photo credit: Iguana Jo

Published as an article in 1982, the Broken Windows theory is the the idea that the little things are what make the difference between an orderly and a crime-ridden city. If you are diligent about cleaning up graffiti and vandalism, then people will be less inclined to cause trouble. Leave damage un-repaired and you send the message that no one cares. And then…

We suggest that “untended” behavior also leads to the breakdown of community controls. A stable neighborhood of families who care for their homes, mind each other’s children, and confidently frown on unwanted intruders can change, in a few years or even a few months, to an inhospitable and frightening jungle. A piece of property is abandoned, weeds grow up, a window is smashed. Adults stop scolding rowdy children; the children, emboldened, become more rowdy. Families move out, unattached adults move in. Teenagers gather in front of the corner store. The merchant asks them to move; they refuse. Fights occur. Litter accumulates. People start drinking in front of the grocery; in time, an inebriate slumps to the sidewalk and is allowed to sleep it off. Pedestrians are approached by panhandlers.

NYC Police Commissioner William J. Bratton was an adherent and applied the idea in his efforts to combat the crime wave that was sweeping New York in the 1990s. Malcolm Gladwell approvingly covered that story, making it one of the pillars of his argument in The Tipping Point. Despite people like Steven Levitt arguing that correlation is not causation, the theory still holds a lot of sway.

So much for the background.

It’s 2009 and the housing market is in free-fall. American resolve, strengthened in the wake of the 9/11 attacks, redirected and solidified by the HOPEful rhetoric of Obama’s new administration is facing its first test. This is not an external challenge, a threat from the outside carried by insidious invaders. This is an internal failing.

Newsmagazines and pundits are proclaiming the End of Capitalism, or at least the need for Serious Reform. Everyone’s trying to figure out who to blame. Insolvent homeowners or the banks who lent to them. Over-regulation or under-regulation. Democrats or Republicans.

Underlying the whole thing is this nagging thread of doubt. What if American can-do can’t? What if the whole thing has been a bubble? What if the sun has finally set on the American Empire?

There are any number of people who’d like to see the United States fail. Al Qeada and their shadowy financiers, of course. Any of the forgotten domestic terrorists. White supremacists, survivalists, cults, and any number of far-right and far-left organizations. Not to mention the Chinese, Russians or countless James Bond-esque ultra-rich villains.

Somewhere in an office or a cave or a secret volcano base, someone is reading The Tipping Point next to the latest housing figures and a light goes on.

Maps are drawn up, sleeper cells are activated, secret Swiss and Cayman accounts are accessed, and the buying begins. It’s child’s play, really. A matter of ensuring the right density of abandoned housing.

In a lot of cases, the problem takes care of itself. Investment housing that no one actually wanted in the first place, places where no one wants to live. Half-finished bedroom communities and subdivisions. Detroit and the rest of the rust-belt. These areas will devour themselves. Just to be sure, agents buy a few properties for fractions of a penny on the dollar.

Other areas require some finesse. They are generally liveable, often quite nice. Here, it’s a matter of finding the homes belonging to people whose wages don’t match their mortgage payments and who are realizing that their debt outstrips their houses’ value.

It’s very easy to recruit agents to this cause. You don’t need suicidal maniacs, you just need people vaguely in favour of your aims who are willing to pick up the mail from time to time.

Once property is bought, it’s simply a matter of keeping up with property tax payments, knocking out a few windows, and leaving the building to die.

The American system is utterly unable to cope with this attack. The whole rhetoric of the need for things like Fannie Mae and Freddie Mac is built on the assumption that homeowners will take care of their land. Even now, measures are being pushed through to protect homeowners who can’t actually afford their homes.

It’s totally legal. People are buying and selling property through normal channels. There is no investigation because there can be no suspicion. It looks like all the rumours of the end of American prosperity are true. Newscasters inadvertently act as force multipliers, broadcasting reports about America’s Decaying Neighbourhoods. Until it’s not news anymore. Until it’s just the way things are.

Some neighbourhoods do resist. Busybody homeowner associations form a kind of local immune system. They fight the tide, calling meetings, filing by-law complaints and struggling to keep their neighbourhoods safe, clean, and free of strangers. It’s exhausting work, and though some neighbourhoods succeed in staving off the damage, most families (worn down by those rowdy children) simply try to move elsewhere. There is nowhere to go.

It’s an engineered crime wave. As security forces helplessly patrol the docks and airports for dirty bombs and terrorist attacks that will never come, America rots from within.

A glimmer of hope: what if Broken Windows is wrong and the whole attack fails? Then the neighbourhood recovers, prices go up and a weapon becomes an investment. Our shadowy attackers sell the houses back at a tidy profit.

((Pulled this article from the New York Times. Found it so striking that I’m going to take a page from Bruce Sterling’s blog and make comments in double parentheses.))

“Ursula K. Le Guin, the science fiction writer, was perusing the Web site Scribd last month when she came across digital copies of some books that seemed quite familiar to her. No wonder. She wrote them, including a free-for-the-taking copy of one of her most enduring novels, “The Left Hand of Darkness.”

“Neither Ms. Le Guin nor her publisher had authorized the electronic editions. To Ms. Le Guin, it was a rude introduction to the quietly proliferating problem of digital piracy in the literary world. “I thought, who do these people think they are?” Ms. Le Guin said. “Why do they think they can violate my copyright and get away with it?” ((Because they can and they are?))

“This would all sound familiar to filmmakers and musicians who fought similar battles — with varying degrees of success — over the last decade. But to authors and their publishers in the age of Kindle, it’s new and frightening territory.” ((Oh, hello books, welcome to the Internet. The marginal cost of making copies of you just dropped to zero. Guess where your price is headed.))

“For a while now, determined readers have been able to sniff out errant digital copies of titles as varied as the “Harry Potter” series and best sellers by Stephen King and John Grisham. But some publishers say the problem has ballooned in recent months as an expanding appetite for e-books has spawned a bumper crop of pirated editions on Web sites like Scribd and Wattpad, and on file-sharing services like RapidShare and MediaFire.” ((Again, that’s RapidShare, MediaFire, Scribd and Wattpad for all your pirated book needs.))

“It’s exponentially up,” said David Young, chief executive of Hachette Book Group, whose Little, Brown division publishes the “Twilight” series by Stephenie Meyer, a favorite among digital pirates.” ((And everyone else!)) “Our legal department is spending an ever-increasing time policing sites where copyrighted material is being presented.” ((I wonder if anyone at corporate is taking the time to figure out what the ROI is on putting more bodies on the hunt.))

…

“It’s a game of Whac-a-Mole,” said Russell Davis, an author and president of the Science Fiction and Fantasy Writers of America, a trade association that helps authors pursue digital pirates. “You knock one down and five more spring up.” ((I wonder if Mr Davis realizes that he’s just succinctly explained why it is that his strategy is doomed to fail. You are playing Whac-a-Mole but with the intention of keeping those moles DOWN FOR GOOD. That’s not how the game works. It might be time to find another game.))

“Sites like Scribd and Wattpad, which invite users to upload documents like college theses and self-published novels, have been the target of industry grumbling in recent weeks, as illegal reproductions of popular titles have turned up on them. Trip Adler, chief executive of Scribd, said it was his “gut feeling” ((They don’t keep detailed stats over there at Scribd?)) that unauthorized editions represented only a small fraction of the site’s content.

“Both sites say they immediately remove illegally posted books once notified of them. The companies have also installed filters to identify copyrighted work when it is uploaded. “We are working very hard to keep unauthorized content off the site,” Mr. Adler said. ((But, you know, Whac-a-mole))

“Several publishers declined to comment on the issue, fearing the attention might inspire more theft.” ((Those sites once again: RapidShare, MediaFire, Scribd or Wattpad – Huge variety, same low price!)) “For now, electronic piracy of books does not seem as widespread as what hit the music world, when file-sharing services like Napster threatened to take down the whole industry.”

…

“Until recently, publishers believed books were relatively safe from piracy because it was so labor-intensive to scan each page to convert a book to a digital file.” ((And yet, if you care to look for it, there are scans of just about any comic book you could imagine available online. Also, have any of these guys been to Asia? Much as with DVDs it’s all pirated photocopies of books. I’d like to see an article about THAT kind of piracy.)) “What’s more, reading books on the computer was relatively unappealing compared with a printed version.”

“Now, with publishers producing more digital editions, it is potentially easier for hackers to copy files. And the growing popularity of electronic reading devices like the Kindle from Amazon or the Reader from Sony make it easier to read in digital form. Many of the unauthorized editions are uploaded as PDFs, which can be easily e-mailed to a Kindle or the Sony device.”

…

The full article is here: Print Books Are Target of Pirates on the Web

Dan Barber’s story (embedded above) is one of my favourite kinds of stories. He begins with something that seems unethical, tells the story of an unlikely maverick who challenges the status quo and wins (a contest). All the while, it turns out that our maverick’s approach involves some down home ingenuity and hands on sustainability. In the end, it turns out that we get to have our cake and eat it to. There is a method for producing foie gras ethically that’s also sustainable (AND DELICIOUS). (If only we didn’t have those evil unsustainable, unethical factory farms that gave us slightly inferior foie gras (and strawberries and mangoes and whatever) year-round.)

At about 8:15 in, Barber unwittingly raises the first issue that will cause massive problems for this kind of farming. He approvingly mentions that the farmer is taking a loss on feeding these geese figs and olives. “The doubly irony is that on the figs and olives, Eduardo could make more money selling those than he can on the foie gras.”

At which point the economist in me asks, “then why does he bother with the foie gras?”

Eduardo is an artisan farmer, he doesn’t need to be profit maximizing, just profitable. So if he wants to take some extra time and effort, he’s welcome to destroy value in the goods he produces as a kind of hobbyist craftsman. That’s fine for him, but does it work on a world-wide scale?

The reason that Eduardo could make more on the figs and olives than he does on the foie gras is that someone has figured out how to make the delicacy more cheaply. It’s far from ethical – it requires factory farming and force feeding – but when it comes to foie gras, people don’t seem to care.

The pricing of foie gras really doesn’t matter to most people, but the same story plays out over and over again in the world of farming. Factory farms produce food more cheaply, with less labour and at a higher density than most organic farms. They also produce the food people want year-round instead of seasonally. They do it at massive environmental and ethical cost, but until there is a price on these things, it is unlikely that entreating people to only eat what is in season will see a shift in the way food is produced.

There’s two ways this story can get better. Either factory food becomes more expensive or sustainable food becomes cheaper.

Eliminating the massive subsidies paid to factory farmers would be a big step in doing both at once. If oil continues to climb, factory farm prices will tend to rise (a lot of oil goes into the machinery and pesticides used on larger farms) making less oil-dependent farming more viable.

The labour issue is a bigger one, which must be solved either by automating organic farming practices, killing western subsidies which will make farming profitable for developing countries (they have a surplus of labour, but ultra cheap grain and dairy from subsidized OECD farmers often forces them out of business), or convincing more OECD citizens to go back to the land.

The last question, to which I don’t know the answer, is: Will organic farming produce enough food to feed everyone? The technologies that underlie the Green Revolution allowed the human population to triple in less than 70 years with very few major famines. Advocates of alternative farming need to account for whether their methods will sustain the human population (or who should die).

They do their lobbying from comfortable office suites in Washington or Brussels. If they lived just one month amid the misery of the developing world, as I have for fifty years, they’d be crying out for tractors and fertilizer and irrigation canals and be outraged that fashionable elitists back home were trying to deny them these things.

–Norman Borlaug

One of my favourite things about financial reporting has always been the way that any change is bad. The dollar would go up and that would be bad, then it would fall and that would be bad.

I took this on Nov 12th when the crisis was only just getting started. Since then, the price of oil has continued to slide. I have no idea if that is a good or a bad thing.

I was reading this article on Slate.com about a number of subprime mortgage holders who are weathering the financial storm just fine. They have delinquency rates of around 3% in an area of finance where the national average is closer to 19%.

How is this possible?

The explanation that stuck with me came from Mark Pinsky, president and CEO of of the Opportunity Finance Network. “We have to be profitable, just not profit-maximizing.”

What sets the “good” subprime lenders apart is that they never bought into all the perverse incentives and “innovations” of the bad subprime lending system—the fees paid to mortgage brokers, the fancy offices, and the reliance on securitization. Like a bunch of present-day George Baileys, ethical subprime lenders evaluate applications carefully, don’t pay brokers big fees to rope customers into high-interest loans, and mostly hold onto the loans they make rather than reselling them. They focus less on quantity than on quality.

And in a world where Neil Cavuto is saying that “loaning to minorities and risky folks is a disaster,” minorities with tiny savings accounts are being served and are paying back their debts. The profits for these companies weren’t as high as they were for the big lenders (one CEO earns a “mere” $190,000/yr), but on the other hand, they are still running.

Compare this to the story that Nassim Nicholas Taleb tells about the wider financial markets (skip to 4:20). “We don’t have slack, it’s over-optimized.”

I keep thinking about the impending extinction of the Cavendish Banana a worldwide mono-culture that was propelled to the #1 spot when the previous favourite, the Gros Michel Banana was wiped out, also by disease. And of the injuries (careful about clicking that link) sustained by Super-G skiers when their highly optimized gear turns against them during a crash. And of Koalas which have evolved to eat a tree no one else eats and who will die off when the trees do.

Then I think about apples which come in a variety of types, casual skiers who make it to the bottom of the hill eventually and raccoons who will eat just about anything. These are all generalists that manage to thrive in a variety of areas, and seem to be pretty good at adapting to massive changes to their environments.

We’re in the midst of the 6th mass extinction in earth’s history and it’s the specialists, with their highly optimized, fragile ecological niches that are going to go first. Cockroaches will still be here when it’s all over, I imagine.

The rule is clear. When things are stable, specialization and optimization is the recipe for success. When things are bumpy, allowing some of the inefficiency that comes from flexibility is probably the thing that will let you survive.

The mistake of the latest market crash seems to be that all the incentives and all the players were aligned to act as if the boom in housing prices was a stable situation that would last and last. You’d think that by now, the financial markets would have learned their lesson.