1

Comment by Franklin “Chuck” Spinney, Original DoD Whistle-Blower and Author of Defense Facts of Life: The Plans/Reality Mismatch (Westview Press, 1985)

After 30 years of trying to understand the budgeting and procurement pathologies of the Pentagon and the Defense Power Games (i.e., the ubiquitous arts of front loading and political engineering), I have concluded that the key to understanding why people behaved the way they did lay in understanding tradeoffs among what I called the asymmetric burdens of risk. There are three basic types of risks in a weapons program -- Economic Risk (i.e., the likelihood that the weapon will cost more than predicted); Technical Risk (i.e., the likelihood that a weapon will not perform as well in combat as predicted); and Political Risk (i.e., the likelihood that the weapon program is terminated for whatever reason). Economic risk affects those who pay for the weapon -- i.e., the taxpayers. Performance risk affects those who use the weapon -- i.e., the soldiers, sailors, airman, and marines at the pointy end of the spear. Political Risk affects the faction that benefits from continuing the weapons production --i.e., the contractors, the bureaucrats and military officers in the Pentagon and those administering the contracts, the politicians in whose districts the weapons are made, and the coterie of hangerons who feed off the weapon in one way or another (journalists, think tankers, academics, lobbyists, etc).

Once risks are viewed this way, the seemingly mad practices that reformers have railed about for the last 40+ years, like success-oriented testing, buy ins, concurrent engineering and manufacturing development, cooked books that can not the most rudimentary audits, etc., all have one thing in common -- they all reflect a tradeoff that reduces programmatic risk by accepting increases ineconomicand performance risk. And the faction benefits from that tradeoff suffers no pain for its gain, because it is spending other people's money and the consequences of its actions affect the spillage of other people's blood.

Now after reading the attached report by David Leonhardt below on the economic theory of LOOTING, it is clear that the behavior exhibited by the Pentagon and Wall Street are variations on a theme, but whereas looting on Wall Street operates in cycles of frenzy and collapse, looting by the Pentagon operates along a slow, methodical, and painful pathway to collapse.

Comment by Robert Steele, author of multiple books on Intelligence, and also of ELECTION 2008: Lipstick on the Pig (Earth Intelligence Network, 2008).

I have thought long and hard about why General Smedley Butler, USMC, would write a book called War Is a Racket, and over the course of many years as an intelligence professional, as a military officer, as a small business CEO, and finally as a non-profit co-founder, struggled with the question of why good people trapped in a bad system produce results that are unconstitutional, undemocratic, irrational, and downright bad for all concerned.

I have gone through three stages in my thanking.

In Stage 1, in the 1980’s, I thought it was that intelligence professionals simply did not get it—they obsessed on the “Hard Targets” (China, Cuba, Iraq, Iran, Libya, Russia, North Korea) and ignored the Third World. I addressed this with General Al Gray, USMC, then Commandant of the Marine Corps, whose article, “Global Intelligence Challenges of the 1990’s” (American Intelligence Journal, Winter 1989-1990) remains the single best prediction piece on where intelligence must focus today—it was just twenty years too soon for most to “get it.”

In Stage Two, in the 1990’s I recognized that the gap between people with power and people with knowledge had grown cataclysmic. I speak to this in VIRTUAL INTELLIGENCE: Conflict Avoidance and Resolution Through Information Peacekeeping (US Institute of Peace, 1997), and I summarize the insights of those with knowledge being ignored by both politicians and policymakers at the time in “The Asymmetric Threat: Listening to the Debate.” (Joint Forces Quarterly, Autumn/Winter 1998-99). We do “know,” but Congress and the politically-appointed in the Executive do not listen.

In Stage Three, the first eight years of the 21st Century, I have come to realize that not only are those in charge of Wall Street and of the US Government at the political level largely ignorant, they also lack integrity. INTEGRITY. I provide a complex Annotated Bibliography free online, and will not belabor the 500 or so books that finally led me to realize that the Constitution is no longer respected in Washington, and regardless of who is President, it is Wall Street and the two political parties that exclude close to half of the eligible voters from relevancy that are in charge. It is in that context that Chuck’s remarks above about Economic versus Technical and Performance Risk are so utterly brilliant. My newest briefing, “The Ultimate Hack: Reinventing Intelligence to Reengineer Earth” both explains the Dumber, Plunder, & Blunder nature of our current mismanagement of the public trust, and provides an outline for how we can reinvent intelligence so as to reengineer everything so as to eradicate the ten high-level threats to humanity by harmonizing investments across the twelve policies and showing the eight demographic challengers how to achieve higher quality of life without making our mistakes. Intelligence—decision support—is central to all of this, and INTEGRITY is central to getting the “true costs” of every aspect of our mining, processing, manufacturing, and services—including defense—redirected into affordable, sustainable, constitutional, healing directions.

I called for “four forces after next” in 1998, and again in 2008 with an unpublished article again summarizing an Army Strategy Conference, “Rebalancing the Instruments of National Power,” and while neither the politicians nor the senior bureaucrats (both uniformed and in suits) are listening, there is a tidal wave of change sweeping across America and I believe that in combination, secret intelligence and public intelligence are about to begin a new era of relevance, potency, and effect.

I will begin my concluding comment with a quote from Senator Sam Nunn (D-GA), a man I deeply admire, a quote that has guided my thinking since I discovered it in the late 1990’s.

I am constantly being asked for a bottom-line defense number. I don’t know of any logical way to arrive at such a figure without analyzing the threat; without determining what changes in our strategy should be made in light of the changes in the threat; and then determining what force structure and weapons programs we need to carry out this revised strategy.

Senator Sam Nunn (D-GA)

Independently, LtGen Dr. Brent Scowcroft, USAF (Ret), another “great man” in the truest sense of the term, and I and a few others have reached the same conclusions: first, that “the threat” is more often than not a non-military and often a non-human threat; and second, that the military as it is now trained, equipped, and organized—and I would add, the U.S. Government as it is now trained, equipped, and organized—are incapable of being effective against more than 10% of the existing threat spectrum.

Beginning in 2002 when I first took an interest in Peacekeeping Intelligence, and accelerating in 2004 when I learned from my Swedish military colleagues the concept of Multinational Multiagency Multidisciplinary Multidomain Information Sharing and Sensemaking (M4IS), I have understood:

1. Intelligence must begin to drive Whole of Government force structure, policy, and spending.

2. No one country can “know” it all—we must restore civilized multinational information sharing across all languages, all topics, all the time.

3. The military in the USA as well as in all other countries is the only element of any government that can be relied upon for “core” services (communications, intelligence, transport, civil affairs and engineering, medical).

4. INTEGRITY at every level in every organization is the single non-negotiable ingredient for restoring the Constitution, for restoring the efficacy of government, and for achieving life, liberty, and happiness.

Yellow Highlights by Chuck Spinney

March 11, 2009

ECONOMIC SCENE

The Looting of America’s Coffers

By DAVID LEONHARDT

New York Times

Sixteen years ago, two economists published a research paper with a delightfully simple title: “Looting.”

The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

On Tuesday morning in Washington, Ben Bernanke, the Federal Reserve chairman, gave a speech that read like a sad coda to the “Looting” paper. Because the government is unwilling to let big, interconnected financial firms fail — and because people at those firms knew it — they engaged in what Mr. Bernanke called “excessive risk-taking.” To prevent such problems in the future, he called for tougher regulation.

Now, it would have been nice if the Fed had shown some of this regulatory zeal before the worst financial crisis since the Great Depression. But that day has passed. So people are rightly starting to think about building a new, less vulnerable financial system.

And “Looting” provides a really useful framework. The paper’s message is that the promise of government bailouts isn’t merely one aspect of the problem. It is the core problem.

Promised bailouts mean that anyone lending money to Wall Street — ranging from small-time savers like you and me to the Chinese government — doesn’t have to worry about losing that money. The United States Treasury (which, in the end, is also you and me) will cover the losses. In fact, it has to cover the losses, to prevent a cascade of worldwide losses and panic that would make today’s crisis look tame.

But the knowledge among lenders that their money will ultimately be returned, no matter what, clearly brings a terrible downside. It keeps the lenders from asking tough questions about how their money is being used. Looters — savings and loans and Texas developers in the 1980s; the American International Group, Citigroup, Fannie Mae and the rest in this decade — can then act as if their future losses are indeed somebody else’s problem.

Do you remember the mea culpa that Alan Greenspan, Mr. Bernanke’s predecessor, delivered on Capitol Hill last fall? He said that he was “in a state of shocked disbelief” that “the self-interest” of Wall Street bankers hadn’t prevented this mess.

He shouldn’t have been. The looting theory explains why his laissez-faire theory didn’t hold up. The bankers were acting in their self-interest, after all.

•

The term that’s used to describe this general problem, of course, ismoral hazard. When people are protected from the consequences of risky behavior, they behave in a pretty risky fashion. Bankers can make long-shot investments, knowing that they will keep the profits if they succeed, while the taxpayers will cover the losses.

This form of moral hazard — when profits are privatized and losses are socialized — certainly played a role in creating the current mess. But when I spoke with Mr. Romer on Tuesday, he was careful to make a distinction between classic moral hazard and looting. It’s an important distinction.

With moral hazard, bankers are making real wagers. If those wagers pay off, the government has no role in the transaction. With looting, the government’s involvement is crucial to the whole enterprise.

Think about the so-called liars’ loans from recent years: like those Texas real estate loans from the 1980s, they never had a chance of paying off. Sure, they would deliver big profits for a while, so long as the bubble kept inflating. But when they inevitably imploded, the losses would overwhelm the gains. As Gretchen Morgenson has reported, Merrill Lynch’s losses from the last two years wiped out its profits from the previous decade.

What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it “management fees” or “performance bonuses.” Once the investments were exposed as hopeless, the lenders — ordinary savers, foreign countries, other banks, you name it — were repaid with government bailouts.

In effect, the bankers had siphoned off this bailout money in advance, years before the government had spent it.

I understand this chain of events sounds a bit like a conspiracy. And in some cases, it surely was. Some A.I.G. employees, to take one example, had to have understood what their credit derivative division in London was doing. But more innocent optimism probably played a role, too. The human mind has a tremendous ability to rationalize, and the possibility of making millions of dollars invites some hard-core rationalization.

Either way, the bottom line is the same: given an incentive to loot, Wall Street did so. “If you think of the financial system as a whole,” Mr. Romer said, “it actually has an incentive to trigger the rare occasions in which tens or hundreds of billions of dollars come flowing out of the Treasury.”

Unfortunately, we can’t very well stop the flow of that money now. The bankers have already walked away with their profits (though many more of them deserve a subpoena to a Congressional hearing room). Allowing A.I.G. to collapse, out of spite, could cause a financial shock bigger than the one that followed the collapse of Lehman Brothers. Modern economies can’t function without credit, which means the financial system needs to be bailed out.

But the future also requires the kind of overhaul that Mr. Bernanke has begun to sketch out. Firms will have to be monitored much more seriously than they were during the Greenspan era. They can’t be allowed to shop around for the regulatory agency that least understands what they’re doing. The biggest Wall Street paydays should be held in escrow until it’s clear they weren’t based on fictional profits.

Above all, as Mr. Romer says, the federal government needs the power and the will to take over a firm as soon as its potential losses exceed its assets. Anything short of that is an invitation to loot.

Mr. Bernanke actually took a step in this direction on Tuesday. He said the government “needs improved tools to allow the orderly resolution of a systemically important nonbank financial firm.” In layman’s terms, he was asking for a clearer legal path to nationalization.

At a time like this, when trust in financial markets is so scant, it may be hard to imagine that looting will ever be a problem again. But it will be. If we don’t get rid of the incentive to loot, the only question is what form the next round of looting will take.

Mr. Akerlof and Mr. Romer finished writing their paper in the early 1990s, when the economy was still suffering a hangover from the excesses of the 1980s. But Mr. Akerlof told Mr. Romer — a skeptical Mr. Romer, as he acknowledged with a laugh on Tuesday — that the next candidate for looting already seemed to be taking shape.

It was an obscure little market called credit derivatives.

E-mail:

EIN CEO Note: For a superb line-up of 25, who sacrificed their integrity to ruin America, see TIME.

As posted to Earth Intelligence portal page.