great state of New York

Dodgeball, Red Rover, Wiffle Ball – those time-honored kids' games, along with activities like Steal the Bacon and Capture the Flag – have been deemed dangerous by the state as part of an effort to tighten regulations for summer camps in the area.

Any indoor or outdoor recreational program that offers two or more organized activities, including one that falls on the "risky list" determined by state officials, will be considered a summer camp under the new rules and subject to the associated regulations.

The rules aim to curtail a loophole in previously passed regulations by the state Health Department that count activities like horseback riding and archery among the "risky list," but do not include many activities like Freeze Tag and kickball featured in indoor programs.

Update: They backed off.   Kids will still be at risk from unregulated red rover.

No, Mr. Obama, the fecklessness of politicians does not obligate me to send more of my money to the government.

Three times in my life I have lent money to people in serious financial straits.  In every case, they came back to me for more.  "X more dollars and I will be home free and can pay you back."  In a few cases I came up with a second infusion and in one case I (embarrassingly) actually gave money a third time.   In no case was I ever paid back.    I haven't heard this phrase in years, but when I was young stock investors had a saying -- "your first loss is your best loss."  This was just another way of saying don't throw good money after bad.

Obama and Bush (I haven't forgotten your culpability in all this George) sold the country, or at least Congress, on emergency spending for wars and bailouts and stimulus.  This was supposedly one-time spending only for the duration of the emergency.  But now Democrats and Obama are treating the peak of this emergency spending as the new baseline, from which cuts are impossible.

This lack of desire to cut spending and a resetting of norms as to "what is normal" is not just a government problem, it is endemic to every organization.  Private organizations face this problem all the time.  The difference is that when times go bad, private organizations do not have fiat taxation power, so that when they are underwater, they must cut bloated budgets or die.  Either way, the problem goes away.  Private companies differ from government not in that they don't have problems with beauracracy and risk aversion and deadwood and bloat and bad incentives - because they do.  The difference is that private companies cannot get away with allowing this stuff to linger forever, and governments can.

Government will never, ever, ever, ever cut spending unless all hope of new taxes is removed, and even then they will likely try to cut spending on the most, rather than the least, popular programs to build public support for more taxes.

In the early 90's, after the fall of the Soviet Union, we talked about a peace dividend from reductions in military spending.  I want a sanity dividend.

Postscript: We like to think that financial problems are due to bad luck, but they usually are due to poor management.  The guy I lost the most money with was producing a really interesting boat concept, basically as fun and lithe and fast as a jetski but enclosed so boaters who were less daring would not actually be in contact with the water.  I wanted a bunch for rental service at our marinas.  But he kept asking for money, saying that he had bad luck with this supplier or that supplier.  Eventually, I found out he was in this incredibly expensive commercial lease, and was burning all the money I lent him on useless rent payments.  Stupid.

After I graduated from college, I cashed in about $7000 in savings bonds I had accumulated.  I was going to make a fortune in the market.  After three years I had lost almost all of it -- right in the heart of one of the greatest bull markets in history!  A few years later, I was in a situation where I could have really used this money.  This was not bad luck or circumstances, I did stupid things.  I recognized something that many dentists and doctors never learn - it was possible to be a smart guy who sucked at investing.  I was one of them.  My investing has been in index funds ever since.

XKCD is freaking awesome today, making fun of the media and food-risk scare stories. Absolutely dead-on.

I have been told that the first person in a negotiation that mentions a number will lose.  Something similar is at work with the US federal budget.  When they controlled Congress, Democrats never even proposed a budget for this fiscal year (which began last October, months before they lost control of the House).  Obama's budget is simply a bad joke, a non-effort,  that simply extrapolates current trends without any real change or exercise of control.

Its amazing to me that all the news reports today are about the "risk" Republicans are taking by actually proposing a plan into this vacuum.   It is amazing to me that actually trying to exercise adult supervision when everyone else is voting "present" could be "political suicide," but I have to accept that the political experts know their stuff.

This situation is in fact exactly what Democrats have been hoping for -- they have purposefully hoped to avoid suggesting any solutions in order to force the Republicans to be the first and only ones to the table with suggestions.  Democrats have zero desire to actually close the multi-trillion dollar deficit;  rather, they see it as a huge opportunity that traps Republicans into trying to actually, you know, solve the problem.  These proposed solutions can then be demagogued against to electoral victory.  Or so goes the theory.

So, I want to thank the Republicans for actually producing a budget plan that actually attempts to bring some fiscal sense to the government.  I would have like to see other changes (less defense spending, elimination of Dept. of Education in favor of block grants, zeroing out of all farm and ethanol subsidies, etc) and Ryan's numbers seem screwy, but let us be happy there is at least one adult in Washington.

Over the last few weeks I have been following the story of the city of Glendale, AZ, in order to protect a previous $200 million public investment in our hockey team, proposing to issue another $100 million bond issue to help subsidize the purchase of the hockey team out of bankruptcy.

The real furor began when the Goldwater Institute, a local libertarian-conservative think tank, said they were considering suing over the bond issue because it violates the gift clause of the Arizona Constitution, which basically bans municipal governments from providing direct subsidies or lending their credit to private institutions.  The gift clause has been frequently breached in the past (politicians do love to subsidize high-profile businesses), but of late Goldwater has successfully challenged several public expenditures under the gift clause.

I won't rehash the whole argument, but I found this bit from Senator McCain interesting

He called on the Goldwater Institute, a Valley watchdog that intends to sue to block the deal, to sit down and negotiate to keep the team

The buyer Matthew Hulsizer and his staff have taken this position throughout the deal -- they have lamented that they are more than willing to "negotiate" with Goldwater, and they are frustrated Goldwater won't come to the table with them.

This claim seems bizarre to me. If Goldwater thinks the deal is un-Constitutional, what is to "negotiate?" I don't know Hulsizer or anything about him, but it strikes me that he is working from a Chicago paradigm, and is treating Goldwater as if it were a community organizer. In Chicago, community organizers try to use third parties to protest various deals, like the opening of a Wal-Mart or a new bank. These third-parties are nominally protesting on ideological grounds, but in fact they are merely trying to throw a spanner in the works in order to get a pay off from the deal makers, almost like a protection racket. The payoff might be money or some concession for the group (e.g. guarantee of X% jobs for this group in project, $X in loans earmarked for group, etc).

Everything I have seen tells me Hulsizer is approaching Goldwater in this paradigm.  Even going out and rounding up the most prominent politician in the state (McCain) to put pressure on Goldwater is part of this same Chicago paradigm.

Here by the way  is what Hulsizer is apparently offering

As one part of the deal, Glendale would sell bonds to pay Hulsizer $100 million, which the Chicago investor would use to purchase the team for $210 million from the National Hockey League.

Hulsizer said he notified Goldwater he would guarantee the team will pay Glendale at least $100 million during its lease on the city's Jobing.com Arena through $75 million in team rent and fees and by covering $25 million in team losses that the city promised to pay the NHL this season, which is included in the hockey team's purchase price.

"We need to move forward now," he said. "I expect that Goldwater and other people who have come out against this deal will hopefully recognize the benefits of it and will now use all of that energy and tenacity and aggressiveness to go out and help us sell these bonds and make hockey work in the desert forever."

Hulsizer said Goldwater had not yet responded to him.

By the way, I hesitate to trust the Arizona Republic to report such deal terms correctly, but if what is reported above is correct, the offer appears to be non-sense

1. What kind of guarantee is he offering?  Is it a guarantee by the corporate vehicle buying the team, because if it is, this is worthless.   The last team ownership group promised to pay the lease for 30 years -- what does that mean once they went bankrupt?  I am sure Borders Books promised to pay a lot of real estate owners money for leases, and many of them are going to end up empty-handed in the bankruptcy.  If this is a personal guarantee, that is a nice step forward, though not enough because....
2. The $75 million in rent is largely irrelevant to the new bond issue -- these rents support the old $200 million bond issue.  What they are saying is "issue a new $100 million bond issue for us and we will guarantee you can make 40% of the payments for the old bond issue."   So?  When Balsillie wanted to move the team, he didn't ask for an additional bond issue and agreed to pay off $50 million of the old one as an exit fee.
3. At the end of the day, if the $100 million is not a subsidy, not at risk, and fully backed by guaranteed cash flows, then Hulsizer should go out and get a $100 million private loan.  Period.

Unfortunately, this might be enough to get the deal through the courts.  Glendale will argue that for the $100 million, they will get $100 million paid against their existing bond issues that would not otherwise be paid if the team folds or leaves town.  This may fly with the courts, unfortunately, but it still sucks for taxpayers.   At the end of the day, nothing about this offer makes the $100 million bond issue any safer.   If the team goes bankrupt, it is lost.  That is an equity risk the city is taking with taxpayer funds, and equity risk for which we are getting no equity.  See here for full discussion of the risks and problems.

Postscript: The following is pure speculation, but I think it is close to correct.  The team is worth about $110 million at best (remember, it has never made money in AZ).  Forbes values it at $117 million but several similar franchises have sold for under $100 million lately.   The reason it is selling for $210 million is that the NHL, which bought it out of bankruptcy, guaranteed its other owners the league would not lose a penny on the team.   But the team has been racking up losses, and the accumulated cost to the NHL is now $210 million.  The NHL is insisting on a price that is $100 million north of where it should be.  In effect, the taxpayers of Glendale are bailing out the NHL for this crazy promise to its owners.

I can just see the negotiation.  Hulsizer, who by every evidence is a savvy financial guy, is not going to pay $210 million for an asset worth $110 million.  Glendale has way too many chips on the table to fold now, so it rides in and says it will contribute the $100 million difference.  In fact, the best evidence this is a subsidy is the difference between the purchase price and any reasonable team value.  Someone has to make up the ridiculous gap between the NHL asking price and reality, and Hulsizer is too smart to do it.   I have been calling this a subsidy of Hulsizer, but in fact this is really a subsidy of the NHL.   The NHL has Glendale by the short hairs, because Glendale knows (from the Balsillie offer, among others) that the only way the NHL can get a $210 million price is from a buyer who wants to move the team.

This, by the way, is EXACTLY the reason I opposed the original stadium funding deal.  Once they built the stadium, and then went further and lured businesses to develop around it, they were wide open to blackmail of this sort.

The problem with doubling down at this point is that the team has never made money and has no real public plan for doing so.  I have talked to NHL executives and none of them see how the turnaround is possible.  So how many years will it be before the new owners tire of their plaything and throw the team back into bankruptcy, so that Glendale will be in the exact same spot except $300 million, rather than $200 million, in debt.

This is the most helpful article I have found yet on the problems at earthquake-damaged nuclear plants.  As one can imagine, it is a lot more sensible than some of the garbage in the general media.

It cleared up one point of confusion I had - I was not sure why there was still heat generation after the control rods slammed down, killing the fission process.  But apparently there are a number of intermediate fission products created that continue to decay for several days, producing about 3% of the heat of the full fission process.  This heat is what boiled away the water in the reactor vessel once flow of cooling water stopped.  It is this boiling that led to the necessity to release steam (to reduce pressure in the reactor vessel).  It was this steam that was partially disassociated into hydrogen and oxygen, which led to the explosion.

One fact that has been lost in all the hype, and may continue to be lost, is that the earthquake alone (which was 7 times larger than the plant was designed for) was necessary but not sufficient to lead to the current problems.  Everything probably would have been fine had it not been for the tsunami knocking off all the diesel generators the plant used in an emergency to keep the colling pumps running.  Apparently the generators they rushed to the site later could not be used due to various incompatibilities, the type of real-world frustrating problem that will be immediately recognizable to any engineer who has a troubleshooting background.

Update: Unfortunately, the author may have been overly optimistic.  The author implied the pile would stop producing new heat after a few days, but that does not seem to be the case, particularly since spent fuel rods apparently have to be kept in water to keep them cool months or years after they were in service.  With the apparent rupture of the main presure vessel around the core, all bets would seem to be off in terms of containing the most harmful radioactive elements.

I did troubleshooting at a refinery for years, and almost every time the worst disasters were from improbable event and/or screwup after improbable event.   The human mind seems to be unable to really grasp just how screwed up things can get.  The novel Jurassic Park was as much about this problem as it was about dinosaurs.

Update #2: This is the piece that was missing from the earlier linked report:

The sharp deterioration came after a frantic day and night of rescue efforts focused largely on the No. 2 reactor. There, a malfunctioning valve prevented workers from manually venting the containment vessel to release pressure and allow fresh seawater to be injected into it. That meant that the extraordinary remedy emergency workers had jury-rigged to keep the nuclear fuel from overheating no longer worked.

As a result, the nuclear fuel in that reactor was exposed for many hours, increasing the risk of a breach of the container vessel and more dangerous emissions of radioactive particles.

By Tuesday morning, Tokyo Electric Power said that it had fixed the valve and resumed seawater injections, but that it had detected possible leaks in the containment vessel that prevented water from fully covering the fuel rods.

Update #3:  Things are slightly better.

This article by Mark Perry seems right to me -- the lightest touch (and probably the most effective) approach to bank regulation is to return to a regime that puts its major emphasis on capital requirements.

We can talk all day about causes of the recent financial crisis, but in my mind the root cause was taking real property with a volatile underlying value (e.g. homes) and leveraging the absolute crap out of it.   In the initial transaction, home buyers were allowed to come to the table with less and less equity, until deals were being cut with more than 100% debt.  This stupidity was a true public-private partnership, as the government kicked off the party and encouraged its growth via various community development policies as well as policies atFannie and Freddie, but private originators as well as home buyers eagerly jumped into the fray.

This debt backed by property that was already too highly leveraged was thrown into portfolios that were themselves highly leveraged, and then further leveraged again through CDS's and other derivatives.  And then the CDS's were put into leveraged portfolios.  I would love to figure out the effective leverage in the AIG portfolio.  For ever $1 million in real property that secured the mortgages they insured, how much equity did they have?  A thousand bucks?  Less?

These investors felt protected by diversification that didn't really exist.  The felt safe with AAA ratings from agencies who really didn't understand the risks any better than anyone else did.  They relaxed assuming everything was watched by government regulators who were in way over their heads.  But more than anything, they felt protected by history.  The system of putting mortgage risks into tranches, such that the top tranches could only be affected by default rates consider then to be wildly improbable, had never to that point failed to deliver its promise.   Default rates had always stayed withing expected norms.

And this is the most dangerous risk -- the risk that something will happen that has never happened before.  Default rates that seemed impossible suddenly became reality.  Tranches that were untouchable suddenly were losing large chunks of their value.  Sure, there were warning signs, but at the end of the day what happened was that events occurred that were worse than people had thought was the worst case scenario  (there is a whole body of interesting behavioral study on how humans tend to overestimate their understanding and underestimate the width of a probability distribution).

As new financial products are created and the economy evolves and the government pursues new forms of interventions in commerce, new failures can occur that have never happened before.  And never has there been invented a micro-regulatory approach that guards against new-type failures (they don't even do a very good job against old-style failures).  Capital requirements are the one approach that guard against catastrophic failures even for unanticipated risks.

It can be argued that this will raise the cost of capital, at it is true interest rates at any one point of time would have to go up.  But one can argue that the low interest rates of the 2000's greatly understated the true cost of capital, and that those additional costs were paid in a sort of balloon payment at the end of the decade.

I am still thinking this through -- I don't think any regular reader would be mistake me for someone who favors regulation in general, but I am coming around to some extent on the notion that banks are different.  I would ideally like to see a self-policing market where companies that choose to cut equity too fine just go bankrupt.  But the reality of the political-financial complex today is that this never happens -- costs of large failures are socialized, and executives who made bad choices get fat gold parachutes and Treasury jobs.

Postscript:  I have arguments all the time about whether the financial melt down was mainly caused by government or private action.  Was it a public or private failure.?  My answer is yes.

One thing that those of us who promote private action over public can never repeat enough is this:  Our support for private action does not mean that private actors don't screw up, that there are not bad outcomes, that people don't make bad decisions, etc.  They do.  Lots of them.  When these constitute outright fraud, there should be prosecution.  For the rest of the cases, though, libertarians believe that in a free society there are automatic corrections and sources of accountability.

Make a bad product - people stop buying it.  Sign a union contract with wages that are too high - you go bankrupt.  Treat your workers shabbily - and the best of them go work for someone else.  Take on too much risk - you will fail and lose all your capital.

The problem with our financial sector is not that it is not regulated -- it is the most regulated sector of the economy.   The problem is that, as always happens, there has been substantial regulatory capture.  There has been an implicit deal cut by large financial institutions - regulate me, but in return protect me.  In a sense, as is typical in a corporate state, large corporations and government have become partners.

As a result, many of the typical checks and balances on private action in a free economy have been disrupted.  In effect, certain institutions became too big to fail, and costs of failure and risk taking were socialized.

That is why the answer is not one or the other.  Certainly the massive failures were driven by the actions of private actors.  But they were driven in part by incentives put in place by the government, and their stupid behavior was not checked because traditional private avenues of accountability had been neutered by the government.    This is why the recent financial crisis will always remain a sort of political Rorschach test, where folks of wildly different political philosophies can all find justification for their position.

I am with Megan McArdle in confirming that the non-pay portions of the typical public employee compensation package is at least as important, and as potentially expensive, as the money itself.  In particular, two aspects of many public employee compensation packages would be intolerable in my service business:

• Inability to fire anyone in any reasonable amount of time
• Work rules and job classifications

From time to time I hire seemingly qualified people who are awful with customers.  They yell at customers, or are surly and impatient with them, or ruin their camping stay with nit-picky nagging on minor campground rules issues.  In my company, these people quickly become non-employees.  In the public sector they become... 30 year DMV veterans.  Only in a world of government monopoly services can bad performance or low productivity be tolerated, mainly because the customer has no other option.  In my world, the customer has near-infinite other options.  And don't even get me started on liability -- when liability laws have been restructured so that I am nearly infinitely liable for the actions of my least responsible employee, I have to be ruthless about culling bad performance.

The same is true of work rules.  Forget productivity for a moment.  Just in terms of customer service, every one of my employees has to be able to solve customer problems.  I can't automatically assume customers will approach the firewood-seller employee for firewood.  All my employees need to be able to sell firewood, or empty a trash can when it needs emptying, or clean a bathroom if the regular cleaner is sick, or whatever.

For those who really believe state workers in Wisconsin are underpaid, I would ask this question:  Which of you business people out there would hire the average Wisconsin state worker for their current salary, benefits package, lifetime employment, work rules, grievance process, etc?  If they are so underpaid, I would assume they would get snapped up, right?  Sure.

Bonus advice to young people:  Think long and hard before you take that government job right out of college.  It may offer lifetime employment, but the flip side is that you may need it.  Here is what I mean:

When people leave college, they generally don't have a very good idea how to work in an organization, how to work under authority, how to manage people, how to achieve goals in the context of an organization's goals, etc.   You may think you understand these things from group projects at school or internships, but you don't.  I certainly didn't.

The public and private sector have organizations that work very differently, with different kinds of goals and performance expectations.  Decision-making processes are also very different, as are criteria for individual success within the organization.  Attitudes about risk, an in particular the adherence to process vs. getting results, are entirely different.

I am trying hard to be as non-judgmental in these comparisons as I can for this particular post.  I know good people in government service, and have hired a few good people out of government.  But the culture and incentives they work within are foreign to those of us who work in the private world, and many of the things we might ascribe to bad people in government are really due to those bad incentives.

It is a fact you should understand that many private employers consider a prospective employee to have been "ruined" by years of government work, particularly in their formative years.  This is simply a fact you will need to deal with (it could well be the reverse is true of government hiring, but I have no experience with it).  That is why, for the question I asked above about hiring Wisconsin government workers, the answer for many employers would be "no" irregardless of pay.

Younger readers will be forgiven for not fully understanding just how credulous the American public became during the late 80's and early 90's as the media, prosecutors, and various advocacy groups worked hard to convince us every school was a sort of Road-Warrior-like playground for child predators.  Adult after adult were convicted based on bizarre stories about ritual murder, sexually depraved clowns, and all kinds of other dark erotic nightmares.  In most cases there was little or no physical evidence -- only stories from children, usually coerced after numerous denials by "specialists."  These specialists claimed to be able to bring back repressed memories, but critics soon suspected they were implanting fantasies.

Scores of innocent people went to jail -- many still languish there, including targets of Janet Reno, who rode her fame from these high-profile false prosecutions all the way to the White House, and Martha Coakley, just missed parleying her bizarre prosecutions into a Senate seat  (Unbelievably, the Innocence Project, which does so much good work and should be working on some of Reno's victims, actually invited her on to their board).

Radley Balko has yet another example I was not familiar with.   The only thing worse than these prosecutions is just how viciously current occupants of the DA office fight to prevent them from being questioned or overturned.

I am particularly sensitive to this subject because I sat on just such a jury in Dallas around 1992.    In this case the defendant was the alleged victim's dad.  The initial accuser was the baby sitter, and red lights started going off for me when she sat in the witness box saying that she turned the dad into police after seeing another babysitter made a hero on the Oprah show.  The babysitter in my case clearly had fantasies of being on Oprah.  Fortunately, defense attorneys by 1992 had figured out the prosecution game and presented a lot of evidence against, and had a lot of sharp cross-examination of, the "expert" who had supposedly teased out the alleged victim's suppressed memories.

We voted to acquit in about an hour, and it only took that long because there were two morons who misunderstood pretty much the whole foundation of our criminal justice system -- they kept saying the guy was probably innocent but they just didn't want to take the risk of letting a child molester go.  Made me pretty freaking scared to every put my fate in the hands of a jury  (ironically the jury in the famous McMartin pre-school case was hung 10-2 in favor of acquittal, with two holdouts).

Anyway, one oddity we did not understand as a jury was that we never heard from the victim.  I supposed it was some kind of age thing, that she was too young to testify.  As it turns out, we learned afterwards that she did not testify for the prosecution because she spent most of her time telling anyone who would listen that her dad was innocent and the whole thing was made up by the sitter.   Obviously the prosecution wasn't going to call her, and her dad would not allow his attorneys to call her as a witness, despite her supportive testimony, because he did not want to subject his daughter to hostile cross-examination.  This is the guy the state wanted to prosecute -- he risked jail to spare his daughter stress, when in turn the state was more than happy to put that little girl through whatever it took to grind out a false prosecution.

update: This is a tragic and amazing recantation by a child forced to lie by prosecutors in one of these cases.  Very brief excerpt of a long article:

I remember feeling like they didn't pick just anybody--they picked me because I had a good memory of what they wanted, and they could rely on me to do a good job. I don't think they thought I was telling the truth, just that I was telling the same stories consistently, doing what needed to be done to get these teachers judged guilty. I felt special. Important....

I remember going in our van with all my brothers and sisters and driving to airports and houses and being asked if we had been [abused in] these places. I remember telling people [that the McMartin teachers] took us to Harry's Meat Market, and describing what I thought the market was like. I had never been in there before, and I was fairly certain I was going to get in trouble for what I was saying because it probably was not accurate. I imagined someone would say, "They don't have that kind of freezer there." And they did say that. But then someone said, "Well, they could have changed it." It was like anything and everything I said would be believed.

The lawyers had all my stories written down and knew exactly what I had said before. So I knew I would have to say those exact things again and not have anything be different, otherwise they would know I was lying. I put a lot of pressure on myself. At night in bed, I would think hard about things I had said in the past and try to repeat only the things I knew I'd said before.

Here are apparently a couple of the new regs for-profit colleges are expecting:

One proposed rule, which is expected to be finalized this spring, will restrict students from using federal financial aid to pay for programs that rack up excessive loan debt but train students for occupations with relatively low entry-level salaries.

A second rule, which will go into effect this summer, will close loopholes that allowed admissions counselors to be compensated based on how many students they signed up

The first rule is particularly interesting to focus on, especially given that they do not apply to government-run schools.  This means that if you want to go to UCLA and run up loads of debt in economically dead-end majors like women's studies or art history, you are still free to do so.  But go forbid you want to study to be a nurse or a teacher at the University of Phoenix.  This from the CEO of Apollo, the parent company of University of Phoenix

some of the trade-school-type programs may be more vulnerable because of gainful employment (the anticipated federal rule about debt and entry-level salaries). . . . Gainful employment will cause programs, in areas such as nursing or teacher education or law enforcement, (for) for-profits not to be able to offer them . . . (because the federal formula) uses first-year salaries.

I can tell you my first-year salary for what I wanted to do wouldn't have qualified. It takes time.

Two things you can expect from any set of regulations.  1) Large companies will eventually benefit, because the compliance costs will weed out smaller companies and deter future startups.  2) Innovation will be reduced, as certain established business models and practices will become safe harbors under the rules, adding risk to anyone wishing to try an additional approach.

I am in the process of completing a home mortgage.  The process has become awful again, not as bad as it was in the early 90's but harder and more frustrating than in the mid-2000's.  There is one set of rules, and if one's situation does not fit those rules, good freaking luck.  Right now, for example, getting a home mortgage when one is self-employed, even in a pretty large business with a decade of history, is really hard.

So I like this proposal

At the moment there is nobody doing conforming mortgages except Fannie and Freddie. Indeed there is almost nobody doing mortgages of any kind except Fannie and Freddie. If the free market wants the business they can have it. (They just don't want it at this sort of interest rate spread - and I don't blame them.)

All the government need to do is tell Frannie to raise their price a little each quarter. Currently they charge 20-25bps for guaranteeing mortgages. (The free market won't take credit risk at that price.) So it is entirely open to the FHFA (and hence the Treasury) to tell Fannie and Freddie to raise their prices by 5bps. The government will get paid better for the risk they are taking (and what free market ideologue will disagree with that) and the private sector can compete if they want to.

I doubt the free market will. But then in a quarter or two Frannie can raise their pricing by another 5 bps. And a quarter or two later Frannie can raise by another 5bps.

At some stage you will get to a level where the private sector chooses to compete. Frannie should not set its price competitively though. In another quarter they should raise the price another 5bps. And in another quarter they should raise again.

By the way, this is a classic example of not learning from your last mistake.  That spread is absurdly low.  I wouldn't guarantee my best friend's loan for 20bp.  Would you take on the default risk of a $100,000 mortgage for $200 a year?

Supporters of Obamacare argued that it would reduce costs because decisions to fund or not fund certain procedures and drugs would be left to panels of experts (later derisively labelled "death panels").

I have argued many times that these panel's job is hopeless.  Solutions and products that may be right for one person may be a waste for another situation, and there is absolutely no way they have the information or the scope to make decisions with any kind of granularity.  One-size-fits-all solutions result.

But let's hold that thought for a minute.  Let's presume that these supposedly non-political boards will make near-perfect decisions.  Then what?  Those decisions become the law of the land?

Hah.  We have a parallel situation in the military, where DoD procurement supposedly acts as the disinterested expert, which Congress frequently ignores to pay off various constituencies.

If Congress is looking for New Year's resolutions, it could start by breaking the habit of funding programs the government doesn't want. A case in point is the attempt to throw another $450 million at the development of a second engine for the F-35 Joint Strike Fighter, a plan that Defense Secretary Robert Gates says the military doesn't need.

In what has become an annual ritual, Congress is weighing whether one of the largest weapons programs in history should support the development of F-35 engines by both General Electric and Pratt & Whitney. In 2001, GE's engine lost in the procurement competition to the one designed by Pratt & Whitney, as F-35 developers Lockheed Martin and Boeing preferred the latter version.

To hedge its technological risk, the Pentagon nonetheless sought financing for the GE engine as a backup through 2006 in case the Pratt & Whitney version fell short. That hasn't happened, and as budgets have tightened the Pentagon has understandably decided that it needs only one engine design. As Secretary Gates put it, "Only in Washington does a proposal where everybody wins get considered a competition, where everybody is guaranteed a piece of the action at the end."

The Pentagon's opposition hasn't stopped Congress, where the usual parochial suspects are still stumping for GE. And the White House appears to be bending.

Of course they are -- the GE CEO carried a lot of water for Obama on health care and energy policy, and will be expecting a pay back.  Someone has to be terribly naive to believe similar shenanigans won't take place with health care.

But we don't have to wait to test this hypothesis.  The fifty states all have must-carry rules in their states, which have a lot more to do with political pull than science - more here and here.

I just got a note from Bank of America telling me that some of my accounts now have unlimited deposit insurance from the FDIC through 2012, above and beyond traditional limits.   We are worried about reckless banks so we are ...  further reducing and socializing the costs of risk-taking?  Notice I received below, I cannot yet find any info on FDIC site.  As usual click to enlarge.

OK, I have to call bullsh*t on a certain cultural phenomenon.  At the risk of uttering a blasphemy, I have to say that In and Out Burger is simply not very good.  It seems to be hot among teens, so I get dragged to it from time to time by my kids, but the burgers are just meh and the fries are simply bad.  Among fast food joints, Wendy's is much better and we have a veritable explosion of gourmet burger places here in Phoenix  (a trend I applaud as mightily as I did the craft beer phenomenon) that are all much better.  As a regional phenomenon that builds a cult following as it spreads east, it reminds me of nothing so much as the similar Coors beer craze in the 70's, where easterners used to illegally carry Coors over state lines to bring some back home (e.g. Smokey and the Bandit).  And Coors sucks too.

University of Arizona President Robert Shelton absolutely berates the state legislature as a bunch of Neanderthals for slashing his budget:

During this period, we have seen our state appropriation cut by nearly one-quarter, going from approximately $440 million to $340 million. The impact of these cuts has been amplified because they have come at a time when we have been asked to grow our enrollment substantially, and indeed we have done just that, setting records for enrollment in each of the past four years.

So the sound bite for this year is that we are being asked by the state to do much, much more, while being given much, much less....

The sad thing, though, with some of these legislators is that they have no idea how much they risk our state's future (and the quality of life for people who live here) when they try to lay waste to the single greatest engine of economic mobility that has ever been created. Because that's what public higher education in this country is.

Here he gets over the top -- look at the words he uses for the state legislature

When malevolent people talk about wanting to dismantle and destroy great universities, all they achieve is dire consequences for the human condition.

I am sure for the children shows up in there somewhere.  But is he right.  Well, technically, the legislature did cut his general fund appropriation.  But then they gave it back to him, and more, in different budget categories.  As it turns out, Shelton is being unbelievably disingenuous about this, and only the fact that most of his students went to public high schools and therefore can't do math lets him get away with such an address.  Greg Patterson tracks down the facts:

I contacted the Joint Legislative Budget Committee and asked for UA's total funding.Here's the response:

Mr. Patterson

UA's originally enacted FY 2008 General Fund appropriation was $362.4 million, and their current year (FY 2011) General Fund appropriation is $271.3 million, which is a decrease of $(91.1) million.

UA was appropriated $117.7 million in Other Appropriated Funds in FY 2008 and $219.3 million in the current year, which is an increase of $101.6 million.

UA's Non-Appropriated and Federal Funds budget was $786.7 million in FY 2008 and $911.3 million in FY 2011, which is an increase of $124.6 million.

In total, UA's FY 2008 budget was $1,266.8 million and their FY 2011 budget was $1,401.9 million, which is a total increase of $135.1 million.

So the University of Arizona's total budget has increased by $135.1 million--over 10%--during the period in which the "malevolent" state leaders have been "slashing" the funding.

Unbelievable.  I am so sick of statists crying budget cut when in fact their budgets are increasing.  Mr. Shelton goes on for thousands of words of drivel about the poor state of public discourse in Arizona while simultaneously dropping this turd in the punch bowl.  How is public discourse supposed to improve when the president of one of our two state universities is spewing out what he must know are outright fabrications and misrepresentations.  Pathetic.

I tell folks all the time that  99% of the time the problem with bad governance is not bad people in the government (or at least not bad before they entered government) but bad incentives and information.

Take the recent public reaction against the new TSA search procedures.  Its not that everyone in the TSA aspired for a job where they could grope stranger's nads.  Its that the incentives in government make risk management impossible.

Let's look first at the cost side.  How much do internal TSA evaluation and incentive systems value

• protection of individual rights and privacy
• stewardship of taxpayers money

Can we safely say close to zero?  I don't think anyone at the TSA is being denied promotion because they were insufficiently concerned with the fourth amendment.

So what is it that does matter in their incentive system?  I would argue that they have one single, overriding concern -- to avoid an incident for which they can be retroactively blamed as being insufficiently diligent.   If you are confused about how this incentive might arise, Conservatives need only look at themselves.  How many of you have pounded Janey Napolitano for being insufficiently diligent, for example in her "the system worked as it was supposed to" comments.

I spent a lot of time at HBS, in consulting at McKinsey, and in corporate life worrying about incentive systems.  And the absolute first rule, in my mind, is to ignore the official incentive system and explore what really drives behavior.  For example, a company might have a finely balanced set of published performance measures, but if the last three promotions all went to the person who sucked up the most to the boss, the latter will likely influence behavior much more than the published system.

The same is true at the TSA.  I have no idea what their official performance metrics are.  But to a large extent these metrics are irrelevant anyway in an environment where it's impossible to be fired and salaries and promotions have more to do with seniority than performance.   In this environment, unofficial incentives are going to be very powerful, and I am virtually positive the overriding such incentive is avoiding blame due to lack of diligence.

So we should not be surprised if the TSA runs out of control with its diligence in a way that is unchecked by any considerations of cost, privacy, or risk management.  This incentive is so powerful that the only way to override it is either through executive leadership or legislative action.  We'll see if we get either, but trashing privacy and the fourth amendment tend to be bipartisan hobbies so I am not wildly confident much will change.

A while back another entrepreneur/blogger wrote and asked me about investment choices for retirement.  My philosophy on retirement seems to be a lot different than that of others, and I think owning one's own company changes some of the dynamics of retirement investing.   Note that this advice is not right for everyone, and maybe no one, so read at your own risk.  I publish it because the person I wrote suggested I do so, and after weeks of crazy intense work schedules I finally have the time.

A blogger wrote me about his despair at finding appropriate investment vehicles for his retirement savings.   With relatively equal chances of 1) a long period of Japan-like slow growth or 2) a high inflationary period triggered by trying to avoid #1, both bonds and equities looked bad, and while real estate may have some value plays when things finally bottom out, neither of us has the time to pursue that.  [since our emails, International equities are something I have moved money into, both as a diversification play as well as a way to short the dollar].

As I wrote him in one email

There is still a good chance of returning to normal growth in the middle somewhere, but both those bookends [inflation and stagnation] loom much larger than they might have, say, in my calculations five years ago.  I have trouble figuring out what to invest in when both are possibilities.  Equities?  Great for hedging inflation but suck if there is a lost decade.  Bonds would make sense in that case, but their interest will be low and they will be awful if inflation ramps up.  If I really knew we would get inflation and devaluation, I would be leveraging like crazy because inflation transfers wealth from creditors to debtors.

As a result, I said that my main investment for my free capital was debt reduction and de-leveraging of my own business.  Paying down debt has the advantage of having an absolutely predictable return and it reduces risk.   This makes double sense for me as I have put new expansion investments in my business on hold until a variety of government issues from health care to tax rates become clearer.  (For example, in health care, because my company is an oddity, with seasonal part time workers mostly on Medicare already, no one can yet tell me what my future costs will be.  Estimates range from +0 to +20% of revenues!)

The key to my business, which may be very different from others, is that I make big investments to gain long-term contracts, but once captured, these contracts give my business a fair amount of stability and predictability.  Further, in the latest recession, my business has proved to be either counter-cyclical or at least recession-proof to some extent, as 2009 was actually a blow-out record year for us.  Given these facts, I am able to put a higher percentage of my net worth into my own business as an investment, without having to diversify as much in case of business trauma.  And I prefer this.  Given the choice of investing in a company I barely know on the NYSE or mine, which I understand and control, I prefer the latter.  Also, returns on capital from buying or investing in private small businesses can be much higher (with higher risk of course) than in traditional equities -- see my whole series on buying a small business.

But here is where I really differ from most people: I take a very different view of retirement.   When I worked in grinding corporate jobs (e.g. up until I was about 40) I was very focused on retirement.  Now that I am doing something that is not brutally stressful,  I hardly think about retirement.   The whole concept of retirement now seems weird.  I have, after a lot of hard work, gotten my business to the point where I can generally work as hard as I want to -- if I don't work hard, the business does not grow but I have good people such that it doesn't fall apart either.  I compete with people who are running businesses in their late 70's who are still having a good time.  I can take nice trips when I want to, take the day off if I need to, or whatever.  My business actually has an off-season so I can be more relaxed part of the year.

My advice to this particular entrepreneur was to maybe reconsider the paradigm of "retirement."  After all, the the long history of the world, retirement is a new concept that is barely 100 years old.

Are you the shuffleboard and golf type?  What do you imagine yourself doing after retirement?  I think you need some protection against becoming infirm or senile, but if you are healthy and vigorous, are you the type to get bored fast?  As an example, nearly all of my 400 employees are retired, but they all got bored and wanted something to do.

Here is an alternative, entrepreneur's way to think about planning for retirement:  How do I work really hard building a business that in 10 years will have a position such that it spits out some level of cash without effort on my part and can still grow if I want to spend time on it.  I am surrounded in Scottsdale by people who have done exactly this after giving up a corporate job.  At some point they took their savings from their 30s and 40s and dumped it into a business where they could still have the lifestyle they wanted.  Buying or building the right company is sort of like buying a bond with an attached warrant whose value is related to how hard you want to work.

As I implied earlier, this is not an appropriate approach for every small business.   The problem with technology businesses, for example, is that they never seem to mature into that latter predictable-cash-flow-stable-market-share phase.  One is always running in place.  One lesson I never forgot from my corporate years:  In the industrial sector, I often saw people making loads of money selling bushings or some such whose design hadn't changed since 1920.  It led me to this strategy:  Find a market with barriers to entry, which may well not be very sexy, and spend ten years battering you way in, and then relax behind those walls.  (As to sexy, the very first two classes of the first year Harvard Business School strategy course were a sexy cool software business and a boring stable industrial product business.  Of course,the boring stable water meters made a fortune, while the software business never made a good return on capital.  Beware of sexy businesses -- see: Airlines).

One other paradigm I would challenge is the notion everything you do as an entrepeneur has to be started from scratch.  Many entrepreneurs have fun doing this but the prospect of doing a bootstrap startup when you are 70 years old is exhausting.   Such entrepreneurs who have had a life of serial startups might consider a new phase in their business career as they get older, when they have saved enough assets to perhaps buy into an existing business rather than starting from scratch.  I cannot tell you how many interesting small businesses there are that come up for sale with a guy who has an interesting product and has made some progress but can't manage his way out of a paper bag and thus hits some growth ceiling.  I bought just such a core to my current business 8 years ago.  These businesses require a lot of due diligence, because they are a real mixed bag, but I bought mine in an asset sale for 3.5 times EBITDA (which is an entirely typical price).  Try buying Wall Street equities for 3.5 times EBITDA!  If you pick the right business, and you are a good manager, there is not a better investment out there.  Again,  see my whole series on buying a small business.

Of course this investing-for-retirement is higher risk, because one bets a substantial portion of his net worth on his own business.  But for those with confidence in their own ability, I find it a lot more compelling to bet my capital on myself rather than on guys I don't know running the Fortune 500.

After having my car hit 3 times in one week driving in Italy, I swore this time I would do it without the car.  So I tried rail.  I had almost as much trouble with rail as with driving.

First, never, ever, ever buy a Eurail pass for Italy.  It is way too expensive compared to the train fares.  Its a good deal in Switzerland, so I bought one for Italy before doing the research.  It became a running joke in Italy - every single Italian rail employee we had to show the pass to told us we should not have bought it.  So not only did I pay too much, but I got reminded of it twice a day.

Second, all but the smallest and shabbiest trains require advanced reservations, but these reservations are nearly impossible to make if you are not Italian, because the rail site has some kind of weird block on most all American credit cards (much about this around the Internet).  This means that I can't just have get-on-the train and go flexibility, I have to pick a train I want to use in the future and then stand in line at a rail station to purchase the ticket or reservation.    Lines do not move fast in Italian rail stations.

But the classic story comes from my minor infraction of rail policy that ended up costing me money.  I don't know if this is just government or if it they have a lot of problem with cheating.  Apparently, each day you are supposed to fill that days date in the next slot on your Eurail pass before you get on the train.  I forgot to on one trip, so the conductor insisted I owed a 50 euro fine.  Seriously.  I said, let me add the date right now, but she said no.  They had a couple guys lined up to throw us off in the next random Italian town if we did not hand over the money  (reminds me of this story in England).

I will say, once I calmed down, that in retrospect the lecture from the Italian state employee on why it is important to follow every single rule and to trust our betters in government that all the rules are for a good reason was almost worth the 50-euro price of admission.

It took me a while to figure out what they were afraid of -- I suppose if you did not write the date in advance, and the conductor never came by, you could get an extra day of travel.  Of course, I had paid extra money for a reservation on that particular train, so it was unlikely I was gaming the system (another reason not to get a Eurail pass in Italy, you still have to pay extra for nearly every train).  And it seemed odd that on a 2-hour train ride they thought it a real risk no conductor would come by, though on the very next day we took a 2-hour ride and there was no conductor, so I suppose it is possible.

In that latter case we were in a car where the AC failed on a hot day, and of course it was the only train we rode on the whole trip where the windows did not open.  No conductor took my ticket, but one did stand at the end of the car the whole trip turning away anyone who wanted to get an open seat in the next car -- after all, we were assigned a specific seat and sitting in another would be against the rules.

The government is the first organization, given its unique powers to use force against citizens, that should be subject to surveillance and transparency.  Unfortunately, since it is the government itself that sets the rules, it is usually the last.  Following in the tradition of a Congress that exempts itself form most of its workplace regulation, comes the new financial bill which apparently exempts the SEC from most public scrutiny

Under a little-noticed provision of the recently passed financial-reform legislation, the Securities and Exchange Commission no longer has to comply with virtually all requests for information releases from the public, including those filed under the Freedom of Information Act.

The law, signed last week by President Obama, exempts the SEC from disclosing records or information derived from "surveillance, risk assessments, or other regulatory and oversight activities." Given that the SEC is a regulatory body, the provision covers almost every action by the agency, lawyers say. Congress and federal agencies can request information, but the public cannot.

That argument comes despite the President saying that one of the cornerstones of the sweeping new legislation was more transparent financial markets. Indeed, in touting the new law, Obama specifically said it would "increase transparency in financial dealings."

Apparently the children of the sixties, who once pushed for the Freedom of Information Act as a check to those in power, now are rolling it back once they are in power themselves.

I thought this was an interesting irony of our growing corporate state:

In my post "Attention Gov't: This Is How Businesses Are Created" I brought up the point that government regulations keep the average American from investing in ground floor business opportunities with rules specifying how much money someone must have before they can invest in start-ups (unless the start-up is being done by a friend or family member).  Government regulations also prevent start-ups from advertising their investment opportunity.  If you need ground-floor investment (as opposed to loans) to bring your business to the proverbial next level, there is a wall of regulation that keeps you from asking for it from the general public and specifies what "sophisticated investors" (the already rich) you can approach and how.

Those rules are there to protect us middle class rubes from being taken in by crafty and ill-intentioned businessmen.

I contrasted this protection the government so thoughtfully provides us"“keeping us from making possible bad investments"“with it's promotion of lotteries and acceptance of casino gambling.

Now these people who will not allow an entrepreneur to advertise or promote his start-up in order to get voluntary investment money from people willing to take a risk on the business idea or invention are looking at legalization of online gambling in the USA.

I was thinking today, what must the families of the 11 people killed on the Deepwater Horizon be thinking?  Their losses are never mentioned in any news reports I see.  Its all about getting oil on the ducks.

Sure, I am pissed off about the enormous damage to the Gulf Coast as well.  But I got to thinking, were I the engineer that made the wrong risk/safety decisions here, what would I feel most guilty about?  I was put in that position for years in a refinery, constantly asked, "is this safe" or "can we keep running" or "do we need to shut down" or "is that vibration a problem?"  These are difficult, because in the real-world of engineering, things are not ever perfectly safe.  But never-the-less, if I had made the wrong call here, I think I would be feeling a lot worse about the 11 dead people than a number of dead fish and birds.  Perhaps my priorities are out of whack with the times.

By the way, TJIC has a great post on risk and cost in the real world of engineering.  I agree with his thoughts 100% from my experience as a troubleshooter / engineer in the field making just these decisions.

Look, we all trade off safety in order to save time and expense.

Do you put on your seat belt when moving your car from one point in the driveway to another?

Do you buy the car that costs twice as much, because it's got a 1% increase in crash survivability?

Did you pay $40k to get industrial fire sprinklers installed in your house?

Do you have a home defibrillation machine?

There is nothing wrong, in the abstract, with trading off safety in order to save time and expense.

The question is whether BP did this to a level that constitutes "gross negligence".