10 November 2010

Black Swan


(Gray Goose Martini Dirty, Willow Loss-leader white and Gray Goose up. Perfectly Peter-poured, contents held in glass by surface tension only. Photo by an amazed and appreciative Socotra.)

It had been a sobering day and there was only one answer for it: Willow, to talk things out over Gray Goose vodka and hope that no one would produce a Black Swan. A group of really smart people had gathered to talk about it earlier in a more formal venue.

I am not that bright, but the Boss asked me to cover the panel for her due to conflicts in her schedule. It was held walking distance from my office and Willow at one of the think tanks. I was happy to do so, since the topic was how to avoid the more egregious errors of the budget drawdown in Spook-land that happened after the Cold War.

I am going to treat it as non-attribution, and the cast of characters was legendary, including a couple distinguished people who taught me the best things I know about the business. They know who they are, so I am comfortable leaving it at that.

In a nutshell, Congress demanded a Peace Dividend in 1991 as the price of winning the Cold War and the first Gulf dust up against Saddam.

It was a unipolar world, remember?

People talked about it with a little grim nostalgia, since the only Americans who were dying then were part of the long string of murders that began with the Marine Barracks in Beirut (Happy Birthday to the Corps, by the way) and led through the Lockerbie Pan Am bombing, the US embassies in East Africa, the USS Cole, and right up to 9/11.

The attacks in 2001 are what might be called “Black Swans.” The term was popularized by author Nassim Nicholas Taleb in his 2007 book of the same title. In his view, a Black Swan event is something unanticipated and highly unlikely. It came from an old Latin phrase about rare birds- there were no black swans, at least until the Brits found them in West Australia. Hence, unlikely, but possible. Examples might be the PC, the internet and World War One- or the notion of airliners being flown into buildings as missiles.
Specifically, Taleb asserts (I am paraphrasing him here) that a Black Swan event is:
1. A surprise (to the observer).
2. Has a major impact.
3. Post Facto, rationalized by hindsight, it should have been expected.

There was no Black Swan in 1991. Congress wanted a 17% reduction in personnel doing intelligence work, and we complied with a budgetary slight of hand. The smartest person I know ran through it, and I felt myself slipping into a reverie of times past. We offered up empty billets to cut- growth, actually, since the out-years are not something the Congress can mess with.

You will have to take my word on that, since it is both more and less complex than it sounds. Simply put, the Committees get to see only next year’s budget, not the five-year plan. So, after the money is appropriated for the new fiscal year, the numbers bounce right back up again.

Contractors replaced the vacant government slots. Different pots of money, you know? Slight of hand.

Anyway, 1993 was the only year that any agency actually took a cut in personnel. The number of Spooks has been going up ever since, and exponentially since 9/11.

We made the reductions demanded by Congress demanded by offering early-outs and putting in a hiring freeze. You have heard me bitch about that before, since the freeze put a “bathtub” shape in the workforce, and no tough decision to weed out the dead wood was ever made. Incentivizing people to leave had the practical consequence of getting rid of the best and brightest, and retaining mediocrity.

After 9/11, we got some tremendous talent. But the rush to fill the organizations meant that we hired and promoted with wild abandon.

The word, placed in the context of a federal budget, is that what we have now is “unsustainable.”

That is a chilling word. It means that what is going on now can’t continue.

The pressures on the discretionary component of the budget- the parts that are not already committed to Social Security and the new health entitlements- is largely in Defense, and within Defense lies the bulk of the intelligence community.

The Congressional Budget Office issued a report earlier this year that painted the whole Federal budget as a disaster in progress. Washington is accumulating debt at an unsustainable rate. Standing at $5.8 trillion through 2008, the more realistic baseline shows the federal government adding an astonishing $16.3 trillion in new debt between 2009 and 2020–$130,000 per household over those 12 years.

Considering the hit we took when the financial bastards ripped us off in the sub-prime fraud, that is a lot of cash.

Someone mentioned the possibility of a Black Swan at Treasury one day. You know, they hold an auction for T-Bills and no one shows up to buy them. Then we moved on to other things, like how to pare the work-force in ways that permitted career progression and avoided the problems we are still coping with from the last retrenchment.

It was a good and productive discussion, but I kept thinking that a Black Swan seems almost inevitable.

Other people are, too. The Gold rush on coins and bullion. People looking around for anything to hedge their bets on non-currency assets against the advent of a big surprise.

It strikes me that the housing bubble meets the criteria for a Black Swan event.  It was a surprise that the financial bastards were giving away money to people who could not even make the first payment on their new homes.

It had a major impact, and it is not done yet.

Post Facto, we should have lynched the smart guys who took us for fools.

The melt down in the markets and economy, exacerbated by wild new entitlement programs, will create a budget deficit that is- what’s the word?-

Ah, yes. Unsustainable.

There are those who are saying we need another stimulus, and Ben Bernanke is trying to give us one by slight of hand from the Fed, buying back $600 Billion in Federal paper before the Republicans take back the House in January.

I don’t know what it means, and it is making me a little crazy. After the panel concluded deliberations, I walked briskly to Willow to engage in some unsustainable behavior of my own.

The usual suspects were assembling. I ordered one of Peter’s perfect martinis, Gray Goose vodka, and definitely not a bird of another color.

Copyright 2010 Vic Socotra
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