Archive for April, 2010
By Thomas E. Brewton
Computer models were the tools employed to inflate the subprime mortgage balloon that precipitated collapse of our financial markets. And the same sorts of inherently faulty computer models are generating proclamations that President Obama’s near-trillion-dollar stimulus and mortgage protection programs will create millions of new jobs and restore the economy to prosperity.
The old saw is “garbage in; garbage out.” When the computer model is too complex and attempts to cover too wide a scope, its output is worse than useless; disaster is just around the corner.
Econometric computer models were at the root of the 1998 collapse of John Meriwether’s hedge fund Long-Term Capital Management (LTC). That event led the Federal Reserve to pull out all the stops and flood the market with liquidity to prevent a possible world-wide financial meltdown. Long-Term Capital Management had too many huge financial commitments to and from the world’s major financial institutions. Allowing it to fail, so the Fed thought, would risk system-wide disaster.
Mr. Meriwether’s computer models had built in all of the assumptions of risks that humans then could foresee in constructing very complex trades involving very complex financial instruments. He and his colleagues were as intelligent and as well informed as any group of securities traders in the world. They were former “masters of the universe” at Salomon Brothers, when in the 1980s it was the world’s largest non-governmental trader of securities. And Mr. Meriwether was at the top of the Salomon Brothers trading heap.
Yet, an unanticipated confluence of market conditions effected a swift collapse of LTC’s house of cards.
By Alan Caruba
What I know about NATO, the North American Treaty Organization, you could put in a bug’s ear. Well, that’s not quite true. I do know the treaty was signed April 4, 1949. It was the result of Cold War fears that the Soviet Union represented a military threat to Europe.
A commentary by E. Wayne Merry that appeared in The Journal of International Security Affairs, “An Obsolete Alliance”, caught my eye. The author is a former State Department and Pentagon official who is now a Senior Associate of the American Foreign Policy Council.
Merry posed a question that had buzzed around in the back of my brain for a long time. Why is the United States still a member of NATO, an alliance that initially was intended to exist for twenty years, but whose life and mission has been expanding now for nearly sixty years? Since the Soviet Union collapsed in the 1990s and the Cold War is over, why does the U.S. or Europe need NATO?
“Over the years, NATO has turned its back on its inherently defensive and conservative origins to become a shameless hustler after engagements to justify its own perpetuation,” writes Merry. He quotes Manfred Woerner, its Secretary General in the early 1990s, who said that in order to survive NATO “must go out of area or go out of business.”
NATO was established by the Treaty of Washington and Merry points out that it was “purely defensive; nothing in it can legitimize use of force other than in response to a direct attack against its members. Article V, contrary to popular myth, does not even commit its members to the use of force.” As such, “NATO lost its basic raison d’etre years ago, as Europe’s need for American troops ended long before the Cold War did.”
Thus, with the collapse of the Soviet Union, NATO was left without a threat or a legitimate purpose. Merry correctly reminds us that “It is axiomatic that nothing in government is so long lasting as temporary measures. Policies, programs and appropriations initiated to respond to a transitory issue take on lives of their own, spawning institutions which not only outlive their purpose, but themselves create new problems to justify their continued existence.”