50 years of Science - part 1

A few months ago I was rooting through my book shelf and I came across "The Intelligent Man's Guide to the Physical Sciences" by Isaac Asimov.  Asimov initially became famous during the "Golden Age" of Science Fiction and is considered one of the Grand Masters of the genre.  He is famous for inventing the "The Three Laws of Robotics".  This ushered in the era of good robots to supplement the previous trope of evil monster robots.  He also wrote the "Foundation" trilogy (and eventually added additional books to the series).  This was an early entry in the sub-genre of Future History and posited that crowd psychology would eventually become a hard science, thus allowing broad historical trends to be forecast and possibly manipulated.

After many years of success as a Science Fiction author he branched out into several other areas.  One of these was writing about science for a general audience.  The "Guide" was written in 1959 and 1960, making it roughly 50 years old.  Asimov did a good job of summarizing the state of the art at that time.  I thought it would be interesting to do a series of posts comparing the state of Science then and now.  But first let me set the scene by looking at the more general situation in 1960 as compared to the present.  Let me start with a long list of "no"'s.

There were no integrated circuits.  The transistor had been invented about 10 years earlier but was not in wide use.  Something called a "transistor radio" would be introduced at about this time.  Previously radios, and electronics in general, were powered by vacuum tubes (essentially a small light bulb with a bunch of extra wires and other stuff jammed inside the glass shell).  A simple device like a radio would have less than 10 tubes.  A very complex device would usually have less than 100.  Modern electronics, by contrast, have the equivalent of millions of tubes combined into a single small chip costing a few dollars.  Computers existed at this time but they had the processing power of a digital watch and cost millions of dollars each. 

There was no Internet.  The very beginnings of what would be eventually become the Internet (called ARPANET at the time) was begun in the late '60s.  Since there was no Internet there was no E-Mail (invented in the '70s) or web pages (invented in the '90s) or Twitter or Facebook (both invented in the '00s).  In fact, you couldn't call someone on your phone by pushing buttons.  Telephones of the time had "rotary" dials with 10 holes (one for each digit).  There were no Area Codes or International codes.  To make a long distance call you had to contact an operator, an actual person, who would make arrangements.  Long distance calls within the U.S. were possible but expensive (a dollar or more per minute).  International calls were just barely possible.  The sound quality was terrible.  It could easily take 20 or 30 minutes to set one up and they were fantastically expensive.  At the time almost no one had actually participated in one due to the cost and difficulty.  You could look up a local phone number in a "phone book" (still around). To get a number for someone not in your town you had to contact an operator (again, a person) in that area who could look it up for you.

And there were no cell phones.  You rented phones from the phone company.  You couldn't even buy one.  There were only a few models to choose from and they were all hard wired to the phone system (e.g. no "walking around" portable phones - you had to go where the phone was and it was by the wall where the phone man had wired it in).

There were TVs but there were no color TVs.  Almost no one had cable so all you typically had were the few channels that broadcast over the air in your area.  There were a few satellites but there were no communications satellites so there were no extra channels like ESPN or C-SPAN or USA or HBO.  You were stuck with what came from your local TV stations.  There were no TiVos or DVRs so you had to watch the show when it was broadcast.  And a particular episode was only broadcast once (except for some reruns in the summer) so if you missed it there was no going back.  At this time there were also no VCRs so you couldn't "Tape" anything.  Nor could you rent movies (or download them).  If you wanted to see a movie, you had to go to a theater while it was in town.

Cars all ran on leaded gas with no ethanol in it.  They had no seat belts or air bags.  Air conditioning was available on a few luxury models.  Cars were cheaper but tended to wear out quicker.  A car was old at 50,000 miles and a junker at 100,000.  But car repairs were much simpler and a lot of people did their own.  SUVs hadn't been invented yet and pickup trucks were only driven by people who needed them for work.  The only in-car electronics were radios and they only got AM.  No FM.  No CD player or entertainment package.  There were no navigation systems. You got free paper maps at gas stations.  There was no "self serve".  Someone (a "gas jockey") pumped your gas for you and checked the tire pressure, and oil and radiator levels.  Cars didn't have fuel injection.  They also didn't have any anti-pollution or other complicated stuff like a diagnostic computer.  A mechanic had to figure out what was wrong on his own.

Finally, books were a lot cheaper.  At $0.90 (1969 price), "Guide" was a little  more expensive than a typical book of the time.  Of course, most things were cheaper then.  But you also got paid a lot less too.  And, if you had a paying job, you were almost always a man.  Few women worked outside the house.  With that as an introduction, let's jump into the book.

The biggest telescope of the time was the 200" Hale telescope located on Mt. Palomar in California.  It used large photographic plates, about 1' by 1'.  They were covered with an emulsion that was sensitive for the time and designed for maximum sharpness.  After processing the plates were examined by eye or perhaps with a small magnifying glass.  CCDs had not been invented so there was no electronic alternative to photographic methods.  And photographic methods were better than staring through the telescope with the naked eye.  Another problem was that the atmosphere introduced small distortions. This was one reason no larger telescope had been built.  The Hale was about as big as it made sense to go.  Modern telescopes use adaptive optics (and other tricks) to deal with this (and other issues) but the technology to make a bigger telescope work better than the Hale did not exist then.  There were other limitations imposed by the atmosphere.  It is opaque to Infrared, Ultraviolet, X-rays, and Gamma Rays.  And there were no telescopes in space (e.g. Hubble) and no big telescopes in the Southern hemisphere.  So Astronomers knew little about how the Universe looked in the Southern hemisphere and nothing about how the universe looked at these other wavelengths.  There were a few radio telescopes like Jodrell Bank in the U.K. but big dish radio telescopes like in the movie Contact or at Arecibo in Puerto Rico had not been built yet.

So with these limitations, how did Astronomers of the time do?  They got the size of the Solar System right.  They got the size of the Milky Way and our rough location in it right.  But they did not know that there was a giant Black Hole in the center of the Milky Way.  Black Holes at this time were an entirely theoretical concept.  No one had any evidence that they actually existed.  Astronomers were also able to estimate the size and distance of the Andromeda Galaxy with reasonable accuracy.  That, and other observations, led them to believe that the universe was at least 5 billion years old.

The current estimate for the age of the universe is 13.7 billion years.  So Astronomers of the time got that wrong.  But they knew they did not have good data.  Instruments of the time only allowed Astronomers to see out about 2 billion years.  (The constant speed of light makes distance and time equivalent.  If you are looking at something that is one million light years away, you are seeing it as it was one million years ago).  So they stated their estimate as "at least 5 billion years".  The 2 billion year observational limit was why they had such a poor estimate of the size and age of the universe.

Asimov does a great job of explaining how Astronomers knew what they knew.  Much of it was hard to figure out given the tools they had to work with at the time.  This is generally true.  It is easy for us to figure out a lot of things now because we now have tools that are so much better.  Given the "it's easy to do now" phenomenon it's easy to fall into the trap of unconsciously thinking we are so much smarter now than they were then.  But in many ways the opposite is true.  They were so much smarter then than we are now because they had to be so clever and creative to figure things out with such poor tools.  So I recommend picking the book up, if you can find it.  It is a useful exercise in humility to see what they had to go through to figure out what they were able to.

 I am going to end things here.  I will pick things up starting with the next chapter in the next installment.

Risk

We are now 3-4 years into our current economic problems.  I have read several books on the subject.  I think I have come up with a simple explanation (e.g. one much less than book length) of how we got into this mess.  I think the whole thing can be explained by focusing on a single word:  risk.  Now the more enlightened among you know Risk as a board game.  But I am talking about "risk" with a lower case "r".  At its most basic, risk is about whether or not things are going to go badly wrong.

Businesses don't like things to go badly wrong.  So they have long sought out "risk mitigation" strategies.  Let's say a business is worried about a large investment going bad.  And let's say further that the business thinks that the chances of this happening are 1 in 100.  Say this business can pay a premium of 2% of the size of the investment for someone else to cover the loss if the investment goes bad.  On paper this might seem like a bad investment as in a probabilistic sense the cost of avoiding the problem is twice the "expected cost" of the problem.  But the business might decide it's willing to pay the 2% anyhow just to avoid having to worry about the investment going bad.  If this sounds like insurance that's because it is.

There are many complexities in actual specific situations but this "what will it cost and what is the probability it will happen" captures the core concept of risk.  And businesses engage in risky behavior as a normal part of doing business.  Any business deal, investment, loan, etc. can go bad.  So one of the critical skills of a good businessman is to be able to properly manage risk.  If a business engages in a lot of low cost high risk transactions then the business most likely self insures.  They build expected losses into the cost of doing business and eat the loss directly.  This saves them the additional cost of farming the risk out.  If they have judged the risk correctly then the mark up on the successful transactions will more than pay for the losses on the ones that go bad.  Businesses often put a lot of thought into situations where the risk is very low but the cost of failure is very high.  These are the situations where they are likely to buy some form of insurance.  But the key to doing this sort of thing correctly is to be able to accurately judge risk.  If something is low risk but you think it is high risk then you waste money on insurance.  If something is high risk but you think it is low risk then you may choose to under-insure or get no insurance at all.  These situations can lead to very bad things as we all now know only too well.  So let's take a look at events of the past few years from the perspective of risk.

For most of my lifetime a mortgage was a low risk investment for a company.  But this was not always so.  The house my father grew up in was built in 1910.  For various reasons my father took control of the family's finances about 25 years later.  The house originally cost $5,000.  He was shocked to learn that after payments had been made for 25 years $5,000 was still owed on the mortgage.  And this being the middle of the great depression, the house was still worth only about $5,000.  His parents had taken out an "interest only" mortgage.  He quickly moved to start paying down the principal and had the house fully paid off a few years later.  If my father's family had been a little less lucky they would have ended up with nothing.  Many depression era families did.  As a result of the experience of those other families FDR was able to introduce mortgage regulation which banned interest only mortgages.  For many years a 30 year 20% down mortgage was the standard.

And a 30 year 20% down mortgage is a very safe investment for the investor.  If something goes wrong the investor can repossess the house and sell it.  They will likely get enough to cover the mortgage balance and any additional costs.  And there was a good chance the home owner who got in trouble would sell the house and use the proceeds to pay off the mortgage in full before the mortgagor even knows there's a problem.  In only a few rare cases did the investor take a loss on the mortgage.  So the risk of any loss was low.  And even in the case of a loss the investor was likely to get most of his money back.  An investor was fully justified in assigning a very low "risk premium" (the amount he needed to mark the transaction up by) to a mortgage transaction.  This situation continued for 40 years or so.

Then people looked at how to make more money in the mortgage business.  The first thing they asked themselves was "what if we reduced the down payment minimum below 20%?"  The answer turned out to be "not much".  Few mortgages went into foreclosure.  When they did the potential loss was usually well below 20%.  So by changing the down payment requirement from 20% to say 15% or 10% nothing much really happened on the risk side.  The number of mortgages that went bad stayed low and the losses, when there was a loss, stayed small.  But all of a sudden a lot more people could afford a mortgage.  So costs went up but not by much and volume went up a lot.  And down payments went down some more to 5% or 3%.  And even more people flooded into the market.



Now what if I write a mortgage to a bad person?  This is someone who is unable or unwilling to pay the mortgage.  What's my risk?  Well, even if the bad person is in the house for only a year the investor will get all his money back if housing prices rise enough.  So why bother with credit checks if you will not lose money if the credit is bad?  In this environment an accurate credit check is not worth much.  If the mortgagee is a good person it's a waste of money.  If the mortgagee is a bad person you still get your money back eventually.  So a entire segment of the mortgage business appeared that specialized in writing mortgages for bad (only in the sense of credit risk) people.  And investors made a lot of money.

It's not just that they failed to lose money.  They actually made money, more money.  This is because of a perverse situation.  If a person has a bad credit rating then you are justified in charging them a higher interest rate (see "risk premium" above).  Investors love getting a higher rate of return (e.g. the higher interest rate) for the same risk (e.g. chance of a loss).  So investors encouraged mortgagors to find problem mortgagees because they could be talked into a higher interest rate.  In fact, it got so bad that many people who could qualify for a low risk low interest rate mortgage were sold a high risk high interest rate mortgage because that was he kind of mortgage investors wanted to buy (and were willing to pay a higher commission on).  Then there was the balloon.

Mortgages began to be structured with a low "teaser" interest rate for the first few years (typically three years).  Then the interest rate would "balloon" up to a much higher rate.  From a mortgagee's point of view this was not as bad as it seemed.  They could refinance, presumably into a new mortgage with another 3 year teaser rate.  If they did this often enough they'd never get to the part where the interest rate ballooned.  If that didn't work they could just sell the house and pay off the mortgage.  So it looked like the mortgagee always had an out, if the mortgagee was smart enough to figure all this out.  If not then he was in for a big surprise but that was his problem.  And on the other side of the deal, the investor side, there was a con job going on.  Mortgages were rated on their return.  Since a typical balloon mortgage would have a low interest rate for 3 years but a high interest rate for 27 years the average interest rate was pretty close to the high interest rate so the mortgage looked like a pretty good investment.  Now this ignores the whole "refinance or sell" thing but investors went with the "ignorance is bliss" strategy in large numbers and pretended the "refinance or sell" option did not exist.

The mortgage industry evolved quickly.  Down payments went down quickly.  Teaser rates and other gimmicks appeared quickly.  So there wasn't a lot of history that accurately represented the current market.  Wall Street took advantage of this.  They would trot out lots of statistics about how slowly mortgages turned over and that only a small percentage of mortgages defaulted.  But most of these statistics covered a different market, a market where down payments were higher and most mortgages did not contain gimmicks.  Averaging a bunch of good old mortgages with some bad new mortgages gives a distorted picture of what is likely to happen with the new mortgages.  But investors in general ignored all this and the marker for bad mortgages was hot, hot, hot.

Now let's step back a little.  For more than 40 years mortgages were a modest boring business.  Volume was relatively low because of the 20% down requirement and the fact that mortgagors usually did a thorough credit check and did not loan to problematic potential customers.  As a result mortgages were in fact very low risk.  Then the market started evolving.  Each evolution was in the direction of higher risk.  The early changes (down payment requirement reduced to 15% or 10%) increased risk but by only a small amount.  But they increased the volume by a lot.  Wall Street loved this.  More transactions meant more profit.  So Wall Street pushed for even more loosening of mortgage standards.  During this period risk increased more quickly than before but the increase in risk was still relatively small and by adding more risk premium (e.g. higher interest rates) loses could be managed and volume increased even more.

This led to a vicious cycle.  Wall Street pushed for more loosening of now already loose standards and volume increased.  And by adding gimmicks the apparent profit margin increased.  Default risk was still small because by this time home prices were increasing by leaps and bounds.  By the end of the process anyone could get a mortgage.  In one book the author met a Los Vegas stripper who owned four houses as investments.  In many cases gardeners and dishwashers were buying McMansions.  There was no way these people could keep up on their mortgage payments even though the vast majority wanted to.  But it didn't matter whether a mortgagee couldn't or wouldn't keep their payments up because any problem could be fixed by flipping the house.  So it appeared if you didn't look closely at what was going on that mortgages were still a low risk investment.  In fact the risk associated with the mortgage market had climbed to the point that it was very high.

This finally became apparently when housing prices stalled out.  They stopped rising quickly.  Then they stopped rising at all.  Finally, they started falling.  If someone has made a 20% down payment and the value of the house drops by 10% the investor will still come out OK.  But if the assessment on the house was inflated (as too many were) and the mortgagee paid 0% down and the value of the home drops then the investor is going to lose a serious amount of money.  And that's what happened.  And that fed into a substantial downturn in the economy.  So that people who could normally have afforded their mortgage payments lost their jobs and defaulted.  And this put a lot of distressed houses into the market, which further depressed housing prices.  And many of the people who were employed in the construction business or the appliance business or many other businesses that saw sales drop off dramatically were let go.  So more mortgagees got in trouble and housing prices got depressed some more.

At the peak most mortgage backed securities were rated AAA.  This means they are very low risk investments.  And right up to the end they behaved like they were very low risk.  Losses up to the peak were very small.  There is a branch of mathematics that describes these kinds of situations.  It is called "catastrophe theory".  Imagine a Popsicle stick.  It is placed on the edge of a table so that half of it is sticking out past the edge of the table.  Now imagine holding the stick down on the table and pushing gently on the other end.  The stick will bend slightly.  Push harder and it will bend some more. Let go and it will straighten out.  Now push much harder.  The stick will bend even more and, if you push hard enough, it will break.  Now stop pushing at all after the stick has broken.  What happens?  The stick will not return to being straight.  It will stay bent at the broken spot.  Catastrophe theory deals with these "bend till it breaks" situations.  Fortunately, we don't need to be catastrophe theory experts.  The broken Popsicle stick tells it all.  After the stick breaks a little change like not pushing on the stick any more does not bring the stick back to being straight.

The mortgage business ended up like the broken Popsicle stick.  Once it broke small fixes like lower interest rates did not put it back to where it had been.  And before it broke a number of people made conscious decisions to push the mortgage market harder and harder.  There justification was "well, it hasn't broken yet".  But they kept pushing harder and harder toward higher and higher risk behavior.  On the front lines were the mortgage sellers.  Once they sold a mortgage to a customer they wholesaled it out to Wall Street.  They made their money on volume and retained no risk once the mortgage was sold off.  And they were pushed by Wall Street to make more and more and riskier and riskier mortgages.  As long as nothing went wrong Wall Street made more and more money.  Much of the mortgage origination market is unregulated.  To the extent that it is regulated some regulators tried to push back.  But they were opposed by Wall Street and their powerful lobbying operation.  The regulated mortgage originators also opposed the regulators because they were losing business to unregulated originators.  They added their lobbying muscle to Wall Street's.

A partner in crime were the securities rating firms like Moody's and S&P.  They rated these investments AAA right up until the end.  But they were captured by Wall Street.  If one firm gave a security a bad rating then Wall Street would hire a different firm if the new firm would promise to give the same security a good rating.  Everyone knew how the game worked.  So the ratings agencies would build a paper trail to justify their rating, a paper trail based on the bogus (see above) historical data and other "analysis" Wall Street provided.  The idea was to have plausible deniability.  "We followed accepted industry practises.  We had no idea, honest!"  This, their own lobbying operation, and a "White Shoe" Wall Street law firm on retainer, was judged to be sufficient cover.  And so far their defensive strategy has worked. No one is in jail.  All the firms are still in business and no individuals have lost big law suits.

An argument can be made that mortgage originators are not all that smart.  I don't believe it, but let's just say.  And similarly an argument can be made that the regulators and the ratings agencies are not that smart either.  Again, I don't believe it but let's just say.  Wall Street prides itself on having lots and lots of "smartest guy in the room" types.  But if one of these Wall Street smart guys had applied their intelligence and pointed out the problems in the mortgage industry, what would have happened?  They would been chastised for not being a team player.  If their firm acted on their conclusions they would have stopped making the kind of money other firms were making.  Instead what the smart guys on Wall Street adopted (or in some cases tried to adopt) a different strategy, the "musical chairs" strategy.

In musical chairs there are a number of people walking around a circle of chairs with one less chair than people.  When the music stops everybody tries to sit down.  Whoever does not make it safely to a chair is the loser.  Many people on Wall Street knew there were problems.  But they also knew that were many players involved.  So it was like musical chairs with lots of people but not enough chairs.  As a Wall Street smart guy the strategy I (and pretty much everybody did this) adopted was to make sure I (or my company) always had a chair I could definitely make it to when the music stopped.  Since I'm the smartest guy in the room some other schmuck will get stuck without a chair.  The problem, of course, turned out to be that the whole roof caved in and there were no chairs left for anyone.  For many on Wall Street AIG was the designated schmuck.  Unfortunately no one thought it was their job to make sure AIG had enough money to fulfill its role.  They didn't.  A couple of beats after AIG went under the music was stopped by the roof falling in.

"No chairs" was not a possibility that anyone had considered.  And it turned out that the government and its middle class taxpayers ended up having to come in and bail Wall Street out.  So for the most part it didn't matter to Wall Street that it had screwed up.  A couple of firms went under and a lot of employees got laid off but the system as a whole survived just fine.

So Wall Street didn't know (or pretended it didn't know) that mortgage risk was not being calculated correctly.  Some regulators got it right or at least came closer than any other group but an aggressive lobbying campaign in public and behind the scenes caused them to be ignored when they weren't silenced outright.  The ratings firms got it completely wrong.  And the mortgage origination industry got it completely wrong.  But several of the largest mortgage origination firms (e.g. Countrywide) sold out to Wall Street at very high prices a year or so before the collapse. So the senior executives of these firms did very well.  And ask yourself why so many sold out when things were going so well?  Maybe some people in the mortgage origination business did have a clue.  They differed from Wall Street only in adopting a "sell out at the top" strategy instead of a "musical chairs" strategy.

If it had just been the mortgage meltdown things would have been bad enough.  But unfortunately, it wasn't.  Wall Street has always made money by selling advice.  This is a steady business with a nice profit margin but there isn't a big enough market for it to make the kind of out sized profits Wall Street craves.  Wall Street's main moneymaker used to be buying and selling securities.  And by "securities" I mean Stocks and Bonds.  That used to be a very lucrative business.  But deregulation set in a few years ago and the amount of money a firm can make per transaction plunged.  The fee on a Stock or Bond transaction used to be enough to buy a dinner at a fancy restaurant.  Now it would be lucky to cover the cost of a small Coke at McDonald's.  Squeezing a half a cent out of the cost of a transaction is just not what a Wall Street Master of the Universe dreams of.  They looked around and found derivatives, the big moneymaker for Wall Street for some time now.

A derivative buy or sell transaction is like a Stock or Bond buy or sell transaction from an execution point of view.  So Wall Street didn't have to invent anything new to move into this business.  Stocks and Bonds are traded on exchanges.  The commissions are negotiable and everyone knows what is going on. So the market is fiercely competitive and the fee for executing the transaction is tiny because people can shop around for the best deal.  Derivatives historically have not been traded on exchanges.  For a specific derivative typically only one firm knows what the security is really worth so that firm can add a nice markup into the transaction.  So the profit per transaction can be like the old days with Stocks before deregulation.  In some cases it can even be much better.  The profit potential is awesome with derivatives.  So what is a derivative?

The answer turns out to be pretty much anything.  All you have to do is find two people, one for each side of a bet and you can package it up as a derivative.  In practise Wall Street deals in money.  So derivatives are generally about something financial.  As an example let's talk about mortgages.  As I said above, Wall Street bought bails of mortgages.  Now Wall Street was only interested in the money part of the mortgage.  So the mortgage was split.  A "mortgage servicer" would worry about collecting the payments and all that nitty gritty stuff.  Wall Street left this part alone and concerned itself only with the cash flow.  They would provide the money to buy the house.  Then they would get the cash flow generated by the mortgage payments from the servicer and marry it back to the mortgage.  And a single mortgage for a single house, even if it was a million dollar McMansion, was too small to interest Wall Street.  Typically thousands of mortgages were bundled into a single "mortgage backed security".

And Wall Street could stop there and just market the mortgage backed security.  But that was not interesting (read profitable) enough.  Different potential investors had different investment objectives.  Some investors were high risk - high reward types.  Others were low risk - low reward types.  It was just too difficult to build special packages for each investor type.  Then someone came up with a brilliant idea called "tranches".  I have no idea where the word came from but the idea is simple.  Say your bundle of mortgages has 1,000 mortgages in it.  Divide them into 10 tranches.  Tranche 1 would contain the 100 riskiest mortgages.  Tranche 2 would contain the next 100 riskiest mortgages.  Tranche 10 would contain the 100 least risky mortgages.  Now we can sell tranche 1 to a high risk investor and tranche 10 to a low risk investor.  The details of which tranche a specific mortgage ended up in are complex and might vary from security to security.  But this "tranche 5 of mortgage package xxx" is a derivative.  Its value is derived from some package of underlying securities.  And a derivative can be created that is a bundle of other derivatives.  So you can have layer upon layer upon layer.

And now the magic happens.  In a normal market what are the probabilities that 10% of a typical package of mortgages will default?  The answer is practically zero.  So a ratings agency might easily rate tranches 2 - 10 as AAA.  Anyone can buy a AAA investment.  Lots of people (pension funds, insurance companies) are required to only deal in "investment grade" securities.  AAA securities are investment grade.  So we have just created a bunch of AAA securities.  If the interest rate on the tranche 1 mortgages is high enough then someone will take a flier on it.  And let's say you are one of those "AAA only" investors.  If you are given a choice between an investment that returns 5 1/4% and one that returns 5 1/2% what do you do.  They are both AAA so of course you buy the 5 1/2% one.  By bundling and tranching Wall Street was able to create giant piles of AAA investments.  They could get the ratings agencies to rate lots of stuff AAA by saying "there is only a one in a million chance that more than 10% of mortgages will default".

Now this "bundle and tranche" strategy was applied to all kinds of stuff besides mortgages.  If you tranche Credit Card Accounts Receivable (your outstanding balance on your credit card) you can create a bunch of AAA securities.  Everybody wants to buy the AAA security that has a little higher return than the run of the mill AAA security.  And "due diligence" for many investors started and finished with "is it AAA?"  And for a fee Wall Street would customize the security.  Typically the Wall Street firm that created one of these derivative securities was the only one who had full information on it.  So if they bundled in some fees and added some markups they could still make the security look like a good deal.  So they did and made fantastic amounts of money doing so.

One more piece was necessary to make the whole scheme work.  Wall Street firms needed a way to assign a risk rating to each of these derivatives.  Now we can ask how many Boeing 575 airplanes fall out of the sky in a given year.  There are lots of 757's around so we can come up with a pretty good estimate for how much risk is built into a 757.  (Fortunately for all of us the answer in most years is none).  But in the case of derivatives many of these securities are unique.  Even when this is not true there is not much to go on.  Wall Street was saved a few years ago.  A math genius came up with an "algorithm" (essentially a computer program) that would pop out a single magical "risk" number no mater how many moving pieces the derivative contained.

The details are for the most part irrelevant to our discussion because we can understand why things went so wrong by concentrating on something easy, what information went into the algorithm.  The first kind of information was the specific details of each underlying security (e.g. mortgage amount, interest rate, duration, FICA number (credit score), etc.).  The other kind of information was historical information for similar securities. For these securities additional information on default rate, delay till default, loss amount, etc. were added to the basic "security" information.  The algorithm would use the historical data to make an estimate of what would happen to the specific set of securities in the package in question.  It would then boil that down to a single magical "risk" number.  With this algorithm a uniform procedure could be applied to any kind of derivative.  Every derivative could be assigned a risk based on the magic algorithm.  And all the major Wall Street firms bought off on this system.  With it all these derivatives could be boiled down to three numbers.  What's the price of the derivative?  What's the return (interest rate) of the derivative?  What's the risk of the derivative?  Now Wall Street was ready to sell large quantities of derivatives.  All the complexity was safely hidden out of sight and everyone could concentrate on "sell, sell, sell".  It looked like a good deal to customers because Wall Street was offering all these AAA securities with these wonderful returns.  What's not to like?

At this point we all know this story did not turn out well.  After the fact the magic algorithm was roundly criticized.  A lot of the criticism was fairly technical (e.g. "tail effect").  But most of the criticism ignored the question of whether the algorithm was properly applied.  Frequently the answer was no.  The original work was done using mortgage data.  The author was only interested in proving that the algorithm worked.  So he grabbed the data that was most readily available.  This consisted of a few years of mortgage data from the boom times.  There was no "bad things happening" data in the historical data he used.  This weakness was unimportant in terms of proving that the algorithm was mathematically correct.  But it was critical in real world applications.  Wall Street never expanded the historical data they used to included a broader sample.  The algorithm with the crippled historical data gave them the answer that allowed them to sell the security so they were happy.  But it gets worse.  The magic algorithm was applied to all kinds of stuff, not just mortgages. Was a custom set of historical data developed for these other types of securities?  No!  The mortgage data was handy.  It had a proven track record of generating a low risk number so why mess with success?  In fact the whole magic formula procedure as implemented on Wall Street was one giant con.  There was nothing wrong with the underlying math.  But the algorithm has to be applied properly and frequently it was not.

If you talk to Wall Street today they claim that they have fixed everything.  They still use the magic algorithm but they now claim that they are using it correctly.  But I see no reason to believe this.  Wall Street went wrong in the first place because it was too hard to make the kind of money they wanted to make without getting creative.  If anything, it is now even harder to make money the old fashioned way.  Margins in traditional lines of business are tighter than ever.  Competition is fiercer than ever.  So there is still a strong incentive to get creative.  And there is still money to be made by selling something that is risky but claiming it is not.  We have just seen clear evidence of this.  A few weeks ago JP Morgan Chase announced that they had taken a 2 billion dollar trading loss.  Many news reports claim the actual figure is 3 billion.  I have even seen one claim that it is 7 billion.  Jamie Dimon, the CEO claims that he now has things under control and that JP Morgan can absorb the loss without significant harm to the company or to the economy at large.  But it highlights the fact that a fundamental problem still exists.

The working assumption of all these Wall Street firms is that all these derivatives are "liquid".  In short this means if you decide to sell the instrument you can easily find a buyer.  And the price you get will be predictable.  But there is no reason to believe this.  In 2008 during the worst of it there were lots of derivatives that could not be sold for any price.  People came to believe they did not know what was in the underlying bundle of securities and, to the extent that they could tell what the underlying securities were, they could not accurately estimate their value.  So they said "I'm staying on the sidelines while I wait for things to shake out".  And the "value" of many derivatives went from 100% of purchase price to 90% or 70% or 50% or less, sometimes in a few days.  Some of these "AAA" rated derivatives ended up being worth 30% or less of face value.  The very fact that the content of these derivative bundles varies from instrument to instrument means that each one is unique or nearly unique.

This has been a problem for JP Morgan.  They have not released details on just what went wrong with which securities.  But traders think they have a pretty good idea.  And if a trader knows (or suspects) that a particular security being offered for sale is a JP Morgan problem child he knows JP Morgan is in a bind.  And that means he can low ball his price knowing JP Morgan might have to accept it anyhow.  Outsiders speculate that traders taking advantage of JP Morgan's bind is why the estimates for how much this will eventually cost JP Morgan vary so much.

In some sense the JP Morgan case is a special case.  But in another sense it is not.  Traders might chose to avoid a particular derivative or class of derivatives at any time for any reason or no reason.  Mostly what they care about is getting the best return for the least risk.  The fact that derivatives are generic because mostly all people care about is price, return, and risk but are custom in the sense that each derivative has a different set of underlying securities makes any specific "risk" number unreliable.  There are always other derivatives that have a similar price, return, and risk but a different set of underlying securities.  And this means that all derivatives are risky all the time.

In summary, we got here by doing a terrible job of estimating risk.  All this was started by various groups working together to drive risk in the mortgage market through the roof, all the while loudly claiming that no such thing was happening.  The market was driven so far from stability that it broke in a catastrophic (in the mathematical sense and in its impact on society) manner.  This firestorm swept through the markets on Wall Street and exposed more and larger failures to properly calculate risk.  We are probably doing a better job now, both in the mortgage market and on Wall Street.  If nothing else, I think customers now take Wall Street "risk" estimates with a 5 pound bag of salt.  The question is are we, and here I primarily mean Wall Street, now doing a good enough job of correctly calculating risk.  The JP Morgan "problem" argues strongly that we are not.

Capitalism

The 1% are in bad odor at the moment.  That's certainly the conventional wisdom and I think it is largely correct.  Where the disagreement comes about is why.  Mitt Romney seems to think ("seems to think" is as close as you can get given his propensity for routinely changing his thinking based on what is currently advantageous to him) that it is because the rest of us are envious.  I don't think that analysis stands up to serious scrutiny.

I can easily think of three people who are much wealthier than Mitt.  I'm thinking of Bill Gates, Warren Buffett, and Steve Jobs.  Any one of them is vastly more wealthy than Mr. Romney.  Now certainly many of us are envious of them.  We would all like to switch places with them (assuming Mr. Jobs was healthy and still alive).  But what's important is that these three people are very popular with ordinary people.  Mr. Romney is not even well liked within his own party.  People may prefer him to President Obama as a Presidential candidate but the number of people who just like him as a person is quite small.  So what's the difference?

One of the key differences is the number of people who went along with the ride.  Mr. Gates is responsible for creating many millionaires and a number of billionaires.  And these newly wealthy people were not wealthy or powerful people when they started out.  Instead they went to work for Microsoft.  A lesser number of people bought Microsoft stock in the early days and held on to it through its fantastic rise.  The same is true albeit to a lesser extent with Mr. Buffett and Mr. Jobs.

If you bought Berkshire Hathaway (Mr. Buffett's company) stock back when and held it you would now be very wealthy.  You did not need any kind of inside connection.  The stock was sold to the general public.  Now I have to admit that in Mr. Buffett's case you couldn't start from nothing.  You needed to have at least thousands of dollars, perhaps tens of thousands of dollars.  This is out of reach for poor people and many middle class people.  But it could have been done and was done by many middle class people.  I don't know of any billionaires created by Mr. Buffett except his close business associate Charlie Munger, and perhaps some members of his immediate family.  But he has made many millionaires and has improved the financial well being of many others.

Steve Jobs sits somewhere between Mr. Buffett and Mr. Gates in terms of his direct financial influence.  He has made several Apple executives a lot of money.  And Apple stock has run up impressively in the last decade or so.  But another thing Mr. Jobs has done to a much greater extent than Mr. Buffett and even to a greater extent than Mr. Gates is create products that ordinary people can buy and fall in love with.  There are many people who have never worked for Apple nor owned a share of Apple stock who celebrate Mr Jobs' great wealth because they love the products he has created.

So it is possible to make a great deal of money, far more than Mr. Romney has made, and be well liked by the public.  So what's with Mr. Romney?  So far most of what I have said is a divergence.  I am now going to return to the central point.

I think most people's idea of a capitalist is someone who puts money at risk.  The narrowest definition would be that the capitalist puts his own money at risk.  But most people are comfortable with expanding the definition to include people who put other people's money at risk.  Mr. Buffett fits this expanded definition of a capitalist to a tee.  He was able to talk people into giving him money to invest, to put at risk, and he earned substantial returns on that money over a very long time.  So it's not that people hate all capitalists.  In fact, I think people don't hate most capitalists if we stick to my definition of a capitalist.  But Mitt Romney is not a capitalist, not at least during his time at Bain Capital.

I just saw a poll indicating that about half the people polled either did not know the "Bain story" or did not have an opinion on it so let me do a quick review.  Bain & Co. is a long established management consultancy.  They advise businesses on how to do business better.  About 30 years ago Bain & Co. decided their focus was too narrow so they created a new entity called Bain Capital.  Bain Capital would be more active.  They would buy up companies, apply Bain &Co. business methods to their management, and make them much more successful (e.g. profitable) companies.  Mr. Romney was one of the founders of Bain Capital and ran it for its first 15 years of existence.  (It is still in business but Mr. Romney no longer has an active role in it).  During Mr. Romney's tenure Bain Capital did over 100 deals.  Some of them were successes.  Some of them were failures.  Typically, the Bain Capital people would buy a controlling interest in the company, make substantial changes to the management and business practises (e.g. run the company the "Bain" way") and this was supposed to substantially improve the company.  So this looks like typical "capitalist" activity.  But I contend it is not.

The problem is with the "at risk" part.  Bain (I will always mean Bain Capital unless I specifically indicate otherwise) did put in money up front to buy the company.  And in some cases capital was added to the company so it looks like there was capital at risk.  But this was an illusion.  As far as I can tell Bain always did the deal in such a way that Bain was guaranteed to get all its money back. 

It turns out that there are a number of ways to shake large amounts of money out of a company.  One way is to rob the pension fund.  Companies will put aside money to pay future benefits for their employees.  There are ways to get at this money.  Doing so means that frequently the pension fund will run out of money in the future but that's in the future.  Another common tactic is to sell land and buildings to a bank and lease them back.  This increases the cost of doing business in the long run but it frees up a large amount of money in the short run.  A third tactic is to lay off a lot of workers.  The business will continue to maintain its traditional level of sales in the short run.  But the reduced quality of service or the lack of new and improved product (because you gutted the R&D operation) takes some time to materially effect the company.  So you get money in the short run at the expense of the long term viability of the company.

So there are a number of techniques, I haven't listed them all, to free up large quantities of money in the short run while putting the long term viability of the company at serious risk.  As far as I can tell, Bain only did deals where they could employ these or similar tactics to shake loose enough money to repay Bain for all its out of pocket costs (e.g. purchase cost plus and capital they put in).  So there was never a risk that Bain would lose money on a deal.  The record I have seen of Bain under Mr. Romney is some wins (companies that did well in the long run) and some losses (companies that went out of business).  It is easy to see how Bain could make money on the successful businesses.  After all, what companies like Bain say they do is to buy badly run companies, fix them, and sell them at a profit.  If the do that then they have earned their profit.  But as far as I can tell, Bain also made money, frequently a lot of money (hundreds of millions of dollars in several cases) on deals where the company failed completely within a few years of Bain coming in.  I know of no cases (please correct me if you know otherwise) where Bain lost substantial amounts of money on any of these deals.  So Bain was not operating as a capitalist operation because it was not putting any money at risk while Mitt was running things.

But then there's Mitt's personal situation.  He was very reluctant to take the job of running Bain Capital.  Eventually Bain & Co. put together a special deal.  Bain & Co. would run a paper exercise where they pretended that Mitt continued on as a regular employee of Bain &Co. and continued to be successful.  They would award (on paper) the usual raises, bonuses, and promotions.  Then if Bain Capital failed they would take him back as a Bain & Co. employee.  They would give him the job title the paper Mitt now had.  They would give him the salary that paper Mitt had.  They would look at his compensation at Bain Capital and compare it to the compensation paper Mitt had earned and award him a bonus sufficient to make up the difference.  In short Mitt took no risk.  If things worked out at Bain Capital then all well and good.  If they did not then he would end up back at Bain & Co.  and be "made whole" for any losses.

Bain Capital turned out to make a lot of money for Mitt and for its investors.  The process of pulling money out of some companies definitely turned what could have been a going concern had it been run for the long term and had it not lost all the money paid to Bain as fees and dividends.  So the employees and others who lost out when these companies were effectively driven out of business were definite losers.  Whether the totality of all the Bain deals is a plus or a minus, I don't know.  But Mitt Romney made a lot of money and there was no personal risk to Mr. Romney nor to the investors that backed Bain.  So the whole thing was NOT a capitalist operation.

I think the reason so many people resent Mr. Romney is because he made a lot of money out of a risk free enterprise that benefited a very small number of people.  I now want to expend my view to encompass two other groups that share these characteristics.  Namely, we have a situation where a small number of people make fantastic amounts of money without engaging in any risks.

The first group I want to focus on is Hedge Fund managers.  Hedge Funds can serve a beneficial purpose.  A Hedge Fund may make an investment that others shy away from because it appears to be too risky.  But sometimes these investments can pay off in a very big way.  And it may turn out that the investment creates something (typically a company) that may be very beneficial to society as a whole.  So the problem is not with the idea of Hedge Funds.  It's with how Hedge Fund managers are paid.  Typically Hedge Fund managers are paid a salary.  This salary is small by current Wall Street standards (hundreds of thousands of dollars, perhaps a few millions of dollars) but it is large when compared to the salary of the average person (the median U.S. salary is a little over 40 thousand dollars).  That's not the problem.  The salary is in line with the skill level necessary to successfully run a Hedge Fund.  The problem is with the bonus system.

Typically Hedge Fund managers are paid 20% of the profits of the Hedge Fund as a bonus.  This has resulted in multi-billion dollar payouts in some cases.  This makes some sense in the case of a successful Hedge Fund.  You can certainly argue that 20% is too much but in principle some percentage of the profits seems a reasonable way to go.  The problem is with what happens if the Hedge Fund loses money.  In this case nothing happens.  The Hedge Fund manager never has to pay anything back.  So if the Hedge Fund does badly then the Hedge Fund manager does OK.  If the Hedge Fund does well then the Hedge Fund manager does well, sometimes very well.  So here again we have a situation where a small group of people can and usually do do very well while undertaking no risk.  Again, the Hedge Fund managers are not capitalists.

Let me move on to my final group, senior executives at large corporations.  Here the situation in detail is much more complicated than in the case of Hedge Fund managers.  Just exactly how much a senior executive is paid in a given year may take a team of accountants weeks to figure out.  But the general idea is the same.  The executive receives a base compensation package.  This is money he gets regardless of how well the company does.  Then there are the "performance" components.  Theoretically these depend on how the company does.  But some of them are rigged to be easy to hit.  And what happens if the company does badly?  The worst thing that happens is that nothing happens.  The executive is never required to give anything back.  And frequently the board of the company will have pity on the executive and award him a bonus even if the company does badly.  So again these executives are not capitalists because for them personally there is nothing at risk.

Many people have observed that these "high potential upside benefit - non-existent downside cost" situations lead to risky behavior.  If nothing bad is going to happen to me personally why not take a flier on some risky deal that might pay off big?  These situations encourage excess risky behavior.    And there is a problem that commentators do not mention.  If nothing is going to happen to me if bad things happen they why should I do "due diligence" to make sure nothing bad actually happens?  The answer is that in this situation "due diligence" is a waste of my time.

One of many contributors to the Wall Street meltdown was a lack of due diligence on the part of many highly paid people.  Highly paid executives and traders were expected to deliver results.  The theory was that if the "trades" many firms engaged in went bad then there were ways to keep the losses small.  No one increased their bonus by questioning this assumption.  Nor did anyone increase his bonus by questioning whether the "safe" ratings of the underlying securities were accurate.  Further, they were in positions where if something did go wrong they would not personally lose any money.  There were other contributing factors to the Wall Street meltdown but the people with the most power were also the people who were encouraged by their compensation system to look the other way (and encourage others like ratings agencies and regulators to look the other way too) and knew they could safely do so.

Some people call the activities of Bain Capital "Vulture Capitalism".  To the extent that Bain did not purchase a company because they thought they could turn it into a going concern rather than make a quick buck before the company went under then they deserve the term.  And you can look at the activities of the takeover company.  Do they do things like slashing R&D that harm the company's ability to be successful in the long term?  Do they pull out so much money in the form of fees and dividends that it leaves the company without sufficient working capital.  Do they raid the pension fund?  Do they do "short term gain at long term cost" things like sale and leaseback deals?  If they do then it is likely that are more interested in making a quick buck then in actually helping the company.

It is clear that a number of deals done by Bain Capital under the leadership of Mr. Romney fell into the Vulture category.  As such the general dislike and distrust of him by a large segemnt of the public is completely justified.  As is also the general dislike and distrust of Hedge Fund managers and many senior executives of large companies.  It is hard to make money.  It is very hard to make a lot of money.  But people like or dislike people who have made a lot of money not based on how much money they have made but on how they went about making that money.  There are few people more generally beloved by the general public than Warren Buffett.  And he is worth tens of billions of dollars.  And he was beloved well before he announced he was going to give almost all of it away. 

The Wrong Bra

I was watching one of those "afternoon" shows the other day and they had a "Bra Lady" on. She claimed that 85% of women wear the wrong bra. That's actually better than the old statistic that I have often seen repeated that 90% of all women wear the wrong bra. Let's say that one of these statistics is true. If so then 85-90% of women are too dumb to figure out what bra is right for them. That's one interpretation and not the one I subscribe to. What I really think is that this "statistic" or "fact" or whatever it is is just a way to sell more bras or more expensive bras to women. Because the statistic is always accompanied by a "bra fit expert" and I figure the real job of the "bra fit expert" is sales.

Now I am going to weigh in on all this. And as a guy who doesn't work in the foundation industry and who has never bought a bra for any purpose you would think that I have no expertise in this area. But I make two claims. First, I have spent some time studying the problem (e.g. by observing women, braed and braless). And secondly, I have an engineer's perspective. And I contend that there are some serious engineering issues involved.

I am old enough to have started my researches in the pre-silicone era. I remember exploring a large cache of Playboy magazines (we'll skip over how I came in contact with this cache in the interests of brevity) in my callow youth. This allowed me to carefully study a large number of centerfolds side by side. Now all these young ladies had large breasts and, this being in the pre-silicone era, they were all natural. What I observed that is germane to this discussion is that these breasts came in different shapes. There was one young lady in particular who had what I would characterize as "banana breasts". They were large. But they were not hemispherical. They protruded a considerable distance but they stuck out more than they should have in proportion to their diameter. They also had a certain amount of curvature. In this case they curved up somewhat. Hence my characterization of them as "banana breasts". In other women their breasts protruded less and had a greater diameter then the banana breasts. And, scanning down from the top, some breasts start high on the chest and slope out gradually whereas others start lower on the chest and have a more abrupt transition from chest to breast. In short, the breasts on display in these Playboy magazines displayed considerable variation in their shape. This is the kind of thing you notice when you apply the engineer's perspective to the problem.

Now most women are not full enough to be Playboy material. But the same conclusion applies. There is a lot of variation in the shape of breasts, even in "flat chested" women. In extreme cases there seems to be nothing there but chest and perhaps a little nipple. Other women have "pancake" breasts. They cover a lot of area but do not protrude much. (This is actually the ideal shape from a strictly structural engineering perspective.) And then some women have breasts that are not the same size, one breast is noticeably larger than the other. As far as I can tell the general shape of each breast is pretty much the same but the size can differ significantly.

Now let's talk about the perfect breast. There actually is one if you look at the design of most bras and at what our culture pushes. Here it is. Take a flat chest as a starting point. Now take a grapefruit and cut it in half. Attach each half to the chest a little under the arm pits and separated by an inch or two. A few decades ago you would now be done at this point because we were all supposed to pretend that breasts did not have nipples on them. Times have changed so we have to now factor them in. But here too there is an ideal. In this case the nipples must be at the "pole point", what would have been the top or bottom of the grapefruit before we cut it in half. And they should point straight out. They should point neither up nor down and neither left nor right. There seems to no clear consensus on how large nipples should be. Some like them larger and some smaller. This is the sole parameter where two women may have an attribute that differs and still both have perfect breasts.

Now that we have defined the perfect breast we can determine what the purpose of a bra is. The purpose of a bra is to take what a woman actually has and make it look like she has perfect breasts. That, anyhow is the best we can do to come up with a criterion for whether a bra is "right" or not. If the woman wearing the bra has what appears to be perfect breasts then she is wearing the right bra. Otherwise, she is a dumb bunny who has committed the great sin of "wearing the wrong bra". I contend that this is the conventional wisdom on the subject. Any you have probably figured out by now that I hold this particular version of conventional wisdom in low esteem. But let's soldier on a little longer first.

To select the right bra a woman is supposed to take two measurements. First she measures the diameter of her chest just below her breasts. The second measurement consists of again measuring the diameter of her chest. But this time she does it at the fullest part of her breasts. Then for some odd reason she is supposed to subtract two inches from the second measurement. So, for instance her first measurement might yield 34" and the second measurement might yield 38". We subtract 2" from the second measurement to get 36" and we are done. But actually we are not. You can't find a 36x34 (or 34x36) bra. There is a number associated with bra sizes and it is supposed to match the first measurement. So in our case we should get a "34" bra. But the other part of the bra size is a letter. What's the deal there? As far as I can tell the letter indicates the difference between the second measurement and the first. So what we really should do is take the second measurement and subtract it from the first. In our case that would give us 38-34=4. Then we subtract an additional 2 (why? because we are supposed to) leaving us with 2. Then I presume we have a table, e.g. A=1, B=2, C=3, etc. So our example lady should get a 34B bra confident that it is the right bra. Oh, really?

This second measurement is included in each issue of Playboy as the first of the centerfold's "statistics". 38, 24, 36 (typical measurements for the women in question) would be interpreted as the bust (breasts at fullest point - second measurement) waist and hips measurements. And 38, 24, 36 are typical measurements for "busty" girls, exactly the kind of girl who is considered prime centerfold material. But "A" cups are for "flat chested" girls, "B" cups are for girls with something there but not enough to get excited above, "C" cup girls would be "nicely rounded", "D" and up cup girls would be "full figured". Girls who are not full figured do not make it into Playboy centerfolds. So it is safe to say that a centerfold girl should be wearing at least a "C" cup and more likely a "D" or larger. So maybe the table is A=0, B=1, C=2, etc. This would at least put our girl into a "C" cup.

But the situation is actually worse yet. How do we take the second measurement. Let's take as our example here a woman who is somewhere between flat chested and full figure and a little closer to flat chested than full figured. Short hand for all this is the presumed cup size. So what I have in mind is a "B" cup girl. Now this girl might be a seventeen year old in the full flower of her youth with nice firm breasts. We can imagine her taking this "second" measurement wearing no bra at all.  Here we would expect a reasonable result.  Now fast forward to fifty years later. Some women's breast shape, their "perkiness", holds up well over time. But other women's breasts head south, way south. Their breasts elongate dramatically and droop accordingly. (As far as I can tell the different outcome is more a result of genetics than anything else.) In any case we are talking the same woman so she should measure out the same. But now the fullest part of her chest is not nearly as full as it had been in her youth. So now her "B" becomes an "A" if we are just going by the formula, whatever it is. I have seen one source recommend that the measurement be done while wearing a properly fitting bra. But this is a prime example of circular reasoning. We need the proper bra in order to take the measurement necessary to determine which is the proper bra. I think I have convinced you by now that the standard method of measuring to select a bra is a joke. So what do I suggest as an alternative?

Well that will take more digression. But before taking that digression let me say that the first measurement actually has some usefulness. Bras are complicated garments. But for the purposes of this discussion I will pretend that they consist of only three components: the band, the cups, and the straps. The first measurement is useful for getting the band size correct. OK, now to the (hopefully final) digression.

What is the purpose of the bra? What function is it supposed to perform? I indicated that the standard answer to these questions is "to turn the actual shape of a woman's breasts into that perfect half grapefruit shape". Now I think that for some times and for some women that is the correct answer. But in a lot of cases a different answer is more correct. The creation of the sport bra indicates that some of the time the bra's function is to support and contain the breasts so that the woman can engage in active athletic endeavors. Here generally a bra should squash the breasts close to the chest and constrain their movement. Hemispherical shape is not important. I once had a busty girlfriend who found active exercise painful because her breasts bounced around too much. This was before sport bras became generally available. Had she known of a sport bra option I believe she could have performed the same activity (jogging) safely and comfortably.

Bras to enable athletic activity is just the simplest example. Small girls want their bras to make them look bigger. Big girls often want their bras to make them look smaller. One bra used to be marketed for its ability to "lift and separate". Women with larger breasts often find that their breasts mash together. They would like their bras to create a gap between their breasts. Women with smaller breasts know that pushing their breasts toward each other generates the impression of "cleavage" which generates the impression that their breasts are larger than they actually are. Some women have nipples that naturally point down and out. They would like their bras to make their nipples point straight out and straight ahead. Women sometimes wear tops that have a scoop neck. In this case it helps if the straps are farther apart. Women sometimes wear "choker" styles that leave the shoulders bare so they want the straps closer together. All straps used to be straight up and down in the back. Now straps can also do a cross over or merge into a single central strap that goes down the spine rather than over the collar bones. Given all the different things a woman might want to do she now needs many different bras that have many different attributes. So there is no longer one single perfect bra for an individual. So part of figuring out what the right bra is now involves figuring out what situation the bra will be used in.

There are also limits to what a bra can do. If a woman is literally flat chested I suppose you could go with an "all padding" bra to achieve the perfect grapefruit contour. But if a woman has truly large breasts a bra can't shrink them to grapefruit size. Only a bust reduction operation can do that. And then there's the comfort factor. If you have banana breasts a bra can squish things around to give you a grapefruit (or perhaps a cantaloupe) profile but it may be uncomfortable. And breasts aren't always in the same place on all women. Some are higher or lower than the standard. A bra can provide a certain amount of lift but this pertains to the projecting part of the breast. A bra can not lift the place the breast attaches to the chest. So what can a bra do?

It may be that a bra is not required at all. If a woman does not sag because she has pancake breasts a bra performs no functional (e.g. engineering) purpose. Here the purpose of a bra might be to improve sexiness. The standard idea is to make your breasts appear larger or to increase their projection. But perhaps the alternate strategy of no bra at all might be a more effective method of achieving sexiness. And its cheaper and possibly more comfortable. Surprisingly, there is another group of women for which the right bra might be no bra. That's women with breast implants. Ideally these will have a natural look and feel. But frequently scar tissue builds up that immobilizes the breasts. In this case we have large breasts that are also self supporting. If the bra is there for support then the bra is unnecessary.

Most women are not flat chested but they can be accurately described as "modestly endowed". This is the situation where a bra can be most effective. For many of these women their breasts never do sag much. For those who are less lucky a bra can be very effective at desagging, at restoring that youthful profile. Sag can also be uncomfortable. So desagging may also improve comfort. From an engineering point of view, it's all about forces. This means the weight of the breast material is what matters. And the weight depends on the volume. Here we are dealing with relatively modest volumes and thus relatively modest weights and thus relatively modest forces. For this woman the bra doesn't have to provide much force to effectively reduce sag. A woman might want her breasts to be pushed together to increase "cleavage". Again only a modest amount of force is required to do this.

From an engineering point of view the band provides the anchor. More height in the band provides more area for the force to work against. In the case of modestly endowed women the necessary forces are modest and the band can be relatively narrow.  The more full the figure the more substantial the band needs to be. It turns out to be a mistake to use the straps to apply much force. The cups are shaped appropriately to do the work and firmly attached to the band. This should get the job done. The straps should mostly be used to hold the bra in place so they can be narrow and snug rather than tight, regardless of the degree of endowment. Properly adjusted they should therefore be comfortable.

A key component is the under wire. In the case of modestly endowed women an under wire should not be necessary in most cases. This makes it less important that the shape of the cups match the shape of the breasts. So in a lot of cases any old bra will work. The most important attribute is band size. Then the cups must be shaped to perform the desired function (e.g. desag, push the breasts together to generate cleavage, etc.) The standard bra measurements address band size but do not address cup shape. So the only solutions are: (a) a good eye, (b) trying bras on till you find the right one, or (c) consult a professional fitter. Note that if you select option (c) studies have shown that most fitters aren't very good. I think this is because they are just people hired to work in the foundation department who have received little or no training and are not tested.

As we move on to bustier women the work a bra needs to do goes up quickly. As indicated above the forces involved are related to the volume. If we increase the band size by 10% we increase the volume by over 30%. But projection is the killer. Breasts that project 2" have twice the volume of breasts that project 1". Centerfolds can easily have breasts that project 6". This means that breasts of more than modest size and even small amounts of sag that needs to be remedied usually require an under wire. The under wire is needed for engineering reasons. The fabric will not hold its shape without the under wire. If it can't hold its shape then it can't push and pull in the right direction to perform its function.

Now if a bra has an under wire the shape of the under wire is critical. It needs to exactly follow the boundary between the chest and the breast. But as noted above breast shape is highly variable. No one pays attention to under wire shape. So you can't tell if a bra has under wires with the correct shape without looking at the bra and perhaps taking some measurements. The under wire shape is determined by the shape of the cutout in the band. It is critical that this be correct. But it is not the whole story. Once the bra has the right under wire shape then to work correctly it must have the right cup shape. The right cup shape depends on what the bra needs to do.

If it is as sport bra then the cups should be relatively shallow and probably higher than normal. This allows them to flatten and contain the breasts. Note: under wires can be omitted in sport bras designed for larger breasts than with other designs due to the fact that flattening and containment can be achieved more easily with just fabric than other objectives. If an objective is to squish the breasts together then the cup should be shallower on the outside side and deeper on the inside side than in the normal situation. If desagging is important then the cup should be shallower on the bottom than in the normal case.

How much of the breast should be covered depends on function. In the normal case the bottom two thirds to three quarters of the breast should be covered. Bra makers cut their products to be used in this way. If the entire breast is covered then the bra is the wrong size. But the objective may be to display a lot of flesh. This usually means a bra with the straps moved toward the outside. If the plan is to display the tops of the breasts then the straps should be moved to the very outside of the cups and the cup material should be even from side to side. None of this impedes the bra from performing a desag function. But if the idea is to display a lot of cleavage then a different approach is necessary. Here the straps are moved to the outside but less so than in the previous case. Here the cup is cut so that it covers more of the breast on the outside than on the inside. This makes desag more difficult and pushes the breasts together whether that is a desired effect or not. In all these cases, the overall size of the cup should be such that the breasts do not bulge over the top of the bra (cups too small) nor should the bra tend to sag away from the breast (cups too big).

More extreme designs are possible. If all that is desired is desag then only the bottom 30-40% of the breast needs to be covered. The nipple can be completely exposed. These designs are usually referred to as half cup or quarter cup designs. Even more extreme designs are possible (e.g. near 100% exposure) if no desag is required. These designs are sometimes referred to as "open cup" designs. These extreme designs do not permit the breasts to be squashed together and provide a limited ability to re-point the nipples.

The way "and separate" is achieved is to put band material between the cups. The width of the band material between the cups must be close to the actual separation of the breasts of larger breasts. More separation is possible to achieve in the case of smaller breasts.

Larger breasts require more parameters (e.g. cup shape, separation distance between the cups, etc.) to be correct in order for the bra to function properly. Unfortunately, the actual values few if any of these parameters can be determined except by actually examining the bra. The solution, if you are a full figures girl, and if you have a lot of money, is to get your bras custom made by someone who knows what they are doing. A solution that often works is to find a bra brand and style and size that works and stick with that. Unfortunately, even this does not guarantee that each bra will be the same size and shape.

So if you hear someone going on about how 85% or 90% of women are wearing the wrong bra, hold on to your wallet.  They are probably trying to sell you some new bras.  Of course, they may also be trying to sell you a book.  If you think you are wearing the wrong bra read this post.  Even if you are confident you are wearing the right bra, read this post.  You might decide you were wrong.  Even if you decide you got it right in the first place the post is fun and I'm not trying to sell you anything.  Only if it doesn't tell you what you need to know to find the right bra and only if you can find a bra fitter that actually knows what she (it's always a she) is talking about does it make sense to put yourself in her hands.  As a free extra bonus you can use the contents of this post to test her to make sure she actually does know what she is talking about. 

Afghanistan

This is the final post of my "Counterinsurgency" series.  See http://sigma5.blogspot.com/2012/03/counterinsurgency.html for the base post and http://sigma5.blogspot.com/2012/03/iraq.html for my post on Iraq.  Finally, I have argued elsewhere (http://sigma5.blogspot.com/2011/06/pakistan.html) that Afghanistan is really about Pakistan.  For the purposes of this post I am going to mostly ignore what I said about Pakistan being the key to Afghanistan and just treat Afghanistan as a stand alone proposition.  I will, however, analyze it from the perspective of what I said about Counterinsurgency.

Afghanistan has a much longer history than Iraq.  I am not familiar with most of its history but I believe its modern borders were set by the British in the 1800's.  However, I believe that unlike with the case of Iraq, these borders conformed roughly to its traditional ones.  So it is not a "created" country like Iraq.  As is usually true, with Afghanistan "geography is destiny".  In this case, the two key features are that it is landlocked and that it represents a key crossroads for commerce and invasions.  So people have been fighting over Afghanistan for a long time and Afghanis have been repelling foreigners, including apparently the British, for a long time.

I will start my analysis in roughly 1980.  the country was experiencing what was characterized at the time as a high level of chaos.  The Russians (called "Soviets" at the time) installed a puppet government.  President Carter and later President Regan sensed an opportunity.  They funded an insurgency to help drive the Russians out.  If you want to know more about this I recommend "Charlie Wilson's War".  The book by George Crile is excellent and goes into a lot of detail about the goings on.  The movie with Tim Hanks is fun but far less informative.  The plan worked.  The Russians were kicked out.  Many credit this event for the beginning of the end of the Soviet empire centered in Russia.  And, from the U.S. point of view, the whole thing was incredibly cheap.  The cost was a billion or so dollars and no U.S. casualties with the possible exception of a few CIA types.  It was considered a big success at the time but not so much now.

After the Russians left the U.S. abruptly cut of funds and Afghanistan descended into chaos.  Eventually the Taliban rose and took over the government.  They provided a safe haven for Al Qaeda.  Al Qaeda launched the 9/11 attack.  The U.S. invaded Afghanistan after the Taliban refused to kick Al Qaeda out.  And we have been there ever since, 11 years and counting at this point.

It is argued that it was a big mistake for the U.S. to cut things off after the Russians left.  But I argue otherwise.  When we started funding the Afghan insurgency we told everyone we had no designs on Afghanistan.  "We just want to kick the Russians out".  The U.S. had a poor track record with respect to meddling in the affairs of other countries so getting the locals to believe this was critical to the success of the whole program.  The U.S. made one other critical decision.  The U.S. took no direct role in the program.  We provided money and other support. But the actual operation was run by the Pakistanis though their intelligence organization, the ISI.  I contend that if the U.S. had taken a more direct role the whole operation would have been a failure.  Instead the Saudis, the Pakistanis, and others were willing to co-operate with us.  This led to an inexpensive and successful operation.  It should have come as a surprise to no one when the flow of U.S. funds was abruptly cut off as soon as the Russians left.

When the U.S. turned the money spigot off the Pakistanis saw their chance.  The U.S. position during the operation was "we'll fund anyone who will fight the Russians".  It was the ISI who actually picked which Afghani groups got support.  For their own internal reasons they picked the people who eventually became the Taliban.  After the U.S. involvement ended the ISI continued to work with the Taliban. With the money, guns, and other support the ISI supplied the Taliban had no trouble winning control of the entire country.  This left the Pakistanis exactly where they wanted to be.  They were in control of their client state of Afghanistan.  Things would have gone along swimmingly for them if the whole Al Qaeda 9/11 thing had not happened.

The U.S. under the Bush Administration was stupid to take their eye off the Al Qaeda ball.  But the Pakistanis were stupid to let their clients, the Taliban, get in bed with Al Qaeda.  But both of them did.  So now the U.S. is involved in a land war in Asia.  It is also said that the U.S. was stupid in how it conducted itself in Afghanistan after the Taliban were easily routed.  I was right that the U.S. acted correctly at the end of the 1980 war. But the situation with the current war is far different than the situation was then.  The Taliban has never broken with Al Qaeda.  It is obvious that a stable anti-Al Qaeda government was needed in Afghanistan to avoid another 9/11.  So this time around the U.S. needed to remain heavily involved in Afghanistan after combat operations ended.  But the Bush Administration felt that things would magically take care of themselves so it was free to go start a war in Iraq.

In the 1980 war the U.S. essentially picked the Pakistanis and the ISI.  This turned out to be a good pick in the short run and a bad pick in the long run.  In the present war the U.S. picked Hamid Karzai.  This too looked like a good pick in the short run because he was instrumental in routing the Taliban.  But in the long run it has not turned out well.  Mr. al-Maliki has shown that he does want Iraq to be a success and that he does want his government's control to encompass the whole country (possibly excepting the Kurd controlled areas).  Mr. Karzai seems primarily interested in maintaining his power base in Kabul and in using graft and corruption to keep the gravy train operating for himself and his friends.

The Taliban were unpopular when they were running the country.  They are still unpopular.  If I apply my "willing and able" rule then the general population of Afghanistan would be more than willing to rat out the Taliban.  But there is a serious problem with the "able" part of the rule.  Unlike in Iraq, the U.S. quickly handed the reigns of power over to the locals.  So theoretically there has been someone familiar with the local language and culture to rat the Taliban out to.  But for many Afghanis this possibility is still theoretical.  There is no effective "Karzai government" in large parts of the country.  This leaves locals pretty much on their own.

The U.S. military has been active in various parts of the country at various times.  But for many years it did not attempt to hook up with local and district authorities.  I believe that it is now devoting more efforts to direct contact with the locals.  But the main effort was and still is directed toward "Kabulization", that is working primarily through the central government in Kabul.  The Kabul government has turned out to be a weak reed.  And few troupes have significant language skills or cultural familiarity so communication is often poor.  And a large non-military effort by the U.S. has never been put into place.

Afghanistan has a lot going against it.  I think that in the early days Afghanis were happy to see us because we liberated them from the Taliban.  But the Taliban were replaced by graft and corruption in Kabul and a vacuum in the rest of the country.  Meanwhile, Pakistan continued to support the Taliban and provide them with a safe haven.  They didn't even sweep up the Al Qaeda remnants in Pakistan.  It is not surprising that an insurgency quickly arose in Afghanistan.

I have argued elsewhere that the appropriate response to an insurgency is an effective government that provides an effective police, judicial, and prison system.  That effective government is still missing in large parts of Afghanistan.  The situation boils down to how likely it is that this effective government will show up any time soon.

Iraq was saved by the Sunni Awakening.  The parts of the country not governed by the al-Maliki administration were effectively governed either by the Kurds or the Sunnis.  The Kurds had an effective government all along.  When the Sunnis decided to flip from the insurgent side to the government side the entire country of Iraq came under the control of effective government and things have settled down quite a bit since.  However, I see no group that is willing or able to play the role of "Sunni Awakening" in Afghanistan.

There are three main groups in Iraq.  There are many more in Afghanistan.  Iraq has suffered to some extent from meddling by its neighbors, especially Iran.  But there is a lot of animosity between Iraq and Iran so Iran's meddling is less effective than it would otherwise be.  In Afghanistan there is also a lot of meddling by its neighbors.  There is no equivalent to the animosity of the Iraq/Iran relationship in the Afghanistan/Pakistan relationship.  Quite the opposite.  The Afghanis are grateful for the help Pakistan provided in driving the Russians out.  So Pakistani meddling is likely to continue at a high level.

Finally, Iraq has Oil.  Afghanistan does not.  What this means is that there is a basis around which to build an Iraqi economy.  With Afghanistan it is hard to see how to get it on to a sound economic footing.  The GDP of Afghanistan is listed as $17 billion.  This number is inflated by the vast amounts of money the U.S. is pouring in to support the war.  Most of the economic activity in the country is war related.  If the U.S. involvement goes away as a result of a winding down by the U.S. it is hard to see much left with the exception of the Opium business.  So where will an Afghan government get the money to support police, courts, and prisons?  I'm stumped.

We have been at it for 11 years.  It can be argued that the Bush period was badly run.  But progress under Obama also seems limited to me.  I think politics in Afghanistan will combine with politics in the U.S. to result in a nearly complete U.S. withdrawal by the end of  2014, if not sooner.  Given the poisonous political climate in the U.S. (here I am referring solely to the unpopularity of the war) I can't see significant financial aid (e.g. tens of billions of dollars per year) continuing much after the troupes leave.  So I see Afghanistan coming to a bad end.

There are those who argue for "another ten years" in Afghanistan.  I don't see any possibility of that.  There is very little evidence that we could fix Afghanistan in those ten years given the situation on the ground today in both Afghanistan and Pakistan.  So many will argue that a continued commitment would be "pouring good money after bad".  I can't imagine a counter-argument to this position.  This leaves the "if we leave - we lose" argument.  I don't think there is any stomach for spending a lot of money and manpower solely to avoid having to acknowledge that we have lost.

So things look ugly.  How do we deal with this?  The first thing to remember is what our strategic goal is.  The sole strategic interest we have is preventing another 9/11 attack from Afghanistan.  I think we can do that without having a significant military presence in the country.  We do it by threats.  We threaten not to invade again (no one would believe this threat) but to rain destruction down from the skies using unmanned drones and/or cruise missiles if we see Al Qaeda or any other terrorist organization setting up shop in Afghanistan.  This destruction would be aimed at the organs of power in Afghanistan.  I think this would work and it would cost very little even if we had to make good our threat.

Then there's Pakistan.  Pakistan has been playing power politics since it was created in 1948.  It has always been able to find a sponsor, usually the U.S., that was interested in using Pakistan to balance against someone else.  But Pakistan is pretty much out of sponsors.  If we abandon them then where do they go?  Apparently they have already approached China and gotten turned down for any significant amount of monetary aid.  And all of their neighbors except Afghanistan are mad at them.  So if we cut off the money spigot to Pakistan I think they are in real trouble.  If we did then I think Pakistan would be forced to confront the many problems it has.  Pakistan is betting that we won't cut them off because they are a nuclear power.  I think we should call their bluff.  But we can't do that until we are out of Afghanistan.  If we are out of both Pakistan and Afghanistan then I think the situation will eventually get a lot better for us.  That at least, is the "happy talk" scenario.

Iraq

I recently posted on Counterinsurgency (see http://sigma5.blogspot.com/2012/03/counterinsurgency.html).  In that post I promised to have more to say on Iraq and Afghanistan.  This is the Iraq post.  I actually wrote an Iraq oriented document on counterinsurgency a few years ago but did not publish it.  The counterinsurgency post was based on that document.  I removed most of the Iraq specific content of that document while editing it to make the counterinsurgency post.  This document is an expanded version of the Iraq content I removed.

Iraq is not an old country.  It was created in the post World War I era.  Its construction was based on the British perspective on how the area should be organized with little consideration for and no input from the locals.  As a result the population of Iraq consists of three discordant segments:  The Shia, the Sunni, and the Kurds.  For most of Iraq's history no one much cared that these groups did not actually get along that well.  During Iraq's recent history Iraq was governed by Saddam Hussein.  Saddam ruled through the Baath party and was a Sunni.  He was able to suppress the political aspirations of the Kurds and the Shia.  He governed by using standard Secret Police tactics.  He was effective enough at governing to prosecute a long and painful war against Iran, a much larger and more powerful neighboring country.  He used the standard tactic of ginning up fear of an external enemy to maintain his power.  For a long time the external enemy was Iran but in his later years he shifted to using the West in general and the U.S. in particular as the bogeyman.

In 1990 in a miscalculation Saddam invaded Kuwait, a small weak country with a lot of oil.  This precipitated the first Gulf War.  Actual combat operations lasted 100 hours.  The U.S. led coalition had little trouble dealing with the extensive Iraqi military, which was organized along traditional lines.  The war, and particularly the "softening up" process that preceded actual combat operations severely damaged both Iraqi military and industrial capability.  Various post war strategies could have been employed.  But the one selected left Saddam enough maneuvering room to retain power.  The first component was to let Iraqi forces retreat from Kuwait as long as they abandoned all heavy equipment.  This left the Iraqi military intact from a personnel point of view but left it under equipped.  The second component was a "no fly" zone.  All fixed wing military craft were to stay on the ground.  Limited use of rotary (helicopter) craft was allowed.  The third component was to abandon indigenous opposition (Shia in the South, Kurds in the North) to their fate, even though these factions had been encouraged to revolt in the run up to combat operations.  Saddam was able to marshall enough military power to put down both of these revolts.  This allowed Saddam to retain the support of the military.  This was combined with long standing Secret Police activities that were unaffected by any of the wars (e.g. Iran, Kuwait).  The Secret Police had successfully weakened opposition enough to render them ineffective without large scale support from outside.  With this support lacking Saddam continued in power.

But Saddam was greatly weakened.  The economy was in poor shape.  The two wars had drained resources from the economy.  His military capacity was much reduced.  In short, his ability to actually do anything was modest.  But Saddam had maintained a reputation for fearsomeness for a long time.  He decided to continue this strategy.  But where in the past this reputation was backed with actual capability that was no longer possible.  But he gambled that he could run a giant bluff.  He would talk like could still deliver.  So he claimed that his military was resuscitated.  He claimed that he had revitalized nuclear and chemical capabilities he had once had.  He gambled that outside powers would not be able to gather enough reliable intelligence to contradict him.  His Secret Police operation was still as formidable as always.  They were generally successful in combating HUMINT (spies on the ground).  For whatever reason SIGINT (spy satellites, photo reconnaissance, etc.) were either unable to detect his lies or weren't believed.  One contributing factor was certainly that the George W. Bush administration really wanted to invade Iraq.

So based on "WMD" that didn't exist, a nuclear program that didn't exist, chemical/biological programs that didn't exist, HUMINT provided by Ahmed Chalabi's organization that turned out to be a pack of lies, and links to al-Qaeda that did not exist, the U.S. initiated a second Gulf War.  Again the Iraqi military was dispatched with little trouble.  This time the country was completely occupied.

So where are we with respect to the thesis advanced in my counterinsurgency piece?  First, the history of Iraq gives ample reason for the indigenous population to view the central government as illegitimate.  But for many years there was no counterinsurgency.  Why?  Because Saddam deployed the first counterinsurgency strategy.  He created an extensive Secret Police operation.  And it was successful.  There were no successful insurgencies mounted from within Iraq.  From time to time the Kurds became a serious problem.  There he bolstered his Secret Police tactics with military tactics.  He bombed the Kurds with poison gas killing large numbers of them.  This cooled things down enough so that he could go back to standard Secret Police tactics.



If the second Gulf War had actually been over when President Bush declared "Mission Accomplished" then I would not be writing this piece.  But within months of the end of the standard military component of what is now in the U.S. called the Iraq War an insurgency began operating.  They mostly used the standard "blend in with the general population" strategy to make themselves hard to find.  The U.S. did make two significant contributions to making them effective, particularly in the early phases.  The U.S. disbanded the Iraqi army.  This created a large group of young males with no job prospects (the economy was in shambles) and military training.  We also did not secure the many Iraqi military ammo dumps.  The insurgents were able to carry off large amounts of small arms, explosives, and other equipment that could be very effectively used against us.

There has been a lot of debate as to what the Bush plan for the post war period was.  Nothing was published before the end of the war and whatever the plan was it was so badly implemented that it is hard to discern what was intended but bungled versus what happened that was unintended.   The only thing we know for sure is that the transition to an Iraqi run government we liked was supposed to be short.  Plans called for a total withdrawal for all U.S. troupes within a few months.  Also, the number of U.S. troupes used initially was enough to defeat the Iraqi military but not to occupy and run the country for an extended post war period.  My theory is that the U.S. government believed that Chalabi, who was close to the Bush Administration, would be warmly received by the Iraqi general public.  This would allow him to quickly form a government that was broadly supported by the Iraqi public and move on to governing with a minimum of fuss.  This, in turn, would allow the U.S. to make a quick exit.

This did not happen.  When Chalabi, an Iraqi expatriate who had been living abroad for many years, returned to Iraq the initial reaction by Iraqis was "who is this person?"  This was quickly followed by "whoever he is, we don't like him and we don't trust him".  Chalabi has never garnered substantial support within Iraq.  If I am right that that was "plan A" then the problem was that there was no "plan B" to fall back on once it became apparent that "plan A" was not working.  Not only was there no one to quickly hand over control of the government to, there was now an insurgency.

This caused the Bush people to make it up as they went.  They also consistently underestimated the difficulty and cost, both in terms of money and in terms of the number of troupes.  Iraq was consistently under resourced.  There was also another problem.  The Bush Administration strongly believed in outsourcing.  So large contracts were written to firms with close ties to the administration for key components of what strategy there was.  These companies' first priority was to make a lot of money, which they did.  The Bush people performed almost no oversight so there was lots of waste, fraud, and inefficiency.  What little there was of a strategy was poorly implemented and thus got poor results.

The early stages of the Iraq post war period was when I developed my "willing and able" test.  It proved itself, unfortunately.  In the early days I am convinced that there were many Iraqis who did see us as liberators who had released the country from the oppression of the Saddam regime.  So these people were more than willing to "drop a dime on" (e.g. rat out) the insurgents.  The problem they had was there was no one on the other end.  All of the power resided with the U.S., usually our military.  But the phones weren't working.  And if they worked there was no one on the other end who spoke the local language.  So it was literally impossible to drop a dime.  Later Iraqis became discouraged as the security situation deteriorated and became unwilling to drop a dime.  Whatever trust the Iraqis had that the U.S. would do the right thing, that they could tell the good guys from the bad guys, evaporated.  We now had both a "willing" and an "able" problem.  It is no surprise that things got worse.

After the U.S. 2004 election a general review was undertaken by several groups.  The general conclusion of pretty much all of them was that there was no reason to put good money in after bad.  Instead we should wind things up and leave.  This did not sound like "victory" to George W. Bush.  So he searched far and wide for someone who put forth a strategy that led to something that could be called "victory".  This led him to General Petraeus.  Petraeus had become an expert in counterinsurgency.  He literally wrote the book on the subject for the U.S. military.  His "Counterinsurgency Field Manual" is available on line.  It is Army publication "FM 3-24" and USMC publication "MCWP 3-33.5".  I found it recently on the web at http://usacac.army.mil/CAC2/coin/repository/FM_3-24.pdf.  It is an excellent document.  Its only weakness is that it is written from the perspective of and for the use of military personnel.  As such, it assumes that there is a large civilian oriented nation building effort going on into which the military will be slotted.  So it focuses on military issues in that context and does not take the broader view of everything that needs to be done.  But if you read between the lines you can get a good idea of what the overall process needs to accomplish.

And the U.S. took a military-centric approach to the problem with a much smaller civilian component.  Without admitting that we were now in the business of nation building we started trying to nation build in Iraq.  Most of the effort was undertaken by the military.  It should have failed dramatically but it did not.  The reason was that Petraeus's timing turned out to be perfect.  Concurrent with the shift in policy by the U.S. was a shift in thinking by the Sunni Iraqis.  We had the "Sunni Awakening".  A large group of important Sunnis decided they were better off working with the U.S. rather than opposing us.  As the Sunnis formed the backbone of the insurgency this immediately reduced it in size and effectiveness.  The shift to the Petraeus approach was critical because it positioned the U.S. to be a willing partner when these Iraqis approached us.  After than things started going much better for the U.S.

Then another good thing happened.  Nouri al-Maliki turned out to be more competent that most people, including myself, expected.  In March 2008 he started "the battle of Basra", an all-Iraqi effort.  Although not a complete victory it convinced everyone that the al-Maliki government was for real.  Al-Maliki continued to gain more control and separate himself from the U.S.  At the end of 2008 he was able to negotiate a timeline for the removal of all U.S. forces.  The deadline in that plan (the end of 2011) was ultimately met.  So Iraq gradually transitioned from a country effectively run by the U.S. to an independent country run more or less effectively by the Iraqis.  In short, the transition to a legitimate government in Iraq was successfully completed.

In my opinion the most critical reason for this transition was the Sunni Awakening.  This took most of the steam out of the insurgency as local support dried up to a great extent.  But the shift to the Petraeus strategy and al-Maliki becoming an effective leader of an Iraqi based government were also critical.

So critical elements of my analysis are vindicated.  The key factor in defeating an insurgency is to create a functioning government that can deliver services, particularly security services to the populace.  The al-Maliki government's ability to fill that role, successfully in the eyes of Iraqis, was critical.  That government also successfully repositioned itself as a "local" government, not a puppet of the U.S.

Is the insurgency in Iraq completely dead?  No!  And many see rough sailing for Iraq.  The tension between the Sunnis, the Shia, and the Kurds continues.  Sectarian violence continues.  But I see most of the violence in Iraq stemming from Sunni/Shiite/Kurd tension.  I think Iraqis see it the same way.  So the violence stems primarily from sectarian tensions and not from an insurgency.  So I see this violence as manageable.  I am optimistic about the future of Iraq.  Will it be a peaceful and stable country like your typical European country?  Not any time soon.  But I think the Iraqis will manage to muddle their way to an accommodation somehow.

This will be helped by oil.  Iraq has vast reserves and terrible infrastructure.  There is a lot of money to be made, particularly at current oil prices of over $100/barrel, if Iraq's oil fields can be properly developed.  It is important to reach a revenue sharing deal among the factions.  I think that is possible.  Once that is done then it is a simple matter of investing in improved infrastructure.  This can easily be funded out of oil revenue so cost is not an impediment.  And if a deal can be done then there will be a lot of money to share around.  I think that money can be used effectively to smooth out the rough spots between the factions.  It will not be pretty but it will work.