Category Archives: Articles

Complexity cloaks Catastrophe

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“Complexity cloaks Catastrophe”

William Leiss (17 January 2012)

Complexity cloaks Catastrophe - PDF

Good risk management is inherently simple; adding too many complexities increases the likelihood of overlooking the obvious.

Leiss, “A Short Sermon on Risk Management” (http://leiss.ca/?page_id=467)

 

The quoted phrase that forms the title for this paper comes from the opening pages of Richard Bookstaber’s indispensable 2007 book, A Demon of our own Design:  Markets, hedge funds, and the perils of financial innovations (New York:  Wiley).  This book inspired much of my own subsequent work in this area, as published in The Doom Loop in the Financial Sector, and other black holes of risk (University of Ottawa Press, 2010:  e-book available at:  http://www.press.uottawa.ca/book/the-doom-loop-in-the-financial-sector);  see the section on “Complexity” at pages 80-83).  Bookstaber’s key point is that complexity in financial innovations is itself an important risk factor for systemic failure in the financial sector.

Now the New York Times columnist Joe Nocera has written in his January 17 column, “Keep it Simple” (http://www.nytimes.com/2012/01/17/opinion/bankings-got-a-new-critic.html?hp), about an important new source for this topic.   This is a November 2011 paper prepared by staff at a firm called Federal Financial Analytics, Inc.:  “A new framework for systemic financial regulation:  Simple, transparent, enforceable, and accountable rules to reform financial markets,” available as a PDF file at:  http://www.fedfin.com/images/stories/client_reports/complexityriskpaper.pdf.

In effect, both the paper and Nocera’s commentary argue – with reference to the U. S. Dodd-Frank Act – that responding to complexities in financial innovations with complex regulatory regimes is a mug’s game.  It does not solve the problem of “complexity risk” and in fact may exacerbate that risk.  It also does a poor job of anticipating the next challenge, as the recent collapse of MF Global shows.

The Obama administration has put its faith in “smart regulation,” which ignores the fact that it is the industries being regulated which can hire the smartest people and task them with finding a way to circumvent any set of rules, however complex.  (Meanwhile, his Republican opponents work feverishly to gut his regulatory agencies of competent staff and leaders.)  Similarly, the authors of the paper, “A new framework for systemic financial regulation,” propose solutions involving new corporate-governance regimes, but the private-sector risk governance regimes failed utterly the last time around, so why on earth would the rest of us want to retry this experiment?

In the end we have to turn to the most reliable guide, Simon Johnson, whose advice is simple:  Break up the big banks.  (Follow his blogs at:  http://baselinescenario.com/; the latest is, “Refusing to take yes for an answer on bank reform.”)  Banks to big to fail should be regarded as too big to exist.  And yet the leading financial institutions in the United States are bigger than ever.  No “systemically-important financial institution” will ever be allowed to fail.  The bankers who run them know this.  They also know that they cannot be outsmarted by the regulators.

 

Nature is the biggest bioterrorist

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“Nature is the biggest bioterrorist”:

Scientists, viagra the Risk of Bioterrorism, pills and the Freedom to Publish

William Leiss (22 December 2011)

[Nature is the biggest bioterrorist] – PDF

The quoted sentence in the title is attributed to R. A. M. Fouchier, ailment a scientist at Erasmus Medical Center in Rotterdam and the University of Wisconsin, in an interview with The New York Times.[1]  He is the lead researcher for the team that, working in a highly secure laboratory in the Netherlands, genetically engineered the “highly pathogenic” avian influenza A(H5N1) virus so as to make it easily transmissible in mammals.  H5N1 is an extraordinarily lethal group or clade of viruses which has killed about 60% of the 600 or so humans that have been infected by it since 2003 (the virus was first identified in 1997).  A pertinent comparison is with the 1918 pandemic, which killed only about 1% of those infected.  The H5N1 viruses are easily transmissible among birds and are sometimes transmitted from birds to humans, but so far there is no evidence for direct human-to-human transmission.

Scientists have been studying its genome in order to understand why human-to-human transmission has been inhibited to date – knowing that, should this inhibition be overcome, at a time when no vaccine was available, the human death toll around the world could be enormous.  Scientists have also been trying to manipulate its genetic structure so as to identify exactly what gene changes would allow it to overcome this inhibition; working with ferrets in the laboratory, they now think they know what kinds of gene changes would enable the virus to move freely among members of a mammalian species.  In the press release from Erasmus Medical Center Professor Fouchier explains why this work was done:  “We now know what mutations to watch for in the case of an outbreak and we can then stop the outbreak before it is too late.  Furthermore, the finding will help in the timely development of vaccinations and medication.”

Now comes the tricky part.  The researchers want to publish their work in full, in the journals Science and Nature, arguing that other researchers working in this same area need to know the details in order to evaluate the results properly.  But the U. S. National Science Advisory Board for Biosecurity has asked the two journals not to publish major sections of the papers, specifically the “experimental details and mutation data that would enable replication of the experiments” – lest terrorists seek to weaponize the engineered pathogen to deliberately produce a global pandemic.

Professor Fouchier and others prefer to treat the issue as a matter of practicalities:  (1) terrorist groups cannot easily duplicate the expertise, lab equipment, and development time needed to engineer this virus, even with the blueprint in hand; (2) even if the experimental details are restricted to recognized researchers, the results will eventually be circulated more widely; (3) there are other, available candidate materials for producing biological weapons for terrorist purposes that are far easier to work with.

One problem in resolving this issue is that Professor Fouchier has muddied the waters considerably with his comment about nature being the “biggest bioterrorist.”  Another scientist, Professor John Oxford, London School of Medicine, further clouded the matter with these remarks:  “The biggest risk with bird flu is from the virus itself.  We should forget about bio terrorism and concentrate on Mother Nature.”[2]  They should both be forced to wear dunce caps and sit in the corner for a while.  As they should know, by the word “terrorism” we refer to deliberate acts of human malevolence and injustice causing great harms in the name of political objectives.  Its commonest and age-old form is state-sponsored terrorism, such as that being suffered now by the citizens of Syria and dozens of other countries around the world; non-state actors also employ it, on a much less widespread scale, and sometimes in pursuit of legitimate struggles of political resistance against tyrannical regimes.

But Mother Nature is not a terrorist.  In using this provocative language some scientists are trying to sidestep the very difficult issues in responsible decision making that have been raised by the proposal to publish this research in its entirety.  These difficulties can be seen if we array the decision problem in the form of offsetting risk scenarios:

  1. What is the probability or likelihood that the full publication of this research will enable public health agencies to save many lives – that would otherwise be lost – if and when the H5N1 virus naturally evolves into a form that is directly transmissible from one person to another? And:
  2. What is the likelihood that restricting full publication to designated members of the research community will achieve the necessary scientific advance from a public health standpoint?

 

Versus

 

  1. What is the likelihood that the full publication of this research will enable terrorists to weaponize this pathogen and deliberately cause a human pandemic that might not otherwise happen through the virus’s natural evolution?  And:
  2. What is the likelihood that the restricted circulation of these research results will succeed in keeping the information out of the hands of potential terrorists?

Framing the choices we face as a set of contrasting risk scenarios is a way of using a systematic and disciplined approach to identify the trade-offs and assumptions that are otherwise hidden in the narrative problem-formulation.  It also acts as a requirement for participants in the debate to specify what types of evidence could be assembled in support of attempts to answer these specific questions.

It would be possible, were sufficient time and resources to be made available, to undertake a formal set of risk assessments to address these four propositions; or we could just decide to rely on educated guesswork, for example, through an established procedure known as “expert elicitation” (http://en.wikipedia.org/wiki/Expert_elicitation).  This is unlikely to happen:  Some behind-the-scenes jockeying between the scientific journals, the research community, and the U.S. biosecurity committee will produce a resolution of this particular issue that the rest of us will read about later.

However, if either kind of systematic decision analysis were to be carried out and then published, all of us could perhaps learn a bit more about how to make sensible decisions of this type, which might be helpful when the next problem of this type rolls around.  Because there is a virtual certainty that there will be more problems of this type.  This is a simple function of the increasing power of scientific investigation itself, especially in highly sensitive areas like genetic manipulation and some others, such as synthetic biology and the detailed understanding and potential manipulation of brain functions.

[1] Denis Grady and William J. Broad, “Seeing terror risk, U.S. asks journals to cut flu study facts” (http://tinyurl.com/89w7cfl) and Doreen Carvajal, “Security in flu study was paramount, scientist says” (http://tinyurl.com/76kn2om), The New York Times, 21 December 2011; Fergus Walsh, “When should science be censored?” (20.12.11)  http://www.bbc.co.uk/news/health-16275946.   For a very thorough summary of background information see the Wikipedia article at:  http://en.wikipedia.org/wiki/Influenza_A_virus_subtype_H5N1.

[2] See further Richard Ingham, “Scientists fight back in ‘mutant flu’ research,” The Globe and Mail, 22 December 2011, A14:  http://tinyurl.com/77tm52w.

Germany as Saviour or Demon: Political Risk in the Eurozone and the Burden of History

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Germany as Saviour or Demon:

Political Risk in the Eurozone and the Burden of History

[Germany as Saviour or Demon] – PDF

William Leiss (9 December 2011)

 

Introductory Note:

These reflections were inspired by the insightful article published on December 6 in Spiegel Online, doctor “A controversial paragon:  Europe shudders at Germany’s new-found power”: treat 1518, viagra sale 801982,00.html”>http://www.spiegel.de/international/europe/0,1518,801982,00.html.  See also (1) the opinion column by Jakob Augstein, “The return of the ugly Germans:  Merkel is leading the country into isolation:” 8 December: http://www.spiegel.de/international/europe/0,1518,802591,00.html and (2) Christoph Schult, “Summit advice:  How about a little humility, Frau Merkel?” 8 December: http://www.spiegel.de/international/europe/0,1518,802515,00.html.

 

The sheer scale of the irony now playing out on the European continent is mind-boggling.  The first phase of the Eurozone crisis is just about over and the second – marked by the German-French alliance’s proposal for a dramatic upgrade in fiscal integration of at least some subset of the EU’s national economies – is about to begin.  Almost certainly the  practical implementation of this new strategy will set the nations who sign up for it on a one-way street:  The external oversight and self-discipline for national budgets that will be required to halt the euro’s downward slide toward destruction will lead, step by step, to a deeper functional unity, first in fiscal matters and later in other institutions.

If the financial markets can be persuaded to accept it as a viable long-term strategy, they will do so only with a highly sceptical mindset.  Those markets will be alert to any hints of backsliding, playing for time, or fakery in the national accounts, and undoubtedly they will punish the malingerers severely should they find evidence of the same.

As the marvellous Spiegel Online article shows, Germany appears to have won over the French – not just Sarkozy, but much of the French decision-making élite more widely – to its concept of long-term financial and economic health.  In a speech in November Sarkozy said:  “All my efforts are directed towards adapting France to a system that works.  The German system.”  In fact, as of now, Germany stands alone as the one and only model for all of the Eurozone (and indeed EU) economies.  Thus 66 years after France and the rest looked around, in the Summer of 1945, at the immense destruction, loss of life, and raw memories of the unimaginable savageries perpetrated on them by their German neighbours, are they about to say:  “We are all Germans now”?

One of the smaller ironies for the French was the news, just this past week, that German police were raiding the homes of the last surviving members of the SS unit that carried out the notorious massacre at the village of Oradour-sur-Glane on 10 June 1944:  There were only two survivors (out of almost 700 men, women, and children); the French have never rebuilt the town (http://www.oradour.info/), leaving it as a memorial to those who died there.  After all this time, the German police apparently were looking for evidence of their complicity in that shameful episode.

But ironies abound.  Who in 1945 could have imagined that in 2011 the Foreign Minister of Poland – a country which suffered so terribly during the Nazi occupation – would give a speech in Berlin in which he said:  “I’m less worried about Germany’s power than about its failure to act.  It has become Europe’s essential nation.  It must not fail in its leadership.”  (See also the New York Times article, December 9, “Europe’s debt crisis brings two former foes closer than ever”:  http://tinyurl.com/7j66llw.)

Meanwhile, in the nation whose citizens have been ordered to impose upon themselves the harshest “austerity” measures to date – Greece – Germany’s presumed role in dictating the bitter medicine they are being forced to swallow is palpable to them.  (In both Dublin and Athens, the EU bureaucrats who have been sent in to oversee these measures are referred to by the natives as “the Germans,” no matter what their actual nationalities happen to be.)  Their memories of the harsh Nazi occupation in 1941-44 are still easily recalled.  So most Greeks will not be joining in the chorus of, “We are all Germans now.”  But could this too change?

As it battles for its fiscal health the EU will arrive at a crossroads, perhaps in one year, or two, or longer.  Persisting along the straight and narrow path – that is, emulating the German model – could, if all goes well, allow citizens of Europe to see with sufficient clarity through the chill winds of austerity to a better and stable collective future.  But in traversing this path they will come upon alternative turnings from time to time.  Taking some of those turnings will mean rejecting the medicines they are now being offered and digging in their heels, resisting the restructurings of employment patterns, pension and retirement schemes, and (to some extent) the welfare benefits they now enjoy but cannot really afford.  There will be strong temptations – already on view in Greece – for citizens and public officials to seek to thwart the application of austerity measures through sabotage and noncooperation.

They may even try to ignore their budgetary targets, but they will not be able to conceal their noncooperation, as before, by faking the national accounts.  What is perhaps even worse, at the political level they may try very hard to cooperate but be unable to do so, because the institutional changes that are presupposed in the austerity targets simply cannot be carried out in the necessary time-frames.  This is the scenario described in a very recent OECD report (Spiegel Online, 8 December, “OECD report questions Greece’s ability to reform”: http://www.spiegel.de/international/europe/0,1518,802514,00.html.)  Should this scenario play out, punishments may arrive from the North (because citizens there will demand this of their governments), and national bankruptcies will loom, leading to full-blown social crises.  It is impossible to forecast how that might all end.

In short, there are enormous political risks inherent in Europe’s present situation.  Much of the pathetic, fumbling search for pseudo-solutions during the last two years has been designed to avoid entering deeply into the zone of political risk by confronting the need for radical changes to the EU institutions.  For example, if national referendums are required to ratify such changes, will the necessary approval be given?  To take the case of Ireland, it was the national government there which made the catastrophic mistake of nationalizing 100% of the debt of its private banks.  The money that enabled them to do so, when their sovereign debt could no longer be financed through the markets, came from the EU.  Will the Irish citizens, knowing how long it will take them to dig themselves out from under this monumental blunder, perhaps conveniently forget how this mess was made and take out their grievances on the EU?

The risk will have to be run, because the earlier strategy is broken.  There will be no quick fix, as Merkel sees clearly, and it is impossible to say how much time will be required; but all the while the financial markets will have Europe’s politicians on a very short leash.

It’s far too simplistic to “blame the markets.”  This is entirely the politicians’ own fault, because in the long run-up to the 2008 crisis they had been fiddling while their bankers stuffed their huge businesses with combustible materials.  European politicians watched from the sidelines as the Irish and Spanish housing bubbles expanded; they allowed their banks to bulk up on toxic assets from the US subprime mortgage assembly-line; they acceded by default to the weakening of international regulatory regimes that was pushed by US and UK interests; they allowed their banks to accumulate large portfolios of sovereign debt instruments on the theory that they were “risk-free”; they turned a blind eye to the Greeks’ blatant lies about their budgetary deficits; and so on.  A slice of these depressing stories is told in Michael Lewis’s inimitable and entertaining style in his latest book, Boomerang:  Travels in the new third world (New York:  Norton, 2011).

The latest German-and-French-led initiatives are a hopeful sign, but there is no guarantee that they will succeed in staunching the bleeding in the Eurozone.  The risk of political disintegration in the EU will remain high for some time to come.  But if it works in the end, with Germany leading the way to a brighter collective future, would this not be the supreme irony, after all that happened in the preceding century?

Author’s Note:

My personal interest in Germany’s role in the burden of history in Europe is dictated in part by the fact that I am of German ancestry, and in part by my long apprenticeship with Herbert Marcuse.  I have discussed this autobiographical background, including reflections on Marcuse and Heidegger, in a recent interview, available at:  http://www.ctheory.net/articles.aspx?id=690.

Hoaxes and Hobgoblins

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This past September we learned of The University of Calgary’s embarrassment over the discovery that oil industry funds had been moved through its research accounts to carry out non-research activities dealing with climate change issues.[1]  These funds were used to support the activities of a group calling itself, buy somewhat mischievously, “Friends of Science” (http://www.friendsofscience.org/).  Of course one thinks immediately of the old saw:  “With friends such as this, who needs enemies”?  Is the irony implicit in the name intended or not (the case would be more interesting if it were).

Read full article: Hoaxes and Hobgoblins [PDF]

[1] http://www.ucalgary.ca/news/sept2011/friends_of_science; Vancouver Sun, 09/15/11 : http://tinyurl.com/3dvscdr; Postmedia News, 09/16/11 (Talisman): http://tinyurl.com/3pvfptv.

Death by Debt

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Here are extracts from Chapter 3 of my book, physician The Doom Loop in the Financial Sector, and Other Black Holes of Risk (University of Ottawa Press, 2010), pp. 101-2:

Thus, by the middle of 2010 six of the seven largest economies in the world looked to be in no shape … to spend their way out of another serious financial meltdown for a very long time to come [due to accumulated debt levels]….  Recent events have seriously eroded the margin of safety in the discretionary public resources available to most of the world’s wealthiest economies; that is, the capacity of their governments to incur additional debt responding to a further financial crisis,…”

Read the full article: Death by Debt [PDF]

Three new papers on Risk

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Three papers on risks associated with the long-term storage of high-level radioactive waste in Canada, mind commissioned by the Nuclear Waste Management Organization: Go to http://www.nwmo.ca/conceptofrisk

Paper #1: How should matters of risk and safety be discussed?

The first paper addresses the question of how to approach discussions about risk in this area. Four “reference frames” are used to demonstrate the different approaches or perspectives that can be applied to a conversation about this risk: the energy policy frame; the risk and safety frame; the overriding values frame, and; the geographical frame.

http://www.nwmo.ca/uploads_managed/MediaFiles/1673_nwmosr-2010-10_paper1_thinking.pdf

Paper #2: How might communities organize their discussions about hosting a site for used nuclear fuel?

This paper presents a variety of deliberative tools that a community might use when holding discussions about hosting a facility. Communities involved in a site selection process may wish to consider how the process of engagement might unfold in the context of their own unique situation, and the author describes some types of formal and informal methods for facilitating reasoned debates about controversial issues.

http://www.nwmo.ca/uploads_managed/MediaFiles/1671_nwmosr-2010-11_paper2_howmight.pdf

Paper #3: What is happening in other countries where similar issues about used nuclear fuel are being discussed?

This final paper deals primarily with high-level radioactive waste management and provides an overview of the plans of various countries to deal with their high-level waste. All of the information is taken from publicly-available Internet sources, most of which are websites maintained either by national agencies that have legal responsibility for the waste within their borders, or international agencies with other types of mandates in this area. Profiles for 16 countries are provided, along with a large collection of references and links to internet-based resources, as well as a table illustrating the progress of each country in managing radioactive waste.

http://www.nwmo.ca/uploads_managed/MediaFiles/1672_nwmosr-2010-12_paper3_whatisha.pdf

William Leiss, OC, PhD, FRSC

Risk Blogs – Summer 2011

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The following series of short essays was written in the period June – August 2011 and posted on my website: www.leiss.ca. Similar pieces will be added to the series on a regular basis. If you are interested in them you may check the website periodically or follow me on Twitter (@WilliamLeiss), where I post a Tweet (a) each time a new short blog appears on my website and (b) when I read something in the current press relevant to risk issues and provide the URL for those who also might want to read it.

LeissRiskBlogsSummer2011rev2 [PDF]

Update: the PDF was updated August 29, 2011

New article – Managing Prion Disease Risks

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W. Leiss, seek M. G. Tyshenko, ailment N. Cashman, medicine D. Krewski, L. Lemyre, C. Amaratunga, M. Al-Zoughool. “Managing Prion Disease Risks: A Canadian Perspective.” International Journal of Risk Assessment and Management, Vol. 14, no. 5 (2010), 381-436.

Abstract: This paper reviews the history of the risk management challenges faced by many countries and regions of the world which have had cases of bovine spongiform encephalopathy (BSE) from 1986 to the present. The paper first summarizes the nature of prion diseases from a scientific perspective, and then presents an overview of the findings of an extensive set of country case studies, devoting special attention to the Canadian case. It derives from these studies the need to reconstruct the frameworks which have been guiding risk management decision making, using formal schemata based on a step-by-step approach. The paper presents and illustrates a revised format for an integrated risk management framework, including a set of specific and explicit objectives that should guide the use of this framework in practice, and concludes by raising policy issues that are currently outstanding with respect to the management of prion disease risks.

This article is now available in its entirety (PDF file) to all interested readers. Please go to the following site and follow the link:

http://www.prionetcanada.ca/landing.aspx?landing=Research

WikiLeaks and the Mushroom Industry

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There has been a fair amount of frothing at the mouth by media commentators, drug including some academics, nurse about the latest trove of documents. Great quantities of damage have been alleged, although (unlike the information in the WikiLeaks documents) these are entirely speculative in nature; huge risks have been postulated, but again, with little intimation of what or who is allegedly at risk (apart from those persons associated with WikiLeaks).

A Canadian diplomat offers to resign for having told his masters that Afghan President Harmid Karzai is a crook. What a surprise! Are these deep thinkers among the commentators really unaware that the President’s office in Afghanistan is and always has been a hub of money- laundering, bribe-taking, and narcotics trafficking? Are they unaware that, no matter what noble sacrifices our soldiers, and those of other countries, have and will make before they finally depart, the country in question will revert to some version of a failed state, run by warlords and manipulated by our stalwart ally, Pakistan’s so-called intelligence service, immediately upon their departure? That then the helpless women of Afghanistan will be subjected to the same vicious brutality and mutilation – see the current issue of National Geographic – they have always endured, with a little extra thrown in for their presumption in seeking a modicum of relief during the foreigners’ occupation?

One or two rotund sheiks from the oil kingdoms urged the U. S. to obliterate the Iranian regime. Here some confusion might be engendered in the public mind: Were they motivated out of concern for the welfare of the Israelis? Probably not. It’s more likely that these pious Sunnis were thinking of how much more peaceful the Islamic Umma would be if about seventy million of their heretical co-religionists were abruptly wiped off the face of the earth.

Pakistan is a failed state, where the fractious government makes promises to their foreign benefactors that they know they will never keep, while gleefully cashing their cheques for vast new stocks of military equipment, and while slyly encouraging popular opinion to blame foreigners for all their woes. Russia is indeed a mafia-controlled state where massive corruption occurs among the political and economic elite. These are truths well-known to all who have eyes to see, and now we realize, courtesy of WikiLeaks, that some diplomats are also aware of them. What an astonishing revelation!

To his credit our own Stephen Harper backed his diplomats in Afghanistan. As far as most other politicians are concerned, their real interest in maintaining secrecy in such matters is to dupe their own citizens about the realities of global affairs. For politics is a subsidiary of the mushroom industry, the modus operandi of which is simplicity itself: Keep the product in the dark and feed it on horseshit. Throwing a bit of light on this dark industry is not good for mushrooms but is always an excellent tonic for the public.

So far as Mr. Assange is concerned, he probably has little to fear from Canadian-based assassination squads, but he really ought to turn himself in to the Swedish justice system and answer the charges against him. After all, it’s not as if it’s the Chinese authorities who are after him. Or is that another unpleasant truth that we shouldn’t talk about?